This presentation was prepared for use by SLSA and SLSA PLC members This presentation was prepared for use by SLSA and SLSA PLC members. It provides preliminary analysis and is intended as an aid in understanding the Servicemembers Civil Relief Act (SCRA). It may contain inaccuracies. Readers should refer to the regulations to resolve any questions. This presentation is not intended as legal advice, and may not be relied upon as such. SCRA ISSUES

Problem Areas in SCRA Compliance Servicers granting borrowers the SCRA 6% interest rate for 12 months and then requiring them to re-apply Borrowers not getting lower payment amounts when they request the SCRA interest rate limitation Time period for applying the 6% cap – date of orders or date active duty begins? Interaction between MIL deferment eligibility and SCRA

Use of DoD’s SCRA Database One of the complaints in the CFPB report “The Next Front?” was that servicers were granting SCRA benefits for 12 month periods and then requiring borrowers to re-apply (i.e., send in another request and new orders) for the interest rate cap at the end of the 12 month period This was occurring because end dates on orders were either unclear or missing entirely

Use of DoD’s SCRA Database Instead, servicers should be using the DoD’s SCRA database to check the status of orders every X months (3,6,9?) and updating borrowers’ status and SCRA eligibility on servicing system based on the DoD website Best practice – even when the end date on the borrower’s orders is clear, you can set your system to trigger a check of the borrower’s active duty status before removing the SCRA interest rate cap

Lower Monthly Payment One of the complaints in the CFPB report “The Next Front?” was that borrowers’ monthly payments were not actually being lowered Same payment amount but loan was being paid off faster because of lower interest rate Servicers should re-amortize the borrower’s loan at 6% going forward and bill for lower payment amount at 6% interest rate

Lower Monthly Payment Section 527(a)(2)-(3) provides (2) Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven. (3) Prevention of acceleration of principal. The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made.

Lower Monthly Payment When the Act was re-stated in 2003, there was legislative history (H.Rpt. 108-81) that explained the addition of Section 527(a)(2) and (3) “To resolve lingering questions about congressional intent, section 207 (dealing with the maximum rate of interest on debts incurred before military service) would clearly provide that interest above the 6 percent rate is to be forgiven, and that the amount of the monthly payment is to be reduced. Not to forgive interest above the 6 percent maximum rate would place the servicemember in precisely the same financial dilemma Congress sought to ameliorate with the 1942 amendments. See H. Rept. 2198, 4 (1942).”

Lower Monthly Payment In many instances borrower requests the SCRA interest rate cap retroactively Re-apply past payments using 6% interest rate - difference should pay down principal (assuming all late fees and accrued interest paid) in those prior months Re-amortize the loan at 6% going forward. NCHER/SLSA IBR Workgroup working through IBR issues now No interest rate used in calculation of PFH monthly payment

Time Period for Imposing the 6% Cap Differing interpretations as to when the 6% cap is imposed Date of orders vs. date active duty service begins Example: Borrower receives orders dated March 1, 2013, and is order to report on April 15, 2013 Does 6% cap begin on March 1st or April 15th? Potential liability is increased when there are big time gaps between the date of the orders and date active duty service begins

Time Period for Imposing the 6% Cap Section 527(a)(1) of the SCRA sets forth the interest rate limitation: (1) Limitation to 6 percent. An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent – (B) during the period of military service, in the case of any other obligation or liability.

Time Period for Imposing the 6% Cap Section 527(b)(2) of the SCRA provides guidance on how the interest rate limitation is to be implemented: (2) Limitation effective as of date of order to active duty. Upon receipt of written notice and a copy of orders calling a servicemember to military service, the creditor shall treat the debt in accordance with subsection (a), effective as of the date on which the servicemember is called to military service.

Time Period for Imposing the 6% Cap Defined terms include: Military service (3) Period of military service. The term "period of military service" means the period beginning on the date on which a servicemember enters military service and ending on the date on which the servicemember is released from military service or dies while in military service.

Time Period for Imposing the 6% Cap CFPB appears to believe that the date of orders is controlling Excerpt from “The Next Front?” – “After receiving a valid request, the servicer must refund any interest charges in excess of the six-percent rate cap, dated from the servicemember’s receipt of orders calling her onto active duty. For example, if a servicemember received orders calling her onto active duty on February 15, 2009, to begin active duty on March 1, 2009, and she left active duty on March 1, 2012, the servicemember could request an interest reduction to six percent as late as September 1, 2012 and her servicer would be required to refund any interest charges paid above the six-percent rate cap subsequent to February 15, 2009.”

Differences in Coverage for Federal and Private Loans The regulations resulting from the changes made to the HEA in 2008 use the date of active duty service as the trigger for the SCRA interest rate cap Cite regs If you believe that the date of the orders is the correct trigger for the imposition of the 6% cap for private loans, then you will have a different begin point for the 6% cap for federal loans Private loans = date of orders Federal loans = date active duty service begins

Interaction between MIL Deferment and SCRA Servicers are reporting that they are seeing borrowers who receive a MIL deferment, based on the certification of a commanding officer, and then later they receive an SCRA request from that borrower that includes orders that clearly show that the borrower does not qualify for the MIL deferment

Interaction between MIL Deferment and SCRA What to do? Desire not to take away servicemember benefit especially when certified by commanding officer But servicer duty to reconcile conflicting documentation Instances where GAs have dinged servicers for incorrect grant of deferment

Interaction between MIL Deferment and SCRA What to do? If SLSA suggestion to provide SCRA request as part of MIL form is followed, then at least the two requests would be made contemporaneously in most instances Borrower would be denied MIL deferment up front At least borrower would not lose deferment retroactively (convert to admin forbearance)

Questions? Winkie wishes that she had better answers for you!!