Interest Rate Reduction Under the Servicemember Civil Relief Act
Michael S. Archer
Legal Assistance Director
Marine Corps Installations East
1. The Servicemember Civil Relief Act (SCRA) provides many important rights and protections for servicemembers (SMs) and their families. Indeed, the SCRA is the most important piece of legislation advancing such rights. This article examines one such SCRA granted protection, the reduction of interest on pre-service financial obligations.
2. SCRA Rate Reduction
a. The SCRA, at 50 U.S.C. 3937, provides that a SM may apply to a creditor to reduce a pre-service debt to 6%, “effective as of the date the servicemember is called to military service.” Covered financial obligations include preservice debts incurred by the SM, and by the SM and spouse jointly. A proposed amendment to the SCRA would also have covered certain debts incurred solely by the civilian spouse of the SM. That amendment, contained in the House version of the National Defense Authorization Act for 2023 did not make it to the final bill that was enacted.
b. The SM’s request for rate reduction must include (a) military orders calling the SM to military service and any orders further extending service, or (b) “any other appropriate indicator of military service, including a certified letter from a commanding officer.” The request must be made not later than 180 days of the SM’s release from military service. A template for an SCRA rate reduction request is provided as Appendix I.
c. It is common within the armed forces for a commander to delegate authority to staff officers to conclude certain actions within a designated area of responsibility. For example, the commander may delegate authority over certain financial matters to the comptroller, or certain personnel issues to the adjutant. When signing documents in this capacity, the document will identify its source as the commanding officer but will be signed by the subordinate staff officer with the notation “by direction.” It is likely that a military service verification letter signed “by direction” of the commanding office is valid. This is so because (i) the statute says that the letter must be “from” the CO rather than “signed, (ii) it is common practice within the armed forces for the CO to delegate certain tasks and authorize by direction authority to other staff officers, and (iii) for over 75 years, the U.S. Supreme Court has held that the SCRA is to be interpreted liberally on behalf of people it is designed to protect. See, e.g., Boone v Lightner 319 U.S. 561 (1943). Nonetheless, the better practice by far is to have the CO actual sign the letter to refrain from giving the creditor any excuse, however flimsy, to deny the rate reduction request.
d. There are only two lawful responses to a proper request. First, the financial institution can reduce the interest rate as requested. Alternatively, the creditor may obtain a court order declaring that the applicant’s military service does not materially affect ability to pay. Creditor application for such judicial relief, let alone successfully obtaining it, is exceedingly rare. In nearly 40 years addressing military issues, this author has never seen it occur. Historically, some creditors have responded in unlawful ways, such as ignoring the request, slow walking the request, or demanding excessive documentation.
e. Pursuant to the SCRA, the excess interest is forgiven, not accrued; that is, the creditor cannot store up extra interest during the borrower’s military service and then stick the SM with balloon charges at the end of the protection period. “Forgiven” means that the excess interest vanishes as if it never existed. Nor can creditors accelerate the loan or puff up monthly principal payments to ensure that the SM pays the same number of dollars each month.
f. The rate reduction shall be effective as of “the date on which the servicemember is called to military service.” When the debt obligation concerned is a mortgage, the rate reduction continues throughout military service and for one year thereafter. For other financial obligations, the rate reduction continues until the end of military service.
3. Application to Student Loans
a. The SCRA rate reduction applies to all pre-service obligations, including student loans.
Prior to 2008, federally guaranteed student loans were, arguably, exempted from the SCRA rate reduction. However, since passage of the Higher Education Act of 2008, the SCRA rate reduction feature applies to federally guaranteed student loans as well as to all other student loans. In fact, additional obligations apply to those who service federal student loans.
b. In the case of most preservice obligations, the SM must make written application to the creditor as described above. However, in the case of servicers of federal student loans and Federal Family Education Loans (FFEL) (a loan program under which state or private loans are guaranteed by the federal government) there is no longer a requirement that the SM provide orders to the creditor, or even make a request for rate reduction. As a condition of being a federal loan servicer, the Department of Education now requires such institutions to check the Department of Defense Manpower Data Center (DMDC) monthly to determine borrower eligibility for SCRA rate reduction and to automatically reduce the rate to six percent, even in the absence of a consumer request! Creditors and others can, free of charge, access the DMDC site and obtain a certificate indicating whether the borrower is a member of the armed forces. Borrower social security number and / or date of birth is required for such inquiry. [For single record request, see https://scra.dmdc.osd.mil/scra/#/login ] This requirement for automatic SCRA review by federal student loan servicers has been in place since 2014.
