By Margo A. Anderson, Examiner, Federal Reserve Bank of Boston
Financial institutions should be mindful of the requirements of the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. App. §501 et seq.,1 when lending to and servicing accounts for members of the armed services. This article reviews those requirements.
The confluence of the financial crisis and our nation's involvement in several military conflicts has caused service members to invoke the protections of the SCRA with greater frequency than in the past. In February 2011, a subcommittee of the House Committee on Veterans' Affairs conducted a hearing on mortgage-related violations of the SCRA. A representative of a large financial institution testified that the institution had violated the SCRA in 4,500 instances by charging interest rates on mortgages above the 6 percent limit during the period service members were on duty and one year thereafter. 2 The hearing and testimony were widely reported in the news media. The bank later refunded $2.4 million in interest in excess of the SCRA's limits, began new programs for service members and veterans, enhanced its controls to ensure compliance with the SCRA, and settled a class-action lawsuit for $27 million.
The SCRA was enacted on December 19, 2003, to clarify and strengthen the protections provided to military personnel through the Soldiers' and Sailors' Civil Relief Act of 1940. The SCRA protects active duty military personnel,3 and in limited instances their spouses and dependents,4 by requiring creditors to reduce interest rates on certain loans, by prohibiting foreclosures without a court order, and by allowing service members to terminate motor vehicle leases in certain circumstances.
Section 527 of the SCRA requires that for debts entered into by service members or service members and spouses jointly before the service member enters military service, the interest rate cannot exceed 6 percent during the period of military service and one year thereafter for mortgages or 6 percent during the period of military service for nonmortgage debt. Interest includes all fees and charges associated with the loan. Interest in excess of 6 percent must be forgiven and not deferred. Creditors must also adjust the periodic payments on the loan to reflect the reduced interest rate.
The protections under §527 are triggered when a service member sends written notice to the creditor and includes a copy of the military order calling the service member to military service. The notice can be sent to the creditor as late as 180 days after the date of the service member's termination or release from military service. After the notice is received, the creditor must adjust the loan retroactive to the date on which the service member was called to military service. Note, however, that §527(c) permits a creditor to seek relief from the interest rate cap if it can demonstrate “the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember's military service.”
Under §533 of the SCRA, real property owned by a service member before military service that is secured by a mortgage or deed of trust cannot be foreclosed upon, sold, or seized during the period of military service or up to nine months after service without a court order or the written agreement of the service member.5 Failure to comply with this requirement voids the sale or foreclosure. If a creditor files a legal action to enforce a mortgage obligation, such as a foreclosure action, §533(b) permits the court to postpone proceedings until the service member is available to attend, extend the mortgage maturity date to facilitate lower monthly payments, grant foreclosure subject to the action being re-opened if the service member challenges it, and extend the period during which the service member can redeem the property by paying the mortgage. To determine if a customer is a service member, financial institutions can search a database maintained by the Department of Defense.
It should also be noted that creditors originating mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD), such as Federal Housing Administration loans, must provide a notice to borrowers who default on these loans, informing them of the rights available to service members under the SCRA. The required notice and further details are discussed in HUD's Mortgagee Letter 2006-28 (Mortgage and Foreclosure Rights of Servicemembers under the SCRA), which is available online .
Under §535(a)(1) of the SCRA, a service member has the right to terminate a lease of a motor vehicle that will be used by the member or a dependent for business or personal transportation in the following circumstances:
The lessee must return the vehicle within 15 days of the notice to report to duty.6 In addition, the lessee must provide written notice to the lessor and include a copy of the military orders. The lease is terminated on the date these requirements are satisfied. The lessor can collect any unpaid payments owed for the period preceding the termination but cannot impose an early termination fee.
In October 2010, the Veterans' Benefits Act of 2010 (VBA) was signed into law.7 The VBA provides a private cause of action for service members for SCRA violations. The relief available includes damages, injunctions, and attorney's fees. The Fourth Circuit recently held that the right to a private cause of action under the VBA could be applied retroactively in Virginia. The case, Gordon v. Pete's Auto Service of Denbigh, Inc., 637 F.3d 454 (4th Cir. 2011), is summarized in “On the Docket.”
In recent years, Congress has made many amendments to the SCRA. Financial institutions should ensure that they have a system in place to monitor legislative changes. The Justice Department maintains a website that focuses on issues concerning service members, including the SCRA.
Financial institutions should review their systems to ensure that they are complying with the SCRA's requirements to avoid the financial, legal, and reputational harm that may result from noncompliance. Specific issues and questions about consumer compliance matters should be raised with the appropriate contact at your Reserve Bank or with your primary regulator.
Complete Issue (1.52 MB, 20 pages)
Kenneth Benton, Editor
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