I. INTRODUCTION
The Servicemembers Civil Relief Act of 2003 (the “Act”), Pub. L. No. 108-189, 117 Stat. 2835 (codified at 50 U.S.C. App. 501 et seq.) is a federal Act passed by the U.S. Congress. It was signed into law on December 19, 2003, which is the effective date the law. The Act renamed, amended and replaced the Soldiers’ and Sailors’ Civil Relief Act of 1940, 50 U.S.C. App. §§ 501-59350. Both the old and new versions of the law serve to protect the rights of military personnel on active duty by suspending the enforcement of certain civil liabilities that they are unable to meet either because they are absent from their homes or because they earn less in the military and cannot meet financial obligations incurred prior to their call to active duty. The Act does not relieve active military personnel from their financial obligations: rather, the intent of the amended Act is to strengthen national defense by providing for temporary suspension of legal proceedings and financial transactions that may adversely affect the rights of servicemembers during their military service.
The preamble of the Act outlines its intent and scope (50 U.S.C. App. § 510):
In order to provide for, strengthen, and expedite the national defense under the emergent conditions which are threatening the peace and security of the United States and to enable the United States the more successfully to fulfill the requirements of the national defense, provision is made to suspend enforcement of civil liabilities, in certain cases, of persons in the military service of the United States in order to enable such persons to devote their entire energy to the defense needs of the Nation, and to this end the following provisions are made for the temporary suspension of legal proceedings and transactions which may prejudice the civil rights of persons in such service during the period herein specified over which this Act remains in force.
When persons are called to active duty, including military reservists or National Guard personnel, bankers should be aware of the rights and responsibilities with respect to these customers. This summary of the Act will concentrate on its application to the credit relationships of members of the Armed Forces on active duty.
II. PERSONS COVERED
A. Servicemembers Called to Active Duty
The Act applies to “persons in the military service,” defined to mean full-time members of the Army, Navy, Air Force, Marine Corps or Coast Guard, members of the Reserve (when called to active duty) and National Guard personnel that have begun active service, whether through call-up or by volunteering. The Act takes effect at the time a person receives ordered to report for duty and continues until a short period after deactivation (generally terminates within 30 to 90 days after the date of discharge from active duty). The Act also applies to a servicemember who is a commissioned officer of the Public Health Service or the National Oceanic and Atmospheric Administration, active service.
B. Dependents of Servicemembers Called to Active Duty
Certain provisions of the Act may also protect dependents of military service personnel on active duty by extending its benefits relating to financial obligations if the dependents apply to a court for the extension. Dependents are defined to include the servicemember’s spouse, child or individual for whom the servicemember provided more than one-half of the individual’s support for 180 days immediately preceding an application for relief under the Act. Dependents will receive the benefits unless, in the opinion of the court, the ability of the dependents to comply with the terms of the obligation is not materially impaired by the military service of the person on whom they are dependent.
C. Servicemembers Called to Active Duty Who are Primarily or Secondarily Liable of Financial Obligations
The Act may also protect, subject to the court’s discretion, other persons who are primarily or secondarily liable on those financial obligations incurred by persons on active service before the commencement of such service. The law allows a court, in its discretion, to grant stays, postponements or suspensions of suits or proceedings to sureties, guarantors, endorsers, accommodation makers, co-makers or others who are or may be primarily or secondarily subject to the obligation or liability, the performance of which is stayed, postponed or suspended. An unresolved question is whether or not the interest rate limitation provisions apply to a joint obligation of a servicemember with someone other than his or her spouse.
D. Waiver of Rights under the Act
Note that although a servicemember may waive his or her rights under the Act, such waiver must be in writing pursuant to a written agreement, specifying the legal instrument to which the waiver applies and be made “knowingly and voluntarily” during or after the member’s period of military service. Pre-active service waivers are not effective.
III. EFFECT ON OBLIGATIONS
A. Interest Rates
The Act is designed to protect the rights of people on active duty because of the burdens active duty imposes. Of particular importance to financial institutions is the provision that limits the amount of interest collected on debts (including credit card and other open-end debts) of persons in military service, as well as to debts incurred jointly by the servicemember and the servicemember’s spouse, to no more than 6% per year during the period of active service. As defined in the Act, “interest” includes service and renewal charges and any other fees or charges (except insurance) related to the obligation or liability. The 6% interest rate is a cap. Interest charged may be less than the cap. The interest rate provision applies only to debts incurred prior to the commencement of active duty (in other words, only preservice obligations), but the rate reduction is calculated from the time the person receives orders for active duty. Once again, it is unresolved as to whether the interest rate limitation provisions apply to a preservice joint obligation of a servicemember with someone other than his or her spouse (e.g., children or parent).
Amendments made by the Housing and Economic Recovery Act of 2008 clarified that the reduced interest rate is to be extended until 1 year after separation from military service in the case of credit obligation secured by a mortgage, trust deed or other security in the nature of a mortgage.