c. A study by the General Accounting Office of data from ten federal student loan servicers between the years 2008 and 2015 found that relatively few eligible borrowers made a written request for interest rate reduction. However, once federal loan servicers were required to check SCRA reduction eligibility via the DoD web site, even without a borrower request, the number of SCRA rate reductions increased over 400%. Had it not been for the requirement for federal student loan servicers to research borrower eligibility for rate reduction, the vast majority of their eligible borrowers would not have received this benefit. The GAO found similar results concerning commercial FFEL. [GAO 17-4, Student Loans: Oversight of Servicemembers’ Interest Rate Cap Could Be Strengthened, November 2016]
4. Under utilization of SCRA Rate Reduction Benefit
a. As identified above, the number of federal student loans with SCRA rate reductions skyrocketed once the Department of Education required federal student loan servicers to determine whether borrowers were eligible for such reduction and if so, to apply it without request. The under-utilization of SCRA rate reduction identified in the GAO report can logically be attributed to two factors: (i) SM borrowers were unaware of their rights or were otherwise dissuaded from making an application, and (ii) creditors improperly ignored or denied rate reduction requests. There is no reason to SM federal student loan borrowers are less informed than other borrowers. Thus, it is likely that most borrowers eligible for SCRA rate-reduction never apply, or have their applications denied, as was the situation with federal student loans prior to 2014.
b. Furthermore, the Consumer Finance Protection Bureau (CFPB) recently examined usage of the SCRA rate reduction right by activated reservists and concluded that at least 90% of the loans eligible for reduction did not receive any reduction. In other words, the study group, over an eleven-year period, paid over $100 million in interest that could have avoided! See “Protecting Those Who Protect Us: Evidence of activated guard and reserve servicemembers’ usage of credit protections under the servicemembers civil relief act” December 7, 2023, online at: https://www.consumerfinance.gov/data-research/research-reports/evidence-of-servicemembers-usage-of-credit-protections-under-scra/
c. The data therefore strongly suggests that better education and assistance concerning this issue will result in rate reduction for far more preservice loans of all types.
5. Enforcement. What if the SM submits a proper application but the creditor ignores or denies it, or erroneously claims that additional documentation is required, or otherwise violates the SCRA? There are several actions the borrowers and their advocates can take.
a. Demand Letter. The borrower or advocate may explain the law (and provide a copy) to the creditor, or to a higher level of management within the creditor organization. The demand letter may point out some or all the following as deemed appropriate under the circumstances:
- that the borrower’s request meets all the statutory requirements,
- that the creditor is obligated either to reduce interest or to obtain a court order absolving the creditor of this requirement,
- that the SCRA authorizes the SM to initiate suit against the borrower in federal (and as applicable, state) court.
- that a person aggrieved by a violation of the SCRA may complain to the U.S. Department of Justice, which aggressively enforces the SCRA against errant businesses and may seek money damages, a fine of up to $55,000 for the first violation, and up to $110,000 for each subsequent violation [50 U.S.C. 4041].
- that the SM may complain to the North Carolina Department of Justice, which is also authorized to enforce the NC SCRA; and
- that the knowing violation of this provision of the SCRA constitutes a crime punishable by a fine and not more than a year imprisonment [50 U.S.C. 3937(e)].
b. Enforcement by the U.S. Attorney General. A person aggrieved by an SCRA violation may make an online complaint to U.S. Department of Justice through its Servicemembers and Veterans Initiative. Military Legal Assistance Attorneys and other SM advocates are encouraged to assist in making these complaints. See: https://www.justice.gov/servicemembers The website contains a portal for making complaints, provides information concerning the initiative, and contains summaries of prior enforcement actions (including press releases, legal complaints, court judgements, and orders). The SCRA authorizes the Department of Justice to seek injunction, money damages, and a civil penalty of $55,000 for the first violation and $110,000 for each subsequent violation [50 U.S.C. 4041]. The U.S. Department of Justice aggressively enforces the SCRA and has previously taken actions concerning interest rate reduction.
