SCRA Q&As

by Mary Beth Guard
Guru BIOS

Question: If the wife of service member (reservist called to active duty) incurred credit card debt, (on a card issued in both names) by herself, prior to active duty, are those charges subject to rate cap?

Answer: The question is whether this would legally be deemed an obligation or liability incurred by the servicemember. If both parties are obligated to pay back the debt, the fact that the charges were actually made by the wife is irrelevant. The charges incurred prior to active duty would be subject to the rate cap.

Question: Does the SCRA apply only in time of war or at all times?

Answer: All the time. There is nothing whatsoever in either the old SSCRA or the SCRA that limits the application of either law to times of war.

Question: In a Community Property State is spouse a legal rep (to invoke provisions)?

Answer: Not for purposes of the SCRA. Legal representative is defined as an attorney representing the person or someone acting under a Power of Attorney,

Question: Are we allowed to extend, with committee approval, a pre-service debt?

Answer: Yes. The SCRA does not preclude you from extending such debt, if an extension is requested by the serviceperson.

Question: What disclosures are required when the rate is returned to original contract rate after military service is terminated?

Answer: If the debt is one that is covered by Reg Z, the conservative approach would be to treat it as an action that would require a subsequent disclosure. If you go that route, that means you must mail or deliver written notice of the change to each consumer who may be affected. The notice shall be mailed or delivered at least 15 days prior to the effective date of the change. Some lenders say they handle this by sending a notice at the time they reduce the rate saying the reduction will be effective as of a particular date, then they go on to state that the rate will revert to the contract rate on such-and-such date (the day after termination of active duty, as evidenced by the orders).

Question: Does this new law apply to those who entered the service before 12/13?

Answer: Yes. The way it was written, it took effect immediately and the only instances it doesn't apply are where there was a proceeding involving a servicemember that had already reached the final judgment stage.

Question: Just for clarification, if someone in the Reserves CHOOSES to go from traditional to active duty that his/her preservice debt is NOT eligible?



Answer: I'm not sure what you mean by choosing to go from "traditional to active duty". If someone is in the reserves and they incur an obligation and they are subsequently called up to active duty, their debt is subject to rate reduction under Section 207.

Question: I was thinking that the acceleration of principal prevention meant that a mortgage (i.e.) would not have to be re-amortized.

The provision on "prevention of acceleration of principal" is Section 207(a)(3) and it merely states that the amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made. To reduce the periodic payment, you would need to reamortize.



Question: What is considered 'bona fide' insurance? Would VSI (vendor's single interest insurance) be considered bona fide?

Answer: The term "bona fide" means "in good faith". In other words, it must be a legitimate charge and not something added on and labeled "insurance" just to try to avoid the cap. VSI should be considered bona fide insurance.

Question: Slide 31 'effect of rate cap' speaks to how the servicemember's payment is to be reduced presuming an interest rate is in effect above 6%. It implies that the original payment is to be reduced by the 'forgiven interest' amount for a payment period. We are discussing closed end credit. Strictly interpreted, this would entail a comparison between the original and new 6% am. schedules at each payment interval to calculate the required payment.

Answer: You've seen the statutory language, so you understand that it unfortunately provides little guidance in this regard. It's possible that Congress simply did not have much input from lenders when constructing this provision and did not think through the complexities involved in either open end credit or precomputed debt. In the absence of further clarification in the law, be guided by the spirit and intent in figuring out how you can provide relief by lowering payments.

Question: To clarify: late charges disclosed as 10 or 15% of payment amount must now be reduced to 6%?

Answer: It's worse than that. The TOTAL amount of all charges that fit within the definition of "interest" under Section 207 - including the interest itself - cannot exceed 6%.

Question: Please clarify how service charges, renewal charges and fees, specifically late fees must be handled to determine if they must be waived?

Answer: Keep tabs on everything that is being charged to the servicemember that could be deemed "interest" under the Section 207 definition. If the interest rate itself is over 6% and you have to bump it down, then all you're going to be able to collect is that 6% interest - you can't tack on any service charges or fees on top of that, because they are "interest" under 207 and they would cause you to exceed the cap. If the rate is at 5%, on the other hand, you'll want to closely watch any fees you assess to make sure the total amount of the rate, plus the fees, do not exceed 6% per annum during the period of military service.

Question: If the bank receives notification after service has been complete and they go back and recalculate the interest, how should corrected 1098 reporting be handled? Service member probably reported interest paid at higher rate.

