New federal law addresses bank, miliatry servicemmeber relations - Mary Beth Guard

New federal law addresses bank, military servicemember relations
by Mary Beth Guard
Guru BIOS

The old Soldiers' and Sailors' Civil Relief Act has been replaced by a new federal law going under the more inclusive title "Servicemembers Civil Relief Act." Intended to be a plain English restatement of the law, it grants some new protections to persons in the military service, but it also provides some important clarifications for duties of financial institutions.

The ten most important sections of the new SCRA are as follows:

Waiver of benefits - Section 107
Nondiscrimination - Section 108
Default judgments - Section 201
Stay of proceedings - Section 206
Maximum rate - Section 207
Eviction - Section 301
Installment contracts - Section 302
Foreclosures - Section 303
Lease terminations - Section 305
Nonbusiness assets - Section 706

In attempting to interpret and apply the law, it is important to keep in mind that not all the protections apply in every case. For example, some protections only apply to pre-service obligations. Some protections apply only to the military person; others apply to third parties as well. Some protections are only in effect during military service. As a result, when doing research into the Act, always refer back to the definitions and read each section in context.

The questions you want to answer about each provision are:

Who's protected by that provision
Period of time applicable
Method of invoking protection
Criteria
Avenues for relief
Pros and Cons of asking for relief

Of course, the most well-known provision (as least to financial institutions) is the maximum rate provision. The "6% cap" is still there, but it has been "tweaked" a bit..

Section 207 reads as follows:
An obligation or liability bearing interest at a rate in excess of 6% per year incurred by a servicemember or serivcemember and spouse jointly prior to military service shall not bear interest at a rate in excess of 6% during the period of military service.

The new law clarifies l) the effect of the cap, and 2) how the protection is invoked.

When the 6% cap applies to an obligation, excess interest must be forgiven, acceleration of principal is prevented, and the amount of payment must be reduced by the amount of interest forgiven that is allocable to the period for which the payment is made.

To get the benefit of this provision, the Servicemember or his or her legal representative must provide written notice to the creditor, along with a copy of military orders (and any orders further extending service). The burden is on the serviceperson. If they don't request relief, they don't get relief. And, of course, if the debt is not eligible preservice debt, the cap does not apply, even if the servicemember does request it.

There is also a timing requirement. In order to avail himself or herself of the 6% cap, the servicemember must make a request no later than 180 days after the date of the servicemember's termination or release from active duty or from military service. If the request is made within the proper timeframe, protection (i.e., the rate cap) goes back to the date on which the servicemember was called to active duty or entered the military. If the servicemember fails to request the relief until more than 180 days after termination or release from active service, the relief is not legally mandated.

Question: Under the Soldiers and Sailors Civil Relief Act (SSCRA), our policy was to insure that the interest rate reduction was retroactive to the day the service member is returned to active duty status and did not end until 60 days after the date of active duty is completed. I believe that the 60 day requirement was implemented due to language in the SSCRA. However, I can not locate that language in the SSCRA now, nor do I see any reference to it in the Servicemembers Civil Relief Act (SCRA). Is there any requirement that the interest rate reduction and corresponding payment reduction be maintained for any time after the service member terminates his or her service?

Answer: Neither the SSCRA nor the new SCRA require you to continue the interest rate cap after the period of military service ends. If Joe Soldier is on active duty from February 3, 2004 until July 3, 2004 and he makes a proper request, the interest rate cap should be applied from February 3 until July 3. The rate would revert to the contract rate on July 4.

Question: With a precomputed loan, the interest is "precomputed," (pre-calculated) unlike with a simple interest loan where the interest is calculated daily throughout the term of the loan. It is relatively easy to recalculate the new payment based on a 6% interest rate for a simple interest loan, however, it is not such an easy matter for precomputed. Would the entire loan have to be reamortized for a precomputed loan and then reduce the payments based on the account being reamortized at the 6% amount?

Answer: The bottom line is that you have to find a way to reduce the interest rate for the covered period of time - and reduce the payments by a commensurate amount. That may indeed mean that after determining the period during which the individual will be in military service, you will need to reamortize the debt so that during the period of military service the rate (including fees, etc.) will be capped at 6% and the payments during that period are reduced. Focus on the goal of Section 207: It is to provide some relief to the serviceperson on preservice debt for the period of time they're on active duty. That means finding a way to recalculate the interest and reduce the payment.

Question: Under the SCRA, a service member is required to provide orders to the creditor in order to invoke the interest rate relief; however, those orders do not have to be provided until 180 days after the service member terminates service. What happens if a service member notifies the creditor that he or she was called to active duty or was inducted 2 years prior, but does not notify the creditor until day 181 after release of service? Does the creditor have to provide the interest rate relief retroactively?

Answer: Nope. This provision is written in a way that provides a reasonable period of time for the servicemember to invoke the interest rate cap, yet still protects the lender by setting an outside time limit. At any time up until 180 days after termination or release from service, the service member can make a written request for the interest rate relief and provide a copy of his orders. If relief is requested after termination of service, the rate relief is retroactive and applies during the period of military service. If the request is made too late, however -- once it is past the 180 days, the right to interest rate relief is lost.

Question: We sell loans to the Federal Home Loan Bank.. They say that a borrower has to prove that the call to active duty is a financial hardship. Therefore, they would require pay stubs from the borrower and a statement from the borrower's employer stating that they were not supplement their employee's income during the call to active duty. First of all, under the old SSCRA was FHLB right to require this documentation? Under the new SCRA, can FHLB continue to require this documentation?

Answer: A lender couldn't require such proof under the old SSCRA and can't require such proof now. The interest rate cap is automatic if requested in the proper manner. The only way a creditor may avoid it is by going to court and getting a court order that says the ability of the serviceperson to pay at the contract rate is not materially affected by reason of their military service.

What you have is a situation where you would be forced to lower the rate (unless you get a court order). The FHLB doesn't have rights that are any greater than any other holder of a servicemember's debt, but as a condition of buying the loan from you, they could contractually require you to inquire into the borrower's financial status. Whether you could force the borrower to supply you with the information described above, without a lawsuit, is questionable. If you filed a court proceeding seeking a court order that the ability of the serviceperson to pay isn't materially affected, you could seek the information in the context of that court proceeding.

Question: I am looking for clarification of the term "Active Duty". According to section 101 (d) (1) of title 10 US Code, it states the definition includes full time training duty or annual training duty. Does this mean boot camp is covered for new recruits?

Answer: Yes. Boot camp is covered as a period of military service/active duty.

Question: If a person signs up voluntarily during a time of peace and enlists for 4 years, does this SCRA benefit apply for all of that time?

Answer: Protections in the SCRA apply both to those who have enlisted (either during times of peace or war) as well as to those in the reserves who are called up to active duty. Please note, however, as illustrated on the SCRA Cheat Sheet included in the materials, that some protections only apply to preservice obligations. The SCRA protections are nice - but not enough to make most people want to run down to their local military recruiter!

Question: Mom and Dad take out a loan for son. The loan is in Mom & Dad's names but the son clearly makes the payment. If the son gets called to active duty do we need to give the relief under the act?

Answer: No. Only the mom and dad are legally obligated on this loan, so it does not qualify for protection under the SCRA, even though the son makes the payment.

Question: How would a servicemember notify a court that he needs a stay if he is involved in a conflict and does not have access to communication avenues?

Answer: If the servicemember knows about the court action, he could have a legal representative (either an attorney or someone acting under a Power of Attorney) seek the stay for him. If he doesn't know of the court action, or can't access communication avenues to seek a stay directly or indirectly, he'll still be protected because the law places severe limitations on the taking of default judgments.

Question: I thought I had read in the act that the dependents were also covered. So if the spouse solely had a loan would they not be covered that way as well?

Answer: There are some protections for dependents - such as the prohibition against eviction and the provision on auto lease terminations, but most protections (as shown on the Cheat Sheet) apply only to the servicemember. If a loan is solely in the name of a spouse, it would not be eligible for the interest rate cap or other protections.

