In a November 1, 2023 blog post titled “Servicemembers continue to face major financial challenges,” the Consumer Financial Protection Bureau highlighted three areas where it is working to secure protections for servicemembers, including the Servicemembers Civil Relief Act’s (“SCRA”) 6% interest rate cap, restrictions on the use of military allotments, and efforts to protect servicemembers from identity theft. While most of the post repackages discussion and information that the CFPB has covered in the past, the post highlights new credit card market research that shows major credit card companies are going above and beyond the legal requirements of the SCRA – but not quite far enough in the eyes of the Bureau – in providing interest rate relief.
According to the research:
- All surveyed credit card issuers check the Department of Defense’s Defense Manpower Data Center (“DMDC”) database to independently verify a servicemember’s military status and eligibility for the interest rate reduction benefit. The check eliminates the need for most servicemembers to provide additional documentation.
- At least two credit card issuers have SCRA policies that include proactively checking the DMDC database to identify accounts that may be eligible for SCRA benefits, but the majority of those surveyed still require servicemembers to request a rate reduction.
- Each surveyed issuer also has SCRA policies that require an enterprise-wide search for additional servicemember accounts and the application of the interest rate reduction to all accounts held by the institution when a servicemember notifies the issuer that they are eligible for SCRA benefits and protections.
While the SCRA allows a creditor to use information retrieved from the DMDC in lieu of requiring notice and documentation to request the interest rate cap, creditors are not required to do so. 50 U.S.C. § 3937(b)(1)(B).
Another notable finding from the CFPB’s research is an emerging industry practice of lowering the interest rate for eligible servicemembers below the 6% interest rate cap required by law. According to the research:
- Half of the surveyed issuers reduced interest rates to either 6% or 5.9%, at or just below the permissible rate.
- One-fourth of the surveyed issuers reduced rates to 4%. Others reduced rates to 4% for certain home loans and reduced rates to 6% for other types of accounts.
- Some issuers reduced rates to 0%.
We have seen creditors offer interest rates below the 6% cap for over a decade across a variety of products. This has the benefit of providing additional benefits to servicemember customers while also mitigating the impact of calculation errors that may result in a violation by providing some additional cushion.
Finally, the CFPB’s research notes that some issuers are going beyond the SCRA’s requirements in extending eligibility to late requests (beyond 180 days after active duty) or providing interest rate benefits to spouses or dependents. While the Military Lending Act’s (“MLA”) 36% cap on the Military APR extends to spouses and dependents, the SCRA’s interest rate cap only applies to servicemembers (or to loans jointly incurred with a spouse), so extending it to others beyond obligations incurred by servicemembers goes beyond the law’s requirements. Despite all this, the CFPB believes that more can be done to implement automation and other proactive measures more broadly so that servicemembers receive SCRA benefits without even having to request them, as is required by law.
The credit card market research is from the CFPB’s sixth biennial report on the credit card market and is based on a number of sources, including the CFPB’s Consumer Credit Panel (“CCP”), the Federal Reserve Board’s “Y-14M” (“Y-14”) data collection from bank holding companies with total consolidated assets of $100 billion or more, data provided in response to requests to Mass Market Issuers (“MMI”) and Specialized Issuers for data beyond the Y-14 data, the CFPB’s Quarterly Credit Card Agreement Database, responses to a January 2023 Request for Information, the CFPB’s Consumer Complaint Database, and Third-Party sources, such as publicly available industry analyst reports. The CFPB does not specifically identify the source of the data used as a basis for the SCRA-related trends it identifies, but we believe the data likely comes from the MMI data or other information provided by major issuers that supplements the CCP and Y-14 data sets.
Beyond the SCRA, the blog mentions that the CFPB continues to hear from servicemembers regarding abuses of the military allotment system, in which companies allegedly try to force automatic payments through payroll deduction from a servicemember’s military pay. Specifically, the Bureau states that examiners have uncovered issues regarding failures to provide timely statements that would have informed servicemembers they were being charged a monthly fee on allotment savings accounts. We have discussed the CFPB’s focus on military allotments, which are restricted under the MLA, including the concern that some lenders are circumventing those restrictions by partnering with banks to set up savings accounts to process allotments.
The blog post also discusses a January 2023 CFPB report regarding an increase in servicemember identity theft incidents. We have previously discussed that report and the specific attributes of the servicemember population that make them attractive targets to identity thieves and the unique and heightened repercussions of identity theft on servicemembers, who are subject to continuous evaluation of their credit history and ability to meet their financial obligations in order to maintain their security clearance.
We have previously discussed the fact that the CFPB’s expectations when it comes to SCRA compliance go beyond the actual legal requirements. A CFPB report issued last year titled “Protecting Those Who Protect Us: Evidence of activated Guard and Reserve servicemembers’ usage of credit protections under the Servicemembers Civil Relief Act,” highlighted the underutilization of the SCRA’s interest rate benefit by eligible servicemembers, and included many of the recommendations discussed in the recent blog post. As the credit card data shows, many creditors do go beyond the legal requirements in extending SCRA benefits for servicemembers. As a result of this shift in the industry standard for benefits, creditors that do not go above and beyond the requirements are often met with supervisory questions as to why they are not doing the same. While we view these questions as improper, we encourage all our clients to review their SCRA Policies and Procedures to ensure they are prepared to explain and defend their approach in light of this regulatory expectation.