ICYMI: SCRA Adds an Independent Verification Option for Credit Unions
Written by André B. Cotten, Regulatory Compliance Counsel, NAFCU
Happy Holidays, Compliance Friends! Nothing puts me more in the holiday mood than a good movie. One of my favorites holiday movies is the Sound of Music! I hope that each of you is taking some time to enjoy this time of year with the ones you hold most dear. Yes, I wanted that to rhyme.
Back to our regularly scheduled programming, this post highlights a fairly recent change to the SCRA, which will hopefully make it easier to provide protections to members of the armed forces and stay compliant.
As a bit of background, the Servicemembers Civil Relief Act (SCRA) provides members of the armed forces with certain financial protections for debts incurred prior to military service. These protections include interest rate reductions, the ability to terminate leases and protections against foreclosure and repossession. The protection begins when the member enters “military service”, i.e., active duty status. One common issue for SCRA compliance is servicemembers properly notifying credit unions of their active duty status to cap their interest rate at six percent.
We’ve had credit unions asking about changes to this process. Section 600 of the John S. McCain National Defense Authoirzation Act (NDAA) amended Section 207 of the SCRA (50 U.S.C. 3937(b)(1)) to permit independent verification of a servicemember’s military status via the Defense Manpower Data Center (DMDC).
As you may recall, in order to receive the benefit of the SCRA’s 6% interest rate cap, servicemembers are technically required to provide a credit union with a written notice and copy of their military orders no later than 180 days after the date of the servicemember’s termination or release from the military. This process is still one acceptable option, but the provision has been broadened in a couple of ways. First, in addition to providing written orders, a servicemember may also provide “any other appropriate indicator of military service” such as a letter from their commanding officer. Additionally, instead of being solely dependent on the servicemember to provide this documentation, a credit union may now independently verify a servicemember’s status via the SCRA database maintained by the DMDC. This amendment became effective August 13, 2018.
For the credit union’s guidance, I have redlined the original text and included the amended text added by the NDAA. To begin, here is the previous version of the SCRA describing the notice requirements:
“§3937. Maximum rate of interest on debts incurred before military service
[ . . .]
b) Implementation of limitation (1) Written notice to creditor In order for an obligation or liability of a servicemember to be subject to the interest rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of the military orders calling the servicemember to military service 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….
Note the prior provision technically required the servicemember to provide written notice and a copy of military orders. Now, here is the recently amended text from the NDAA:
“SEC. 600. PROOF OF PERIOD OF MILITARY SERVICE FOR PURPOSES OF INTEREST RATE LIMITATION UNDER THE SERVICEMEMBERS CIVIL RELIEF ACT.
Section 207(b)(1) of the Servicemembers Civil Relief Act (50 U.S.C. 3937(b)(1)) is amended to read as follows:
“(1) PROOF OF MILITARY SERVICE.—
(A) IN GENERAL.—Not later than 180 days after the date of a servicemember's termination or release from military service, in order for an obligation or liability of the servicemember to be subject to the interest rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of—
(i) the military orders calling the servicemember to military service and any orders further extending military service; or
(ii) any other appropriate indicator of military service, including a certified letter from a commanding officer.
(B) INDEPENDENT VERIFICATION BY CREDITOR.—
(i) IN GENERAL.—A creditor may use, in lieu of notice and documentation under subparagraph (A) [written notice and military orders], information retrieved from the Defense Manpower Data Center through the creditor’s normal business reviews of such Center for purposes of obtaining information indicating that the servicemember is on active duty.
(ii) SAFE HARBOR.—A creditor that uses the information retrieved from the [DMDC]…with respect to a servicemember has not failed to treat the debt of the servicemember [as subject to the 6% interest rate cap] if—
(I) such information indicates that, on the date the creditor retrieves such information, the servicemember is not on active duty; and
(II) the creditor has not, by the end of the 180-day period under subparagraph (A), received the written notice and documentation required under that subparagraph with respect to the servicemember.”
Here instead of “written notice to creditor,” Congress has replaced that section with a broader heading, “proof of military service.” Note that the 180 days remains “after the date of a servicemember’s termination or release from military service.”
But more importantly, the amendment also allows for an independent verification by a credit union and has a safe harbor if a credit union chooses to do so. This subparagraph allows credit unions to rely on the DMDC instead of the receiving written notice and military orders from the servicemember. This new subparagraph also provides a safe harbor for credit unions who rely on information found in the DMDC and by the conclusion of the 180-day period following the end of military service. However, this only applies if the credit union has not received written notice and documentation from the servicemember.
It seems that Congress has decided to codify what some credit unions have been doing in practice which is doing some kind of verification to assist servicemembers who may call in or otherwise seek out the 6% interest rate cap, but may face difficulties in getting written orders to the credit union. Considering this recent change, credit unions who want to take advantage of this process and the safe harbor may also want to be sure to update their policies and procedures to incorporate this change.
Question: What kind of cars do elves drive?