Answer: I gasped when I read this question. Holy smokes. What a can of worms. In such an instance, where the rate reduction is requested and made after the fact and a refund is made of interest previously paid, I'm honestly not quite sure what the best course of action would be because the individual paid the original amount of interest during the year for which you reported. The interest adjustment is occurring now for a previous year. Your report was accurate when it was filed. Maybe there will be an IRS bulletin or ruling in the near future to provide guidance.

Question: Lease terminations - does this mean that the service member would not be liable for any early termination fees, etc?

Answer: That is correct, if the circumstances fall within the type of leases discussed in Section 305. The statute says "In the case of the lease of a motor vehicle, the lessor may not impose an early termination charge, but any taxes, summonses, and title and registration fees and any other obligation and liability of the lessee in accordance with the terms of the lease, including reasonable charges to the lessee for excess wear, use and mileage, that are due and unpaid at the time of termination of the lease shall be paid by the lessee."

Question: Does the lease clause include financing of Commercial Leases owned and/or operated by a servicemember? For example Restaurants that we finance leases for equipment?

Answer: Section 305 (which gives the servicemember early termination rights) only applies to motor vehicle leases and a lease of premises occupied, or intended to be occupied, by a servicemember or a servicemember's dependents for a residential, professional, business, agricultural, or similar purpose, but Section 302, which protects a servicemember against rescission or termination of a lease by the lessor for a breach of terms of contract applies to preservice contracts for the lease of real or personal property, so it would be broad enough to include a lease entered into by the servicemember for restaurant equipment. [There's no language that limits it to leases for a personal, rather than a business, purpose, under Section 302.]

Question: Please repeat the comments regarding the bank's obligation to reduce an interest rate and payment if the serviceperson is one of several guarantors on a business loan.

Answer: This is what I think is the biggest quagmire under the new law. Under the old SSCRA, it said no preservice obligation or liability incurred by a servicemember could bear interest at a rate in excess of 6% during military service. Most people interpreted that to mean if the servicemember was one of the obligors or the sole obligor, the interest rate cap applied. However, the new SCRA provision in Section 207 says

"An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent per year during the period of military service."

Here's the problem: Since it specifically references obligations of l) the servicemember; or 2) the servicemember and spouse jointly, that leads to the argument that any obligations that are not within those two specific categories do not qualify for the rate reduction. For example, a loan to the servicemember and her daughter, or a loan to the servicemember and his brother. I think there's a good argument to be made for that interpration, based on the statutory language, but I doubt that's what Congress intended, and I wouldn't want to be a test case for trying to restrict the rate cap provision to those two types of loans.

Question: So if a late charge is added to a loan payment, and this results in the payment rate being over 6%, we are in violation? Would you advise a blanket waiver of late charges for service members?

Answer: In answer to your first question, yes. (Assuming you're talking about a preservice obligation on which you've lowered the rate to 6%.) A blanket waiver might be the easiest way to avoid violations.

Question: Did I understand correctly that we should use the date the servicemember received the orders for active rather than the date they must report for active duty?

Answer: Yes.

Question: If a father guarantees a loan for his son and the father is called into active duty, must the loan be capped at 6%?

Answer: See the answer to the question above relating to whether the rate cap applies in instances where the servicemember is merely a guarantor.

Question: Can we continue to enforce collection efforts through the judicial system or our selves if servicemember is on active duty?

Answer: Yes, but subject to the right of the servicemember to obtain a stay or the court to grant one. It would be wise to disclose to the court that the defendant is in military service. Also, watch out for the limitations on things like self-helpf repossessions. Look on the Cheat Sheet to determine when they apply.

Question: When the servicemember leaves active duty and the interest cap ceases, can we put the contractual payment immediately in effect (based off re-amoritization of loan with the contract rate for the remaining balance) or must we wait out Regulation Z change in terms period of 15 days?

Answer: Since the individual must provide a copy of their orders to invoke the rate cap, you'll know when the period of military service is scheduled to end and you can provide notice of the reversion to the contract rate well in advance so you don't have to wait and can raise the rate back on the first date after termination of active duty.

Question: What if they decide to stay in the military for life. On a 20 year mortgage are we obligated to keep the rate at 6% for the entire life of the loan?

Answer: If it's a preservice mortgage loan, yes.

Question: When can a financial institution report adverse credit on a serviceperson with a delinquent loan without violating the SSCRA?

Answer: When the basis for the report is NOT due to the servicemember's invocation of rights under the SCRA.

Question: If a member has a joint Open End Plan, either party can make a loan and obligate either party. So if the wife came in and made a loan under the OE Plan, both parties are still obligated and wouldn't SCRA cover this?

Answer: Yes.

