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Servicemembers Missing Out on Lower Interest Rates

Reserves and National Guard called to active duty can get interest rate reductions, including for their mortgage. But a CFPB study found that few request it.

WASHINGTON – U.S. Reserve and National Guard members called to active duty are missing out on $9 million in interest savings every year because they aren’t getting interest rate reductions – their right under the Servicemembers Civil Relief Act (SCRA).

According to a study released by the Consumer Financial Protection Bureau (CFPB), the SCRA gives servicemembers on active duty the right to request interest rate reductions on outstanding loans during the time they’re activated – and to request an additional year in the case of mortgages.

But CFPB finds that only a small fraction of activated Guard and Reserve servicemembers actually receive interest rate reductions, saying financial institutions can take steps to ensure these individuals can more easily assert their rights.

The report – Protecting Those Who Protect Us: Evidence of activated Guard and Reserve servicemembers’ usage of credit protections under the Servicemembers Civil Relief Act – is posted online.

“Our analysis suggests that members of the Reserves and the National Guard who serve in active-duty status are not receiving interest rate reductions on their loans pursuant to the law,” says CFPB Director Rohit Chopra in a statement. “Given rising interest rates, financial companies should take steps to ensure military family financial rights are respected.”

Congress enacted SCRA to provide legal and financial protections so servicemembers on active duty can focus on their mission. The protections include the right to a reduced interest rate on any pre-service obligation to a maximum of 6%.

The Act also includes protections against repossession of certain property without a court order, protections against default judgments in civil cases, and protections against home foreclosure without a court order. Eligible servicemembers can also terminate certain residential housing and automobile leases early without penalty.

The right to an interest-rate reduction can be a significant financial benefit, but even more so now that interest rates are rising. It’s an even bigger benefit for servicemembers who took out larger loans or remain on active duty for a substantial period of time.

CFPB looked at data from 2007 to 2018 and found $100 million of foregone interest rate benefits on auto and personal loans.

The challenge for servicemembers? Many creditors require proactive notifications about a shift to active-duty status. And a servicemember with multiple accounts – credit cards, a mortgage, etc. – must often notify each one individually. In addition, that notification often includes a copy of their orders to active-duty service or other appropriate indicator, including a certified letter from a commanding officer, that shows the date they began active-duty service.

Some creditors require even more. In some cases, they continue to require that written requests or documentation be submitted by mail or fax instead of using an online process.

However, creditors don’t need much of that information. According to CFPB, they could just as easily access a Department of Defense system that checks any borrower for active-duty status. By using the Defense Manpower Data Center SCRA website, creditors would help ensure servicemembers benefit from their right to interest rate reductions.

Servicemembers’ challenges negatively affect the financial strength of military households, CFPB claims.

CFPB study results

  • Between 2007 and 2018, fewer than 10% of auto loans and 6% of personal loans received a reduced interest rate: CFPB finds evidence that interest rates on some loans are being reduced, but its low use means few loans actually receive interest rate reductions.
  • In addition to the $100 million of foregone benefits on auto and personal loans, members of the reserve component also infrequently benefit from interest rate reductions for credit cards and mortgage loans: CFPB estimates that a mortgage loan with an interest rate between 6.5% and 7.5% could accumulate savings of between $1,890 and $5,670 per activation. By comparison, the per activation numbers for auto and personal loans are $331 and $249, respectively.
  • While reserve component servicemembers are more likely to obtain a reduced interest rate during longer periods of activation, even among activations of a year or more, the likelihood of an interest rate reduction remains under 16% for auto and personal loans.

Consumers can submit complaints about financial products or services by visiting the CFPB’s website or calling (855) 411-CFPB (2372).

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