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Q&As About SSCRA
By Mary Beth Guard, Esq.

With the help of Kathy Emery with the Oklahoma Bankers Association, I've dug out some questions I answered several years ago about the SSCRA. I've added a few new ones as well, that I thought would be helpful.
Interest rate reductions and triggers
Question: How does the interest rate reduction work and must it be requested?

Answer:Section 526 of the Act provides that if a person incurred an obligation or liability (such as a loan) PRIOR TO HIS ENTRY IN THE SERVICE which had an interest rate in excess of 6 percent per annum, then if he subsequently enters the service, during the time he is serving on active duty the obligation cannot bear interest at a rate in excess of 6 percent per annum. [For these purposes "interest" is deemed to include all fees and charges except "bona fide insurance".] Note: This is an automatic reduction in the interest rate. The statute DOES NOT require it to be requested, despite what you may have heard or read elsewhere. Some authorities are recommending that servicemen request the interest rate reduction simply because the lenders don't have any way to know the borrower has entered military service without such a request. However, once you receive such a request, you must go back and adjust the interest rate back to the time the person entered the service - not just to the time of the notification of the bank. This provision applies both to individuals who are just now signing up for the armed forces AND to persons who are in the reserves or National Guard who are being called up for active duty. If you made a loan to someone in the reserves and they later enter active duty, the 6 percent interest limitation will apply from the time they enter active duty.

Duration of rate reduction
Question: How long does the rate reduction last, and when does it begin?
Answer: Keep in mind that the interest rate reduction begins when the person enters military service or, if he is a reservist or guardsman, when he is called up for active duty, and continues throughout the "period of military service". Under Section 511 of the Act, "The term 'period of military service', as used in this Act (said sections), means, in the case of any person, the period beginning on the date on which the person enters active service and ending on the date of the person's release from active service or death while in active service. . .." Some of the other benefits of the SSCRA, such as the stay of litigation, can be extended for the period of military service and three months thereafter.

Sole obligees only?
Question: Does the part of the law which mandates interest rate reduction apply only if the serviceperson is the sole obligee on the loan?
Answer: No. It appears that most authorities are taking the position that the interest rate reduction on pre-military service debt applies regardless of whether the serviceperson is the sole obligee on the loan. Since the statute simply says that no obligation or liability incurred by a person prior to entry in the military service shall bear interest at a rate in excess of 6 percent per annum during the period of military service, if the serviceperson is one of the parties who incurred the debt, the reduction shall apply even if other parties are also obligated. In order to be able to charge the contract interest rate, the lender would need to apply to the court for an order that the ability of the persons to pay the contract interest rate has not been materially affected by reason of the military service of the one obligee.

Additionally, we spoke to the our local Administrator of the Department of Consumer Credit regarding the interest rate reduction and how it applies when you have a loan that has add-on interest. In his view, the statute mandates a 6% APR maximum and you must make whatever adjustment is necessary to arrive at that figure.

Who's protected
Question: To whom and what does it apply?
Answer: Section 526 applies if the loan was made prior to the time the person entered the service (or prior to active duty in the case of reservists and National Guardsmen). If you made a loan to a serviceman while he was already in the service, he is bound by the contract terms. As far as the coverage of the Act, it applies to ALL persons on active duty in the military: that means full-time Army, Navy, Air Force, Marines, Coast Guard, Public Health Service, as well as members of the Guard or the Reserves who have commenced active service.

Exception for Student Loans
Question: Does the 6% rate apply to all types of indebtedness?
Answer: No. Under 20 U.S.C. Section 1078(d) no provision of any law which limits the interest rate on a loan shall apply to the guaranteed student loan program loans. There is therefore no interest rate reduction under the Soldiers and Sailors Civil Relief Act for guaranteed student loans. They will continue to bear interest at the contract rate. Note, however, that the serviceperson may be able to qualify for a deferment.

The Act DOES reduce interest rates on all other kinds of indebtedness, including credit cards. And, for those of you who have been wondering, the interest rate reduction applies regardless of who the lender was - bank, credit union, rich guy next door, American Express, etc.

