Written by: André B. Cotten, Regulatory Compliance Counsel
Hello, compliance friends! I am still recovering from an intense week at NAFCU's Regulatory Compliance School last week. However, I enjoyed meeting so many of you in-person, and I look forward to connecting with more of you at future NAFCU events. One issue that is always on our agenda and leads to questions at this conference is the Servicemembers Civil Relief Act (SCRA).
To provide a bit of context, 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, and in certain circumstances their spouses and dependents, by requiring creditors to reduce interest rates on certain loans, by prohibiting foreclosures without a court order, and by allowing servicemembers to terminate motor vehicle leases in certain circumstances.
One of the main challenges in complying with the SCRA is the lack of implementing regulations or formal guidance. As a result, we must look at the law itself for guidance, although it is worth noting that there are also enforcement actions and litigation that clarify the SCRA.
This blog will give a high-level overview of some frequently asked questions regarding the SCRA.
Is a credit union allowed to negatively report on a servicemember to the credit bureaus?
The SCRA does not permit a credit union to negatively report the member to the credit bureaus unless the member is delinquent. Specifically, section 518 prohibits making an "adverse report relating to the creditworthiness of the servicemember" solely because the servicemember properly exercises his or her rights under the SCRA. However, if a credit union has complied with the SCRA and the member is late sending their payment, then the SCRA would not prohibit the credit union from reporting to the credit bureaus.
Is there a time limit for a servicemember to notify the credit union of their military service in order to qualify for the reduced interest rate?
Generally, the six percent protection is retroactive to the member's entry into military service, even if the member does not notify the credit union in a timely fashion. As previously mentioned, the SCRA does not have any implementing regulation so we mostly have to rely on the statute. Here's a relevant excerpt:
“§ 527. Maximum rate of interest on debts incurred before military service
(a) Interest rate limitation.
(1) Limitation to 6 percent. An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent –
(A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or
(B) during the period of military service, in the case of any other obligation or liability. " (Emphasis added).
Section 527(b)(1) goes on to state that the servicemember has 180 days after the termination or release from military service to invoke the 6% interest rate limitation.
Also, when determining which servicemembers are eligible for the 6% interest rate cap, the SCRA also defines the terms “military service” and “period of military service” which clarify which servicemembers are eligible for certain protections. There is also a Department of Defense database that tracks SCRA status. A 2011 edition of the Philadelphia Federal Reserve's Consumer Compliance Outlook article also contains a helpful overview of SCRA issues including invoking the 6% interest rate cap.
If a member makes a request for the reduced rate after the loan has either been paid or charged off, must the credit union refund any applicable interest and fees?
While there is not clear regulatory guidance here, in the event interest exceeds six-percent, the SCRA requires a credit union to refund any interest in excess of the six-percent "that would otherwise be incurred" during military service. There is no exception in the statute for interest already paid or interest on a loan which has been paid off during military service but prior to the request. The SCRA does not provide a specific method for the refund, so in these kinds of cases, consulting with counsel may be helpful.
If the member has purchased a vehicle through an installment contract with a credit union, is the servicemember allowed to voluntarily return the vehicle and have their debt considered settled?
The SCRA allows a servicemember to terminate an existing auto lease if he or she enters military service for a period of 180 days or more. Additionally, for leases entered into after military service begins, a member can terminate the lease if he or she is deployed outside of the United States. However, there is not a similar provision for installment contracts.
Alternatively, the SCRA still protects servicemembers if their ability to make their installment payments is "materially affected" by their military service, here's an excerpt from section 532:
532. Protection under installment contracts for purchase or lease
(a) Protection upon breach of contract.
(1) Protection after entering military service. After a servicemember enters military service, a contract by the servicemember for—
(A) the purchase of real or personal property (including a motor vehicle); or (B) the lease or bailment of such property, may not be rescinded or terminated for a breach of terms of the contract occurring before or during that person's military service, nor may the property be repossessed for such breach without a court order. (Emphasis added).
The SCRA allows a servicemember to waive their rights under the SCRA in writing and forfeit the lease for personal property (i.e. vehicle) secured by that property. Here is a relevant excerpt from section 517:
(b) Actions requiring waivers in writing. The requirement in subsection (a) for a written waiver applies to the following:
(1) The modification, termination, or cancellation of—
(A) a contract, lease, or bailment; or
(B) an obligation secured by a mortgage, trust, deed, lien, or other security in the nature of a mortgage.
(2) The repossession, retention, foreclosure, sale, forfeiture, or taking possession of property that—
(A) is security for any obligation; or
(B) was purchased or received under a contract, lease, or bailment. (Emphasis added).
A forfeiture of rights must be executed separately from the contract or other underlying agreement, and it must be in at least 12 point font. However, keep in mind that the Military Lending Act does not permit waiver of SCRA rights for MLA covered loans.
Also, the SCRA is not clear as to how the forfeiture of a purchase contract is to be treated, but gives three rather discretionary options to a court. As a result, the credit union may consider speaking with local counsel regarding the recession of purchase contracts, since these are generally case-by-case determinations. Also, some states have statutes that protect servicemembers more favorably than the federal SCRA.
The SCRA has been amended multiple times. For example, in October 2010, the Veteran's Benefits Act (VBA) of 2010 was signed into law. The VBA provides a private cause of action for servicemembers for SCRA violations. The relief available includes damages, injunctions and attorney's fees. This Department of Justice website also contains a list of enforcement actions that can be helpful for researching specific SCRA questions. Credit unions reviewing SCRA issues may want to ensure they are complying with the SCRA's requirements since noncompliance can be costly and present legal and reputation risks.