Student Loans: Oversight of Servicemembers' Interest Rate Cap Could Be Strengthened
Released: 2016-11-18T00:00:00

Letter

Background

The Servicemembers Civil Relief Act (SCRA), enacted in 2003 as a modernized version of the Soldiers’ and Sailors’ Civil Relief Act of 1940, provides protections for servicemembers to help them meet the unique circumstances they face when serving their country. SCRA provides protections to active-duty servicemembers in the event that their military service prevents them from meeting financial obligations. The act provides mortgage-related protections, including prohibiting foreclosures on active-duty servicemembers’ homes without court orders. In addition, the act provides protections for other types of debt, such as credit cards and vehicle and student loans. During periods of active military service, the act caps interest rates and fees at 6 percent for debt incurred prior to active duty.

Interest Rate Cap under SCRA

The interest rate cap covers full-time members of the Army, Navy, Air Force, Marine Corps, and Coast Guard, as well as Reservists, National Guard members, commissioned National Oceanic and Atmospheric Administration officers, and commissioned Public Health Service officers, while they are on active duty. For the purpose of the 6 percent interest rate cap, “interest” is defined to include service charges, renewal charges, fees, or any other charges with respect to an obligation or liability. Any such interest above the 6 percent rate—whether it has yet accrued—is permanently forgiven, and the monthly payment amount going forward must be reduced by the amount of interest forgiven allocable to the period for which payment is made. The interest rate cap has applied to private student loans since 1942 under a provision of the Soldiers’ and Sailors’ Civil Relief Act of 1940, and to federally owned and guaranteed loans since the 2008 reauthorization and amendment of the Higher Education Act of 1965 (HEA). During 2008-2016, interest rates for student loans owned by Education ranged between 3.4 and 7.9 percent, with rates above 6 percent in every year for at least some of these loans, while the most common interest rate for loans guaranteed, but not owned by Education was 6.8 percent, ranging from 5.6 to 8.5 percent. Available data for private student loans show that fixed interest rates charged by 9 major lenders ranged from about 3 to 19 percent, with an average starting interest rate of 7.8 percent (see appendix I for additional information on student loan interest rates).

Student Loans and Student Loan Servicers

Student loans play a crucial role in ensuring access to higher education for millions of students, and three types of student loans are or have been available through governmental and private sources: federal loans, commercial Federal Family Education Loans (FFEL), and private loans (see table 1).

Student loan servicers are banks that service loans they make or nonbanks contracted to handle billing and repayments, inform borrowers about repayment options, and respond to customer inquiries. As of December 31, 2015, Education had contracts with 10 companies to service federal student loans, and all of these companies also service commercial FFEL loans. No new FFEL loans have been made since 2010, but there is about $350.2 billion in outstanding FFEL loans. FFEL loans were originated by private or state entities, but Education has owned some of these loans since 2008 (referred to as federal loans in this report). Those that are still owned by private and state entities are often referred to as commercial FFEL loans (referred to as commercial FFEL loans in this report). The 10 companies that serviced federal loans as of December 2015, also each service some private student loans, which are student loans that are not owned or guaranteed by Education.

Identifying Servicemembers Eligible for the Interest Rate Cap on Their Student Loans

The SCRA interest rate cap applies to federal, commercial FFEL, and private student loans as long as at least one party to the loan is a servicemember with qualifying military service. Historically, as provided in SCRA, servicemembers had to contact their student loan servicer(s) and provide written notice and proof of an active-duty start date. The loan servicer would apply the cap to any loans that were (a) disbursed prior to active military service, and (b) had an interest rate above 6 percent. However, Education has since implemented new contract requirements for federal student loan servicers to automatically identify eligible servicemembers by matching their borrower files against DOD’s SCRA website to obtain information on active military service. The match identifies servicemembers who are starting active duty, in order for servicers to apply the cap and also those who come off active duty, in order for servicers to remove the cap. Since 2014, student loan servicers have had to match their files for borrowers with federal student loans against DOD’s SCRA website on a monthly basis to determine which borrowers have military service that qualifies them for the cap for federal student loans, and for what periods of time (we will refer to this process as the automatic eligibility check in this report). Education also issued regulations requiring the servicers of commercial FFEL loans to implement the automatic eligibility check as of July 1, 2016. As a result, written notice from servicemembers for the cap is no longer needed for federal or commercial FFEL loans, although servicemembers can still apply in writing. The automatic eligibility check is not required for private student loans (see table 2).

The SCRA website can be used by anyone who inputs a borrower’s identifying information to match DOD’s information on a servicemember’s periods of active military service. Users can submit one name for a match, or do batch matches for up to 250,000 names at one time, and the website should provide results within 24 hours, according to DOD. Servicers also have to notify each servicemember who receives the cap within 30 days and retain a record of the SCRA website match in the servicemember’s file (see fig. 1).

Federal Oversight for Student Loans and for Administering the SCRA Interest Rate Cap

DOD, Education, CFPB, and DOJ each play a role in overseeing servicemembers’ student loans. DOD, Education, and DOJ also have roles with respect to SCRA’s interest rate cap for servicemembers’ student loans. Under SCRA, the DOD secretaries of each military branch have primary responsibility for ensuring that servicemembers receive notification of and information on their SCRA benefits, including for student loans. In addition, DOD maintains the SCRA website, which is considered the official source of servicemembers’ active-duty status for complying with SCRA. Education’s Office of Federal Student Aid administers federal student aid programs, including loans, and oversees the performance of contracted student loan servicers that handle billing and other administrative tasks. It also has some responsibility for monitoring commercial FFEL student loan servicers since the loans are federally guaranteed.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) established CFPB and provided it with authority to supervise certain student loan lenders and servicers with respect to the enumerated federal consumer financial laws as defined by the Dodd-Frank Act. Specific to student loans, CFPB also collects borrower complaints about private student loans and has an internal focus, through its Ombudsman and Office of Servicemember Affairs, on issues affecting private student loan borrowers, including servicemembers and their families. However, because SCRA is not included in the enumerated federal consumer financial laws transferred to CFPB for oversight, the bureau does not have specific oversight of SCRA compliance for private student loan lenders and servicers.

