On Tuesday, the Department of Justice filed the first lawsuit against Sallie Mae involving student loans under the Servicemembers Civil Relief Act – or SCRA. This law helps protect U.S. servicemembers because it caps interest rates on certain types of consumer loans, such as student loans, at six percent.
The intent of the law is to ensure that our servicemembers are not stuck repaying loans under terms that are unaffordable or unfair. As alleged, the student lender Sallie Mae sidestepped this requirement by charging excessive rates to borrowers who filed documents proving they were members of the U.S. military.
In the complaint, it is allege that Sallie Mae engaged in a nationwide practice of failing to provide servicemembers with the six percent interest rate to which they were entitled under law. It is further alleged that, in some cases, Sallie Mae improperly obtained default judgments against servicemembers who were protected under the SCRA.
Alongside the complaint, the Department also filed a proposed settlement of the lawsuit. This settlement is expansive. It covers the entire portfolio serviced by, or on behalf of, Sallie Mae – from private student loans, to Direct Department of Education Loans, to student loans that originated under the Federal Family Education Loan Program. If approved by the Court, the settlement will require Sallie Mae to pay $60 million to directly compensate victims of these violations. It is estimated that these funds will reach approximately 60,000 servicemembers, some of whom were impacted by violations that occurred nearly a decade ago.
In addition to direct compensation and a civil penalty, the proposed settlement also requires Sallie Mae to request that all three major credit bureaus delete negative credit history entries suffered by servicemembers due to these interest rate overcharges and improper default judgments. Going forward, the company will be required to streamline the process by which servicemembers may obtain an interest rate reduction – to ensure these courageous men and women receive the rights and benefits they deserve.
This matter was referred from the Consumer Financial Protection Bureau, in response to complaints by individual members of the armed forces.