Question: Does the pre-existing debt rule begin on the date the individual enters the military service or the date s/he is called to active duty? Or is that perceived to be the same date?

Answer: Military service is deemed to begin when the person receives their orders, rather than the date the servicemember must actually report for duty. This is good news for creditors. If it were written differently, a person could receive their orders, go run up debt, then seek to have the rate lowered once they reported for active duty. Since military service is deemed to begin when the person receives his orders, this is not possible.

Question: Does the SCRA apply to a commercial loan in the name of a business that is guaranteed by an active duty serviceperson?

Answer: I wouldn't want to be the test case for this one. Arguably, yes, it could be deemed to apply. What the serviceperson would argue is that Section 207 applies to any obligation or liability "incurred by a servicemember" and that would include a guaranty. The financial institution, on the other hand, would argue that the party "incurring" the debt is the borrower and the guarantor is only secondarily liable and thus Section 207 would not apply. I'd wait to see if a servicemember in a guarantee position actually attempts to invoke Section 207 through a written request and I'd then visit with your counsel at that time to decide what your course of action should be. It's not black and white.

Question: Does the rate cap apply retroactively? For example, if a SM applied for relief under SSCRA, must we apply the new requirements under SCRA?

Answer: The SCRA provisions took effect immediately and would be applicable in any situation in which a final judgment has not been reached. So, if it is within 180 days after release/termination of a servicemember from military service and they provide you with a written request and a copy of their orders relating to a preservice obligation, Section 207 applies. Note, however, that Section 207 is just a clarification of the old Section 526. The only thing that is really new in Section 207 is the requirement that the servicemember take affirmative action to invoke its protection. The rate cap, the definitions, the forgiveness of interest and the reduction of payments were all standard (although not necessarily as explicit) under the old law.) And, yes, all other provisions of the SCRA also apply.

Question: Are you still obligated to lower the interest rate if their military pay is higher than their civilian pay?

Answer: Yes, l) if they request it; 2) if they follow the right procedure; 3) if the debt is covered preservice debt; UNLESS you go to court and get the court to rule that their ability to service the debt is not materially affected by their military service. That's the only way out.

Question: Does a child support levy apply while member is on active duty?

Answer: It would appear that unless there is a court order that stays the execution of such a levy (which could be procured under Section 204), the levy would be applicable. Sec. 204. STAY OR VACATION OF EXECUTION OF JUDGMENTS, ATTACHMENTS, AND GARNISHMENTS. (a) COURT ACTION UPON MATERIAL AFFECT DETERMINATION- If a servicemember, in the opinion of the court, is materially affected by reason of military service in complying with a court judgment or order, the court may on its own motion and shall on application by the servicemember--
(1) stay the execution of any judgment or order entered against the servicemember; and
(2) vacate or stay an attachment or garnishment of property, money, or debts in the possession of the servicemember or a third party, whether before or after judgment.

(b) APPLICABILITY- This section applies to an action or proceeding commenced in a court against a servicemember before or during the period of the servicemember's military service or within 90 days after such service terminates.

Question: Is this a consumer protection law, or would this apply to business obligations also?

Answer: If the servicemember incurred the obligation or liability prior to military service, regardless of the purpose, Section 207's interest rate cap would apply. So, for example, if the servicemember operates a sole proprietorship and obtains a loan for that business, the cap would certainly be applicable (if it was preservice debt). Also, don't forget the new Section 706: Sec. 706. BUSINESS OR TRADE OBLIGATIONS.
(a) AVAILABILITY OF NON-BUSINESS ASSETS TO SATISFY OBLIGATIONS- If the trade or business (without regard to the form in which such trade or business is carried out) of a servicemember has an obligation or liability for which the servicemember is personally liable, the assets of the servicemember not held in connection with the trade or business may not be available for satisfaction of the obligation or liability during the servicemember's military service.

(b) RELIEF TO OBLIGORS- Upon application to a court by the holder of an obligation or liability covered by this section, relief granted by this section to a servicemember may be modified as justice and equity require.'.

Question: Please explain Section 106, Report to and Ordered to Report vs. Enlist? And is this just a personal expansion of the spirit of the law? Especially concerning previous service debt?

