Servicemembers Civil Relief Act Class Action Litigation: An Expert Witness's In-Depth Analysis and Comments

1. Based upon my review of the records in a recent Servicemembers Civil Relief Act ("SCRA" or "the Act") case, it was my professional opinion that the bank failed to competently implement the requirements of the Act. Had thebank been competent and had it acted reasonably to implement the SCRA, it was my opinion that it was more likely than not that the bank’s systemic overcharges and persistent violations of the Act would not have occurred, and the many tens of thousands of active-duty servicemembers with credit cards issued by this bank would have been protected from unfair interest rates and fees, as Congress intended.

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of this bank’s documented incompetence in implementing the SCRA went back many years. Bank documents showed that it overcharged active duty servicemembers millions of dollars in unlawful interest and fees.

In this particular case, the bank’s negligent implementation of the SCRA went even further, as the OCC noted in a letter to to this bank, stating that “[m]anagement needs to develop effective controls and policies and procedures to ensure full compliance with SCRA” including “no evidence of checks of the relevant databases having been performed to determine if the borrowers were protected by the SCRA.”

Further, the OCC required the bank to enter into a Consent Order that established that the bank “[f]ailed to have in place effective policies and procedures across the Bank to ensure compliance with the SCRA” and that “[b]y reason of the conduct set forth above, the Bank engaged in unsafe or unsound banking practices.”

The bank itself acknowledged its lack of standards to implement the SCRA, describing “internal challenges and lack of consistent standards and approach ...” in one of its communications.

2. One example of the bank’s lack of effective procedures was its failure to timely set up a flag in its databases to identify active duty customers to whom SCRA benefits were owed, which undermined its ability to properly implement the SCRA and constituted a woeful failure to meet nationwide industry standard banking practices. It was my opinion that such a flag is a standard banking practice and that the bank’s failure is another example of its incompetence in implementing the SCRA and of its negligence toward its active-duty customers.

The bank’s failure to set up an SCRA flag was well documented. This bank’s SCRA Review Plan stated: “There is no servicing system flag for denials prior to [date]”

The bank, likewise, indicated “[t]he ability to tag an account for SCRA started in [date]” and that its “[l]ack of a ‘flag’ for SCRA across all systems impacted [our ability to comply]” and was a “known data integrity issue with source data.”

The bottomline is that the bank knew about this shortcoming in its systems, and should have and could have taken action and developed an SCRA flag across its systems much earlier than it did.

3. Tangentially, for far too long, the bank failed to automate its systems as they related to the SCRA, which also demonstrates a failure of care in implementing the Act and noncompliance with nationwide industry standard banking practices. The bank admited its failure to use automation and admited its unreasonable reliance on manual implementation. The bank’s discovery responses in this case indicated that the bank did not have SCRA-specific programming until a date much later than it should have. But the OCC indicated that as of several months after the bank knew of its shortcomings in this area, the bank was still developing an automated solution. And bank records show it still had not implemented a functioning automatic SCRA calculator until a couple of years later.

As a part of these problems, the bank apparently developed the SCRA calculator in two phases, the second of which was not delivered until several years later, and which was supposed to fix defects that prevented the calculator from correctly calculating retroactive adjustments.

Under the banking standards as I have observed them during my banking and consulting careers, the bank should have implemented a functioning automated program years earlier than it did, and in sync with its initiation of its participation in the SCRA.

4. The bank failed to meet an industry standard of care by repeatedly failing SCRA compliance audits for twelve years! Even one violation of the SCRA would have been unacceptable, but failing to correct the problem once and for all after discovering it is seriously concerning.

According to the bank’s own audits, for a continuous five-year period, the bank overcharged over seven thousand customers.

For a later three-year period, the bank again overcharged almost eight-thousand customers.

I also reviewed the bank’s discovery responses in this particular case, which further indicated that during an eighteen-month period, the bank issued approximately 60,000 checks or credits to servicemembers to remediate the bank's SCRA errors.

Based upon my review, I saw no reasonable excuse for the bank needing to execute multiple remediations for the same issues that resulted in repeat overcharges of its active duty customers. Facing such serious compliance issues, it was my professional opinion that the bank should have appointed a senior-level manager to oversee SCRA compliance. Instead, the bank encountered this problem and then failed to deal with it, resulting in ongoing systemic illegal overcharges.