Question: If a customer borrows money in their individual name to purchase rental property, would the borrower qualify for an interest rate reduction under the SCRA when called to active duty?

Answer: Yes. Purpose of the loan is not relevant.

Question: Let's say a servicemember has cosigned a vehicle loan for a son or daughter. The servicemember is then deployed and the loan becomes delinquent. The child had been making the payments and is in possession of the vehicle. Can we repossess or not?

Answer: You'll need a court order. See Section 302, where it says:
Sec. 302. PROTECTION UNDER INSTALLMENT CONTRACTS FOR PURCHASE OR LEASE.
(a) PROTECTION UPON BREACH OF CONTRACT-
(1) PROTECTION AFTER ENTERING MILITARY SERVICE- After a servicemember enters military service, a contract by the servicemember for--
(A) the purchase of real or personal property (including a motor vehicle); or
(B) the lease or bailment of such property,
may not be rescinded or terminated for a breach of terms of the contract occurring before or during that person's military service, nor may the property be repossessed for such breach without a court order.

Question: Section 108(5) SCRA This section states that the law prohibits an annotation in a servicemember's record by a creditor... However, are we allowed to note active duty date and branch of service on our system of record for the purpose of insuring compliance with the other provisions of the SCRA (for example, rate of interest cap or prohibition against repossession)

Answer: Yes. Despite the seemingly broad language of the prohibition, the intent would not be to preclude you from being able to take steps that would allow you to carry out the protections.

Question: If they notified us last summer of their active duty & we reduced the interest rate to 6% at that time, do we need to go back and reduce the payments even though these revisions to the act didn't become effective until December 19th?

Answer: I'm a little confused by the question. Under both the old law and the new law, the 6% cap was much the same and applied to preservice debts once a person entered a period of military service. The reduction you applied last summer should have been in force for the full period of active duty.

Question: Our procedure (and I thought was based on the original SSCRA) was to put a hold on credit reporting while they are on active duty. We didn't negatively report but we also wouldn't positively report. The previous question seemed to state if a loan was delinquent you still had to report. Our bank procedures are pretty firm on their stand on this one. Did I misunderstand your answer?

Answer: You don't have to report, but you are not prohibited from reporting - so long as you aren't making a negative report simply because a servicemember exercised SSCRA or SCRA rights.

Question: Can a servicemember be charged for overdrafts?

Answer: If the overdraft is incurred while they're in military service, sure.
If it was incurred preservice, then it is an "obligation" and whatever you charge on it will be subject to the 6% cap.

Question: If a servicemember cashes in a Certificate of Deposit early does the SCRA state a penalty fee cannot be charged?

Answer: No. The early withdrawal penalty fee on a CD would not be in connection with an "obligation" incurred by the servicemember. And I don't think even a clever attorney could successfully argue that the early withdrawal of a CD is synonymous to the termination of a "lease". ;-)

Question: If the co-debtor of the service member is not a spouse, do they get the same protection? Can set-off be exercised against the co-debtor?

Answer: See answer to one of the earlier questions. Basically, the law is now ambiguous on this point. Generally, however, the same protections against self help remedies, such as set-off, that are available on preservice debt to the servicemember would arguably also be available to co-obligors.

Question: Could you please address how service charges and fees affect the 6% cap?

Answer: They are added to the interest rate to determine whether the total goes over 6%.

Question: If the servicemember has an existing credit card account with an outstanding balance prior to being called to active duty and then makes charges after being called call to active duty, are we required to apply payments to the 6% balance before applying payments to the new charges?

Answer: The law simply does not address that. There appears to be nothing to say wheter you have to apply the payment to either the lower or higher rate debt.

Question: Are we required by the SCRA to send notices to the service members of the rate reduction and recalculated payments? Also are we required to send a notice that the rate and payment reduction is expiring due to their orders before changing the rate and payment back to the original agreement?

Answer: As a practical matter, yes. If you don't provide a notice of the change, they have no way of knowing the proper amount of their new payment. See another question above about giving notice of the reversion to the contract rate.

Question: When trying to determine if 'debt' is pre-service do you use the date of the orders or the date the member reports for active duty? The orders are dated 1/1, the loan is closed 1/2 and the report date is 1/4.

Answer: You use the date of the orders. I don't think Congress intended for a person to be able to receive orders and run up a bunch of debt before reporting for active duty.

Question: If we have a soldier that applied for relief over one year ago and never sent us copies of his orders, do we have the right to now demand copies of orders to continue the coverage?

