The Service Members Civil Relief Act of 2003 (SCRA) was enacted into law on December 19, 2003, amending and replacing the Soldiers’ and Sailors’ Civil Relief Act of 1940, and is codified at 50 U.S.C. App. 501 et seq. The law was introduced to provide financial assistance and protection to active duty military personnel1, and in some instances their spouses and dependents2.

The SCRA, not to confound with the Military Lending Act (MLA),3 focuses on pre-service debts incurred by servicemembers prior to being placed on active duty. The protection afforded on pre-service debts includes a maximum rate on loans and leases and prohibiting default.  This coverage of pre-service debts include credit card debt, mortgages, and auto finance loans while on active duty and for a specified period after the end of duty. Additionally, the SCRA also protect members against proceedings involving default judgments and against foreclosure or repossession subject to specific conditions.

Protections afforded by the SCRA

Protection Against Default Judgements4

Section 521 of the SCRA provides all servicemembers protection against default judgments while on active duty:

  • Affidavit requirement: requires courts to demand affidavits from the plaintiff, prior to judgment, that state whether or not the defendant is in military service. If the court determines that the defendant is in military service, a judgment cannot be entered against him/her until the defendant is appointed an attorney. Accordingly, if he/she is appointed an attorney and the attorney is unable to reach the defendant, the attorney’s actions will not be held to bind the servicemember. If the court is unable to determine whether the defendant is in military service, the court, before entering judgment, may require the plaintiff to file a bond in an amount approved by the court.
  • Authority for court to vacate or set aside judgment: if a default judgment is entered in an action covered by this section against a servicemember during the individual’s period of military service (or within 60 days after termination of or release from such military service), the court entering the judgment shall, upon application by or on behalf of the servicemember, reopen the judgment for the purpose of allowing the individual to defend the action if it appears that— (A) the servicemember was materially affected by reason of that military service in making a defense to the action; and (B) the servicemember has a meritorious or legal defense to the action or some part of it.
  • Protection of bona fide purchaser: if a court vacates, sets aside, or reverses a default judgment against a servicemember and the vacating, setting aside, or reversing is because of a provision of the Act, that action shall not impair a right or title acquired by a bona fide purchaser for value under the default judgment.
Interest Rate Reductions4

Section 527 of the SCRA requires that for debts entered into by servicemembers or servicemembers and spouses jointly before the servicemember enters military service:

  • Limitation to 6 percent: the interest rate cannot exceed 6 percent during the period of military service and one year thereafter for mortgages or 6 percent during the period of military service for nonmortgage debt. Interest includes all fees and charges associated with the loan.
  • Forgiveness of interest in excess of 6 percent: interest in excess of 6 percent must be forgiven and not deferred.
  • Prevention of acceleration of principal: creditors must also adjust the periodic payments on the loan to reflect the reduced interest rate.

The protections under §527 are triggered when:

  • Written notice to creditor: a servicemember sends written notice to the creditor and includes a copy of the military order calling the servicemember to military service. The notice can be sent to the creditor as late as 180 days after the date of the service member’s termination or release from military service.
  • Limitation effective as of date of order to active duty: after the notice is received, the creditor must adjust the loan retroactive to the date on which the servicemember was called to military service.
  • Creditor protection: a creditor may seek relief from the interest rate cap if it can demonstrate “the ability of the service member to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the service member’s military service.”
Foreclosure Procedures4

Under §533 of the SCRA, real property owned by a servicemember before military service that is secured by a mortgage or deed of trust:

  • Sale or foreclosure: cannot be foreclosed upon, sold, or seized during the period of military service or up to nine months after service without a court order or the written agreement of the servicemember (up to 9 months after service’ became effective on 1/1/2016, previously 12 months). Failure to comply with this requirement voids the sale or foreclosure.
  • Stay of proceedings and adjustment of obligation: if a creditor files a legal action to enforce a mortgage obligation, such as a foreclosure action, (§533(b) permits the court to postpone proceedings until the service member is available to attend) extend the mortgage maturity date to facilitate lower monthly payments, grant foreclosure subject to the action being re-opened if the service member challenges it, and extend the period during which the service member can redeem the property by paying the mortgage.
  • Creditors originating mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD), such as Federal Housing Administration loans, must provide a notice to borrowers who default on these loans, informing them of the rights available to servicemembers under the SCRA.5
Lease Terminations for Motor Vehicles6

