Soldier sues Citibank over loan's 'mandatory forbearance'

Feb 22 2011 - 3:20pm

Capt. Lyndsey Olson had little time to organize her personal finances during her year at the Joint Base Balad in Iraq, which was hit so often by mortar fire that soldiers called it "Mortaritaville."

But Olson claims that Citibank made a difficult situation worse by illegally altering terms of her student loan.

Now Olson, a member of the Minnesota National Guard, is suing Citibank in federal court in Minneapolis, accusing the bank of penalizing military personnel by placing their loans into "mandatory forbearance," which can add hundreds of dollars in interest over the life of a loan.

"Why penalize people for serving their country?" asked Olson, 34.

Citibank argues that forbearance is a benefit because it relieves soldiers from making payments while they are on active duty. This gives service members "additional time and flexibility to repay their debts," the bank said in court documents.

The suit, which seeks class action status, could affect thousands of U.S. military personnel who took out loans before their deployments to combat zones. It comes as reports of violations of a federal law designed to protect military personnel surface nationwide, and as Congress considers new protections for military families that face financial hardship.

At issue in Olson's case is whether a lender can unilaterally change the terms of a loan when a service member is called up for active duty and seeks protection under a federal law known as the Servicemembers Civil Relief Act, or SCRA. The 70-year-old law provides a broad array of protections for service members deployed overseas, including a 6 percent rate cap on loans taken out before active service.

Olson said she contacted Citibank to have her interest rate, 9.25 percent at the time, capped at 6 percent. Citibank agreed to the rate cap, while placing her loan into forbearance and canceling the automatic payment feature. When she called to complain, Citigroup said that forbearance was required if she wanted to receive the lower interest rate.

Olson was forced to arrange loan payments from a combat zone and returned from Iraq with a larger debt burden than if she had not applied for relief under the SCRA.

Citibank tried to have the case thrown out, but U.S. District Judge Paul Magnuson denied that motion. Without ruling on the case, he said the bank's policy of putting loans into forbearance makes it more difficult for active-duty service members to track their loan balances.

A spokesman for parent company Citigroup declined to comment on the case, but said in a written statement that the bank "has a longstanding commitment to complying with (SCRA) and the protections available to military personnel."

The suit is the latest among recent legal cases and complaints involving alleged violations of the civil-relief act, a federal statute that many lenders still don't fully understand.

Last month, J.P. Morgan Chase & Co., the nation's second-largest bank, admitted it had overcharged 4,500 service members on their mortgages. Congress is weighing new legislation to protect service members from losing their houses or being charged punitively high interest rates while on forced absence.

The new consumer watchdog agency created by Congress recently made a special division, called the Office of Servicemember Affairs, to protect military families from financial scams. It's headed by Holly Petraeus, wife of Gen. David Petraeus.

In his recent ruling, Magnuson said Citibank's forbearance policy raised the borrower's "effective interest rate," by increasing the principal and the interest charged on it. Magnuson said Citibank had failed to explain why it requires certain loans to be put into forbearance, rather than making it an option.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

 

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