**DRAFT Proposed Modifications to Existing Regulation**

**04/23/2015**

# Issue Paper 2: SCRA

**Session 3:**April 28 – 30, 2015

**Issue:**Establishing procedures for Federal Family Education Loan (FFEL) Program loan holders to use the Department of Defense’s Defense Manpower Data Center (DMDC) database to identify U.S. military servicemembers who may be eligible for a lower interest rate on their FFEL Program loans under the Servicemembers Civil Relief Act (SCRA).

**Statutory cites:**§428(d) of the Higher Education Act of 1965, as amended

50 U.S.C. §527, App. Sec. 207 of the SCRA

**Regulatory cites:**§§682.202, 682.208, 682.410 and 685.202

**Summary of Change:**Expands the provisions in §682.202 and §682.208 to require loan holders to determine a borrower’s active duty military status for application of the Servicemembers Civil Relief Act (SCRA) maximum interest rate based on information from the authoritative electronic database maintained by the Department of Defense. Modifies §682.410 to require guaranty agencies to apply the maximum interest rate under the SCRA upon receipt of evidence of the borrower’s active duty military service. Modifies §685.202(a)(11) to provide that, for Direct Loans, the Secretary determines a borrower’s active duty military status for application of the SCRA maximum interest rate based on information from the authoritative electronic database maintained by the Department of Defense.

**§682.202   Permissible charges by lenders to borrowers.**

The charges that lenders may impose on borrowers, either directly or indirectly, are limited to the following:

(a) Interest.  

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(8) *Applicability of the Servicemembers Civil Relief Act (SCRA) (50 U.S.C. 527, App. sec. 207) as of August 14, 2008.*Notwithstanding paragraphs (a)(1) through (a)(4) of this section,  a loan holder must use the official electronic database maintained by the Department of Defense to identify all borrowers with an outstanding loan who are active duty servicemembers, as defined in 10 U.S.C. 101(d)(1) and (d)(5), and ensure the interest rate on a borrower’s qualified loans with an outstanding balance does not exceed the six percent maximum interest rate under 50 U.S.C. 527, App. section 207(d) on FFEL Program loans made prior to the borrower entering active duty status. For purposes of this paragraph, the interest rate includes any other charges or fees applied to the loan.

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**§682.208   Due diligence in servicing a loan.**

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(j)(1)  Effective July 1, 2016, a loan holder is required to use the official electronic database maintained by the Department of Defense, to --

(i) Identify all borrowers who are active duty servicemembers and who are eligible under paragraph §682.202(a)(8); and

(ii) Confirm the dates of the borrower’s active duty status and begin, extend, or end, as applicable, the use of the SCRA interest rate limit of six percent without further request from the borrower.

(2) The loan holder must compare its list of borrowers against the database maintained by the Department of Defense at least monthly to identify servicemembers who are in active duty status for the purpose of determining eligibility under §682.202(a)(8).

(3) A borrower may provide the loan holder with evidence of active duty service to demonstrate eligibility.  In addition, if the borrower believes that the information contained in the Department of Defense database is inaccurate or incomplete, the loan holder may accept alternative evidence, which includes but is not limited to– 

(i) A copy of the borrower’s military orders; or

(ii) The certification of the borrower’s military service from an authorized official, in connection with the borrower’s request for another benefit on the loan.

(4)(i) When the loan holder determines that the borrower is eligible for the interest rate under §682.202(a)(8), the loan holder must ensure the  interest rate on the borrower’s loan does not exceed the SCRA interest rate limit of six percent.

(ii) The loan holder must apply the SCRA interest rate limit, not to exceed six percent, for the longest eligible period verified with the official electronic database, or alternative evidence of active duty service received under §682.208(j)(3), using the combination of evidence that provides the borrower with the earliest active duty start date and the latest active duty end date.

(iii) In the case of a reservist, the loan holder must use the reservist’s notification date as the start date of the military service period.

(5) When the loan holder applies the SCRA interest rate limit of six percent to a borrower’s loan, it must notify the borrower in writing within 30 days that the interest rate on the loan has been reduced to six percent during the borrower’s period of active duty service. 

(6) The loan holder must end the application of the SCRA interest rate limit, not to exceed six percent,  effective the date the loan holder determines the borrower’s active duty status has ended through the review of the electronic database, or alternative evidence of active duty service under §682.208(j)(3), using the combination of evidence received that provides the borrower with the earliest active duty start date and the latest active duty end date.

(7)(i) For loans with an endorser, the loan holder must use the official electronic database to begin, extend, or end, as applicable, the SCRA interest rate limit, not to exceed six percent, on the loan based on the endorser’s active duty status, regardless of whether the loan holder is currently pursuing the endorser for repayment of the loan. 

(ii) If both the borrower and the endorser are eligible for the SCRA interest rate limit, not to exceed six percent, on a loan, the loan holder must use the earliest active duty start date of either party and the latest active duty end date of either party to begin, extend, or end, as applicable, the SCRA interest rate limit.

(8)(i) For loans with co-makers, the loan holder must use the official electronic database to begin, extend, or end, as applicable, the SCRA interest rate limit, not to exceed six percent, on the loan if one of the borrowers is eligible for the interest rate under §682.202(a)(8).

(ii) If both borrowers on a co-made loan are eligible for the SCRA interest rate limit, not to exceed six percent, on that loan, the loan holder must use the earliest active duty start date of either party and the latest active duty end date of either party to begin, extend, or end, as applicable, the SCRA interest rate limit.

(9) If the application of the SCRA interest rate limit, not to exceed six percent, results in an overpayment on a loan that is subsequently paid in full through consolidation, the underlying loan holder must return the overpayment to the holder of the consolidation loan.

(10) For any other circumstances where application of the SCRA interest rate limit of six percent results in an overpayment of the remaining balance on the loan, the loan holder must refund the amount of that overpayment to the borrower.

**§682.410   Fiscal, administrative and enforcement requirements.**

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(b) *Administrative requirements.*

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(3) *Interest charged by guaranty agencies*. (i) Except as provided in paragraph (b)(3)(ii) of this section, the guaranty agency shall charge the borrower interest on the amount owed by the borrower after the capitalization required under paragraph (b)(4) of this section has occurred at a rate that is the greater of—

(A) The rate established by the terms of the borrower's original promissory note; or

(B) In the case of a loan for which a judgment has been obtained, the rate provided for by State law.

(ii) If the guaranty agency determines that the borrower is eligible for the interest rate limit of six percent under §682.202(a)(8), the interest rate described in paragraph (b)(3)(i) shall not exceed six percent.

**§685.202   Charges for which Direct Loan Program borrowers are responsible.**

**(a) Interest**

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(11) *Applicability of the Servicemembers Civil Relief Act (50 U.S.C. 527, App. sec. 207).* Notwithstanding paragraphs (a)(1) through (10) of this section, upon the Secretary's receipt of evidence of the borrower’s active duty military service, the maximum interest rate under  50 U.S.C. 527, App. section 207(d), on Direct Loan Program loans made prior to the borrower entering active duty status is six percent while the borrower is on active duty military service. For purposes of this paragraph, the interest rate includes any other charges or fees applied to the loan.

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