-The Department of Justice sued Sallie May / aka Navient, a large student loan servicer, alleging failure to comply with SCRA rate reduction provisions and failure to exercise due diligence before filing affidavits with the court asserting that the borrower was not a servicemember. A consent order dated May 13, 2014 resolved the case, directing the defendant creditor to implement an SCRA compliance plan, to provide SCRA training to its employees, to repair the credit of affected consumers, to pay a $55,000 civil penalty, and to pay $60 million in restitution [U.S. v. Sallie Mae, aka Navient, 1:14-CV-00600-UNA (D. DL)].
-The Department of Justice sued Conn Credit, alleging (i) that the defendant failed to honor proper SCRA rate reduction requests, (ii) told borrowers that they had to pay off the entire loan as a condition of getting a rate reduction, (iii) required a copy of military orders for a rate reduction even though the SCRA allows the borrower to produce, in lieu of orders “any other appropriate indicator of military service, including a certified letter from a commanding officer,” (iv) applied an erroneous date of inception for rate reduction, and (v) required the same monthly payment amount (applying more to the principal) instead of lowering monthly payments as required. A consent order dated September 3, 2020 resolved the case, directing the defendant to implement a training and compliance plan, to conduct an independent review to determine violations, to pay restitution of $500 plus a refund of excess interest for each violation, and to pay a $50,000 civil penalty [U.S. V Conn Credit, 420-CV-3221 (S. Dist, TX)].
-The Department of Justice sued Bayport Credit Union, alleging that the defendant (i) failed to decrease interest on preservice loans when required to do so, (ii) increased monthly payments even when it decreased interest rates, (iii) failed to apply the rate reduction retroactive to inception of military service, (iv) contrary to SCRA, required deployment as a condition for interest rate reduction, and (v) violated another SCRA provision [50 U.S.C. 3952] by enforcing preservice contracts by repossessing and selling vehicles without a court order. A consent order dated March 18, 2022 resolved the case, requiring the defendant in each interest rate case to pay $500 and to refund all excess interest, to pay $10,000 plus lost equity in each motor vehicle repossession case, to repair credit of affected consumers, to develop an SCRA compliance plan, and to pay a civil penalty of $40,000.
c. Enforcement by the North Carolina Attorney General. On July 25, 2019, North Carolina enacted the NC SCRA [NC GS 127B-25 et seq], which incorporates the federal SCRA into North Carolina law and authorizes the North Carolina Attorney General to seek relief in court, including injunction, restitution, a civil penalty of $5,000 per violation, and other relief. The website of the NC Department of Justice hosts a portal that facilitates online consumer complaints.
d. Enforcement through Private Lawsuit.
(1) Private Federal Lawsuit. The SCRA authorizes aggrieved persons to seek relief in court, including money damages, attorney fees, court costs, and other relief [50 U.S.C. 4042]. In discussing this option with clients, military legal assistance attorneys should be mindful of the assistance clients may receive through the American Bar Association Military Pro Bono Program. In analyzing this option, make sure to review the contract to determine whether it contains provisions either for mandatory arbitration or SCRA waiver. Substantive SCRA protections such as the 6% rate reduction can certainly be argued at arbitration. However, procedural SCRA rights, such as the right to stay proceedings if military service materially affects ability to appear and defend, do not apply to arbitration. There have been legislative efforts to require prohibit arbitration of SCRA claims absent an agreement signed by the parties after the dispute arises. However, to date, these efforts have not resulted in such legislation. It may be argued that mandatory, pre-dispute arbitration provisions constitute an unlawful waiver of SCRA protections. In any event, contractual arbitration provisions pose a significant obstacle to relief through private lawsuit.
Concerning waiver, the SCRA itself provides that it can be waived [50 U.S.C. 3918] and sets forth stringent criteria for doing so:
- The waiver must be in writing.
- The waiver must be executed as an instrument separate from the obligation or liability to which it applies.
- The waiver must be executed during or after the SM’s period of military service.
- The waiver must specify the legal instrument to which it applies (and if the SM is not a party to the instrument, the SM concerned).
- The waiver must be in at least 12-point type.
(2) Private North Carolina Lawsuit. The NC SCRA [NC GS 127B-25 et seq] authorizes persons aggrieved by an SCRA violation to seek relief in court, including injunction, restitution, damages, attorney fees, and court costs. In discussing this option with clients, military legal assistance attorneys should be mindful of the assistance clients may receive through the American Bar Association Military Pro Bono Program. The discussion above concerning contractual arbitration and waiver is also applicable.