The four federal financial regulators for banks—Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, National Credit Union Administration, and the Office of the Comptroller of the Currency—oversee SCRA compliance in connection with student loan lending and servicing by banks, credit unions, institution-affiliated parties as defined in the Federal Deposit Insurance Act, and in certain instances third-party service providers under the Bank Service Company Act. DOJ has the specific authority to enforce SCRA and accepts referrals from other federal agencies, including CFPB, for possible SCRA violations.

Number of Servicemembers Who Received the SCRA Interest Rate Cap on Student Loans Has Increased

Number of Servicemembers with Federal Student Loans Who Received the Rate Cap Increased Dramatically with Automatic Eligibility Checks

The number of servicemembers with federal student loans who received the SCRA interest rate cap increased dramatically when Education required servicers of these loans to use an automated process to identify qualifying servicemembers and apply the cap to their eligible loans. In particular, Education in 2014 required that federal loan servicers use the SCRA website each month to identify borrowers with qualifying periods of active military service and automatically apply the rate cap to their eligible federal loans, rather than requiring servicemembers to provide written notice of eligibility. When some federal loan servicers began using the SCRA website, they identified servicemembers with active military service start dates as early as 2008, when the SCRA rate cap first applied to federal loans. These servicers then applied the cap to servicemembers’ eligible federal loans retroactively for those qualifying periods of service. As a result, some servicemembers were eligible to receive the rate cap for months going forward and also retroactively for months in which they were previously eligible. Recently, in response to findings from a report issued by Education’s Office of Inspector General, the agency required federal loan servicers to identify all servicemembers with qualifying military service back to August 2008, including those that were not identified in the initial website checks, and automatically apply the interest rate cap retroactively to their eligible federal loans by December 2016.

Data from the federal loan servicers show that the number of servicemembers who received the SCRA interest rate cap on their federal student loans for December 2015 was dramatically higher than for October 2008, with the increase driven by federal loan servicers using the SCRA website to identify qualifying servicemembers and automatically apply the cap to their eligible federal loans (see fig. 2). (For additional information on servicemembers who received the cap, see appendix II.)

The sidebar illustrates the potential financial impact of the interest rate cap on an individual servicemember’s federal student loan.

Some of the servicers had sought to implement the automatic website checks earlier. For instance, in June 2011, four trade associations representing student loan servicers jointly requested permission from Education to conduct SCRA website eligibility checks. Education denied the request, stating that the act specifically required servicemembers to apply in writing for the rate cap. Then DOJ, in its 2014 settlement with a federal loan servicer for potential violations, interpreted SCRA as allowing the servicer to use the SCRA website to confirm borrowers’ eligibility and to ascertain active-duty begin and end dates. Education officials said because SCRA is under DOJ’s enforcement jurisdiction, they deferred to DOJ’s decision to allow the servicers to use the SCRA website.

Number of Servicemembers with Commercial FFEL Loans Who Received the Rate Cap Increased with Early Implementation of Automatic Eligibility Checks

The number of servicemembers with commercial FFEL loans who received the SCRA interest rate cap also increased after most federal student loan servicers began using the SCRA website to automatically identify borrowers with active military service qualifying them for the rate cap and apply it to their eligible commercial FFEL loans. Loan servicers were not required to use the website checks for commercial FFEL loans until July 1, 2016, and could instead require written notice from servicemembers until that date. But Education authorized and encouraged servicers to use the automatic website checks for commercial FFEL loans when it required them for federal student loans in 2014. When some federal loan servicers began using the SCRA website for borrowers with commercial FFEL loans, they identified servicemembers with active military service start dates as early as 2008, when the SCRA rate cap first applied to commercial FFEL loans, and applied the cap retroactively for those qualifying periods of service. As a result, some servicemembers were eligible to receive the rate cap on a commercial FFEL loan for months going forward and also retroactively for months in which they were previously eligible.

According to data from the federal loan servicers, who serviced at least 77 percent of the outstanding balance of commercial FFEL loans as of December 31, 2015, the number of servicemembers who received the SCRA interest rate cap on their commercial FFEL loans for December 2015 was much higher than the number who received the cap for October 2008, with the increase mostly driven by federal loan servicers using the SCRA website to identify qualifying servicemembers and automatically apply the cap to their eligible commercial FFEL loans (see fig. 3). (For additional information on servicemembers who received the cap, see appendix II.) Data were not readily available on the remaining share of the commercial FFEL market serviced by non-federal loan servicers. In addition, the number of outstanding commercial FFEL loans decreased from 2008 to 2015, primarily due to the termination of Education’s authority to make or insure FFEL loans, effective July 1, 2010.

Number of Servicemembers with Private Loans Who Received the Rate Cap Also Increased

Although the automatic eligibility check for the SCRA interest rate cap is not required for private student loans, the number of servicemembers who received the cap on at least one of their private loans increased for 6 lenders who have voluntarily implemented automatic SCRA website checks. The number of servicemembers who received the cap on at least one of their private student loans more than doubled, from 14,970 to 33,309 from September 2014 to March 2016, according to data from 6 lenders who together accounted for 65 percent of the private student loan market. According to the 6 lenders, the servicers they use for their private student loans all began voluntarily using the SCRA website to check for eligible servicemembers as of June 2015. Because limited data are available on loan servicing for the private student loan market not covered by the 6 lenders (about 35 percent), it is unclear how many servicemembers are receiving the cap for any private loans handled by the other servicers.