The interest rate limitation applies unless a court determines that the ability of the servicemember to pay interest on the debt at a higher rate is not materially affected by the borrower’s military service. In such a case, a court may grant a creditor relief from the interest rate limitation. How would a lender determine “material affect?” One rule of thumb appears to be as to whether a debtor’s pre-activation income is more than military income. There may be the case were an activated person receives reduced income upon entering military service, but has sufficient cash or assets to pay the financial obligation. Although the Act allows a creditor to claim no material effect necessary for the 6% interest rate cap, the burden of proof is on the creditor to succeed in such a challenge.
The most straightforward cases for application of this provisions of the Act occur where a person leaves a civilian job for active military service at a much lower rate of pay, where the rate of military pay meets or exceeds prior civilian pay but new or higher expenses are incurred as a result of active duty (e.g., child care expenses) or where a person’s physical absence from his or her regular domicile prevents the defending of rights in court. In each of these cases, the service man or woman is likely to suffer a significant material effect on the ability to manage affairs or service debt obligations. Under these conditions, creditors may not generally take action to collect a debt, and for the duration of active duty, may not charge more than 6% interest on any obligation incurred before service began.
Generally, National Guard and Reservists will invoke this provision, even though it applies to new active duty officers and enlisted personnel. Active duty personnel rarely use this provision because (1) the person’s military service must materially affect the ability to pay the obligation; and (2) the obligation must predate the active service. Most often, new active duty personnel have either just left college or high school and may actually experience an enhanced financial well-being upon entering active duty. The opposite is generally true for National Guard and Reservists who are called to leave higher-paying civilian jobs to assume less lucrative pay upon activation or voluntary active duty with practically all financial commitments incurred prior to activation.
The interest rate reduction is to which military personnel are entitled results following a servicemember’s or the servicemember’s “legal representative” (i.e., defined by the Act to be a power of attorney from the servicemember or an attorney acting on the servicemember’s behalf) written notice to the creditor with a copy of the servicemember’s military orders (and any other orders further extending service). The burden is on the servicemember to initiate the rate reduction protections and only those persons who request relief are entitled to it. The John S. McCain National Defense Authorization Act for Fiscal year 2019 expanded the type of proof of service that a service member can provide in lieu of sending orders, to include certified letters from the servicemember's commanding officer and any other "acceptable" proof of military service. The Act specifically requires that the interest rate on credit extended to a person activated to military service must be reduced to not exceed 6% and the creditor must reduce any periodic payments due under the debt to reflect the reduced interest rate. Interest in excess of 6% cannot be accrued during active service, but must be forgiven.
As for the time period limitations on invoking interest rate relief, the Act provides that a servicemember can invoke protection by making request at any time up to no later than 180 days after date of the servicemember’s termination or release. Note that the rate cap protection reverts to the date on which servicemember is called to active duty
B. Installment Contracts
Installment contracts for the purchase of real or personal property (including motor vehicles) and the lease or bailment of such property entered into by a servicemember prior to commencement of active duty are covered by the Act if the servicemember’s ability to make the payments is materially affected by the military service. The servicemember must have paid, prior to commencement of active duty, a deposit or installment under the contract. The Act’s provisions generally prohibit the seller from rescinding or terminating such contract, from breaching the terms of the contract or repossessing property purchased for nonpayment of any installment that became due (or any other breach of the contract) during the period of military service, unless authorized by the court.
C. Mortgages and Trust Deeds
The Act prohibits the sale, foreclosure or seizure of property for nonpayment of any amount due on (or other breach of) obligations secured by a mortgage, trust deed or similar security during the period of active military service and actions within one year, after termination of active service without the permission of a court of competent jurisdiction. In order to be afforded such protections:
The Government National Mortgage Association (“Ginnie Mae”) will reimburse its mortgage lenders for the interest shortfalls for all Reserve and National Guard borrowers called to active duty. This reimbursement policy is retroactive to September 11, 2001.
D. Collections, Foreclosures and Repossessions
The Act also provides that without the permission of a court of competent jurisdiction, a creditor may not take actionto collect a debt and may not foreclose on or repossess collateral because of a default occurring prior to or during the period of active service. In any legal proceeding to enforce such an obligation, the court will either stay the proceedings or make some other disposition of the case which preserves the rights of the parties, unless the lender can show that the borrower’s active duty status does not materially impair his or her ability to comply with the terms of the obligation.
E. Default Judgment Protections
Affidavit Requirement. In a default judgment action, the court, prior to judgment, must require a plaintiff to file an affidavit stating whether or not the defendant is in military service or a statement that the defendant is unable to determine whether the plaintiff is in military service. If it appears that the defendant is in military service, the court must appoint an attorney to represent the plaintiff prior to entering judgment and if the appointed attorney cannot locate the servicemember, the attorney’s actions in the case will not waive a servicemember’s defense or other bind the servicemember. Once an attorney is appointed, a minimum 90 day stay of proceedings will be granted either by the defendant’s attorney or under the court’s own motion. If, the court cannot ascertain by the affidavit filed that a person is in military service, the court, prior to entering judgment, may require the plaintiff to file a bond which will be made available to indemnify a defendant who is later found to be in military service for loss or damage suffered by reason of a judgment for the plaintiff.