TEMPLATE FOR INTEREST RATE REDUCTION REQUEST
Tailor as necessary to fit the facts of the client’s case.
YOUR ADDRESS HERE
CREDITOR NAME HERE
CREDITOR ADDRESS HERE
Subject: INTEREST RATE REDUCTION UNDER SERVICE MEMBER CIVIL RELIEF ACT:
To Whom It May Concern:
Pursuant to the interest rate reduction provisions of the Service Member Civil Relief Act, Title 50, U.S. Code, section 3937 (hereinafter referred to as the SCRA) I hereby request that the interest on the above-mentioned debt be reduced to 6% as of the date that I was called to military service.
I incurred this civil debt prior to the date that I was called to military service. I began active duty on ___________________________ and have remained on active duty as reflected in the following documents [Identify the document(s) that show the date you entered the armed forces and your current military status. Examples: enlistment contract / extensions, appropriate pages of military service record, reserve call up orders, or letter from commanding officer].
My current enlistment extends through _______________. However, I may choose to reenlist at that time. I will notify you upon my release from active duty.
You may also confirm my military service dates online at the website of the Defense Manpower Data Center (DMDC) https://www.dmdc.osd.mil/appj/scra/ Access to my military service information on this website requires you to input my date of birth and / or social security number. I have previously provided this information to you in connection with the application for credit.
I am currently assigned to [UNIT NAME] ___________________, located at [Military Installation Name]. [If applicable, add the following: I anticipate deployment to_XXXX_in the near future.]
My entry into the military service has materially affected my ability to meet this obligation at the original interest rate. [If desired and appropriate, state here the how military service affects ability to pay; e.g., by noting the specific decrease in pay resulting from military service]
The SCRA sets a 6% per annum ceiling on interest charges (including service charges, renewal charges and fees) during the period of military service for obligations made prior to the date of entry onto active duty. Interest above 6% must be forgiven and not accrued. Please ensure that your records reflect this statutory ceiling and that any excess charge is withdrawn.
U.S. Marine Corp
TEMPLATE FOR INTEREST RATE DEMAND LETTER
Tailor as necessary to fit the facts of the client’s case.
YOUR ADDRESS HERE
CREDITOR NAME HERE
CREDITOR ADDRESS HERE
Subject: INTEREST RATE REDUCTION UNDER SERVICE MEMBER CIVIL RELIEF ACT:
To Whom It May Concern:
My client ___________ previously requested reduction of interest on his account, which she /he is entitled to pursuant to the interest rate reduction provisions of the Service Member Civil Relief Act, Title 50, U.S. Code, section 3937 (hereinafter referred to as the SCRA). I have attached a copy of this request. My client provided this request to you / your company on _______________but has yet to receive a response. [Or, if there was a response, address and refute the reasons, if any, given for the denial].
My client’s rate reduction request identifies the debtor and the account and meets all the SCRA requirements. It provides appropriate documentation of military service, demonstrates that the debt was incurred prior to military service, and shows that the rate reduction request was made while my client was on active duty or within 180 days from separation from active-duty service. Furthermore, you can confirm my client’s military service dates online at the website of the Defense Manpower Data Center (DMDC) https://www.dmdc.osd.mil/appj/scra/ Access to information on this website requires you to input the subject’s date of birth and / or social security number. My client previously provided this information to you in connection with the loan application.
The SCRA sets a 6% per annum ceiling on interest charges (including service charges, renewal charges and fees) during the period of military service for obligations made prior to the date of entry onto active duty. Interest above 6% must be forgiven and not accrued.
I am hopeful that this matter can be resolved amicably and without litigation. However, you are advised that my client may take action to enforce his/ her SCRA rights, including but not limited to the following:
-Complaint and enforcement through the U.S. Attorney General. A person aggrieved by an SCRA violation may make an online complaint to U.S. Department of Justice through its Servicemembers and Veterans Initiative. See: https://www.justice.gov/servicemembers The U.S. Department of Justice aggressively enforces the SCRA and has previously taken action concerning interest rate reduction and other SCRA issues. Further, it is not unusual for the Department of Justice to initiate its own investigation based on consumer complaints and thereafter to find many other violations. The SCRA authorizes the Department of Justice to seek injunction, money damages, and a civil penalty of $55,000 for the first violation and $110,000 for each subsequent violation [50 U.S.C. 4041].