One would have thought that the bank would have taken this seriously after it was called before Congress to describe the failures of its SCRA system and admitted to multiple problems in its SCRA implementation and expressed apologies to our Nation’s servicemembers. Yet, the bank continued to neglect these matters, and years of additional failures and overcharges resulted.

It was also my opinion that the long duration of bank’s SCRA overcharges evidenced the bank’s lack of diligence in identifying and fixing the problems. The bank’s overcharges dated back over ten years, kicking off over a decade of allowing its SCRA non-compliance to proceed in one form or another.

These continuing problems also raise questions about the bank’s motives and priorities in managing its business. If the bank’s systemic problems with its SCRA implementation resulted in undercharging its customers, rather than overcharging them, I have no doubt that the bank would have quickly fixed the issue.

5. The bank’s years of delay in issuing refunds of overcharges did not meet nationwide banking industry standards. It is never acceptable to delay refunds owed to customers, and certainly not for three years, the period between the agreement to remediate in the consent decree and the mailing of the payments. The bank's remediation program failed to meet national industry standard banking practices in this respect.

The bank knew that it had an SCRA compliance problem very early on. The OCC Consent Order was issued two years later, but remediation checks did not go out until four years later. This is an unacceptable timeline that flies in the face of nationwide banking industry standards. Any bank of this bank’s size and resources could have refunded these funds earlier. Moreover, the excuses the bank made for its delay are not reasonable. For example, the bank claimed it needed more time for “additional work and time needed to execute cross LOB (line-of-business) sharing of SCRA information,” but the bank should have executed such information sharing long ago.

6. The bank’s remediation did not comport with the nationwide standard of care in the banking industry when it failed to provide remediation payments via credit or direct deposit when the servicemembers maintained open accounts with the ank. Indeed, at one point, all of the bank’s remediation payments were sent by the mailing of checks, even though the bank had previously and subsequently used credits and direct deposit to refund overcharges.

The bank should have known that military personnel frequently move, particularly while on active duty, but that their accounts do not, making credits and direct deposits the best method and only sure way of delivering remediation payments.

As a result of the bank’s unreasonable insistence on issuing remediation payments by paper checks for two years, many thousands of checks went uncashed, totaling $30+ million. The bottom line results were that the servicemembers did not receive the $30+ million in uncashed checks, and the bank had the benefit of retaining the $30+ million and earning interest on those funds for years.

Banking is increasingly mobile with the proliferation of e-banking and paperless banking. Reasonable care required the bank to utilize these banking features to put the remediation funds directly into its customers’ accounts. It is my understanding that the bank did not even send email to these customers informing them of the problems, which is also a breach of the standard of care, especially because servicemembers may be more reliant than other groups on e-banking.

It was also my opinion that since the bank insisted on using paper checks, it should have done more to reissue the uncashed checks. As soon as the bank received returned, uncashed checks, its job was not over. It should have taken all reasonable efforts to find the recipient and reissue the check to them. At a minimum, this would include trying to contact the customer by email or phone to verify the address or contacting the military for the servicemember’s current address. Without doing any of these things, the bank acted inconsistently with the nationwide banking industry standard duty of care, deprived the servicemembers of the use of their funds, and profited from the servicemembers' funds that stayed at the bank as deposits.

7. It was my professional opinion that the bank violated the nationwide banking industry standard of care when it sent remediation checks and 1099 tax forms to incorrect addresses. It was my understanding that many class members never received their remediation checks because the bank used a bad mailing address. I also saw evidence that the bank sent checks and 1099s to incorrect addresses even though the bank had a more-recent address for the recipient on file, a mistake that plainly violates nationwide banking industry standards. The bank is a highly sophisticated organization with abundant experience communicating with large numbers of customers and managing their information. With even a modest level of effort, bank could have avoided many of the problems they subsequently faced from using incorrect mailing addresses.