Vacation or “Setting Aside” of Default Judgment. The Act provides that in the event a default judgment is entered in an action against a servicemember during military service or within 60 days after termination or release from service, the servicemember may reopen the default judgment and set it aside. The “set aside” occurs when the servicemember shows that he or she was prejudiced by not being able to appear in person and that there are meritorious or legal defenses to the action or some part of it maintained against him or her. The servicemember’s court appearance for relief must take place within 90 days of termination or release from military service.
F. Exercise of Rights under the Act
Essentially a nondiscrimination provision, a person that applies for or is granted temporary relief from financial obligations and liabilities under the Act may not in itself be the basis for:
A lender may take adverse action against a person who fails to comply with obligations after adjusted pursuant to the Act (e.g., a person does not pay monthly installments on an obligation reduced to 6% could be subject to an adverse credit report) but may not take adverse action against a person who seeks protection under the Act (e.g., asserted a “stay” under the Act or the 6% interest rate cap).
IV. APPLICATION OF ACT
The protection afforded by the Act becomes effective on the date when a person is ordered to report for duty. The military services are required to notify servicemembers of their benefits under the Act and typically, borrowers called to active duty will notify their financial institution upon being called up. To provide adequate documentation of the effective date of the order, a financial institution should retain the servicemember’s or the legal representative of the servicemember a written notification and copy of military orders, a copy of certified letters received from the servicemembers's commanding officer, or other "acceptable" proof of military service.
The financial institution may also attempt to obtain a written statement from the borrower specifying the date that his or her active service was completed; however a borrower is not required to give the financial institution such notice. Therefore, a financial institution will have to develop its own means to determine when the provisions of the Act no longer apply to a particular borrower.
The OCC recommends in Advisory Letter 2004-8 (June 18, 2004) that banks seek legal counsel to resolve disputes arising over relief claims and to ensure compliance as well as monitor their portfolios and the performance of loans affected by the Act and adjust loan loss allowances accordingly.
V. MILITARY DATABASE SERVICE
The Defense Manpower Data Center (DMDC) is a free military database that is available to financial institutions for assistance in verifying the active duty status of customers who are members of the armed services. To sign up for this service, a written request to do so must be first sent requesting access to the DMDC Military Verification System. The letter should affirmatively state that neither the financial institution nor its employees will use the information provided for any purpose or reason other than Servicemembers Civil Relief Act searches. The letter may be sent by FAX to (703) 696-4156 or mailed to: Defense Manpower Data Center, Military Verification, 1600 Wilson Blvd., Suite 400, Arlington, VA 22209. Once the letter request is received, the DMDC should send, via mail, a form to be completed. Once the form is submitted, a designated employee of the financial institution should receive the password to access the DMDC database. The DMDC may be accessed by the internet at www.dmdc.osd.mil, FAX or mail. When information regarding a customer is submitted, the database reports the beginning date of service, the current active duty status and the service or agency that the customer is serving on active duty.
VI. MORTGAGE AND FORECLOSURE RIGHTS OF SERVICEMEMBERS – HOMEOWNER NOTIFICATION
A. Introduction
The Department of Housing and Urban Development (HUD) has issued a notice regarding the homeowner notification requirement of Section 106(c)(5) of the Housing and Urban Development Act of 1968. The Servicemembers Civil Relief Act (SCRA) provides legal rights and protections that are applicable to the debts of servicemembers and their dependents. Notice is to be provided to all homeowners who are in default in order to inform them of mortgage and foreclosure rights available to them under the SCRA if they are servicemembers or dependents of servicemembers. HUD has developed, in consultation with the Departments of Defense and Treasury, a final disclosure form (HUD-92070) to be used by mortgagees for fulfilling this notice requirement may also be accessed by going to the HUD website at www.hud.gov and inserting “92070” in the search box. You should see a link to a document entitled “Legal Rights and Protections Under the SCRA”.
The SCRA provides various protections to active duty military members and reservists, or members of the National Guard called to active duty, and, in limited situations, dependents of military members. The SCRA is intended to ease the economic and legal burdens on military personnel by postponing, suspending, or mitigating obligations, such as mortgage payments and foreclosure actions.
B. HUD Notice of Servicemembers Rights Under SCRA
HUD has developed the final disclosure form for the required notice of servicemember rights. All mortgage loans, including conventional mortgages and mortgages insured by HUD, are subject to the notification requirement. The notice is required to: (1) be sent to all homeowners who are in default on a residential mortgage; (2) include the toll-free telephone number for Military OneSource to call if servicemembers or their dependents require further assistance; and (3) be made within 45 days from the date a missed payment was due, unless the homeowner pays the overdue amount before the expiration of the 45-day period. The required notice must be sent each and every time a borrower becomes 45-days past due - this is not a one-time notice.