-Enforcement by the North Carolina Attorney General. North Carolina enacted the NC SCRA [NC GS 127B-25 et seq], which incorporates the federal SCRA into North Carolina law and authorizes the North Carolina Attorney General to seek relief in court, including injunction, restitution, a civil penalty of $5,000 per violation, and other relief.
-Enforcement through Private Lawsuit. The SCRA authorizes aggrieved persons to seek relief in court, including money damages, attorney fees, court costs, and other relief [50 U.S.C. 4042].
You are also advised that the knowing violation of the rate reduction provision of the SCRA constitutes a crime punishable by a fine and up to a year imprisonment [50 U.S.C. 3937(e)].
My client has made a proper, legally sufficient request for reduction of interest on his / her preservice financial obligation pursuant to the SCRA. He / she is entitled to relief. Accordingly, please reduce the interest on my client’s account to 6%, effective upon my military service.
PERRY M. MASON
Encl: SCRA rate reduction request dated ________
TEMPLATE FOR COMMANDER VERIFICATION OF MILITARY SERVICE
Tailor as necessary to fit the facts of the client’s case.
1. I, [rank / name of commander] being duly sworn, hereby state and certify that the following is true:
-I am the Commanding Officer of the following military unit ________________________, located at [Name of Installation].
-[Name / rank of debtor / borrower] is an active-duty member of my command who has or soon will, apply for interest rate reduction of a preservice debt pursuant to the Servicemembers Civil Relief Act, Title 50, U.S. Code, section 3937 (hereinafter referred to as the SCRA). The purpose of this statement is to provide creditors with accurate information concerning this servicemember’s dates of military service to ensure the proper application of the SCRA interest rate reduction provisions.
-To the best of my personal knowledge and belief, and after review of the relevant military records, I certify that the aforementioned [Marine, Soldier, Airman, Sailor, Coast Guardsman] commenced active-duty military service on ____________________and has remained on active duty to the present date.
-[As applicable] The current enlistment contract concerning the aforementioned service member extends through ________________________.
-This statement is true and correct to the best of my knowledge and belief.
JOHN P. JONES
Lieutenant Commander, U.S. Navy
STATE OF __________________
COUNTY OF _________________
On this day of , 2023, personally appeared before me, the said named JOHN P. JONES, to me known and known to me to be the person described in and who executed the foregoing instrument and he/she acknowledged that he/she executed the same and being duly sworn by me, made oath that the statements in the foregoing instrument are true.
My Commission Expires__________
50 U.S.C. 3937
Maximum rate of interest on debts incurred before military service.
(a) Interest Rate Limitation
(1) Limitation to 6 percent. An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent—
(A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or
(B) during the period of military service, in the case of any other obligation or liability.
(2) Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven.
(3) Prevention of acceleration of principal. The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made.
(b) Implementation of limitation.
(1) Proof of military service.
(A) In general. Not later than 180 days after the date of a servicemember’s termination or release from military service, in order for an obligation or liability of the servicemember to be subject to the interest rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of—
(i) the military orders calling the servicemember to military service and any orders further extending military service; or
(ii) any other appropriate indicator of military service, including a certified letter from a commanding officer.
(B) Independent verification by creditor.
(i) In general. A creditor may use, in lieu of notice and documentation under subparagraph (A), information retrieved from the Defense Manpower Data Center through the creditor’s normal business reviews of such Center for purposes of obtaining information indicating that the servicemember is on active duty.
(ii) Safe harbor. A creditor that uses the information retrieved from the Defense Manpower Data Center under clause (i) with respect to a servicemember has not failed to treat the debt of the servicemember in accordance with subsection (a) if—
(I) such information indicates that, on the date the creditor retrieves such information, the servicemember is not on active duty; and
(II) the creditor has not, by the end of the 180-day period under subparagraph (A), received the written notice and documentation required under that subparagraph with respect to the servicemember.
(2) Limitation effective as of date of order to active duty. Upon receipt of written notice and a copy of orders calling a servicemember to military service, the creditor shall treat the debt in accordance with subsection (a), effective as of the date on which the servicemember is called to military service.
(c) Creditor protection. A court may grant a creditor relief from the limitations of this section if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military service.
(d) Definitions. In this section:
(1) Interest. The term “interest” includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.
(2) Obligation or liability. The term “obligation or liability” includes an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage.
(e) Penalty. Whoever knowingly violates subsection (a) shall be fined as provided in title 18, United States Code, imprisoned for not more than one year, or both.