Interest is refunded from the effective date to report for active duty.
§3937 (b)(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.
During 2022, the FDIC identified violations of SCRA’s anti-acceleration provision when institutions unilaterally applied excess interest to the servicemember’s principal loan balance without giving the servicemember an option of how to receive the funds.
While SCRA does not require a specific method for reimbursing the excess interest and does not prohibit a creditor from providing it to the servicemember as a cash refund or timely applying it to current or future monthly payments, or applying it to past-due amounts, SCRA prohibits accelerating principal (i.e. applying accrued interest savings or excess interest directly to principal), for both open-end and closed-end credit.
Therefore, applying the excess interest to the principal balance of the loan is permitted only if the servicemember affirmatively chooses that method after being offered other options (such as cash refund and/or timely application to current or future payments).
One of the central purposes of SCRA is to ease financial burdens on service members during periods of military service. While reducing the principal does provide some benefit to the servicemember, the choice of how to receive that benefit must be made by the servicemember and not unilaterally decided by the institution.
In these cases, the institution would benefit from having procedures in place that document the options provided to the servicemember and the choice selected by the servicemember as to how the forgiven excess interest reimbursement is to be handled.