C. Rights and Protections Under the SCRA
The SCRA provides, among other things, that a debt incurred by a servicemember, or by a servicemember jointly with a spouse, prior to entering military service, shall not bear interest at a rate above six percent during the period of military service. Servicemembers become eligible for the interest rate limitation by providing to the creditor with written notice, a copy of the military orders calling the servicemember to active duty, and any orders further extending military service, not later than 180 days after the date of the servicemember’s termination or release from military service. Upon receipt, the creditor must limit interest on the obligation to no more than six percent per year, effective as of the date on which the servicemember is called to military service. Only a court may grant the creditor an exception to the interest rate limitation, which may only be granted if in the opinion of the court the ability of the servicemember to pay interest on the obligation or liability at a rate in excess of six percent per year is not materially affected by reason of the servicemember’s military service.
In a legal action to enforce a debt against real estate that is filed during, or within 90 days after the servicemember’s military service, a court may stay the proceedings for a period of not less than 90 days or may adjust the debt. In addition, the sale, foreclosure, or seizure of real estate shall not be valid if it occurs during or within one year after the servicemember’s military service unless the creditor has obtained a court order approving the sale, foreclosure, or seizure of the real estate.
VII. CONCLUSION
The NBA has fielded several questions regarding the operation of the both the former and current Act and has found that there were many technical or complex aspects under the old law that are now addressed in the current version of the law. Regardless, the lack of comprehensive answers stems from the fact that there are no implementing regulations of the Act and that much of the previous law had a very limited litigation history. Thus, some provisions have not been interpreted by the courts.
The U.S. Supreme Court has previously stated that the former Soldiers and Sailors Civil Relief Act of 1940 must be read with “an eye friendly to those who dropped their affairs to answer their country’s call.” When the former Act was challenged (Dameron v. Brodhead), the U.S. Supreme Court held that Congress may pass such legislation by virtue of its power “to declare war” and “to raise and support armies.” In fact, legislation granting civil relief for members of the military service has survived judicial scrutiny from Civil War days until the present.
While the courts have been generally favorable to servicemembers, the Act itself does consider lender interests. The Act states that it “if a court determines, in any proceeding to enforce a civil right, that any interest, property, or contract has been transferred or acquired with the intent to delay the just enforcement of such right by taking advantage of this Act, the court shall enter such judgment or make such order as might lawfully be entered or made concerning such transfer or acquisition.”
VIII. SERVICEMEMBERS CIVIL RELIEF ACT QUESTIONS AND ANSWERS
1. Q. Who is eligible for benefits under the Act?
A. The SCRA protects all servicemembers on federal “military service,” including:
In addition, many of the SCRA’s protections extend to dependents of active duty service members, but this coverage varies from section to section. SCRA protections may also extend to a partnership or a business; the test is generally whether the servicemember would be liable for the obligation of the partnership or business in which case SCRA protections generally apply. Finally, state laws may provide protections to members of state national guards that are called into service for the state.
2. Q. What is meant by “military service?”
A. The SCRA’s protections cover periods of “military service” which, in turn, are defined as periods of active duty status. For members of the regular Armed Forces, active duty begins the day they leave civilian life; for them active duty is not synonymous with deployment. For a member of a reserve component, in contrast, the protections the SCRA offers begin when a member of the Reserves or National Guard receives mobilization orders. It is initiated upon receipt of mobilization orders in order to give the soldier time to put his or her affairs in order. There may be several active duty periods during a member of the Reserves or National Guard’s career, including the initial active duty for training (“boot camp”) and subsequent call-ups for service, for example for service in the wars in Iraq or Afghanistan. Whether or not the servicemember volunteered for active duty is immaterial. Finally, military service also includes any period during which a servicemember is absent from duty because of sickness, wounds, leave, or other lawful cause.
Section 527: Maximum rate of interest on debts incurred before military service
3. Q. What loans are affected by the rule reducing interest to 6%?
A. The section of the SCRA that reduces interest rates – 50 U.S.C. App. § 527 – is written very broadly. It addresses any “obligation or liability” of an eligible servicemember, or the servicemember and the servicemember’s spouse jointly. The statute provides that such an obligation or liability may not bear interest at a rate above 6% per year for the period of active duty (and beyond for some indebtedness) as long as the loan was made before the servicemember entered active duty. The theory behind section 527 is that entering active duty may change a servicemember’s ability to repay. The law is designed to protect the servicemember when his or her status and income change as a result of being called to active duty. The interest rate cap does not apply to a loan entered after or during active duty. If a loan is contracted after active duty begins, it is assumed that a servicemember knows what he or she can afford and the underwriter will also be able to assess ability to repay based on current income.
The broad language in section 527 – any “obligation or liability” – means that the SCRA applies to all of an eligible borrower’s pre-existing loans, including installment loans, mortgages, credit card balances, and pre-existing draws on home equity lines of credit as well as any other pre-existing loan made by any lender to the servicemember.
