Compliance Assistance from NAFCU

Recapping the Servicemembers Civil Relief Act
January 2009

Member Brochure (to help consumers understand the rights and responsibilities granted to U.S. Servicemembers by this act.)

On Dec. 19, 2003, H.R. 100, the Servicemembers Civil Relief Act (SCRA), was signed into law. This law rewrote the Soldiers’ and Sailors’ Civil Relief Act of 1940, clarifying and updating many of the previous law's provisions. The SCRA provides for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service. This protection permits United States servicemembers to devote their entire energy to the defense needs of the nation.   It affects credit unions in several ways.

The SCRA temporarily reduces the financial obligations of individuals whose ability to repay is diminished as a result of going on active military duty. Credit unions are also limited in their ability to institute legal proceedings to collect payments for debt incurred prior to active duty during the individual's active duty.

The SCRA provides for a maximum annual interest rate of 6 percent during the member’s time of active duty on obligations incurred before the member entered active service.   For example, if a person is called to active duty and has an automobile loan at your credit union at an interest rate of 8 percent, his or her rate would be lowered to 6 percent for the duration of his or her active duty. The amount of interest in excess of 6 percent is permanently forgiven.   Payments themselves must be re-amortized and lowered. Credit unions may not keep the payment amount the same and shorten the maturity of the loan.

The Housing and Economic Recovery Act of 2008 (HERA 2008; Public Law 110-289) amended the SCRA with regard to the 6 percent interest rate cap for mortgage-related loans.  For mortgage-related loans, the 6 percent interest rate must remain in place for the duration of the member’s active duty and one year thereafter.  For example, if your member left active service on January 1, 2009 the 6 percent interest rate on their mortgage must stay in place until January 1, 2010.

Additionally, HERA 2008 temporarily extended the foreclosure prevention assistance available to servicemembers.  Credit unions must wait 9 months from when a member returns from active duty status to begin foreclosure proceedings (increased from 90 days in the SCRA).  This temporary extension expires on December 31, 2010.

An individual may be on active duty in peacetime, as well as in time of war. Active duty includes certain training activities, such as initial active duty (boot camp). The member’s military orders will designate the type of duty being performed. The member must provide proof of active duty status.   The 6 percent limitation is effective the date the member’s active duty begins, not the date the credit union is notified of the active duty.

The interest rate provision of the Act applies only to debts incurred prior to the member’s active duty in the military.   Debts incurred after the member enters the service (including loan extensions and advances) are not subject to the protections of the Act.   While automatic stays of legal proceedings are not available if the debt is incurred during active duty, a court may grant a temporary stay if it determines that the member’s active duty materially affects his or her ability to appear in court.

Credit unions are not required to adjust the interest rates in every situation, even when the debt is incurred prior to active duty. Student loans are not affected, but credit unions may defer or forbear payments.   More significantly, the SCRA only covers those members whose ability to repay is materially affected by entry into active duty.   For example, a commercial airline pilot’s income is likely to decline markedly upon being called to active duty, while those members with lower salaries might not be materially affected.  If a credit union believes that the member’s ability to repay the debt has not been materially affected by his or her active duty military service, it may petition the court for relief. If the credit union can demonstrate to a court that the military person’s ability to pay is not materially affected by his or her being called to active duty, the credit union can continue to collect interest at the contract rate, as opposed to lowering the rate to 6 percent and forgiving the amount in excess of 6 percent. While the issue is before the court, the credit union must reduce the interest rate until relief is granted. The credit union cannot fail to lower the rate unless it obtains court approval.  Credit unions should consider the burden of a court filing and the potential reputation risk when determining whether to challenge a request for an adjustment.

In addition to providing direct relief to military personnel, the Act also provides relief for military dependents who are materially affected by the active duty. Dependents of the member on active duty may also be entitled to relief from certain actions, such as eviction and foreclosure proceedings. Similarly, the Act’s protections extend to military personnel who are only secondarily liable on a debt.

Guarantors of any kind are also protected by the Act.   If a person on active duty has a loan with a cosigner, guarantor, or endorser, the credit union cannot collect from the guarantors instead of lowering the rate to 6 percent.   However, a stay of legal proceedings is generally not available to a guarantor unless the service member’s active duty materially affects the guarantor’s ability to appear in court.

A credit union cannot report a service member’s rate reduction request as negative credit to a consumer reporting agency, or otherwise retaliate against a member who has exercised rights under the SCRA.   However, a member must continue to make payments during active duty.   Credit unions should make clear to members that the SCRA does not operate as a deferment of a loan obligation.  If the member becomes delinquent on an obligation, the credit union may report it.  If the member subsequently defaults on the obligation, the credit union can only receive a default judgment if the court orders it to be entered.  A court order is also required to repossess or foreclose on secured property if the obligation is on property owned by the debtor before he or she entered active duty, the debt occurred prior to military service, and the property is still owned by the service member.  If the service member applies for a stay of proceedings, the court will grant it unless it determines that military service does not materially affect the member’s ability to pay the debt.

Once a member leaves military service, the credit union may raise the interest rate back to its original contractual level. For mortgage-related loans, the 6 percent interest rate must stay in place until one year after the member leaves active duty.  The member may apply to the court for an extension of time to repay any arrearages. The maximum time for which an extension may be granted depends on whether the loan is secured or unsecured.

Benefits under the SCRA may also apply to member business loans.   One federal court recently found that a business loan personally guaranteed by a soldier called to active duty is still afforded the protections of the Act even where the primary borrower is a corporation.  Cathey v. First Republic Bank, 2001 US Dist. LEXIS 13150 (SD La., 2001).

In November of 2006, HUD issued Mortgagee Letter 2006-28 regarding a relatively new requirement to notify certain homeowners in default regarding possible rights under the Servicemembers Civil Relief Act (SCRA). The National Defense Authorization Act for Fiscal Year 2006 directed HUD to create the notice, in consultation with the Treasury Department and Department of Defense. All mortgage loans, including those insured by HUD, are subject to the notification, which must be sent to homeowners within 45 days from the missed payment – unless the homeowner pays the overdue amount before the 45-day period expires. Mortgagee Letter 2006-28 is available at www.hud.gov. In late January, HUD released a model notice.   You can find the form here.

The Department of Justice has viewed the protection of the benefits of servicemembers as a very serious matter, particularly in times of reliance on reserve forces. The DOJ has zealously represented numerous members of the armed services.    Separate from the DOJ’s enforcement, federal district courts now recognize private causes of action brought against violators.

Statutory requirements

Excerpts from the statute

Full text of SCRA statute

Q & A