Answer: Section 106 is intended to extend the rights and protections of the SCRA to members of the reserves, beginning on the date they receive their orders. Honestly, this section of the law is so poorly written, it's a little difficult to tell exactly what they're trying to do. It's like one hand giveth and the other taketh away.

Question: Under the Soldiers and Sailors Civil Relief Act (SSCRA), our policy was to insure that the interest rate reduction was retroactive to the day the service member is returned to active duty status and did not end until 60 days after the date of active duty is completed. I believe that the 60 day requirement was implemented due to language in the SSCRA. However, I can not locate that language in the SSCRA now, nor do I see any reference to it in the Servicemembers Civil Relief Act (SCRA). Is there any requirement that the interest rate reduction and corresponding payment reduction be maintained for any time after the service member terminates his or her service?

Answer: Neither the SSCRA nor the new SCRA require you to continue the interest rate cap after the period of military service ends. If Joe Soldier is on active duty from February 3, 2004 until July 3, 2004 and he makes a proper request, the interest rate cap should be applied from February 3 until July 3. The rate would revert to the contract rate on July 4.

Question: With a precomputed loan, the interest is "precomputed," (pre-calculated) unlike with a simple interest loan where the interest is calculated daily throughout the term of the loan. It is relatively easy to recalculate the new payment based on a 6% interest rate for a simple interest loan, however, it is not such an easy matter for precomputed. Would the entire loan have to be reamortized for a precomputed loan and then reduce the payments based on the account being reamortized at the 6% amount?

Answer: The bottom line is that you have to find a way to reduce the interest rate for the covered period of time - and reduce the payments by a commensurate amount. That may indeed mean that after determining the period during which the individual will be in military service, you will need to reamortize the debt so that during the period of military service the rate (including fees, etc.) will be capped at 6% and the payments during that period are reduced. Focus on the goal of Section 207: It is to provide some relief to the serviceperson on preservice debt for the period of time they're on active duty. That means finding a way to recalculate the interest and reduce the payment.

Question: Under the SCRA, a service member is required to provide orders to the creditor in order to invoke the interest rate relief; however, those orders do not have to be provided until 180 days after the service member terminates service. What happens if a service member notifies the creditor that he or she was called to active duty or was inducted 2 years prior, but does not notify the creditor until day 181 after release of service? Does the creditor have to provide the interest rate relief retroactively?

Answer: Nope. This provision is written in a way that provides a reasonable period of time for the servicemember to invoke the interest rate cap, yet still protects the lender by setting an outside time limit. At any time up until 180 days after termination or release from service, the service member can make a written request for the interest rate relief and provide a copy of his orders. If relief is requested after termination of service, the rate relief is retroactive and applies during the period of military service. If the request is made too late, however -- once it is past the 180 days, the right to interest rate relief is lost.

Question: We sell loans to the Federal Home Loan Bank.. They say that a borrower has to prove that the call to active duty is a financial hardship. Therefore, they would require pay stubs from the borrower and a statement from the borrower's employer stating that they were not supplement their employee's income during the call to active duty. First of all, under the old SSCRA was FHLB right to require this documentation? Under the new SCRA, can FHLB continue to require this documentation?

Answer: A lender couldn't require such proof under the old SSCRA and can't require such proof now. The interest rate cap is automatic if requested in the proper manner. The only way a creditor may avoid it is by going to court and getting a court order that says the ability of the serviceperson to pay at the contract rate is not materially affected by reason of their military service.

What you have is a situation where you would be forced to lower the rate (unless you get a court order). The FHLB doesn't have rights that are any greater than any other holder of a servicemember's debt, but as a condition of buying the loan from you, they could contractually require you to inquire into the borrower's financial status. Whether you could force the borrower to supply you with the information described above, without a lawsuit, is questionable. If you filed a court proceeding seeking a court order that the ability of the serviceperson to pay isn't materially affected, you could seek the information in the context of that court proceeding.

More questions and answers to be featured next month.

The original version appeared in the Febuary/March 2004 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 08/23/04