Protecting the Financial Rights of Those Who Fight For Us

When servicemembers answer the call to serve, they deserve legal and financial protections that allow them to focus on their mission and set aside related worries about home.

The Servicemembers Civil Relief Act (“SCRA”) of 2003 is intended to address that very situation. It sets forth financial and legal protections unique to U.S. active-duty military personnel, including capping the interest rate that institutions can charge at 6 percent. The SCRA also protects against home foreclosures, civil proceedings, lease terminations and car repossessions.¹

In recent years, prolonged economic growth and low interest rates created an environment that potentially reduced the risk of SCRA enforcement actions. When rates were near historic lows in 2021, only four SCRA-related cases were filed. However, high inflation, rising interest rates and economic uncertainty seem to be increasing the risk. “In fact, in the first quarter of 2023 alone, the United States Department of Justice (“DOJ”) has already filed a complaint or a Statement of Interest in four SCRA-related cases.”²

Now, more trouble could be brewing within this new environment. As servicemembers face rising rates and economic difficulties, they may flood financial institutions with requests for rate reductions and other remediations.³ Financial institutions, in turn, may find themselves ill prepared to handle the influx — whether because of the volume or unfamiliarity with the regulatory requirements.

Potential SCRA Regulatory Scrutiny
On September 15, 2022, the average interest rate in the United States for a 30-year mortgage reached 6.02 percent. That milestone is significant — it is the first time since the 2008 financial crisis, and the subsequent establishment of the Consumer Financial Protection Bureau (“CFPB”), that the average rate exceeded the 6 percent cap under the SCRA.⁴

Currently, the DOJ’s Civil Rights Division enforces the SCRA, while the CFPB’s Office of Servicemember Affairs monitors the market and refers SCRA violations to the DOJ.⁵ Under federal law, the CFPB has a broad mandate to police consumer protections.⁶

That said, it’s difficult to predict what approach the CFPB will take regarding SCRA-related matters. Formed as a watchdog agency by Congress in 2011, the CFPB has made headlines of late for enforcing actions mandated under other statutes. Recent CFPB actions, however, suggest the bureau may soon shift its focus to servicemembers: In July 2022, the CFPB issued a joint letter with the DOJ that reminded auto finance companies of their responsibilities under the SCRA.⁷ The CFPB also issued an industry report in December 2022 that highlighted how certain active-duty servicemembers do not always receive the required SCRA benefits.⁸

SCRA violations are punishable by fine, and previous enforcement cases offer clues about what may be at stake for financial institutions: During the “Great Recession,” for example, a framework from the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System recommended fines ranging from $15,000 to $125,000, plus equity, for every SCRA mortgage foreclosure violation.⁹

In the case of SCRA-related interest rate violations, the framework also specified that institutions were required not only to remediate customers for the excess amounts charged, but also to calculate and pay interest on the remediation amounts.

In this fast-changing landscape, it’s reasonable to assume that institutions could inadvertently run afoul of the SCRA’s guidelines. One reason is that the law’s provisions may not be top of mind for staff who have only previously worked in a low-interest-rate environment. Another is that some servicing systems might not have been tested for the SCRA’s rate caps, which can lead to an inability to cap rates in practice. This lack of exposure means that adequate controls and processes may not always be in place across the entire organization.

Additional confusion can stem from provisions in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) of 2020,¹⁰ which included separate protections that halted housing foreclosures and provided forbearance options to many active-duty military personnel whose loans are guaranteed by the United States Department of Veterans Affairs.¹¹ Without proper training in the SCRA’s guidelines, any separate benefits stemming from CARES may be forgotten or discontinued.

Don’t Be That Institution
Firms should take concrete steps to ensure their people, processes and technology are up to speed on SCRA requirements to avoid potential regulatory penalties or the reputational risks of negative media attention. These crucial review areas include:

Governance and Oversight

Institutions should ensure that their boards and senior management are informed of key SCRA provisions and can make decisions involving SCRA-related risks.
They should ensure all policies and procedures are up to date, including job aids, particularly regarding activated National Guard and Reserve servicemembers.
Institutions should review CFPB recommendations to increase the use of SCRA benefits and determine if these additional actions are appropriate.

Training

Firms should review and update training materials to ensure staff is appropriately educated on the proper intake and application of SCRA-related consumer protections.
Similarly, military orders for service personnel are often technical and complex to interpret, which means staff must have a solid understanding of SCRA provisions and how they are applied to all accounts the servicemember has with the institution.
It is also important to note that institutions are responsible for ensuring that their vendors and other third parties have proper training and meet SCRA compliance standards.

Monitoring

SCRA-related monitoring efforts should be evaluated against industry best practices and potentially enhanced, especially given that many financial institutions use older legacy systems with limited preventive controls.
This monitoring should include periodic transactional testing of both approved and rejected SCRA-related requests from customers.

It’s in all our interests to get this one right. To ensure compliance, institutions must not only have the right policies, procedures and controls in place, but they must also set a “tone from the top” and make sure everyone understands the significance of the SCRA and the potential regulatory and reputational risks of harming servicemembers. If institutions act now, they can make certain that they are offering important benefits and protections for servicemembers under the SCRA and preparing for potential increased regulatory risk in the future.

Footnotes:

1: “The Servicemembers Civil Relief Act (SCRA): Section-by-Section Summary,” Congressional Research Service (updated February 9, 2021), https://crsreports.congress.gov/product/pdf/R/R45283/6.

2: Servicemembers and Veterans Initiative Home – Cases, United States Department of Justice (last accessed May 22, 2023), https://www.justice.gov/servicemembers/cases.

3: “The Servicemembers Civil Relief Act,” Consumer Financial Protection Bureau (last accessed May 21, 2023), https://www.consumerfinance.gov/consumer-tools/educator-tools/servicemembers/the-servicemembers-civil-relief-act-scra/

4: 30-Year Fixed Rate Mortgage Average in the United States, Federal Reserve Bank of St. Louis (last accessed May 21, 2023), https://fred.stlouisfed.org/series/MORTGAGE30US.

5: “CFPB Finds Members of the Reserves and National Guard Paying Millions of Dollars in Extra Interest Each Year,” Consumer Financial Protection Bureau (December 7, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-members-of-the-reserves-and-national-guard-paying-millions-of-dollars-in-extra-interest-each-year/

6: “Introduction to Financial Services: The Consumer Financial Protection Bureau,” Congressional Research Service (updated January 5, 2023), https://crsreports.congress.gov/product/pdf/if/if10031

7: “CFPB and Justice Department Caution Auto Finance Companies about Servicemember Protections,” Consumer Financial Protection Bureau (July 29, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-justice-department-caution-auto-finance-companies-about-servicemember-protections/.

8: Charles A. Goldman and Yael Katz, “Protecting Those Who Protect Us,” Consumer Financial Protection Bureau (December 2022), https://files.consumerfinance.gov/f/documents/cfpb_servicemembers-usage-of-scra-credit-protections_2022.pdf.

9: “Financial Remediation Framework for Use in the Independent Foreclosure Review,” Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve System (June 21, 2012), https://www.occ.treas.gov/topics/consumers-and-communities/consumer-protection/foreclosure-prevention/correcting-foreclosure-practices/financial-remediation-framework.pdf.

10: Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 134 Stat. 281 (2020).

11: Michelle Singletary, “The federal foreclosure moratorium has ended. Struggling homeowners may still be able to keep their homes.” The Washington Post (August 3, 2021), https://www.washingtonpost.com/business/2021/08/03/faq-foreclosure-moratorium-ending/.

© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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