Servicemembers Face Challenges Obtaining the SCRA Interest Rate Cap for Student Loans

Servicemembers Receive Inaccurate Information about the Cap

Consumer information provided to servicemembers about the SCRA interest rate cap is sometimes inaccurate. Under SCRA, the military branch secretaries have primary responsibility for ensuring that servicemembers receive pertinent information on their SCRA benefits. However, a key source of information for servicemembers, DOD’s Military OneSource website, incorrectly states that the SCRA cap does not apply to commercial FFEL student loans incurred prior to active military service. Further, DOD provided us with 8 documents it uses to inform servicemembers, military legal aid attorneys, officials who examine financial institutions, and others about servicemembers’ SCRA benefits. Our review of these documents, prepared by various offices and branches within DOD, found that all contained significant inaccuracies. For example, 6 of the 8 documents specify that the servicemember must provide written notice to obtain the cap and provide military orders, and 3 of those 6 say that the request must be made within 180 days of the end of military service—requirements that no longer apply to federal or commercial FFEL loans. In addition, 2 of the 8 documents specifically state that the SCRA rate cap does not apply to student loans. Inaccurate information could be especially problematic for servicemembers with private student loans because, unlike for federal and commercial FFEL loans, servicers of private student loans are not required to automatically identify and apply the cap to borrowers’ eligible loans.

In acknowledging these inaccuracies, DOD officials told us that the department needs to work across functional areas and military installations to ensure that DOD information on the SCRA rate cap is correct and uniform for all servicemembers. DOD recently combined many of its financial readiness initiatives under one office, which officials said they expect to result in more accurate and consistent SCRA materials across military installations, but the effect of this consolidation is not yet known. Federal internal control standards state that agencies should externally communicate the information necessary to achieve their objectives, but inaccurate information about the SCRA rate cap not only falls short of those standards, it may also prevent some servicemembers who have private student loans from receiving a benefit for which they are eligible.

Eligible Servicemembers Are at Risk of Not Receiving the Rate Cap for Some Private Student Loans

There is a risk that not all servicemembers who are eligible for the SCRA interest rate cap are receiving it on their private student loans for several reasons. First, the automatic eligibility check is not required for private loans, so the extent to which the rate cap is being applied to servicemembers’ private student loans is unknown. The private student loan market comprised approximately $102 billion in student loans, about 7.6 percent of the total student loan market, as of March 31, 2016. The 6 lenders of private student loans for whom we received data are voluntarily identifying eligible servicemembers and providing the rate cap through the automatic eligibility check. Our analysis of data from these 6 lenders showed that the number of borrowers receiving the SCRA rate cap on private student loans more than doubled once these servicers started using the automated process. These lenders’ loans represent about 65 percent of the private student loan market, or about $66 billion as of March 2016. Information on the remaining 35 percent of the private student loan market, or about $36 billion as of March 2016, was not available with regard to whether the lenders or servicers use the automated process.

Second, representatives from the four veteran service organizations we spoke with told us that the SCRA interest rate cap is not well publicized and that many servicemembers are not aware of the benefit. One representative said that while implementation of the automatic eligibility checks has been relatively smooth for federal and commercial FFEL loans, it has caused confusion because of the different requirement to obtain the same rate cap for private loans. Although SCRA states that during active military service the interest rate of a servicemember’s debt shall not exceed 6 percent, those servicemembers with private student loans are at risk of not receiving the cap if they do not know how to obtain it and their loan servicer does not automatically apply it.

There are also indications that private student loans may be more susceptible to SCRA rate cap violations than other types of loans. In DOJ’s 2014 settlement with one of the federal student loan servicers, nearly three-fourths of DOJ’s settlement of borrower claims—about $45 million—went to borrowers with private student loans, while just one- fourth went to servicemembers with federal loans or commercial FFEL loans. In 2015, Education, the CFPB, and the Department of the Treasury issued a joint policy stating that common student loan servicing functions should be consistent for all student loans. However, without a requirement that loan servicers automatically identify eligible servicemembers and apply the interest rate cap for private student loans, servicemembers with private loans may not be receiving the interest rate cap for which they are eligible in a manner consistent with those who have federal and commercial FFEL loans.

DOJ has proposed changes to SCRA’s statutory language to explicitly allow a servicemember’s oral rather than written notice of eligibility to obtain the interest rate cap. Additionally, the proposal would eliminate the provision that servicemembers provide the creditor a copy of their military orders. While these changes, if enacted, would remove the burden on servicemembers with private loans of having to provide written notice of their military status, they would still need to be aware of the cap and orally provide notice of their status to their loan servicer. Alternatively, requiring the automatic eligibility check for private student loans would better ensure that all servicemembers with private student loans are receiving a benefit for which they are eligible and that the interest rate cap is applied consistently across all types of student loans.

Federal Agencies Use Various Mechanisms to Oversee Application of the Interest Rate Cap for Student Loans, but Limitations Exist

Education Oversees Application of the Rate Cap for Federal Loans and Commercial FFEL Loans, but Lacks a Systematic Way to Track Complaints

Education, as part of its oversight of federal student loan servicers, uses a variety of mechanisms to oversee how servicers apply the SCRA interest rate cap for federal student loans and commercial FFEL loans held by eligible servicemembers. However, Education does not systematically track SCRA-specific borrower complaints.

