SCRA Refund to Borrower or Guarantor

In the process of updating our Servicemember Civil Relief Act procedures, a question was raised about who should receive the letter and check, if applicable.

For this scenario:
Servicemember is the Guarantor on Loan A. Servicemember requests SCRA benefits and is determined that Loan A qualifies for SCRA benefits. An analysis of the loan history is conducted and determined a refund must be issued due to the interest rate being more than 6% during the active duty period. A letter will be sent stating Loan A interest rate updated to 6% as result of SCRA benefit and a refund check is sent for excess of 6% paid during active duty.

Questions:
Is the letter sent to only Servicemember (Guarantor) or to Servicemember and Borrower?
Is the refund check sent to Servicemember (Guarantor) or the Borrower?

Thanks.

Welcome to BOL.

IMO the refund would go to the borrower since they are the ones making the payments and the servicemember is only secondarily liable on the debt.

As for the letter you are sending I would send to both parties. The servicemember to show the request was honored and the borrower advising them of the refund due to the servicemember's request.

I don't disagree with Dan, but I would also not be averse to making the check to each person liable on the the debt. We may assume the borrower is paying and the SM is not, but we've no idea what is happening in the background and it shows proof the SM was made hole and acknowledged receipt. Not a requirement, but a CYA.

Looking for clarification, See 50 U.S.C. § 3937(a)(2) (3) indicates the interest should be forgiven and any amount that is forgiven may reduce the principal of the debt. Is there an option to refund that excess interest that would have been paid by the borrower in a retroactive benefit provided?

I'm not sure I understand - Is there an option to refund that excess interest that would have been paid by the borrower in a retroactive benefit provided?

Your only option is to refund the overpayment.

and any amount that is forgiven may reduce the principal of the debt.

(3) talks to reducing the periodic payment by the amount of interest forgiven, not the principal balance.

The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made.

Dan - so you when you refer to refund is the only option, you could reduce the periodic payment by the amount forgiven, so would you do both in a retro perspective? For example, if the borrower made 12 payments at 10% and then applies for SCRA and thus you go back and reduce the rate to 6%, reapply payments and the excess interest is applied as a reduction in ongoing periodic payments and you can send the excess as a refund to the borrower?

If you have a retroactive adjustment to make then the excess from your adjustment is provided to the borrower. On the go forward you lower the payment. On the look back you need to give the borrower the excess amount they already paid.

So you lower the periodic payment by the excess interest paid and refund the amount to the borrower? Seems double benefit. What am I missing!?

Maybe an example will help.

Suppose a servicemember had a loan with a monthly payment of $125. The servicemember went on active duty beginning January 1, 2021. If the SCRA benefit had been applied, the monthly payment would decline top $100. Due to a processing error, SCRA benefits were not applied until August 1, 2021. The servicemember would be owed a refund of $25/month for a 7-month period, for a total of $175. In addition, the payment for the remainder of the covered period would be set at $100 on a go forward basis.

If the loan was paid off before the error was corrected, the entire SCRA benefit would be paid as a refund.

Great thank you!

Another question, the borrower's only option is to receive the $175 as a refund correct?

No. The borrower could direct you to apply it to the principal. The request should be in writing if they do.

Infairness gave you a great example for how the refund should work for payments already paid.

thanks!

Probably over thinking this, but we reduce the interest rate and payment amount retroactively and reapply the excess automatically to principal then we ask the borrower what he would like to us to do, either apply to principal or refund. If he doesn't respond then we leave the additional amount in principal. I believe we should obtain borrower authorization to apply to principal, any issues with not getting borrower authorization?

The law says you can't charge them the excess. You applied it to principal - thereby keeping the over payments. To do that and that is "keeping it" and not refunding it. I don't believe no answer is an affirmation to keep the over payment even applying it to principal.