Answer: Tough question. If they were requesting the relief now, the answer would clearly be yes, but at the time they applied for relief a year ago, there was no statutory requirement for them to provide anything to you, including a copy of their orders. I would request a copy, indicating that this will enable you to confirm the proper beginning and ending dates for the adjustment. If they want the adjustment, they'd be foolish not to supply the copy immediately.

Question: Loan is made prior to service member's active duty. While on active duty Service Member applies and gets a refinance of obligation. Does the new obligation qualify for SCRA whether there is new money disbursed or not?

Answer: A refinance would involve satisfying the old obligation and replacing it with a new one. The new one would not be a preservice obligation, so the cap would not apply.

Question: If we repossess a car and after the car is sold the member notifies us that he was in the service and protected under the act, are we liable since we were not notified or aware of the active duty status?

Answer: Probably not, but be prepared to undo the damage quickly and completely! Also, keep in mind that the protection against repossession only applies if the car loan was entered into PRIOR to military service, so if the loan was incurred while in military service, the repo is not forbidden.

Question: What is the best way to calculate the new payment? Currently we take the remaining balance and recalculate it at 6% for the remaining term of the loan to come up with our new payment. We have some cases where this only lowers the payment a few dollars because the customer may have had collateral protection insurance added to the account over the years or late payments, or they may have had SSRA relief in the past. Is there a better way to calculate this?

Answer: Probably not, unless you just used the remaining balance without the collateral protection insurance and late payments, meaning their payment term would be longer (to pay off those things), but they would get more short term relief on the payment amount right now.

Question: Are we okay to force place hazard insurance on a real estate loan to an active duty servicemember?

Answer: I don't see anything that would preclude you from doing this, but I would work extra hard to make the notifications and to get the borrower to procure the insurance if possible. If someone comes home from the service and has a big liability for exoribantly priced force placed insurance, they're going to look real hard for some provision that would allow them to avoid the charge - and they might just find something. Having said that, however, you have an absolute right to protect your collateral, so don't avoid getting the insurance.

Question: Should accounts be included in or excluded from monthly credit reporting?

Answer: See earlier questions re credit reporting and consult Section 108 for a full understanding of the limitations on reporting. Section 108 is intended to simply be a nondiscrimination provision.

Question: Should we continue to waive fees if assessed on account after setup on SCRA and interest rate is at 6%?

Answer: Yes, because charging them will put you over the cap.

Question: In the seminar you talked about Section 207 and mentioned that the 6% cap also includes such things as service charges, renewal charges and other fees.

We have been changing the interest rate on our loans to a cap of 6% but any late fees or annual fees that normally would access are being charged to the account.

Should we be waiving all fees on these loans? Or how do we calculate the 6% to include these fees? Would it be advisable to charge a lower rate and still access late charges when applicable?



Answer: Yes, you will need to waive them, as a practical matter. As for charging a lower rate and still assessing late fees, I think you wouldn't come out as well in the long run. If you reduce the interest rate to 6%, that's a sure thing . . . Late payments may or may not occur, so you may never see fees for those.

Question: In the seminar, the presenter repeatedly stated that this act involved all service personal whether "order to service' or those that enlisted. In the original spirit of the law, it was designed to protect those individuals that were 'forced into military service - drafted' and had to leave better paying jobs in the civilian world for worse wages in the military. I was one of those luck individuals. However, those that enlist are very much aware of what the wages (monetary) will be in the military, what the expenses are while in the military, and what the expenses will continue to be from before military service. Section 106 under Article 1 clearly states that those persons '?ordered to report?' are entitled to benefits. The interpretation given was that an enlistee can now take out a loan before entering the service and become basically collection proof while in the service, and I also must reduce the interest rate while the individual is hiding behind this act. Was this presenter extremely liberal in her interpretation of the spirit of the law, or am I just as conservative because of my experiences?

Answer: This interpretation is borne out by over 60 years of usage in the United States and interpretation by the courts. In the past, many military persons were hesitant to "take advantage" of some of these provisions, but they exist in times of peace and in times of war and apply equally to those who voluntarily enter the service, as well as those involuntarily called to action.

Question: Under section 207, "Prevention of Acceleration of Principal", Does this only apply to closed-end loans or is it stating that revolving loans Must reduce the monthly payment amounts due to the reduction in APR on servicemember's accounts? If they are on a fixed payment stream, how would this work?

Answer: There is no distinction made in the law between closed end loans and revolving loans. The statute merely refers to "obligations". The cap applies to all types of preservice obligations and the payment reduction should be made even on revolving loans. If they are on a fixed payment stream, you'll have to adjust the fixed payment to comply with the spirit and intent of the legislation.

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

First published on BankersOnline.com 10/11/04