Education’s SCRA Oversight Mechanisms

Education has established several mechanisms to oversee whether federal student loan servicers are properly applying and removing the rate cap for federal and commercial FFEL student loans:

Reviews of federal loan servicers: In February 2015, Education indicated it created a loan servicer monitoring group of 10 monitors and 1 supervisor to oversee servicing activity for federal student loans. This group reviews borrower accounts, and implementation of the SCRA rate cap is one of its core functions. The first set of reviews in 2015 found that 332 of the 335 borrower accounts reviewed had correctly processed rate caps under the automatic eligibility check, according to the review reports. Servicers did not correctly process 3 accounts: in 2 cases borrowers were not notified that their rate had been reduced, and in 1 case the rate reduction was applied retroactively to a date prior to when the loan was eligible for the cap. The second set of reviews was completed in April 2016, and the review reports show that all 300 reviewed borrower accounts had the rate cap properly applied, had correct beginning and end dates (if applicable), and had borrowers who were notified about application of the cap.

Data reporting: Federal student loan servicers provide Education with monthly reports of all federal student loan borrowers who fall into a “Service Members category,” which includes servicemembers who are SCRA eligible. In addition, servicers report weekly to Education the date they applied the rate cap for each servicemember who is receiving the cap, the date the cap was ended, and the date the servicemember was notified of the cap. Education is using this information to track the number of borrowers who have military service qualifying them for the rate cap.

Technical assistance for loan servicers: In early 2015, when working with loan servicers to implement the automatic eligibility check for federal loans, Education hosted conference calls with the servicers and reached out to DOD for clarification when needed. Representatives of 7 of the 10 federal student loan servicers said such calls were useful, and two also noted that they also have a liaison at Education whom they can contact about questions or challenges. According to Education officials, the agency is continuing to provide technical assistance on the website match, such as working on updated guidance for servicers to help resolve non-matches due to marital or hyphenated last names. In addition, Education officials explained that staff listen to a sample of incoming and outgoing calls between servicers and servicemember borrowers, to ensure accuracy and completeness of provided information. Feedback is provided to servicers through meetings and a written report, and servicers make required changes or provide employee training to correct deficiencies, Education officials said.

Agency-wide oversight board: Education has an internal board comprised of staff from different units and groups within Education’s Office of Federal Student Aid (e.g., Chief Financial Officer, Program Compliance Staff) that has met periodically since 2012 to coordinate loan servicer monitoring activities. The agenda for the October 2014 monthly meeting included implementation of the automatic eligibility check for federal loans.

Program compliance reviews: Education included implementation of the automatic eligibility check as part of its review of the loan servicers that had an annual compliance review scheduled in 2015 or 2016 to look at how the federal student loan servicers were implementing the revised automatic eligibility check. In the three review reports provided to GAO, one servicer did not properly apply the SCRA rate cap for a reservist who had been called to active duty military service. No other SCRA-related issues were identified for these three servicers in the reports.

Education’s Process for Tracking Student Loan Complaints

In addition to these efforts, Education tracks and resolves borrower complaints about federal and commercial FFEL student loans it receives directly, but does not track the number of SCRA-specific complaints. Education officials said they generally receive complaints from borrowers who believe their issue was not satisfactorily resolved by a servicer or who are reluctant to submit a complaint to a servicer. Until July 1, 2016, Education recorded borrower complaint information through a dozen different systems within the agency, including the Ombudsman’s complaint tracking system and the Office of Program Compliance’s Complaint Tracking System. While borrowers could contact Education with SCRA-related complaints, officials said the agency did not specifically track the number of SCRA complaints it received across all its complaint systems.

In March 2015, the President signed a Student Aid Bill of Rights which required Education by July 1, 2016 to develop and implement a simple process for borrowers to file complaints and for Education to track their resolution. The agency completed design of the new system and started using it in July 2016. While the system is designed to generate more robust, standardized information on borrower complaints, Education officials said it does not systematically track SCRA-related complaints.

Under the new system, when complainants enter their contact information online, they can choose to self-identify as “a servicemember or veteran” using a check box, as appropriate, but this is an optional data field. There are also two options in a drop-down menu categorizing complaint type that Education officials said are appropriate for SCRA-related complaints: “Military and Veteran Benefits” and “Loan Interest Rate,” but neither is specific to SCRA complaints. In addition, there is a blank text box in which complainants could opt to specify that their issue is SCRA related. Education officials said they could determine the volume of SCRA complaints by running a report on complaints with “SCRA” in the text box. However, this approach relies on borrowers to enter SCRA in the text box. Also, not all servicemembers may know how to refer to the rate cap benefit by its actual name or acronym.

While Education has taken steps to improve and streamline how it tracks borrower complaints, without a way to systematically identify SCRA- related complaints Education will not be able to evaluate the effectiveness of its efforts to oversee these benefits or be able to use this information to improve service to borrowers who are servicemembers. For example, the agency will not know if the frequency of SCRA complaints for commercial FFEL loans decreased as servicers implemented the automatic eligibility check for these loans. In addition, federal internal control standards state that an agency’s management should analyze and discuss information related to achieving agency goals. One of Education’s strategic objectives is to provide superior service and information to borrowers, and not having information on the extent of SCRA-related complaints can hinder the agency’s ability to provide this level of customer service. In addition, Education has identified having a unified borrower complaint tracking system as a key mechanism to enhance oversight and customer service. However, Education will not be able to fully respond to servicemembers’ SCRA-related issues without knowing details about or frequency of these types of complaints.

Defined Roles of Multiple Agencies Leave a Gap in SCRA Oversight

The current roles of CFPB, the four federal financial regulators, and DOJ with regard to SCRA compliance result in an oversight gap because no agency is currently authorized to routinely oversees SCRA compliance for private student loans made or serviced by nonbank lenders and servicers (see fig. 4). By routine oversight, we are referring to onsite reviews to specifically look for instances of noncompliance with SCRA by nonbank private student loan lenders and servicers. Nonbank lenders include institutions of higher education and private companies that are not banks. According to CFPB, the nonbank student loan servicers include the seven largest student loan servicers. While the proportion of private student loans that are made or serviced by nonbanks is unknown, as of March 2016, the total private student loan market had an outstanding balance of about $102 billion, and available data show that interest rates on such loans can range from about 3 to 19 percent. While Education routinely monitors the application of the SCRA cap for federal and commercial FFEL loans, it does not do so for any private loans serviced by these companies.