Some within the bank raised concerns about this problem and how to overcome it, but the bank made a decision that benefited the bank and not the servicemembers. For example, one employee noted that the “approach of escheating any returned mail does not seem appropriate for this remediation given the amounts of the checks and the intention to get this money in the hands of servicemembers who were harmed. Seems like there should be skip tracing for any returned mail.” The response to this comment was “Do not update address outside of NCOA Process. Do not utilize Lexis Nexis to “skip trace addresses”.

Moreover, it was my understanding that the bank sent 1099s for many Servicemembers to bad addresses, even where the checks on which the 1099s were based were returned to the bank as undelivered. There were also examples of the bank not reissuing the 1099s when new, correct addresses were eventually found.

Other documents indicated there was some internal discussion within the bank about mailing 1099s when a check was returned or went uncashed. One comment on an internal bank document indicated that if a check is returned and the bank could not find the correct address, the bank should NOT be filing a 1099.” A subsequent comment overruled this concern, stating “we have a tax obligation to report income, interest, etc., to the IRS by means of form 1099 in the year in which the payment (in this case check) was issued to the customer regardless of the actions taken by the customer after the fact.

The IRS and state and local taxing authorities would have received the servicemembers' 1099s indicating that they were paid funds, yet the servicemembers themselves would not have received those funds due to the check being returned to the bank. The servicemembers in these instances would have prepared their income tax return using an erroneous 1099 overstating their income by the amount of the unreceived check, or understated their income as a result of having no 1099 at all – either of which situations could have resulted in imposition of interest and penalties.

Any reasonable bank should have done more to find a correct address when a check was returned or uncashed, especially given the servicemember population that had been harmed. At the very least, the bank should have tried to contact the servicemember by phone or email, or the bank should have contacted the military for the customer's correct mailing address.

Even more egregiously, the bank apparently instituted a policy of not re-sending 1099s if an alternative address was found and used for reissuing a returned check. In other words, the bank consciously ignored new information that it used to deliver remediation checks, keeping those customers in the dark about their consequent tax liability. This is not how a prudent bank operates, and the bank’s failure to comply with the IRS's requirements and the banking industry standard of care caused real harm to its customers.

It was also my understanding that there were many examples of the bank sending a 1099 even though the check went uncashed. Indeed, it appears that bank adopted a policy to send the 1099 in all cases and “It would not matter if that check was returned for bad address or if the 1099 was returned for bad address” according to a bank document. The bank cancelled the checks after 180 days but did nothing to correct the 1099. This conduct also violated IRS policies and the nationwide banking industry standard of care.

8. The bank failed to comply with the nationwide banking industry standard of care when it expressly excluded the time value of money from its remediation. It is well established that capital increases in value over time and that remediating wrongfully withheld or overcharged sums must include the time value of money. To understand the importance of remediating the time value of money, one must understand how banks profit from it. The primary way commercial banks make their money is by using their customers’ capital to issue loans to other customers, either as credit card loans, mortgages, auto loans, or others. The bank charges interest on these loans at various rates that exceed the interest rates they pay to their customers for depositing with them. The longer a bank retains capital, the longer it can use that money to issue loans and make other types of investments, increasing the bank’s profits over time. In short, any amount of money, no matter how small, is worth more the sooner it is received and banks understand this better than anyone: it is how banks make profits. It follows that when the bank overcharges under the SCRA and retains those overcharges for an extended period of time, it must compensate its overcharged customers for the lost time-value of their money. That money never should have left the customers’ pocket; they should have always retained the investment potential. This is so well established that the bank’s own prior SCRA remediations included compensation for the time value of money.

Had the bank remediated its overcharges promptly, the total time value of the overcharges would have been low, but because the bank held overcharges for as long as a decade, and indeed still held some overcharges after 15 years, this amounted to a significant figure that had to be remediated. In many cases, the harm to the servicemembers being deprived of their funds was especially significant because the overcharges often remained on the servicemembers’ credit card account and accrued interest at the contract rate, which could be as high as 29%.

I also pointed out that the “inconvenience payment” that the bank included as part of its earlier remediation was not related to the time-value of money. There is no connection between a multiplier of overcharges and the time-value of money, nor did the bank make any attempt to calculate an appropriate time-value of money component. This is in contrast with other remediations in which the bank did include a flat percentage as a time-value of money component.

