This past May, we wrote about the $60 million Servicemembers Civil Relief Act (SCRA) settlement announced by the Department of Justice (DOJ) and Department of Education (ED) with a major student loan servicer and expressed our concern that the settlement could be seen as changing the rules for when all servicers must reduce the interest rate on a loan to a servicemember to 6 percent. Indeed, in commenting on the settlement (which resulted from a referral by the CFPB to the DOJ), Holly Petraeus, Assistant Director of the CFPB’s Office of Servicemember Affairs, indicated that the settlement “should serve as warning not just to the student loan servicing industry, but to all institutions that provide or service loans to the military.”
Last week, those rules did change for federal student loans with the ED’s issuance of a “Dear Colleague Letter” (GEN-14-16) that provides SCRA guidance for servicers of Direct Loan and Federal Family Education Loan Program (FFEL) loans. Under SCRA Section 527(b)(1), to obtain a rate reduction on a loan originated before the borrower entered military service, a servicemember must submit a written request for relief and a copy of the military orders calling the servicemember to military service. The relief request and orders must be submitted within 180 days of the servicemember’s termination or release date from military service.
The ED guidance largely tracks the requirements that the ED imposed on the major student loan servicer as part of the settlement. It dispenses with the need for an ED servicer to receive a request from a servicemember or a copy of the servicemember’s military orders before applying an SCRA rate reduction. According to the guidance, the ED is implementing new procedures under which servicers can use the Department of Defense’s Defense Manpower Data Center (DMDC) database to determine a servicemember’s eligibility for a rate reduction. The ED indicates that it has determined that the DMDC “provides sufficient supporting documentation of an individual’s eligibility for the SCRA rate limitation by identifying borrowers who are, or who have been, in military service and by confirming the dates of service.” The ED states that it has directed its servicers to check the names of borrowers against the DMDC and reduce the interest rate of eligible borrowers without a request from the borrower. It also states that servicers will compare their databases of borrowers against the DMDC “on a regular basis” and apply the SCRA reduction as they identify eligible borrowers.
In the guidance, the ED also “authoriz[es] and encourag[es]” FFEL lenders and lender-servicers, effective August 25 (the date of the guidance), to use the DMDC database to identify borrowers who are eligible for an SCRA rate reduction. The ED indicates that “without a specific request from the borrower, FFEL loan servicers may affirmatively check the names of all borrowers whose loans they service against the DMDC database to identify borrowers who qualify for the SCRA interest rate limitation.” It further states that the once a servicer confirms a borrower’s status and serviced dates using the DMDC, it can use the DMDC information in lieu of requiring a request from the borrower and a copy of the borrower’s military orders. According to the ED, a lender that grants a rate reduction based on the DMDC information “will not be subject to any program liabilities” if such information is found to be incorrect. The guidance also indicates that because it dispenses with the need for a servicemember to submit a request for rate relief and military orders, the 180-day time limit on such submissions “cannot be applied.”
Questions that had been raised by the industry in the wake of the DOJ and ED settlement are now answered in the guidance. The SCRA eligibility of reservists is specifically addressed as is the treatment of federal consolidation loans. The guidance states that a reservist who has received orders to report for military service or who is in military service is entitled to the SCRA rate reduction and that a lender can confirm a reservist’s eligibility using the DMDC and rely on the dates reflected in the DMDC as the active-duty service period for which the borrower is eligible for the reduced rate, including using the reservist’s order notification date as the service period start date. The guidance goes on to explain that a federal consolidation loan will be considered eligible for rate relief as long as the borrower submitted his or her application prior to starting active duty service.
While the federal government is certainly free to adopt a more permissive approach when it comes to its own student loans, we note that the text of the SCRA, which reflects a measured approach by Congress as to how best to provide benefits to servicemembers, remains unchanged. That said, lenders and loan servicers in other sectors of the consumer financial services marketplace should carefully review their policies and procedures with counsel to confirm that they are complying with Section 527 and with any representations they may have made to servicemembers about interest rate relief or other military benefits.