Military student loan deferments guaranteed by federal law are being denied or mishandled by banks, resulting in loan defaults and career hardships, according to a Consumer Financial Protection Bureau report.

Complaints to the bureau indicate that some lenders are still not abiding by the Servicemembers Civil Relief Act, despite recent multimillion-dollar settlements paid by lenders for non-compliance.

The SCRA prevents lenders from charging more than 6 percent interest on any type of pre-service debt to anyone on active duty, and also prevents adding charges from that time period when a servicemember leaves active duty.

The law also prevents evictions in most cases, and allows servicemembers to break leases and cell phone contracts when leaving for permanent assignments.

The report, co-written by CFPB assistant director Holly Petraeus and student loan ombudsman Seth Frotman, blames lenders for poor communication and improper denial of SCRA rights.

“For example, we heard from an active-duty servicemember who had been deployed to Afghanistan and contacted his servicer to inquire about a military deferment during his deployment,” the report stated. “The request was denied.

“But instead of clearly explaining the reason for the denial, the borrower’s servicer merely listed the various criteria used to determine eligibility, without indicating which of the criteria he failed to satisfy.”

After the servicemember complained to the CFPB, the lender reversed its decision, according to the report.

Military families requesting that loans be forgiven following the death of a loved one also reported denials to the bureau, according to the report.

The improper debts accruing could also have an impact on servicemembers’ job prospects, the report noted. The loans could negatively impact a person’s credit, which is a determinant in acquiring and maintaining a security clearance.

“Servicemembers should not have to find themselves distracted from their military assignments by a mishandled payment, an unanswered deferment request, or a botched transfer,” the report stated. “Their time should be spent focusing on their mission … not fixing servicer errors or worrying about the additional repercussions of potential negative credit reporting.”

In May, the CFPB opened a public comment period related to student loan servicing. Those wishing to comment may do so at www.regulations.gov., through July 13.

In 2014, student loan servicers Sallie Mae and Navient agreed to pay $60 million in compensation to more than 77,000 servicemembers who were improperly denied SCRA benefits.

Federal officials have also pursued penalties against lenders for SCRA violations for other types of loans.

On May 29, the Office of the Comptroller of the Currency fined Bank of America $30 million and ordered remediation for 73,000 servicemembers after finding SCRA violations in the bank’s non-home loan division.

Bank of America also runs DOD Community Bank, which services 67 overseas U.S. military bases.

In 2013, Bank of America and Morgan Stanley agreed to pay a combined $39 million for SCRA violations, according to a settlement with the Justice Department. Home lending subsidiaries of the two banks unlawfully foreclosed on 155 servicemembers between 2006 and 2010, according to the settlement.

slavin.erik@stripes.com

Twitter:@eslavin_stripes

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