Yesterday, as a result of a referral from the Consumer Financial Protection Bureau, the Department of Justice and the Department of Education announced a $60 million settlement against a major student loan servicer for failing to reduce the interest rates on loans to servicemembers to 6 percent, when allegedly required to do so by the Servicemembers Civil Relief Act (the “SCRA”), the federal law that provides various benefits to servicemembers so that they can better focus on their military obligations.
But, a closer inspection of the servicer’s 10-Q, the press releases, the complaint, and the consent order leads to some stunning conclusions. The CFPB, DOJ and ED have apparently taken it upon themselves to amend the SCRA to change the requirements set by Congress for servicemembers to obtain rate relief. While those changes may reflect best practices, and may be desirable as a matter of policy, they are not required as a matter of law.
As set forth in Section 527(b)(1) of the SCRA, and as the CFPB has conceded in The Next Front, to obtain a rate reduction on a loan originated before the borrower entered military service, the servicemember must submit a written request for relief and the servicemember must submit a copy of the military orders calling the servicemember to military service. It is only upon receipt of written notice and a copy of orders that the creditor is required by Section 527(b)(2) to reduce the interest rate to 6 percent.
Moreover, ED has consistently held federal student loan servicers to this exacting standard. Its own regulations specifically track the provisions of the SCRA, requiring both a written request and a copy of military orders. In fact, ED has previously advised federal student loan servicers that the receipt of military orders alone is not sufficient because it is both inconsistent with the SCRA and inconsistent with its own regulations.
Now, however, it would appear that any institutional knowledge of military service, whether through a telephone call, written correspondence, or even an email or text communication, obligates a student loan servicer, and by implication, any creditor, to attempt to obtain the necessary written request and military orders or substitutes therefor through the use of the Defense Manpower Data Center. More significantly, the servicer and creditor must provide the 6% interest rate relief even if the servicemember has never submitted any request for such relief. Frankly, we’re stunned.