9. In my experience working in and with the banking industry for many years, I have become familiar with the predatory lending practice known as “debt traps.” A debt trap often occurs when a borrower is enticed by a low interest rate on a loan, but the loan is structured in a way where the interest rate balloons to untenable proportions, trapping the borrower in a perpetual struggle to pay off interest on the loan without being able to shrink the principal. Various jurisdictions have tried to address these debt traps in different ways, including capping APR interest rates at certain levels (although even the interest cap can be excessively high for borrowers caught in the trap), requiring equal amortizing payments, and making banks ensure that their customers can afford to repay the loan, among others. A common way for a bank to entice a customer into a debt trap is with a teaser rate that is artificially low. Then, with a triggering event or the passage of a fixed amount of time, the interest rate increases. With the new, higher interest rate in effect, the consumer falls deeper and deeper into debt without paying off the principal.

I saw this playing out with the bank’s SCRA program. The bank offered returning servicemembers a generous 4% credit card interest rate, but then later increased their rates by many multiples. This “bait and switch” scheme operated just like a classic debt trap. With the new interest rate as high as 29%, many returning servicemembers would not be able to make their payments on their debt service, stretching the term of the loan, siphoning out ever more money from them and making the bank a nice profit. I reviewed some of plaintiffs’ accounts where this exact thing occurred. They returned from service and took advantage of a 4% rate, only to have that rate increased by as much as 700%, which can cause a significant debt trap.

For servicemembers, like other lower-income populations, this can be devastating. Servicemembers tend not to have much income growth that could make up for the ballooning interest rates or could allow them to make their payments on the debt service. Lacking sufficient income for even a short period can cause spiraling effects for a veteran with substantial debt obligations.

10. Finally, after reviewing the details of bank’s SCRA contractual program and related records, it was clear to me that the bank’s contractual program did not provide a reduced interest rate for a defined duration, but rather, its duration was contingent on the end of the servicemembers’ military service. As one of the documents states,“Once the account is enrolled, you’ll receive benefits during the entire qualifying period or until the Servicemember’s separation date.” If the account qualifies for relief under the SCRA, benefits are provided under the law until the servicemember’s active duty end date. Additionally, under the bank's policy, as a business policy, the benefits will extend 365 days after the cardholder returns from active duty. It is the bank’s policy not to end benefits “unless notified or the bank becomes aware the servicemembe is no longer SCRA eligible through the DMDC [Defense Manpower Data Center].”

The bank's documents also stated, “Before ending SCRA interest rate protection, each LOB [line of business] must establish procedures to determine if the service date has been extended or service is continuing”. The many form letters the bank uses to communicate with its SCRA customers does not state a time period for subsequent interest rate increases.

The bank’s SCRA Firmwide Policy also states that before discontinuing benefits, the customer must follow procedures to determine if his or her service is continuing, requiring that the servicemember use the DMDC database or other acceptable documentation to determine the eligibility date. And even if the servicemember customer does not furnish this documentation, the bank’s policy is to use the DMDC database to re-review for eligibility or possible extension of benefits.

It is also clear to me that the bank’s benefit of offering a 4% rate to returning servicemembers for a year after active duty is not required by the SCRA. Presumably, that benefit is offered to entice servicemembers to choose the bank for their credit and banking needs, as opposed to the bank’s competitors.


© 2020 by Don Coker. Serving clients worldwide from his Atlanta metro area office.

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ABOUT THE AUTHOR: Don Coker
Don Coker is a Banking, Financial, Real Estate, Embezzlement, Business Valuation, Expert Witness – Servicing Clients Nationwide – Worldwide from his metro Atlanta, Georgia office.

696 cases, 176 testimonies, plaintiffs & defendants. All areas of banking, finance, real estate, business & IP valuation, damages, embezzlement. Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 77 of top 400 law firms, 115 banks, 65 insurance cos., government clients incl. IRS, FDIC. Clients in 39 countries, work in 66 countries.

Previous officer at Citicorp, other banks & 2 years as a high-level governmental bank regulator.

BA, postgrad, executive ed.- Alabama, Houston, SMU, Spring Hill, Harvard Business School.

1 book, 100 articles. Quoted often.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.