SCRA benefits under scrutiny: Know how to comply
The Servicemembers Civil Relief Act (SCRA) is intended to offer a variety of financial protections to active-duty service members. They include the ability to reduce the interest rate on any preservice obligations or liabilities to a maximum of six percent.
But, the Consumer Financial Protection Bureau (CFPB) published research data on December 7, 2022, showing that active-duty service members of the Army Reserve and National Guard are paying an extra $9 million in interest every year. The research suggests that only a small fraction of those service members are using the rate-reduction benefit.
And this was not the first indicator of renewed regulatory focus on SCRA protections.
Fast-forward to the FDIC supervisory highlights published in March 2023 and it is evident financial institutions need to review their policies and procedures for complying with the SCRA. Understanding this renewed attention on the act will lead to insights that can help your institution assess its own processes with regard to SCRA.
What’s changed
From fall 2008 through spring 2022, interest rates remained at historically low levels.
But that changed in September 2022 when the prime rate exceeded 6% for the first time since January 2008. The rate has continued to rise since then and is anticipated to remain at this higher level.
Prior to spring 2022, it would be rare that an active-duty service member would need to invoke their right to the interest rate reduction. But in today’s environment, this once scarce practice may now need to be revisited on a regular basis. The current interest rate environment and the publications by both the CFPB and FDIC are a reminder of your financial institution’s obligation to comply with the SCRA protections afforded to active-duty service members.
What hasn’t changed
One of the primary types of protections SCRA offers to active-duty service members is a reduction in the interest rate on any preservice loans to a maximum of a combined 6%, considering interest, service charges and fees.
In addition, SCRA prohibits accelerating principal for both open-end and closed-end loans. These requirements have not changed, but the FDIC supervisory highlights address a concern with how financial institutions are handling the excess interest charged during the period between when an active-duty service member is called to active duty and when they invoke their rights under the act and request a rate reduction.
When an active-duty service member invokes their rights under the SCRA, the financial institution must calculate the difference in the interest and fees charged to the service member during that period and refund the excess interest over 6%.
Prohibited practices
Financial institutions were found to be applying excess interest to the service member’s principal loan balance without providing the service member the option of how they would like the excess interest refunded. Applying the excess interest to the principal balance of the loan is permitted only if the service member affirmatively chooses that method after being offered other options. Otherwise, this practice would be considered accelerating the principal balance which is prohibited.
While reducing principal does provide some benefit to the service member, the choice of how to receive that benefit must be made by the service member and not unilaterally determined by the financial institution. SCRA does not require a specific method for reimbursing the forgiven excess interest, but service members should be provided the choice.
Don’t lose sight of the underlying reason for the SCRA: to provide protections to service members to reduce financial burdens during their time of active duty. If affirmative consent cannot be obtained at the time the protection is applied, the financial institution could consider the following nonprohibited practices:
- Provide a cash refund.
- Apply the refund to current or future monthly payments in a timely manner.
- Apply the refund to past-due amounts.
What action should you take?
If your financial institution has been applying excess interest to the principal loan balance, you should take immediate action to end this practice, unless you are obtaining affirmative consent from the service member after providing acceptable options. Consistent with the FDIC’s guidance, your financial institution should take the following measures:
- Develop and implement formal policies and procedures that comply with the provisions of SCRA, or review your existing policies and procedures to confirm they align with the requirements.
- Review, monitor and audit SCRA loans to ensure policies and procedures are implemented and followed.
- Provide service members with the option of how to receive the excess interest, or at a minimum, provide the excess interest in a cash payment.
How Wipfli can help
Wipfli advisors can assist you in reviewing your policies and procedures with respect to SCRA. We are here to provide guidance in identifying areas of weakness and finding solutions. Let us help you as you continue to support our nation’s service members. Contact us to learn more about our services that can provide assurance that your institution stays in compliance.Sign up to receive additional financial institutions content in your inbox or continue reading:
