Soldiers' and Sailors' Civil Relief Act Q&A - Part 2
By Mary Beth Guard, Esq.
Question: What if the lender requires a serviceperson to personally co-sign a loan to a corporation or other business entity, or give his/her personal guarantee for the debt of the corporation or business entity?
Answer: If that was done, the bank may have triggered the provisions of the SSCRA. If the serviceperson is personally liable for the corporation's debt, the debt is probably subject to the protections of the SSCRA. Look carefully at the definition of "borrower" in the note itself. If the serviceperson is required to individually sign the note (especially if he/she would then be included within the definition of "borrower" in the note itself), it is probably protected by the SSCRA. (See our article about the Cathey case.)
Question: We familiarized ourselves with the SSCRA during the Gulf War. Anything new we should know about?
Answer: Yes. In the early 1990s, Congress made several changes to the Act, one of which is particularly significant to financial institutions, and another which may indirectly affect financial institutions.
Section 518 of the SSCRA now embodies what amounts to a non-discrimination provision. It provides that a serviceperson may not be subjected to certain consequences as a result of having availed himself or herself of the rights afforded by the SSCRA. Specifically, none of the following actions can be taken if the sole basis is the serviceperson's exercise of rights under the SSCRA:
- A creditor cannot deny or revoke credit;
- A creditor cannot make a change in the terms of an existing credit arrangement;
- A creditor cannot refuse to grant credit to the military person in substantially the amount or substantially the terms requested;
- An adverse report relating to the creditworthiness of the military person cannot be made by or to a consumer reporting agency;
- An insurer cannot refuse to insure such a person.
With respect to home equity plans covered under Regulation Z, there is an apparent conflict. Section 230.5b(f) provides in pertinent part:
"No creditor may, by contract or otherwise:
* * *
(3) Change any term, except that a creditor may:
* * *
(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
* * * (D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;"
While some may read this provision and believe that it is directly targeted at rate reductions stemming from SSCRA, the Reg Z Commentary reveals this is not the case. As an example of a situation where this Regulation Z provision can be relied upon, it gives the following:
"Government limits on the annual percentage rate. Under Sec. 226.5b(f)(3)(vi)(D), a creditor may prohibit further advances or reduce the credit limit if, for example, a state usury law is enacted which prohibits a creditor from imposing the agreed-upon annual percentage rate."
The major difference between that example and the SSCRA rate reduction is that the SSCRA has a specific federal statutory anti-discrimination provision that protects the serviceperson from having its creditor take this type of action. You should, of course, confer with your own counsel, but my personal view is that the terms of Section 518 of the SSCRA, which are specific to the SSCRA rate reduction, control over the more general Regulation Z language quoted, and Section 518 would prevent a creditor from utilizing Section 226.5b(f)(3)(vi)(D) to prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which the creditor is required to reduce the interest rate to 6%.
The provision which may indirectly impact financial institutions is the revised Section 530, which says;
"No eviction or distress shall be made during the period of military service in respect of any premises for which the agreed rent does not exceed $1,200 per month, occupied chiefly for dwelling purposes by the wife, children, or other dependents of a person in military service, except upon leave of court granted upon application therefor or granted in an action or proceeding affecting the right of possession."
Previously, the amount was $150, rather than $1,200.
Question: Any more guidance on reducing monthly payments?
Answer: In 1990, the OCC issued Advisory 90-12 with general information on the Soldier's and Sailors' Civil Relief Act. In 1991, it followed up with an Advisory Letter AL-91-1 which stated:
"...[w]e have been asked whether monthly payments must be reduced when the interest rate on credit extended to a person in military service is reduced to six percent. We believe the payment should be reduced to the amount needed to fully amortize the loan at six percent by its scheduled maturity date.
The reduction in the interest rate does not change the creditor's obligation to permit repayment of the loan over its contractual life. The purpose of the act is to provide relief to persons in military service 'to enable such persons to devote their entire energy to the defense needs of the Nation.' A reduction in the interest rate without a corresponding reduction in the payment amount has the effect of shortening the maturity of the loan but provides no short-term relief to the person called to active military service."
This is in harmony with what we have been saying.
Question: When you reduce the interest rate, how do you report and record the lost income?
Answer: We're still seeking information about this one, but our initial contacts with regulators indicate that you will need to adjust your accrual accounts. After going through your loan portfolio and identifying which loans will be affected, you should make adjustments to correct income. This would be made to Income Earned Not Collected.
Another alternative suggested by a bank (which we have not yet received regulatory feedback on) is to do a modification of the loan for the term of the person's orders and then allow for the loan to automatically increase to the prior rate and amortization at the end of the person's tour of duty. This particular bank said it is not going to try to identify a specific loss identifiable with loans subject to the SSCRA. It will become simply a reduction in income as the result of following federal law.
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
First published on BankersOnline.com 9/27/01
First published on 09/27/2001