As part of its oversight responsibility, CFPB collects borrowers’ student loan complaints and reports on issues facing private student loan borrowers, including military borrowers, through its Ombudsman and Office of Servicemember Affairs. CFPB also oversees the student loan lending and servicing operations of large banks and their affiliates (large bank lenders and servicers), nonbanks that make private student loans (nonbank lenders), and certain large nonbank student loan servicers (nonbank servicers) for compliance with certain federal consumer financial laws, through onsite examinations. However, because SCRA is not one of the federal consumer financial laws whose oversight was transferred to CFPB, the bureau does not have the authority to routinely oversee SCRA compliance by student loan lenders and servicers, and does not inspect SCRA compliance during its onsite reviews.

The four federal financial regulators—Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, National Credit Union Administration, and Office of the Comptroller of the Currency—have broad authority to review the banking activities of regulated entities’—insured depository institutions, credit unions, and their affiliates—including compliance with certain applicable laws, such as SCRA. According to agency officials, they also have enforcement authority over institution-affiliated parties, and in certain instances, over third-party service providers, including reviewing compliance with the SCRA rate cap for student loans. However, the regulators do not have the authority to routinely oversee whether nonbank student loan lenders or servicers comply with the SCRA rate cap for private student loans.

DOJ has specific authority to enforce SCRA based on referrals of possible violations, but does not conduct onsite reviews of student loan lenders or servicers to check for SCRA compliance, including lenders and servicers of private student loans. According to DOJ officials, they ask servicemembers to first go through DOD’s military legal assistance system to resolve SCRA complaints, including those concerning private student loans. If the military system is unable to resolve the complaint, it is referred to DOJ, which may open a formal investigation and/or file a lawsuit. However, referrals from DOD would only capture cases in which a servicemember knew about the rate cap for private student loans and believed that it had been erroneously denied. Currently, because of the statutorily defined roles of each agency, no agency can routinely oversees SCRA compliance by certain nonbank private student loan lenders and servicers by, for example, conducting onsite file reviews. Because of this, there is a risk that SCRA violations for private student loans will go undetected, potentially leaving some servicemembers without a benefit for which they are eligible.

While CFPB has written agreements in place with the four federal financial regulators and with DOJ for interagency coordination related to oversight, these agreements do not provide for routine SCRA oversight for private loans connected with nonbank lenders and servicers. This may be because none of these agencies currently has the authority to routinely oversee SCRA compliance at nonbank private student loan lenders and servicers. Because CFPB, the federal financial regulators, and DOJ each have a role in the oversight of either private student loans or the SCRA rate cap, any of these agencies could potentially be in a position to assume responsibility for the oversight of SCRA compliance by nonbank private student loan lenders and servicers. However, additional statutory changes may be required to give these, or any other agencies, additional authority to conduct routine oversight of SCRA compliance at nonbank private student loan lenders and servicers. CFPB and DOJ could communicate this need to the Congress.

In prior work, we developed a framework for crafting and assessing an effective financial regulatory system that stated such systems should be appropriately comprehensive, and cover all activities that pose risks to consumer protection, including closing any gaps in oversight. The lack of routine oversight of nonbank private student loan lenders and servicers related to SCRA compliance increases the risk that some servicemembers will not receive a benefit for which they are eligible, even though SCRA was designed to provide financial protection for all active- duty servicemembers.

Conclusions

The number of servicemembers receiving the SCRA interest rate cap for their federal and commercial FFEL student loans has greatly increased since student loan servicers began using an automatic eligibility check to identify those who are eligible. Nonetheless, some servicemembers continue to face challenges in obtaining the cap. They receive inaccurate SCRA information from DOD. In addition, if servicemembers have private student loans, their loan servicer is not required to use the automatic eligibility check to identify them. As a result, servicemembers are at risk of not always getting the rate cap benefit for which they are eligible. If DOJ were to update its proposed SCRA changes by requiring private loan servicers to use the automatic eligibility check to identify eligible borrowers, this could lead to legislative action that would provide consistent treatment for all eligible servicemembers regardless of type of student loan.

Education’s new borrower complaint system simplifies the complaint process for consumers, but lacks the ability to track SCRA complaints systematically. Without a systematic way to track complaints about the rate cap, Education will not be certain whether servicemembers continue to experience problems, making it difficult for Education to meet its strategic goal of providing superior service. Oversight of compliance with SCRA is also dispersed across multiple agencies, each of which has limitations on its authority. Consequently, there is no routine oversight of SCRA compliance for nonbank private student loan lenders and servicers. The resulting lack of routine oversight for nonbank lenders and servicers increases the risk that SCRA violations for private student loans will go undetected and that some servicemembers may not benefit from the rate cap for which they are eligible.

Recommendations for Executive Action

1. To help ensure quality information is conveyed to servicemembers about how the Servicemembers Civil Relief Act (SCRA) interest rate cap applies to student loans, we recommend the Secretary of Defense direct the secretaries of each service branch, and work with other secretaries as appropriate, to ensure that all information about the SCRA interest rate cap for student loans is accurate when provided to servicemembers and to those who work with servicemembers to help them obtain SCRA benefits, including information contained in outreach materials. 2. To ensure that all eligible servicemembers with student loans receive the SCRA interest rate cap, we recommend the Attorney General direct the Department of Justice to consider modifying its proposed changes to SCRA to require use of the automatic eligibility check for private student loans. 3. To enhance customer service, we recommend the Secretary of Education direct the Office of Federal Student Aid to identify ways to modify the data collected in its unified borrower complaint system to allow the agency to more precisely identify and analyze complaints specifically about the SCRA interest rate cap. 4. To better ensure that servicemembers with private student loans benefit from the SCRA interest rate cap, we recommend that the Director of the Consumer Financial Protection Bureau and the Attorney General of the Department of Justice coordinate with each other, and with the four federal financial regulators, as appropriate, to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers. If CFPB and DOJ determine that additional statutory authority is needed to facilitate such oversight, CFPB and DOJ should develop a legislative proposal for Congress.