Under §535 of the SCRA, a servicemember has the right to terminate a lease of a motor vehicle that will be used by the member or a dependent for business or personal transportation in the following circumstances:

  • the lease is executed by a person who subsequently, during the term of the lease, is called to service for a period of more than 180 days or for a period of less than 180 days if that order is later extended to more than 180 days; or
  • a service member executes a lease while in military service and subsequently receives an order
  • for a permanent change of station from within the continental United States to a location outside the continental United States, or
  • from a location in a state outside the continental United States to any location outside that state, or
  • for deployment with a military unit or in support of a military operation for a period of at least 180 days.

Under §535 of the SCRA, the manner of terminating a lease is made as follows:

  • the lessee must return the vehicle within 15 days of the notice to report to duty.
  • the lessee must provide written notice to the lessor and include a copy of the military orders.
  • the lease is terminated on the date these requirements are satisfied. The lessor can collect any unpaid payments owed for the period preceding the termination but cannot impose an early termination fee.
Take-away for Clients

The increasing regulatory scrutiny continues to focus on consumer financial laws, such as the unfair, deceptive, or abusive acts or practices (UDAAP) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, SCRA, and MLA. Providers of consumer financial products and services, as well as, third-party service vendors, cope with the growing challenge of managing compliance within an environment of multiple consumer regulations, while facing potential risk to their reputation, financial penalties, lawsuits and increased compliance cost.

Financial and nonfinancial institutions should take steps to assess their strategies on how to comply with the requirements and provisions of these consumer regulations. This includes reviewing formal training against current policies and procedures, formalizing compliance monitoring and testing and integrating the institution’s various regulatory programs.

References

  1. Under the act, service members are divided into two types: 1) members of the Army, Navy, Air Force, Marine Corps, or Coast Guard on fulltime duty in the active service of the United States, including training duties and service schools; and 2) members of the National Guard who are under the call of duty authorized by the President or Secretary of Defense for more than 30 consecutive days and service members who are engaged in active service. “Servicemembers Civil Relief Act (SCRA) of 2004,” Federal Reserve Board, Consumer Compliance Handbook, November 2011. Access at: http://www.federalreserve.gov/boarddocs/supmanual/cch/scra.pdf
  1. Section 511 defines a service member’s dependent as: 1) a spouse; 2) a child; or 3) any individual for whom the service member provided more than half of his or her support for the 180 days preceding any application for relief under the act. “Servicemembers Civil Relief Act (SCRA) of 2004,” Federal Reserve Board, Consumer Compliance Handbook, November 2011. Access at: http://www.federalreserve.gov/boarddocs/supmanual/cch/scra.pdf
  1. “Final Rule: Military Lending Act,” Federal Deposit Insurance Corporation, Financial Institution Letter, FIL-37-2015, September 8, 2015. Access at: https://www.fdic.gov/news/news/financial/2015/fil15037.pdf
  1. “Servicemembers Civil Relief Act,” Justice Department, Act Oct. 17, CH. 888, 54 Stat. 1178. Access at: https://www.justice.gov/sites/default/files/crt/legacy/2015/04/03/scra_revised_2014.pdf
  1. “Mortgage and Foreclosure Rights of Servicemembers under the Servicemembers Civil Relief Act (SCRA),” Federal Housing Commission, Mortgage Letter 2006-28, November 20, 2006. Access at: http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_36003.doc
  1. “Servicemembers Civil Relief Act,” Justice Department, Act Oct. 17, CH. 888, 54 Stat. 1178. Access at: https://www.justice.gov/sites/default/files/crt/legacy/2015/04/03/scra_revised_2014.pdf

Newsletter Author: Samantha Regan, Michael Kim, Jonathan Patterson
Newsletter Contact Person: Craig Unterseher

Disclaimer

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