Note: The interest rate cap was not previously applicable to federally-guaranteed student loans entered before entering active duty, but since the enactment of the Higher Education Opportunity Act (Public Law 110-315, Aug 14, 2008) it also applies to all student loans.
4. Q. Does the interest rate reduction apply to charges on credit cards or draws on lines of credit incurred after the borrower goes on active duty?
A. Section 527 limits the application of the interest rate cap to obligations or liabilities “incurred” prior to the borrower’s entry on active duty. Thus, the rule limits the application of the 6% ceiling to the account balance that existed when the borrower went on active duty. Although there is no clear guidance from the courts or from the regulators, it does not appear that charges or draws made after active duty commences are entitled to the interest rate reduction, even though the credit arrangement pre-exists active duty. In cases where it is not clear whether a debt was incurred before or after the borrower entered active duty, local counsel should be consulted, because the result will probably depend on provisions of state law that determine when the debt was legally incurred. In some instances, banks have allowed the cap as a public service even to charges on a line of credit incurred after active duty started.
5. Q. How is “interest” defined in the SCRA?
A. For the purposes of this interest rate cap, the term interest includes all “service charges, renewal charges, fees, and any other charges (except those for bona fide insurance).” The creditor should re-compute payments so that interest and all fees stay within the 6% cap per annum. All interest and fees in excess of 6% must be forgiven. Interest above six percent does not accrue while the borrower is on active duty and cannot be added to principal.
NOTE: A lender may apply to a court for an order allowing it to collect more than 6% interest on a loan covered by this provision. For the court to issue such an order, the lender must show, and the court must find, that the ability of the servicemember to pay more than 6% interest is “not materially affected by reason of the servicemember’s military service.” The term “court” includes “any court of competent jurisdiction of the United States or of any State, whether or not a court of record.” However, the lender's court action seeking authority to charge more than 6% interest may be stayed under other provisions of the SCRA staying civil proceedings. Lenders should also factor reputation risk into the decision to seek such a court order.
6. Q. Are late fees charged on pre-service debt intended to be included in the calculation of the 6% interest rate cap?
A. As stated above, section 527 defines interest as including “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” The term “fees” is not defined, but ABA does not believe that the term “fees” was intended to include late fees. That would have the effect of forcing a bank to calculate the interest cap to include any potential late fees and write off the difference. In addition, this would result in encouraging a servicemember not to pay bills in a timely manner, as there would be no incentive for doing so. This is not the intent of the SCRA which was written to ensure fair treatment and relief from excess liability due to income reduction and absence from a job. It was not intended to allow a servicemember to be irresponsible in regard to his or her debt.
However, banks should be aware that because section 527 does not define the term “fees,” a servicemember could dispute a bank’s decision to charge a late fee under section 523 (governing fines or penalties under a contract) or section 527. In either case, this would force the bank to go to court. Therefore, it is up to the bank to decide whether a late fee is worth the cost of hiring counsel and going to court. In addition, the bank should consider any reputational damage that might result. Ultimately, this is a business decision each bank must make for itself.
7. Q.How far back in the history of an eligible loan will the reduction to 6% reach?
A. The reduction to 6% applies back to the first day of active duty as long as the loan pre-existed active duty. Therefore, banks should be prepared to re-calculate any interest and fees that may have accrued between the time active duty commenced and the time that the loan is adjusted.
8. Q. How long does the reduction to 6% stay in effect?
A. The interest on most pre-active duty loans is reduced to 6% as long as the borrower remains on active duty. However, for obligations or liabilities secured by a mortgage, trust deed, “or other security in the nature of a mortgage,” the period during which a creditor may not charge interest in excess of 6% is extended for one year following the end of active duty.
9. Q. When can a soldier request the interest rate reduction?
A. A servicemember may request the interest rate reduction at any time but not later than 180 days after the end of active duty.
10. Q. How does a servicemember request the interest rate reduction?
A. Section 527 requires a servicemember to make the request in writing and places the burden on the service member to provide proof of his or her active duty status. Proof of active duty status is normally shown by a copy of the orders calling a person to active duty and any orders extending the period of active duty, but can also be satisfied through the provision of certified letters from the servicemember's commanding officer or any other "acceptable" proof of military services.
11. Q. Can a lender choose not to grant the interest rate reduction until the borrower sends a copy of his orders or other certificate of service?
A. Although nothing in section 527 expressly prohibits this, ABA urges banks to consider the reputational risk of that course of action. Banks should be aware that there may be a delay in a servicemember’s receipt of orders. Because copies of orders for an individual may be delayed until after deployment, banks are often willing to accept unit or troop orders accompanied by some verification that the servicemember is part of the unit being activated or deployed. Equally important, a bank that has received a request for an interest rate reduction from a servicemember can check the Department of Defense’s Defense Manpower Data Center website to verify status (for more information about this process, see Q. 20).
12. Q.Can a lender choose not to comply until a borrower submits pay stubs or other financial data demonstrating a “material effect” on the borrower’s ability to pay the contracted for rate?
