In these days of peaks and troughs of the lending cycle, prudent mortgage professionals are keeping a close eye on compliance. The Servicemembers Civil Relief Act ranks high in list of regulatory requirements with some of the most severe consequences for failures.
Setting up your compliance risk management system, policies, and handbooks for implementing the procedures is important, but sensitizing and training of front-line personnel is essential. If something slips through the cracks, it is important to have a process to correct them and to examine how the failure occurred.
The risks of non-compliance with the SCRA go beyond possible massive fines and protracted court cases. There is additional risk to the reputation of the lender and loss of confidence of business partners and potential customers (or members of credit unions).
The SCRA is a federal statute passed in 2003 to replace the old Soldiers’ and Sailors’ Civil Relief Act. There have been a few amendments since then, mostly changing the time periods for some protections and some to impose higher penalties and to allow borrowers to have a private right to bring a law suit (as opposed to the U.S. Justice Department which is the primary enforcement arm).
The goal behind the SCRA was to allow our servicemembers some peace of mind as they performed their duties. Obligations they had before entering active duty were given limitations. For example, a loan that originally had a 7% interest rate would have to be reduced to 6% for active servicemembers.
Who is protected?
Generally, all active servicemembers in the Army, Air Force, Navy, Marines, some members of the National Guard, Public Health Service and the National Oceanic and Atmospheric Administration (seven agencies in total) have personnel who may be protected under the Act. Further, activated reservists and national guardsmen may have protections. “Active Duty” is defined to include full-time duty, full-time training, annual training, and attendance at certain designated schools. National Guard and Reservists have their own subset of qualifications. National Guard members would only enjoy protections if called up by the President (as opposed to by a state Governor) and the call-up is for at least 30 days and the protection starts at the call-up, as opposed to the date they report for duty.
What about dependents? A servicemember’s dependents (including spouse, children, and anyone the servicemember has been providing at least one-half of the support for during the 180 days before applying for SCRA protections). It should be noted that, for dependents to assert protections, they generally must go to court. If a court grants a stay or other relief to a servicemember, it is likely that the co-borrowers would get the same postponement.
Who is generally NOT covered? Generally, not covered are retired personnel (after the expiration of benefits like the one-year protection for foreclosures), National guard troops called to duty by a state Governor, civilian employees of DoD or the armed forces, contractors, and active Guard Reserve Soldiers and Airmen under title 32.
What are the protections under SCRA?
There are several basic protections, but the six percent rule is one of most interest to the lending industry. An active duty servicemember who has a loan that pre-dates his active status (or in the case of the National Guard, the call-up date) is entitled to have his lender reduce the interest rate to 6% on all loans, including mortgages, car loans, and credit card bills for the entire period of his active service. Joint loans with a spouse are covered under the SCRA.
All excess interest must be forgiven and not deferred, nor should the maturity date be extended to get to a lower payment or accelerated. Interest includes “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” That would include late charges and NSF fees, but excludes the costs of bona fide insurance. If the borrower already paid excess interest, it should be refunded. The cap could be extinguished if a court finds that the servicemember has the ability to pay more and that the ability is not materially affected by their military service. There are very few cases where a creditor went to court for that determination.
There are other requirements involving foreclosure, eviction from REO, and assignments of life insurance policies, most of which require a court order before proceeding against a servicemember.
How long do protections last?
Not all SCRA protections end when the servicemember retires. For example, foreclosure protections now extend for a full year post-service. In earlier versions of the SCRA, that period had been 90 days.
Does a Servicemember have to ask for a lower interest rate or other protections?
On the interest rate cap, the SCRA says that the servicemember should provide written notice, with copy of orders any time up to 180 days after end of military service to get the protections. However, prudent lenders are being more proactive.
- Lenders are relaxing the requirements for orders and are accepting communications from commanding officers and similar, alternate proof of military service.
- Lenders are becoming more proactive in researching whether existing customers are in the military and reaching out to confirm and offering rate reductions.
How to be more proactive – how to verify military status? Most lenders prefer to have a third-party verify military status and select from:
- If you need a military or SCRA affidavit, if you need an affidavit of due diligence, or if you do not have the person’s social security number, http://www.servicememberscivilreliefact.com (“SCRACVS”) is your best resource and processes thousands of verification requests each year for lenders, lawyers, landlords, and others.
- The U.S. Department of Defense’s Defense Manpower Data Center (“DMDC”) at https://scra.dmdc.osd.mil/scra/#/home is a resource if you have the social security number and do not require an affidavit. You may also provide a date-of-birth only, but the results will have a disclaimer that limits the value of the certification. DMDC will ignore requests if no SSN or date of birth is provided.
- Batch or “scrubbing” is when the lender submits a data file with names, social security numbers, and other information. Both the SCRACVS and DMDC can accept these files and send back response files. For lenders that already have integrated platforms with national service providers, such as CoreLogic, there are often modules that can be added for SCRA inquiries.
Can Lenders ask Borrowers to Waive SCRA rights? Yes, but exercise caution. Before addressing the requirements, decide whether there are non-legal considerations, such as the public perception that you are conditioning a loan on a person giving up valuable rights. If you do decide to request a waiver, there are requirements. A waiver is only valid after the servicemember is in military service. It must be a separate document (12-point font or larger), not stapled to any other document, and it must recite what promissory note, document, or other agreement is affected by the waiver.
What are the Risks of Non-Compliance? Apart from the damage to reputation, the SCRA has teeth. A person who knowingly causes a foreclosure or seizure is subject to fines and imprisonment. Punitive damages can be assessed and one particular settlement agreement among the government and 5 large lenders for SCRA violations resulted in the lenders paying more than $2.5 Billion dollars.
What industry sectors should be concerned about SCRA compliance? Mortgage servicers, originators, banks, lenders, credit unions, and credit card issuers should be vigilant about complying with the SCRA.
Roy Kaufmann is an attorney and director of the Servicemembers Civil Relief Act Centralized Verification Service. He has written extensively on the SCRA and professionals often refer to the articles posted at www.ServicemembersCivilReliefAct.com.