Repossessions, Foreclosures, and the Servicemembers Civil Relief Act - A Primer and Some Resources
Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Happy Friday to all of you out there in regulatory compliance land. On July 26, 2016, the U.S. Department of Justice filed a lawsuit against a creditor for repossessing servicemembers motor vehicles without first obtaining court orders authorizing repossession. Among the allegations made by the Justice Department include charges that the institution did not have adequate procedures for determining the military status of members prior to exercising its contractual rights to seize collateral to satisfy delinquent loans. In addition to injunctive relief, the Justice Department also seeks monetary damages and civil penalties.
The Servicemembers Civil Relief Act (SCRA or Act) prohibits credit unions from repossessing personal property (including a motor vehicle) or foreclosing on a mortgage after a servicemember enters military service without first obtaining a court order if the servicemember made a deposit or installment payment before entering military service. See, 50 U.S.C. 3952(a)(1)-(2). The Act also contains additional protections against foreclosure or sale for any existing obligation on real or personal property owned by a servicemember secured by a mortgage, deed of trust, or other security in the nature of a mortgage. See, 50 U.S.C. 3953(a)(1)-(2). A knowing violation of either of these provisions is a misdemeanor and can result in a fine or imprisonment for up to a year, or both. See, 50 U.S.C. 3952(b), 3953(d).
Furthermore, the protections of the Act are not necessarily limited to servicemembers. When a court grants a stay, postponement, or suspends an action taken by the credit union, the court may also grant similar relief to sureties, guarantors, cosigners, or any other person who may be primarily or secondarily subject to the obligation or liability. 50 U.S.C. ÃÂ§ 3913(a). Dependents may also request a court to grant similar protections if the dependent's ability to comply with a lease, contract, bailment, or other obligation is materially affected by reason of the service member's military service. 50 U.S.C. 3959. Finally, the Act also protects citizens of the United States serving with allied forces. See, 50 U.S.C. 3914.
Unlike the Military Lending Act, a servicemember may waive any rights and protections provided by the SCRA. Waiver of protections against repossessions and foreclosures, however, must be made in writing, executed as an instrument separate from the obligation or liability to which it applies, and are effective only if made during or after the servicemember's period of military service. See, 50 U.S.C. 3918(a). What this appears to mean is that credit unions may not rely on a blanket waiver in a loan agreement but rather must secure a separate waiver from the service member during or after military service. As with any other disclosure, credit unions may wish to review the document to ensure that disclosures are provided in a clear and conspicuous manner to ensure that the service member makes a knowing and intelligent waiver of his or her SCRA rights. Furthermore, there may be state law requirements for such a waiver, or state court procedural requirements for the presentation and reliance on such a waiver. While not necessarily addressing this issue, some useful resources addressing clear and prominent disclosures can be found in my last blog on deceptive advertising.
Although not required by the SCRA itself, NCUA has recommended that credit unions establish internal controls to manage potential SCRA compliance risk. Some internal controls recommended by NCUA and other banking agencies include:
- Determining military status prior to initiating a civil action by reviewing information available on the Defense Manpower Data Center (DMDC) SCRA database (available here);
- Researching military status periodically;
- Maintaining up-to-date books and records that document military status;
- Providing comprehensive training to loan officers and collections departments on SCRA compliance; and
- Having a quality assurance process to ensure that employees are following the credit union's policies and procedures.
One thing to note is that the DMDC's SCRA database is separate from the MLA database which is used to perform a covered borrower check to determine compliance with the Department of Defense's Military Lending Act Rule.
Additional information on SCRA risk management can be found in this 2012 webinar on the SCRA available through the Federal Reserve. Letter to Credit Unions 09-CU-12 (June 2009) also provides resources, including interagency SCRA Exam Procedures and a copy of the AIRES Questionnaire dealing with SCRA compliance, that may also be helpful. In addition to SCRA compliance risk, credit unions may also wish to consider any potential reputation risk that may result from taking action against an active duty member of the armed forces. This article by an enforcement specialist at the Federal Reserve Bank of Philadelphia provides a useful summary on how credit unions may identify, measure, and mitigate reputation risk.
I hope this blog has been helpful and that you enjoy your weekend.
DoD Military Lending Act Interpretive Guidance Released
This blog was written before DoD issued its MLA interpretative guidance on August 26, 2016. The interpretative guidance can be found in the Federal Register. NAFCU's Regulatory Compliance team will update the association's MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.
CFPB Updates TRID Webinar Question Index. On Wednesday, July 27, 2016, the CFPB announced that it has updated its index of questions addressing the Bureau's TRID Rule. The index now includes questions asked and answered during the March 1, 2016 and April 12, 2016 Outlook Live webinars hosted by the Federal Reserve. You can access that index here.