A. No.
13. Q. Must the payment be reduced when the interest rate is reduced?
A. Yes.
14. Q.What happens to the interest rate on loans affected by this provision of the Act after the servicemember is released from active duty?
A. Generally, the loan reverts to the contracted-for rate of interest after active duty ends. However, HERA extended the interest rate cap for pre-service mortgage obligations for an additional year after leaving active duty.
15. Q. How does a lender know when a borrower has ceased active duty? A. The statute is silent on this point. Some bankers, when they notify the customer of compliance with a request to lower the rate to 6%, simultaneously remind the borrower to notify the lender at the completion of active duty. In this notice, and in later communications with the borrower, the lender may want to remind the borrower that the interest rate returns to the contracted-for rate when the borrower's active duty is completed. With regard to pre-service mortgage obligations, the lender should remind the borrower that the interest rate cap remains in effect for one year following the end of active duty status. A lender does have the option of including a tickler in the system as a reminder when the customer’s active duty is scheduled to end.1 However, before any adjustments to the rate can be made, the bank must confirm that active duty has ended and has not been extended.
1 In the interest of good customer service, some banks take the opportunity to welcome the individual home and acknowledge their service and offer to help with any financial needs the servicemember may need.
16. Q. If a loan, such as a mortgage, has been sold or securitized, who bears the burden of the reduced interest rate?
A. The SCRA provides that affected loans shall not bear interest at a rate in excess of 6%. However, this provision does not change the relationship of the parties involved with the loan. The party which was entitled to receive the interest from the loan before the rate was reduced is still entitled to receive interest at the reduced rate. A party which merely services a loan is not required to make up the difference in interest, absent contractual arrangements to the contrary. Fannie Mae and Freddie Mac have announced that they will bear the losses from any loan affected by this provision of the Act.
Section 533: Mortgages and Trust Deeds
17. Q. Does the SCRA have any effect on a foreclosure of real property which is subject to a mortgage?
A. As explained above, although section 527’s interest rate cap of 6% applies to mortgage obligations incurred prior to active duty, another provision of the statute, section 533, applies to sales, foreclosures, or seizures of property initiated to enforce a security interest securing an obligation incurred before entering active duty. As explained more fully below, while servicemembers must request the interest rate cap under section 527, the protections under this provision of the statute do not require any action on the part of the servicemember. It also is important to understand that section 533 does not preclude foreclosures (a fact frequently misunderstood by the press), but it does impose significant limitations on foreclosure actions. These restrictions are designed to protect the servicemember who has been called to active duty.
18. Q. What limitations on foreclosure actions are imposed by section 533?
A. Section 533 provides that no sale, foreclosure, or seizure of property for a breach of a pre-active duty service “mortgage, trust deed or other security in the nature of a mortgage” is valid if made during or within one year after the period of active duty service except upon a valid court order. In other words, if a mortgage is protected by the SCRA, no self-help or non-judicial foreclosure is allowed. There are 23 states in which some form of non-judicial foreclosure is ordinarily allowed. In those states, the lender may have obtained a waiver of any legal proceedings in the event of a default in the mortgage documents themselves. However, such a waiver is invalid under 50 U.S.C. App. § 517. When a lender wants to foreclose on mortgage protected by the SCRA, it must seek a court order. The servicemember is then entitled to a hearing before a judge, who has the power either to stay the foreclosure or “adjust the obligation to preserve the interests of all the parties.” This provision is interpreted by the courts as a broad grant of authority to alter the terms of a contract to protect a servicemember and his or her family from foreclosure. It is, however, conditioned on a finding that the servicemember’s military service “materially affects” the ability of the defendant to comply with the terms of the obligation.
Note: Recall that section 533 has been amended to extend the foreclosure protections from 90-days to one year after the conclusion of active duty service.
Also note: Under section 513, if a court grants relief (stay, postponement, or suspension of obligation) to the servicemember, the relief may also be granted to persons primarily or secondarily liable with the servicemember, including a surety, guarantor, endorser, accommodation maker, co-maker, or any other person who may be primarily or secondarily subject to the obligation or liability.
19. Q. Are the limitations on foreclosure actions automatic – i.e., do they apply regardless of the servicemember’ failure to notify the creditor of his or her active duty status?
A. Yes. Unlike section 527, which expressly requires the servicemember to “provide to the creditor written notice and a copy of the military orders calling the servicemember to military service,” section 533 includes no such requirement. In the absence of this language, the Department of Justice and the courts take the position that the limitations on foreclosure apply automatically, and that the creditor bears the burden of determining whether the borrower is on active duty prior to initiating non-judicial foreclosure proceedings. Because these protections apply without any action by the servicemember, sending the HUD SCRA notice to all delinquent borrowers takes on increased importance.
