An action the Department of Justice took Monday shows that it's watching whether servicers cut rates to 6% for borrowers who took out loans before entering military service, a requirement that takes on new significance at a time when the average market rate is over 7%.

The more than $500,000 that Village Capital & Investment LLC agreed to pay will resolve claims that it failed to do this for at least 41 pre-service mortgages, and took action to punish servicemembers who requested that it fulfill the requirement.

The law requires that the rate on debt held by servicemembers go no higher than 6% starting from the date they receive their military orders. Monthly mortgage payments must be reduced by the amount of interest that needs to be forgiven, according to the DoJ.

The DoJ reported that it will be engaging in ongoing scrutiny of servicers aimed at ensuring they're acting in accordance with the Servicemembers Civil Relief Act's interest rate benefits, which regulators have said financial institutions haven't done enough to support in the past.

"We will continue to enforce the law to ensure servicemembers receive the protections they have earned," Assistant Attorney General Harmeet Dhillon of the Justice Department's civil rights division said in a press release.

At least $425,000 of the total will go to affected servicemembers.The servicer also will pay the maximum penalty for an initial violation of the SCRA's terms, which is $79,380.

The DoJ alleged Village Capital instead misled borrowers, claiming rates were below 6% when they weren't and struck back at those who asserted a right to their benefits by accelerating principal on loans and reporting them as delinquent. 

"When lenders refuse to honor the benefits guaranteed under the Servicemembers Civil Relief Act — or worse, retaliate against those who assert their rights — they not only violate federal law, but undermine the trust that military families place in financial institutions," Dhillon said.

Village Capital agreed to update rules, procedures and training for compliance. The company had not responded to a request for comment at deadline.

SCRA's past and potential future is servicing

Other servicing rules governing mortgages that servicemembers receive before starting duty include certain foreclosure protections. Servicemembers received $311 million in compensation from five large mortgage servicers for violations of these in 2015.

Key protections for pre-service mortgages under these rules include a requirement that foreclosures be judicial unless there is a court order, applicable for up to one year after leaving active duty. A court can't grant a default judgment without an affidavit related to military status.

The SCRA-protected borrower must also have a court-appointed attorney before a default judgment and service members get at least 90 days of leeway on foreclosure proceedings if their military duty conflicts.

Some legislators have recently sought to expand servicing responsibilities under the SCRA.

The Improving SCRA Benefit Utilization Act would make financial institutions responsible for applying the 6% rate cap to all pre-service debts a particular creditor had for a borrower once called upon to do so, rather than requiring itemization.

Sen. Jon Ossoff, D-Ga.; Sen. Rick Scott, R-Fla.; and Rep. April McCLain Delaney, D-Md., collectively provided bipartisan support for the proposed legislation.