Compliance of Servicemembers' Civil Relief Act Post Sallie Mae/Navient Consent Order
Earlier this year, the Department of Justice and Sallie Mae/Navient entered into a Consent Order regarding the allegations of Servicemembers' Civil Relief Act (SCRA)1 violations. It is important to note that Sallie Mae/Navient did not admit to any of the allegations set forth in the Department of Justice's complaint.
A strict reading of the SCRA indicates that the benefits set forth are not automatic. In order to receive the benefit of the interest rate limitation, servicemembers have the affirmative duty to notify their creditors in writing of their intent to invoke the protection and provide a copy of their military orders.2 Not only does the SCRA specify this, but the Department of Education's (DOE) regulations (up to May 2014) and the Consumer Financial Protection Bureau's own guidance to servicemembers affirm these requirements. However, the Department of Justice's allegations and the agreements set forth in the Consent Order deviate from the letter of the law and historical guidance. Specifically, servicemembers will not be required to submit any documentation, including written notice of their orders, to receive the 6% interest rate cap.3
After several months of silence, the DOE issued updated guidance in its "Dear Colleague" letter (GEN-14-16). Although it is directed to the DOE's servicers of direct loans and Federal Family Education Loan (FFEL) lenders and servicers, it is clear the burden has shifted. Student loan lenders and servicers must now proactively identify servicemembers within their inventory. If a servicemember is identified, the lender/servicer must apply the interest rate limitation and recalculate the balance.
Servicemembers will be identified a couple ways for SCRA protection. The Department of Defense's Defense Manpower Data Center (DMDC) database will primarily be used. Lenders and servicers will need to scrub their inventory on a regular basis against this database. The DMDC will confirm a student loan borrower's active duty military status and the corresponding service dates. Lenders and servicers may also be informed of active duty status when a servicemember applies for a military deferment or forbearance. This action should also trigger a review of the DMDC database to confirm active duty start date. Once the service date is identified, the balance will need to be recalculated due to the 6% interest rate cap.
Additionally, both the Consent Order and the DOE guidance appear to deviate from the requirement that servicemembers must be able to establish material affect to receive SCRA benefits. In the past, servicemembers may have had to show that their military status hampered their ability to meet financial obligations. If the application of the benefit is to be automatic, then it would seem to reason that material affect is no longer relevant.
Finally, it is important to reinforce that other aspects of the SCRA remain unchanged. A servicemember will only be entitled to SCRA benefits if the loan originated prior to entering active duty service. The result of this reinforcement is that a consolidation loan made after the servicemember has entered service or even after discharge, will be ineligible for SCRA protection.
Even though the DOE guidance references federal loan programs, private lenders and servicers will take notice as well. The Consent Order does not distinguish between federal and private loans. The expectation is that at some point the Act will be amended to incorporate the shifting burden to creditors. Of course, in today's political climate, no one knows when that will occur.
1 Servicemembers' Civil Relief Act of 2003, 50 U.S.C.A. Appendix § 501 et seq.
2 Servicemembers' Civil Relief Act of 2003, supra at §527.
3 Interest includes service charges, fees, and any other charges