20. Q. How is a lender to determine a borrower’s status?
A. The Department of Defense, through the Defense Manpower Data Center (DMDC), maintains a publicly-accessible website (http://legalassistance.law.af.mil/content/locator.php) that lets lenders check the active duty status of a person with only a name, social security number, and date of birth (or just a name and either a social security number or a date of birth). When confirming active duty status, lenders should be aware that there may be a delay in posting information to this website. The DMDC list currently provides the following information: whether the individual is on active duty as of the date of the query; whether the individual has been on active duty in the last 366 days (because the interest rate cap for pre-service mortgage obligations extends for a year).2 and the first day of that individual’s active duty service for the latest active duty period. Due to concerns about protecting the safety and security of active duty members of the armed forces and their families, queries must be done manually, on an individual basis, and cannot be processed in batches. However, responding to recent concern about the inefficiencies of the process, the military is reconsidering the decision not to allow batch queries.
ABA recommends that prior to initiating foreclosure proceedings, lenders check the DMDC list. Even if a borrower does not appear on the list, lenders should print a “negative finding” screen shot to document the fact that an inquiry was made and the servicemember was not listed as being on active duty on the date of inquiry. In addition, because many months may pass between the initiation of non-judicial foreclosure proceedings and sale of the property and active duty status can change quickly, ABA recommends that lenders re-check the website periodically throughout the process and document the results of those searches.
2 Status during the last 366 days are reported to account for leap years.
21. Q. Does it matter whether the underlying default on the mortgage obligation occurred prior to or during active duty status?
A. No. The timing of the initial default is immaterial. The only limitation is that the mortgage obligation must precede active duty.
22. Q. What is meant by “other security in the nature of a mortgage?”
A. It is unclear. HERA’s amendment of section 533 seems to demonstrate Congress’ intent that section 533’s protections apply only to real estate secured loans. However, there is some old case law that expands the protections of section 533 to loans secured by property other than real property.
Section 591: Anticipatory Relief under the SCRA
23. Q. When is anticipatory relief available?
A. If a servicemember anticipates that he or she may not be able to pay the mortgage or meet other financial obligations (on obligations incurred before entering active duty), the servicemember may go to court to ask for anticipatory relief under section 591 of the SCRA. The request must be made while on active duty or within 180 days after active duty ends.
24. Q. What relief may the court grant?
A. If a court finds that the servicemember’s ability to pay his or her mortgage or to meet other financial obligations has been “materially affected by reason of military service,” the court can grant a stay of enforcement of the obligation during the servicemember’s period of active duty military service plus an additional amount of time equal to the period of active duty military service. The stay, however, does not result in the debt being forgiven. The amount of all deferred payments must be paid over the remaining life of the obligation after the deferral period has ended.
Section 591 has rarely been used, but the military takes the position that since a court has discretion to stay the entire amount due, it may also reduce the monthly payments during the period of the stay. In other words, rather than completely writing off the payments, the court may stay only a portion.
Section 531: Protection from eviction
25. Q. What protections from eviction does the SCRA give servicemembers?
A. Today, many banks have bank-owned properties that may have servicemember tenants; therefore, banks need to understand the protections section531 provides to active-duty servicemembers. Under section 531, a property owner may not evict a servicemember or his or her dependents from a primary residence without a valid court order. Section 531 applies only to certain premises: it must be occupied, or be intended to be occupied, as a primary residence, and the monthly rent must be less than $2958.53, an amount subject to an annual inflation adjustment based on the housing component of the Consumer Price Index.
In addition, section 531 provides that during the eviction hearing the court may – or upon application by the servicemember whose ability to pay the rent is “materially affected” by military service, the court shall – stay the eviction proceedings or “adjust the obligation under the lease topreserve the interests of all parties.”
It should also be noted that nothing in section 531 expressly requires a servicemember to provide a copy of his or her military orders, suggesting that the burden is on the property owner (i.e., the bank) to ascertain whether the tenant is on active duty prior to initiating the eviction process. Finally, financial institutions should also be aware of the protections generally provided to any tenant under the Protecting Tenants at Foreclosure Act of 2009, Pub.Law 111-22, Title VII, §§ 701-704.
Section 532: Protections under installment contracts for purchase or lease
26. Q. Does the SCRA provide protections for installment contracts for the purchase or lease of personal property?
A. Yes. Section 532 applies to a pre-service obligation for the purchase or lease of personal property, if a deposit or installment has been paid by the servicemember before entering active duty. In the event of a breach of contract, the protections of section 532 mirror those of section 533. The protections of section 532, however, only extend for the period of active duty.
The lease of a safe deposit box is a lease of property covered under section 532 of the SCRA. Specifically, the statute provides that “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.” As a result, if the servicemember has rented a safe deposit box from your bank, you may not drill the box for non-payment of the rent without getting a court order. This section of the SCRA places responsibility on the bank for determining whether the servicemember is protected (a servicemember must request relief under the statute when requesting a reduction in interest rate). Therefore, the bank must determine if its safe deposit box renter is a servicemember on active duty.
Like section 533, section 532 prohibits termination or repossession of property without a valid court order. As a condition of terminating the contract and repossessing the property, a court may order repayment to the servicemember of all of the prior installments or deposits. Alternatively, the court on its own motion may stay the proceedings or “make other disposition as is equitable to preserve the interests of all parties.” And, if the servicemember files a motion with the court and demonstrates that his or her ability to comply with the contract is materially affected by military service, the court “shall” stay the proceedings or “make other disposition as is equitable to preserve the interests of all parties.”