Agency Comments and Our Evaluation

We provided a draft copy of this report to DOD, Education, CFPB, DOJ, and the four federal financial regulators for review and comment. We also provided relevant report sections to the federal student loan servicers and the private-sector company representing the 6 private lenders, for technical comments. DOD’s comments are reproduced in appendix III, Education’s in appendix IV, CFPB’s in appendix V, and DOJ’s are in appendix VI. Of the four federal financial regulators, the National Credit Union Administration provided formal comments, which are reproduced in appendix VII, while the other three other regulators provided technical comments. We incorporated technical comments in the report as appropriate.

In its written comments, DOD disagreed with our recommendation, saying it was unnecessary because the department was already providing accurate information about the SCRA interest rate cap for student loans. DOD said that information provided in 6 of the 8 documents GAO reviewed is accurately based on statute whereas Education’s updated requirement to automatically apply the cap is based on policy which could change in the future. Moreover, the automated process applies only to federal and commercial FFEL student loans in contrast to other types of debt. DOD said that providing information based on statute rather than policy would cause less confusion and was a better approach than what we recommend. With regard to Education’s automated process, we note that Education formalized this approach through federal regulations that became effective as of July 2016, which currently legally requires servicers to use this process for all federal and commercial FFEL loans. In addition, DOD said it was unable to verify whether DOD’s Military OneSource website still inaccurately states that the SCRA rate cap does not apply to commercial FFEL loans. However, when we searched the website using the term “SCRA,” we still found this inaccuracy as of October 26, 2016. DOD said it would look into a means of verifying website information, but in the meantime, it is satisfied that its training provides correct information. Given that Military OneSource is a key source of information for servicemembers and that, as we note in this report, 2 of the 8 documents DOD provided state that the SCRA rate cap does not apply to student loans, we continue to believe that servicemembers are not always receiving accurate and up-to-date information about how the SCRA rate cap applies to student loans.

In its written comments, Education said it is committed to accurately tracking the types of complaints it receives. While Education believes its new feedback system and monitoring efforts allow it to identify SCRA- related issues by conducting keyword searches using a variety of terms, the agency said that it will respond to GAO’s recommendation by creating a complaint subcategory specifically for SCRA under the “Military and Veterans Benefits” category. Education added that it had not previously created a specific complaint category for SCRA given that military members may be unfamiliar with the term. We share Education’s concern in ensuring complaints are captured regardless of whether the service member has knowledge of the SCRA term. However, as we point out in this report, one of the challenges with Education’s keyword search process is that it may miss relevant loan complaints where SCRA is not specifically mentioned. In implementing our recommendation by creating a subcategory for SCRA complaints, we encourage Education to use simple language to describe what an SCRA complaint is, rather than rely on the servicemember’s knowledge of the acronym. We believe doing so would help servicemembers note concerns related to their student loan interest charges and active duty status, and allow Education to appropriately capture this information and resolve any issues.

In its written comments, CFPB did not specifically agree or disagree with our recommendation to provide oversight of SCRA compliance among nonbank private lenders and servicers, but acknowledged that it shares GAO’s interest in maximizing SCRA protections. CFPB said that while it will continue its strong collaboration with relevant federal agencies, existing interagency agreements could not be used to coordinate oversight of SCRA compliance because these agreements would not create the statutory authority CFPB would need to oversee SCRA. Based on CFPB’s comments, we modified the recommendation by removing the suggestion that oversight could be accomplished by updating interagency coordination agreements. Although CFPB does not currently have authority over nonbank lenders and servicers, the bureau said it has other tools at its disposal, including sharing information with other agencies about SCRA-related complaints or possible violations. We believe, however, that referring complaints does not take the place of regular oversight and that CFPB and DOJ can take additional steps toward that end. We therefore encourage both agencies to work together to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers, and to consider developing a legislative proposal seeking additional statutory authority, as needed, should they determine that step to be necessary.

In its written comments, DOJ neither agreed nor disagreed with our second recommendation and agreed with our fourth recommendation.

With respect to requiring use of the automatic eligibility check for private student loans, DOJ said that its current package of proposed legislative changes provides benefits to servicemembers with all kinds of loans, including private student loans. Rather than requiring servicemembers to submit written notice and a copy of military orders, they need only give oral or written notice of eligibility for the cap to their creditors. However, as we stated in the report, servicemembers with private student loans would still need to be aware of the rate cap in order to give notice, whether written or oral. Therefore, we encourage DOJ to consider updating its current proposal to require use of the automatic eligibility check by all student loan lenders and servicers. Not only would this ensure that servicemembers with private student loans receive a benefit for which they are eligible, but also that the interest rate cap is applied consistently across all types of student loans.

With respect to coordinating oversight with CFPB, and the four federal financial regulators, as appropriate, DOJ agreed with this recommendation and believes the agency is in full compliance; therefore they believe the recommendation should be closed. DOJ said the agency already coordinates extensively with CFPB and the financial regulators concerning SCRA compliance, through such mechanisms as referrals from CFPB for any SCRA-related violations and access to its consumer complaint database, and that it will continue to build upon them. While these mechanisms are commendable, we believe they do not constitute exercising routine oversight of nonbank private student loan lenders and servicers who are not affiliated with a depository institution. Therefore, we cannot close the recommendation as DOJ suggests. We believe that additional interagency coordination, including working with CFPB to seek additional statutory authority, as needed, is necessary to ensure routine SCRA compliance.