Unfunded portions of a line of credit
Question: What about unfunded portions of a line of credit? Are they subject to the interest rate reduction? Answer: If future advances under a line of credit originally agreed to prior to entry in service are mandatory, it is possible that they would be subject to a 6% interest cap. The rationale would be that the obligation was incurred prior to entry in military service. If, however, the advances are totally discretionary and the borrower could not sue to require the making of the advances, they could be deemed to constitute a new obligation. Any obligation entered into AFTER the person is in military service is ineligible for the interest rate reduction. We have been told that some credit card issuers are reducing the interest rate to 6% on outstanding obligations and then cutting off charge privileges and issuing a new card after negotiations with the serviceperson. The new card's charges would bear interest at the contract rate. [NOTE: The actions described in the previous two sentences were taken during the Gulf War. In light of Section 518 of the Act (part of the amendments which became effective in 1991), a credit card issuer should consult with counsel about whether such action would be permissible. Consult our Soldiers' and Sailors' Civil Relief Act Q&A - Part 2 for details.

Recouping the lost interest
Question: I understand we must temporarily reduce the interest rate. Can we later recover the "lost" interest after the person's military service has ended?
Answer: No! The interest rate differential between 6% and the bargained-for rate on a loan to an affected serviceperson may not be recovered at a later time. Although the lender can change the interest rate back to the contract rate after termination of military service, the interest lost during the period of military service must be forgiven, not simply postponed.

Reducing payments
Question: Does the reduction of the interest rate to 6% require you to reduce the payments?
Answer: We believe it does. The statutory language simply states that "[n]o obligation or liability bearing interest at a rate in excess of 6 per centum per annum incurred by a person in military service prior to his entry into such service shall, during any part of the period of military service . . . bear interest at a rate in excess of 6 per centum per annum . . .." The congressional history indicates that the purpose of the Act is to reduce the burden on those in the military. Obviously, that burden cannot be reduced if the payment amount stays the same. For that reason, we believe an adjustment in the payment amount is advisable; however, we urge you to communicate with your customer if at all possible. Some of them may still be able to make the original payment amount and would prefer to do that and pay off the loan early.

Preservice debt -- what it means
Question: The Act talks about obligations "incurred by a person in military service prior to his entry into such service." Does that mean if someone was already in the National Guard or the Reserves when he got the loan that he is not eligible for the interest rate reduction?
Answer: No. When used in reference to reservists and Guardsmen, the term "military service" probably means active duty. Therefore, a person could be in the reserves for years, obtain credit during that time, and be eligible for the interest rate reduction once he has been called to active duty.

Effect on loans to entities
Question: What if you made a loan to a corporation whose sole stockholder is a serviceperson? Does the interest rate reduction apply?
Answer: No. The corporation is a separate legal entity. It is only a serviceperson's own debt that he gets relief for, not the debt of a partnership or corporation he is associated with. HOWEVER, in the typical loan to a small corporation, a lender may require the sole shareholder (and, in some instances, the spouse) -- the serviceperson -- to personally co-sign the notes and give their personal guarantees for all the present and future debt of the corporation. The notes frequently define "borrower" as "the corporation and all persons who sign or co-sign this note". If the serviceperson then signs the note, according to the Cathey decision (see our article about the Cathey case), that triggers the protection of the SSCRA.

Burden of proof of impaired payment ability
Question: Who has the burden of proving that the servicemember's ability to pay interest in excess of 6 percent is not materially affected by military service?

Answer: The lender has the burden. The interest rate reduction is automatic. It dates from the time the person entered military service or from the time the Guardsman or reservist was called to active duty. In order to get around the limitation, the lender must apply to a court for an exception and must show that the ability of the serviceperson to pay is not materially affected by military service.

Default judgments
Question: Can you get a default judgment against a person who is in the military?

