Federal regulators have placed an increasing focus on compliance with the Servicemembers Civil Relief Act. This act provides protections for servicemembers with active military status. Many SCRA compliance violations involve mortgages and student loans. But a number of recent events point to regulators expanding their actions to other consumer-facing industries.
Auto Lending Under SCRA
One of those is the automotive industry. The SCRA provides protection for those with active military status in five primary areas. Those who work in the auto finance industry should be aware of:
- Interest rates – The SCRA provision that interest rates may not exceed 6 percent also applies to auto loans. Interest rates on auto loans taken out before the servicemember was upgraded to active military status often must be adjusted. Servicemembers are required to take some steps before they can receive the lower rate. This includes submitting a written notice and a copy of the military orders calling them to action.
- Repossession for breach of auto loan – Without a court order, a servicemember’s property cannot be repossessed for nonpayment while they are on active-duty status. Lenders must verify that the servicemember has active military status and then pursue the repossession in court. The court may grant the repossession, or it may opt to do one or more of the following:
- Make the creditor return the payments made on the loan before granting the repossession.
- Stay the car repossession proceedings.
- Require that the creditor pay the servicemember the difference between the car’s value and the debt balance. This is called an equity payment.
- Repossession for breach of auto lease – The SCRA prevents contract termination due to nonpayment or breach without a court order. If servicemembers can demonstrate their active military status compliance with the terms of the contract is impossible, the court may order a stay.
- Repossession for breach of storage lien – Without a court order, you can’t put a lien on a servicemember’s property until 90 days after their service ends. But a court can grant a stay or an adjustment.
- Lease termination rights – A servicemember who signed a lease before going on active duty may cancel that lease without penalty. An active-duty servicemember who signs an auto lease is generally required to abide by that lease. But not if he or she gets PCS orders outside of the continental U.S. or orders to deploy.
Penalties for Violation of the SCRA
In a piece published in The Banking Law Journal earlier this year, creatively titled, Highway to the Danger Zone: Automotive Lending and the Servicemembers Civil Relief Act, Kirk Jensen, John Redding and Sasha Leonhardt outlined a case that exemplifies the seriousness of the auto lending laws under the SCRA.
In March 2013, 75-year-old used-car dealer Carl Nuss got a letter from a customer requesting a reduction in interest rate to the 6 percent required under the SCRA, according to the article. While Nuss would ordinarily comply with this request, this customer was thousands of dollars behind on his car payments. Nuss instead repossessed the car and sold it to cover these losses.
Two months later, a court indicted Nuss on two counts of violating the SCRA. The first count was for failing to apply the reduced interest rate to the customer’s loan. The second for repossessing an active-duty servicemember’s vehicle, the article reported. Each of these counts carries a maximum sentence of one year in jail and a fine of $100,000. On June 27, Nuss plead guilty to both of these counts of violating the SCRA.
While servicemembers deserve SCRA protections, this case highlights how ignorance of auto lending and SCRA laws is no excuse. Further, it shows an increasing willingness of federal regulators and prosecutors to invoke the SCRA’s criminal provisions in addition to civil ones.
So it’s important for anyone in an industry who deals with servicemembers to keep an eye on the laws. Violations — even unintentional — can result in fines and penalties. Industry managers must regularly determine which of its customers have active military status. The Servicemembers Civil Relief Act Centralized Verification Service can help to make this process easier by streamlining search functions and providing helpful resources.