In its written comments on our fourth recommendation, the National Credit Union Administration (NCUA), one of the four federal financial regulators, agreed that additional interagency coordination around SCRA compliance for private student loans would be useful, especially for certain third-party service providers who may lend money for or service private student loans. NCUA noted that it does not currently have authority to provide routine oversight of SCRA compliance by these entities.

In its technical comments, the Federal Deposit Insurance Corporation proposed that GAO delete the fourth recommendation. In their view, oversight of nonbank private student loan lenders and servicers cannot be accomplished by updating existing interagency agreements since the agency lacks statutory authority to oversee these entities. As noted earlier, we modified the recommendation accordingly to address a similar comment received from CFPB. We underscore the need for CFPB and DOJ to work together to ensure the routine oversight of SCRA compliance for all nonbank student loan lenders and servicers, which they may determine requires them to seek additional statutory authority, to ensure that all eligible servicemembers receive the interest rate cap for their private student loans.

We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, Secretary of Education, Director of the Consumer Financial Protection Bureau, Attorney General of the United States, Chairman of the Federal Deposit Insurance Corporation, Chair of the Board of Governors of the Federal Reserve System, Chairman of the National Credit Union Administration, Comptroller of the Currency, and to other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII.

Appendix I: Objectives, Scope, and Methodology

This report examines: (1) How many servicemembers have received the Servicemembers Civil Relief Act (SCRA) interest rate cap for their student loans? (2) what challenges do servicemembers face obtaining the cap? and (3) to what extent do federal agencies oversee implementation of the cap?

We used multiple methodologies to conduct this study. To obtain information on servicemembers receiving the SCRA cap, we used data from the 10 federal student loan servicers, the Department of Education (Education), and six private student lenders. To identify challenges servicemembers face obtaining the cap and assess the extent to which federal agencies oversee implementation of the rate cap, we interviewed officials and reviewed documentation from the Department of Defense (DOD), Education, the Consumer Financial Protection Bureau (CFPB), and the Department of Justice (DOJ). We also interviewed representatives of the 10 student loan servicers who are contracted by Education to service federal student loans, from four advocacy groups that represent servicemembers, and from one trade group representing servicers. In addition, we reviewed relevant federal laws and regulations. We used the above methodologies and a review of federal internal control standards and standards for assessing financial regulatory systems, as well as Education’s strategic objectives to determine whether the information provided to servicemembers about the SCRA rate cap is accurate, whether the challenges faced by servicemembers are different for those with private student loans, whether Education tracks SCRA- specific complaints, and whether there are any gaps in the oversight of the SCRA interest rate cap for student loans.

We conducted this audit from May 2015 through November 2016, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Analysis and Review of Data

To describe how many servicemembers received the SCRA interest rate cap on their student loans, we analyzed record-level data from the 10 federal student loan servicers—the companies contracted to service loans owned by Education—on borrowers with federal loans or commercial Federal Family Education Loans (FFEL) for the period October 2008 (the beginning of the first full fiscal year that SCRA was applied to student loans owned by Education) through December 2015 (the most recent available data). The 10 federal loan servicers as of December 31, 2015, were: Cornerstone, EdFinancial, Granite State, Great Lakes, Missouri Higher Education Loan Authority, Navient, Nelnet, Oklahoma Student Loan Authority Servicing, Pennsylvania Higher Education Assistance Agency/FedLoan, and the Vermont Student Assistance Corporation Federal Loans. Specifically, for borrowers who received the cap on at least one of their loans, we analyzed data provided by the 10 loan servicers to determine (1) whether the cap was applied on the basis of a written notification of eligibility from the servicemember or on the automatic eligibility check; (2) the type of loan (i.e., federal or commercial FFEL); (3) the duration of the cap; (4) loan interest rates prior to borrowers receiving the cap; and (5) loan disbursement amounts. We also used these analyses to examine how the SCRA interest rate cap may affect total loan costs for servicemembers.

We also reviewed the interest rates for federal, commercial FFEL, and private student loans from 2008 to 2016, to make sure that interest rates were over 6 percent for each type of loan during at least some of the period of time covered by our review (see tables 3 and 4).

We reviewed aggregate data from Education’s National Student Loan Data System on the number of borrowers with federal loans who were receiving the SCRA cap as of October 1, 2014, October 1, 2015, and December 31, 2015, and compared these data to the data we received from the 10 federal loan servicers. In addition, we reviewed aggregate data on the total number of federal and commercial FFEL loans open each year, from fiscal year 2009 through the first quarter of fiscal year 2016, and the outstanding balance of commercial FFEL loans as of December 31, 2015 to describe the size of the commercial FFEL loan market. We also reviewed information provided by Education on loan transfer rates between servicers to determine the extent to which loan transfers occur. Because some loans were transferred between servicers during our review’s time frame, our numbers may include duplicate counts for borrowers who had the cap applied by more than one servicer. According to data from Education’s National Student Loan Data System, 2 percent of federal loans were transferred in fiscal year 2009 and 5 percent were transferred in fiscal year 2015. In addition, 12 percent of commercial FFEL loans were transferred between servicers in fiscal year 2009 and 3 percent were transferred in fiscal year 2015.