Finally, note that under section 523, Fines and penalties under contracts, if a servicemember fails to perform a contract and a penalty is assessed as a result, the servicemember may request the court to reduce or waive the penalty. This provision has been used to avoid the payment of a mortgage pre-payment penalty assessed when a home had to be sold because a servicemember was given orders to move.
Section 521: Protections of servicemembers against default judgments
27. Q. What are the procedural requirements for obtaining a default judgment?
A. Before any judgment may be entered for the plaintiff in any civil or administrative proceeding in which the defendant does not appear, theplaintiff must file an affidavit – a signed, sworn statement declared to be true under penalty of perjury – stating:
Note: ABA encourages institutions to implement procedures to ensure compliance with the requirements for filing affidavits in actions in which the bank seeks a default judgment. Bank policies and procedures should assign responsibility for executing affidavits to particular personnel within the bank. Procedures should also ensure that the affiant has undertaken the necessary research to determine whether a defendant is a servicemember on active duty and has documented that research (for example, a screen shot of the DMDC list may be used to document both negative and positive search results). In addition, banks should consider implementing compliance monitoring procedures to verify that the research was in fact conducted and documented.
28. Q. What happens if the affiant cannot determine the defendant’s status?
A. If based on the affidavit, the court cannot determine whether the defendant is on active duty, the court may require the plaintiff to post a bond before entering judgment for the plaintiff. If it later turns out that the defendant was on active duty, the bond is available to indemnify the defendant if the judgment is subsequently set aside. The bond will remain in effect until the expiration of any time for appeal or setting aside of a judgment.
29. Q. What happens if it appears from the affidavit that the defendant is on active duty?
A. Section 521 states that if it appears from the affidavit that the defendant is on active duty, the court may not enter a judgment until after the court appoints an attorney to represent the defendant. Moreover, if the defendant is on active duty, the court shallstay the proceedings for a minimum of 90 days, if it determines that theremay be a defense that cannot be presented without the presence of the defendant; or after due diligence, counsel has been unable to contact defendant or otherwise determine if a meritorious defense exists.
30. Q. What relief is available if a default judgment has been entered against a servicemember on active duty?
A. If a default judgment was entered against a servicemember on active duty (or within 60 days after the conclusion of active duty), the court shall reopen the judgment on motion by or on behalf of the servicemember, if it appears that the servicemember’s ability to defend against the action was “materially affected” by the military service and the servicemember has a meritorious defense to the action or a part of it.
Section 522: Stay of civil proceedings when servicemember has notice
31. Q. When is a servicemember entitled to a stay of a civil action?
A. This protection recognizes that a servicememberusually cannot drop what he or she is doing to appear in a civil or administrative proceeding. It applies to any civil action or proceeding to which a servicemember on active duty is a party (or within 90-days of termination of active duty) and the servicemember may request a stay at any stage before final judgment. A stay is automatically granted for at least 90 days if the servicemember sends to the court:
The servicemember may also apply for an additional stay, and if the court denies the request, the court shall appoint counsel to represent the servicemember in the proceeding. In addition, it is important to recognize that when an action against a servicemember for failure to comply with the terms of a contract is stayed, fines or penalties for failure to comply may not be assessed. (See section 523.)
Section 524: Stay or vacation of execution of judgments, attachments, and garnishments
32. Q. When may a court stay the execution of a judgment, an attachment or a garnishment order?
A. If military service “materially affects” compliance with a court judgment or an attachment or garnishment order, the court shall on application of the servicemember stay the execution of the judgment or order and vacate or stay an attachment or garnishment of property, money or debts in the possession of the servicemember or a third-party. The court may also take this action on its own motion. Section 524 applies to any proceeding begun while the servicemember is on active duty and continues for 90-days after active duty service terminates.
Section 518: Exercise of rights under the SCRA not to affect certain future financial transactions
33. Q. May a bank consider that a servicemember asserted rights under the SCRA when evaluating requests for financial products or services?
A. Section 518 is intended to protect a servicemember who has asserted rights under the SCRA from having that affect future financial transactions. Section 518 states that assertion of rights under the SCRA “shall not itself (without regard to other considerations) provide the basis for any of the following:”
In other words, if a loan to a servicemember was modified in accordance with the SCRA or the servicemember avails him or herself to any of the protections of the SCRA, that fact cannot reflect negatively on the servicemember’s creditworthiness.
Section 517: Waiver of SCRA rights
34. Q. It is possible for a servicemember to waive his or her rights under the SCRA?
A. Yes, but only written waivers signed during or after a service member’s period of military service are effective. In addition, the waiver must be in writing – in at least 12-point type – and must be executed as a separate document from the obligation or liability to which it applies.
Questions? Contact ABA’s Virginia O’Neill or Leslie Callaway for more information.