CFPB Report Finds Only Small Fractions of Activated Guard and Reserve Servicemembers Receive SCRA Interest Rate Reductions

On December 7, the Consumer Financial Protection Bureau (CFPB) released a report entitled Protecting Those Who Protect Us. The report sought to quantify, for the first time, the use of the Servicemembers Civil Relief Act (SCRA) interest rate reduction benefit. According to the CFPB’s research, between 2007 and 2018, fewer than 10% of eligible auto loans and 6% of personal loans received a reduced interest rate. Additionally, members of the reserve component also infrequently benefit from interest rate reductions for credit cards and mortgage loans. The report identified several strategies (previously “codified” via consent orders) to increase servicemember access to SCRA protections, including automatically applying interest rate reductions and applying reductions for all accounts held at an institution if a servicemember invokes protections for a single account.

The SCRA applies to active-duty members of the Army, Marine Corps, Navy, Air Force, Space Force, and Coast Guard as well as reservists or members of the National Guard serving for more than 30 consecutive days for the purpose of responding to a national emergency. The law also applies to active duty commissioned officers of the Public Health Service or the National Oceanic and Atmospheric Administration. The SCRA provides multiple legal and financial protections to active duty servicemembers, including: (1) the ability to reduce the interest rate on any pre-service obligations or liabilities to a maximum of 6 percent; (2) protections against repossession of certain property, including motor vehicles, without a court order; (3) protections against default judgments in civil cases; (4) protections against certain home foreclosures without a court order; and (5) the ability to terminate certain residential housing and automobile leases early without penalty.

The CFPB’s report focused only on the interest rate reduction benefit and protection against repossession. To receive the interest rate reduction, a servicemember must notify their lender in writing with a copy of their orders to active-duty service or any other appropriate indicator of military service. Creditors may also proactively grant the interest rate reduction by retrieving information from the Defense Manpower Data Center SCRA website to determine active-duty status in lieu of written notification.

The report used data from the CFPB’s Consumer Credit Panel from 2007 to 2018 matched to activation data from the Department of Defense. Key findings from the report include:

• Fewer than one in ten members of the reserve component with eligible auto loans, and only 6% of those with eligible personal loans, received an interest rate reduction from 2007 to 2018. These missed interest rate reduction opportunities represent about $100 million in foregone savings.
  
  
• Members of the reserve component also infrequently benefit from the rate reduction benefit for credit cards and mortgage loans. Although the CFPB could not apply the same method to credit cards (in part because they are open-end credit) and home mortgages (in part because their payments often include taxes and insurance), it estimated the foregone savings of these rate reduction opportunities could amount to between $1,890 and $5,670 per activation, which is much larger than the savings for auto and personal loans.
  
  
• Reserve component servicemembers are more likely to obtain a reduced interest rate during longer periods of activation. Even among the longest periods of activation (about a year or more), however, the likelihood of an interest rate reduction remains under 16% for auto and personal loans.
  
  
• Reserve component servicemembers are less likely to experience reported repossessions during an activation. During activated periods, auto loans are two-thirds less likely to be reported in repossession, compared to non-activated periods.
  

In conclusion, the CFPB recommended that creditors take the following steps, consistent with practices that have been required as a practical matter by consent orders resolving SCRA violations, to increase utilization of the SCRA rate reduction:

• Apply SCRA interest rate reductions enterprise-wide if a servicemember invokes protections for a single account. If widely adopted, this measure will increase interest rate reduction utilization, reduce the duplication necessary to invoke the SCRA interest rate reduction for multiple accounts, and address complexity that may be hindering utilization.
  
  
• Explore ways to automatically apply the SCRA interest rate reduction. When the SCRA interest rate reduction benefit is automatically applied, as has been done for many student loans, eligible servicemembers are substantially more likely to benefit than if they are required to submit proper written notification.
  
  
• Develop comprehensive and periodic indicators of SCRA benefit utilization. A comprehensive and periodic review of SCRA rate reduction utilization would provide beneficial information to evaluate future efforts to expand servicemembers’ financial protections.