With regard to private student loans, we reviewed aggregate data from 6 private student lenders, who together accounted for 65 percent of outstanding private student loan debt as of March 31, 2016, via MeasureOne, a private-sector company representing the lenders. The 6 lenders are: Citizens Bank, N.A.; Discover Bank; Navient; PNC Bank, N.A.; Sallie Mae Bank; and Wells Fargo Bank, N.A. Specifically, we reviewed aggregate data on the number of private student loans, borrowers, and outstanding loan balances serviced by these servicers overall, and for those receiving the SCRA cap, as of September 30, 2014, September 30, 2015, December 31, 2015, and March 31, 2016 (the most recent available data). Because 2014 was when Education required that federal loan servicers use the automatic eligibility checks for federal student loans on a monthly basis, we collected data from the end of fiscal years 2014 and 2015, and for each quarter after the end of 2015, from the private loan servicers to see if the number of borrowers receiving the cap for private loans was also increasing over this period of time. We also asked these servicers whether they implemented the automatic eligibility check for the private loans they service over this time frame, and if so, when they first began using it and how often they use it to identify eligible servicemembers.

We determined that data from each of these sources were sufficiently reliable for the purposes of this report by electronically testing the data for missing data, outliers, and errors; by reviewing existing information about the data and the systems that produced them; and by interviewing knowledgeable loan servicer and Education officials, as appropriate. In the case of the private student loan data, we sent data reliability questions for the 6 lenders to MeasureOne, who forwarded them to the lenders. MeasureOne then collected the lenders’ written responses and forwarded them to us.

Interviews

To learn how the 10 federal student loan servicers identify and work with eligible servicemembers to apply the interest rate cap and about any related challenges, we conducted semi-structured interviews between October 2015 and January 2016 with representatives of the federal student loan servicers who together serviced all federal student loans as of December 31, 2015. We also interviewed an official with the National Council of Higher Education Resources—one of four trade associations whose membership includes student loan servicing companies—about their attempt in 2011 to obtain permission from Education to use the SCRA website to obtain active-duty dates. This group also participates in the Student Loan Ombudsman’s Caucus. To identify challenges servicemembers face obtaining the cap, we spoke with officials from DOD, Education, and CFPB, and with representatives of four advocacy groups that were selected to provide representation of both currently active servicemembers and veterans, and based on suggestions from agency officials and experts in this area: American Legion, Military Officers Association of America, Student Veterans of America, and Military.com. We also interviewed Education, CFPB, and DOJ officials to clarify the role of each agency with respect to overseeing implementation of the SCRA interest rate cap for student loans.

Review of Federal Laws, Regulations, and Other Relevant Documentation

To determine how the federal loan servicers are supposed to be applying the cap for eligible borrowers and how Education, CFPB, and DOJ oversee implementation of the SCRA interest rate cap, we reviewed relevant federal laws and regulations, and policies, procedures, and guidance for the cap, as well as Education’s contracts with and monitoring plans for the federal student loan servicers. To learn about the challenges servicemembers face in obtaining the SCRA cap, we reviewed complaints submitted to CFPB by servicemembers and reports from CFPB that discuss such challenges. To identify possible challenges servicemembers encounter concerning the cap, we also reviewed relevant agency publications and websites, including materials used by DOD and Education to inform servicemembers about the cap. Finally, we reviewed documentation, such as memoranda of understanding, related to interagency coordination concerning the cap, including the Joint Statement of Principles on Student Loan Servicing issued jointly by Education, CFPB, and the Department of the Treasury in September 2015.

Appendix II: Additional Data from Federal Loan Servicers and Private Lenders

Received automatically via SCRA website 58

Total 275 1,042 1,771 2,821 3,644 4,466 5,383 6,527 7,447 8,349 9,469 10,518 11,320 12,029 12,672 13,497 14,483 15,203 16,107 17,760 18,107 18,108 18,126 18,317 18,005 17,975 18,103 18,271 18,319 17,562 6.8 $12,000 180,939 (47%) 240,582 620 (1%)

Total

Total

Appendix III: Comments from the Department of Defense

Appendix IV: Comments from the Department of Education

Appendix V: Comments from the Consumer Financial Protection Bureau

Appendix VI: Comments from the Department of Justice

Appendix VII: Comments from the Prudential Financial Regulators

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact mentioned above, the following staff members made significant contributions to this report: Meeta Engle (Assistant Director), Jennifer McDonald (Analyst-in-Charge), Jeffrey G. Miller, and Jill Yost. Additional assistance was provided by Susan Aschoff, James Bennett, Mark Bird, Deborah Bland, Jessica Botsford, Brian Egger, Lawrence Evans, Brenda Farrell, Cody Goebel, Cynthia Grant, Kirsten Lauber, Sheila McCoy, John Mingus, Barbara Steel-Lowney, Michelle St. Pierre, Nicholas L. Weeks, Adam Wendel, and Rebecca Woiwode.

Related GAO Products

Federal Student Loans: Education Could Improve Direct Loan Program Customer Service and Oversight. GAO-16-523. Washington, D.C.: May 16, 2016.

Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness. GAO-16-175. Washington, D.C.: February 25, 2016.

Federal Student Loans: Key Weaknesses Limit Education’s Management of Contractors.GAO-16-196T. Washington, D.C.: November 18, 2015.

Federal Student Loans: Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options. GAO-15-663. Washington, D.C.: August 25, 2015.

Higher Education: Better Management of Federal Grant and Loan Forgiveness Programs for Teachers Needed to Improve Participant Outcomes. GAO-15-314. Washington, D.C.: February 24, 2015.

Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1999.

Federal Student Loans: Better Oversight Could Improve Defaulted Loan Rehabilitation. GAO-14-256. Washington, D.C.: March 6, 2014.

Servicemembers Civil Relief Act: Information on Mortgage Protections and Related Education Efforts. GAO-14-221. Washington, D.C.: January 28, 2014.

Mortgage Foreclosures: Regulatory Oversight of Compliance with Servicemembers Civil Relief Act Has Been Limited. GAO-12-700. Washington, D.C.: July 17, 2012.

Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. GAO-09-216.Washington, D.C.: January 8, 2009.