2021 was a challenging year for most borrowers and financial institutions alike. Despite the stimulus checks and expanded unemployment benefits, many borrowers still found themselves struggling to repay their loans. For their own part, financial institutions struggled to keep up with consumers’ growing preference for digital, self-serviaces, under an increasingly watchful and punitive regulatory environment ushered in by new leadership at the Consumer Financial Protection Bureau (CFPB).
CFPB is watching
In 2021, there were 487,988 complaints made to the CFPB by consumers who felt wronged by their financial institutions, some 30,000 (approximately 6 percent) of these self-reported as servicemembers. And the CFPB continues to take notice of control gaps and missteps by financial institutions that violate SCRA regulations, and expose consumer harm for the servicemembers and dependents the rules seek to protect.
SCRA provides a range of benefits and protections for active duty servicemembers and their dependents as it relates to loans and other financial obligations. To comply with SCRA, financial institutions need to identify SCRA-protected individuals when servicing their accounts. The SCRA protects servicemembers from creditors taking certain negative actions against a borrower while on active duty, and provides benefits like rate reductions, fee suppression and more.
The CFPB and The Department of Justice (DOJ) recently issued a joint letter to mortgage servicers regarding military borrowers who have already exited or will be exiting COVID-19 forbearance programs in the coming months. The letter was sent in response to complaints from military families and veterans on a range of mortgage servicing violations, including inaccurate credit reporting, misleading communications to borrowers and requests for lump sum payments for reinstating their mortgage loans.
CFPB Director Rohit Chopra said in a statement: “The CFPB will be closely watching mortgage servicers and will hold them accountable for illegal tactics perpetrated against military families.” With auto defaults seeing the largest monthly rise in more than a year, I predict this won’t be the last warning letter from the CFPB or DOJ - nor will it be limited to mortgage servicers.
Manual errors create risk whether you serve a few or many servicemembers
While the current loan servicing model relies heavily on manual fulfillment of tasks and is highly prone to human errors, there is nothing forgiving about the CFPB’s response when it comes to consumer harm, especially if the financial institution can’t demonstrate that it took every reasonable step to follow the rules.
All servicers have some level of compliance management system in place to ensure appropriate financial protections are provided to servicemembers. Most even provide regular training for their employees on servicemember protections. The problem lies in the execution of those protections.
Back office training is important, but imagine if loan servicers didn’t have to rely solely on an agent’s knowledge or attention to detail? Financial Institutions would be well served to automate servicemember requests - including the ingestion of the request and connection to automated verification of orders and processing of related policies. Further, allowing servicemembers to self-serve for their requests will unburden the back office, and most importantly, provide the protected customer with the financial benefits, assurances and peace of mind the regulation intended.
Self-service and automation of SCRA validation and benefits
One of the first and most important steps in servicing a loan account is to determine the status of the account holder and whether they’re eligible for SCRA protection and benefits. Most loan servicers manually validate SCRA orders, making self-service difficult. Some can actually link to integrated service providers that will automatically scan and validate status, but the processing of these orders is still quite manual and prone to error. Leveraging technology to take it a step further and both validate, apply benefits and allow servicemembers to self-serve for real-time application and completion of active duty servicemember benefits is truly transformational. Eliminating the risk of manual intervention and the misapplication of inaccurate benefits is a game-changer for the servicember - and your relationship with the regulators.
With increased CFPB and other agency oversight, it’s more important than ever that all the benefits and protections are applied to a servicemember’s accounts in a timely and accurate manner. In truth, it’s often at this point, especially when legacy systems are still in place, that things start to come apart at the seams.
For example, when a servicemember or protected dependent notifies a financial institution about their status, the financial institution should reduce the interest rate on qualified loans, adjust the rate retroactively to the first day of eligibility and code the loans to adjust the periodic payments appropriately. The SCRA limits this interest to no more than 6 percent per year and requires forgiveness of any interest in excess of that ceiling. With an antiquated system, there are a lot of manual adjustments involved to make sure the rate is reduced to 6 percent both retroactively for the prior year, as well as prospectively.
Imagine if all these ‘rules’ were set up and configured in one place so that when the Financial Institution is put on notice, these benefits and actions automatically associate with the servicemember’s accounts - and furthermore triggers the processing of these transactions back to the core platform.
Automating SCRA validation and benefits can help avoid reputational harm
The financial institution’s loan portal can be one of its most effective tools to facilitate identification and monitoring of customers eligible for protections under SCRA. It should automatically flag the borrower as a servicemember or their dependent when known, or attempt to validate the same when first notified, along with tracking active duty status dates to ensure that accounts associated with those customers are afforded appropriate protections.
SCRA noncompliance can result in significant reputational harm for a financial institution. In an age where customer satisfaction is a priority, no financial institution wants the attention that improper treatment of servicemembers attracts, least of all from the CFPB.
About the author
Lindsay Wescott serves as Head of Enterprise Implementations at Constant, where she leverages her extensive expertise in data governance and operational compliance to bring new features to market. She oversees policies and procedures for proper vendor oversight, monitoring and testing of integrated partners, ensuring compliance and remediation of exceptions for transmission and use of data.
Prior to her role at Constant, she served as Head of Transaction Processing at a top 10 US Bank and was responsible for leading consumer and commercial loan servicing divisions through transformational change, including process automation, system conversion and system simplification workstreams, economic relief program development, audit remediation, and regulatory compliance mandates.
Constant, a CUNA Strategic Services alliance partner, is the only software provider that fully automates loan servicing so members can resolve issues entirely in their online banking account - and then leverages insights from those actions to make relevant product offers to the member. With Constant, credit unions can reduce operating costs, empower members to self-serve, and leverage member self-service actions to deliver tailored product offerings.