Answer: Not very easily. In order to obtain a default judgment in a normal case, an affidavit must be filed setting forth facts showing that the defendant is not in military service. If the defendant IS in military service, the Court has the option to appoint an attorney to represent the defendant and protect his interest and can require the plaintiff to post a bond to indemnify the defendant against any loss or damage he may suffer by reason of the judgment should it later be set aside in whole or in part. The defendant, if was prejudiced by reason of his military service in making his defense, may come in not later than 90 days after the termination of his service and open the judgment and make his defense.

Other special benefits
Question: What other special benefits does the Act give a serviceperson?

Answer: l) A court can stay any action or proceeding at any stage thereof where a person in military service is involved, either as plaintiff or defendant, during the period of such service or within sixty days thereafter unless the court determines that the ability of plaintiff to prosecute the action for the defendant to conduct his defense is not materially affected by reason of his military service. 2) When an action for compliance with the terms of a contract is stayed under the Act, no fine or penalty shall accrue by reason of failure to comply with the terms of such contract during the period of the stay and a court may relieve against the enforcement of such fine or penalty if the person who would suffer had his ability to pay or perform materially impaired by reason of his military service. 3) A court can stay the execution of any judgment or order entered against a person in military service, unless it is shown that the ability of the defendant to comply with the judgment or order entered or sought is not materially affected by reason of his military service. 4) A court may vacate or stay any attachment or garnishment of property, money, or debts in the hands of another, whether before or after judgment. 5) Any stay of any action, proceeding, attachment or execution ordered by a court under the Act may be ordered for the period of military service and three months thereafter. 6) Section 524 of 50 App. provides that where the person in military service is a codefendant with others the plaintiff may apply for leave of court to proceed against the others. 7) The Act tolls the statutes of limitations during the period of military service. 8) A landlord cannot evict a person in the military service during the period of military service from any premises for which the agreed rent does not exceed $1200 per month. The premises must be occupied chiefly for dwelling purposes by the wife, children, or other dependents of a person in military service. The landlord can request a court order to get around this. 9) Installment contracts cannot be rescinded or terminated and the seller cannot resume possession of the property for nonpayment of any installment thereunder, if a deposit or installment of the purchase price, or a deposit or installment under a contract, lease or bailment has been received from a person who, after the date of payment of such deposit or installment, has entered military service, during the period of military service. Again, the seller can go to court to get relief from this provision. 10) No sale, foreclosure, or seizure of property for nonpayment of any sum due under an obligation secured by mortgage, trust deed, or other security in the nature of a mortgage on real or person property owned by a person in military service or for any other breach of the terms thereof, whether under a power of sale, under a judgment entered upon warrant of attorney to confess judgment contained therein, or otherwise, shall be valid if made during the period of military service or within three months thereafter, except pursuant to an agreement [which must be executed during or after the period of military service] or upon any order previously granted by the court. 11) If a proceeding to foreclose a mortgage upon or to resume possession of personal property or to rescind or terminate a contract for the purchase thereof has been stayed, the court may appoint three disinterested parties to appraise the property and order such sum as may be just paid to the person in military service or his dependent as a condition of foreclosing the mortgage, resuming possession of the property, or rescinding or terminating the contract. [THIS COULD BE AN IMPORTANT REMEDY FOR LENDERS. It's found at Section 533.] 12) If you have a lease covering premises occupied for dwelling, professional, business, agricultural, or similar purposes where the lease executed by or on behalf of a person who, after the execution of the lease, entered military service, and the premises so leased have been occupied for such purposes or a combination of same by such person or by him and his dependents, it may be terminated by the servicemember. He must furnish notice of the termination in writing to the lessor at any time following the date of the beginning of his period of military service. Termination of a lease with monthly payments is effective thirty days after the first date on which the next rent payment is due after the date the notice is delivered. In the case of all other leases, termination shall be effective on the last day of the month following the month in which the notice is delivered. Any unpaid rent for a period preceding termination on these types of leases shall be prorated and any rental paid in advance for a period after termination shall be refunded. A lessor can go to court to try to get relief from this provision. NOTE: If a serviceperson terminates a lease as allowed by this section, the landlord CANNOT seize, hold, or detain the person effects, clothing, furniture, etc. of the person or interfere with its removal from the premises for the purpose of subjecting or attempting to subject any of such property to a claim for rent accruing subsequent to the date of termination of such lease. 13) No person can exercise any right to foreclose or enforce any lien for storage of household goods, furniture, or personal effects of a person in military service during such person's period of military service and for three months thereafter unless they get a court order which allows them to do so. 14) The dependents of persons in the military service can apply to a court for entitlement to the benefits accorded to persons in military service. They should show that their ability to comply with the terms of the obligation, contract, lease, or bailment has been materially impaired by reason of the military service of the person upon whom the applicants are dependent. 15) A person in the military service may apply to a court for a stay of the enforcement of any obligation or liability incurred by such person prior to his period of military service.

