I first noticed this in one of my Lending Club accounts about a year ago. It was a C-grade loan that went from 14% and was suddenly paying 6%. I thought it must have been a mistake but when I did some investigating I discovered this 6% rate was indeed correct. How can that be?
I didn’t think much more about it because it was an isolated incident that hasn’t happened since. Then yesterday, I noticed this tweet from Michael at Nickel Steamroller. There are several low grade loans for sale right now on Folio with a 6% interest rate including this E-grade loan. What gives?
Active Duty Military Can Only be Charged 6% While Deployed
These loans didn’t start out at 6%. They were normal loans with an interest rate commensurate with the credit risk. But there is a law called the Servicemembers Civil Relief Act (SCRA) that states that when active duty military are deployed they can only be charged a maximum of 6% on any debt incurred prior to their deployment. Here is the pertinent information. This act:
Clarifies and restates existing law that limits to 6 percent interest on credit obligations incurred prior to military service or activation, including credit card debt, for active duty servicemembers. The SCRA unambiguously states that no interest above 6 percent can accrue for credit obligations (that were established prior to active duty or activation) while on active duty, nor can that excess interest become due once the servicemember leaves active duty – instead that portion above 6 percent is permanently forgiven. Furthermore, the monthly payment must be reduced by the amount of interest saved during the covered period.
This is not an issue that impacts many investors. Of the more than 30,000 loans that are active right now at Lending Club only 11 of them have been adjusted down to this 6% rate. I don’t have the numbers for Prosper but I imagine it is a similar tiny percentage.
So sure, as an investor you may lose a little in interest but that doesn’t worry me in the least. In fact, I look at it as just a way to provide support for those hardworking men and women serving our country. In my case the 6% C-grade loan stayed that way for several months and then it returned back to its normal interest rate and the borrower continued making payments.