Relief from the SSCRA
Question: Is there any relief from these requirements?
Answer: Not much. The statute allows you to make application to a court for an order finding that the ability of the borrower to pay interest in excess of 6 percent per annum is not materially affected by reason of their being in the military service. Unfortunately, you will probably face two hurdles in obtaining such a court order. First, particularly in the case of people in the reserves and the National Guard who are leaving other jobs behind, their ability to make payments probably WILL be materially affected by their service, for while the law requires the employer to hold their job open, it does not require the employer to continue to pay them during their absence. Secondly, the other major component of the Act stays most proceedings against servicemen. In other words, you could file the action, but more than likely the Court will find that the serviceman would be prejudiced by his inability to appear and defend his rights, and will therefore postpone a hearing on the cause until some later time - perhaps even until the serviceman returns to the country. During that period you can only require the payment of the 6 percent per annum interest rate. One exception to the stay would be in the case of a serviceman who has not been transferred to another location and is present and able to defend his position.

Make sure your attorneys are informed
Question: Will our attorneys know about this?
Answer: We would certainly hope so, but not necessarily. You will want to make sure your bank's attorney is thoroughly familiar with the Act because it CAN AFFECT FORECLOSURE PROCEEDINGS, SUITS FOR MONEY JUDGMENT, REPOSSESSIONS, and other actions when they involve a member of the military service.

Although the Act was passed in 1940, there have been relatively few court decisions construing it, so there are still some gray areas in its application.

After the War
Question: What do we do when the troops come home?
Answer: Thinking positively., thinking optimistically. . . Let's say the war is over and our military people have come home and reservists and National Guardpersons have returned to their normal lives. What about the Soldiers' and Sailors' Civil Relief Act? Keep in mind that just because servicemen are returning to the United States, that does not necessarily mean that they are leaving the military service or coming off of active duty. In fact, during the Gulf War, when the troops were pulling out, the JAG Corps informed us that new people were being called up! Some servicepersons will remain on active duty status for an extended period of time. You should attempt to establish contact with any serviceperson customers who have returned to the States and request that they furnish you a copy of their termination papers when they get them. The interest rate reduction ends upon termination of active duty or military status.

Be aware some provisions of the SSCRA extend even after the person has left the military. The section which prohibits you from selling, foreclosing or seizing property for nonpayment of amounts owed applies during the period of military service and for three months afterward. You therefore cannot exercise any right to self-help until the three month period after the end of military service has passed. In order to take any action against the property of the debtor, you must first obtain a court order.

Other Helpful Links
Reservist Achieves Victory Under SSCRA: What Every Lender Should Know

Understanding the Soldiers' and Sailors' Civil Relief Act of 1940
PART 2 -- SSCRA Questions
SSCRA Information and Links Page
Text of the Soldiers' and Sailors' Civil Relief Act of 1940
Explanation of Act for service members from the American Forces Information Services
Further Explanation from American Forces Information Services -- also geared toward service members
The Soliders and Sailors Civil Relief Act info
Soldiers and Sailors Civil Relief Act - from the US Military
Soldier's and Sailor's Civil Relief Act from Military.com



First published on BankersOnline.com 9/24/01



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