We are an FDIC regulated Bank with low military loan activity; however, our procedure is to run a DoD status check on each of our consumer loan applicants to determine if they are active duty military and then to subsequently key their account[s] accordingly. Our Internal Audit Dept has just completed their first-ever SCRA/MLA audit [after returning from an annual auditors convention] and they are 'recommending' that we STOP this process and that we remove the SCRA coding on those few loans that are active duty military. Their reason: So the Bank can claim that "We didn't know" if there is an FDIC examination issue. This makes no sense to us here in Lending.

So, I am soliciting opinions regarding:
* why should/can we follow their cease and desist recommendation, and
* why we should go against their recommendation and continue
our status check.

Advice will be appreciated.

That is really interesting advice. We just had the OCC at our shop and they scrutinized very heavily our procedures and policies for SCRM. We are very low, if any at all, military. I think we have 2 loans and they are not even active servicemembers. I was amazed by how much time was spent on the regulation by the head examiner no less/

When do you run the DoD check? At application? At loan consummation? During the life of the loan? Or just when the loan begins to underperform?

The DoD check is run at consumer loan application all the time. Sometimes it is missed over in consumer mortgage processing, but it is always picked up in post-close file review, and it is always run when the loan begins to underperform.

Thanks for continued advice.

Deliberately cutting back on a control feature so that you might later claim ignorance of the consumer's status is a pretty lame suggestion. If you have a mortgage loan that goes into collection, you have to provide the HUD/SCRA notice after 45 days regardless of who the borrower is. If you are about to initiate foreclosure, you have to do some sort of check to see if the mortgagor is protected under the SCRA.

I can see suggesting that doing the check up front might be non-productive use of your time given that you need to check if the loan goes south. But not so you can claim ignorance.

If it isn't an MLA loan type I can see it. BUT ignorance is no excuse if your debt went into collection and having a policy against checking, if a situation arises, is terrible. Read any of the SCRA-UDAP related cases. Banks are having to do MORE on checks for SCRA applicability, not less.

I suggest you examine where in your processes you have risk and ensure verifications are in place there.

Many thanks, John and Andy, for your advice. It certainly gives us verbiage to use in our audit reply. I don't think we will follow the auditor's 'recommendation.'

I guess I am missing something here. With respect to consumer loans, SCRA only applies to loans taken prior to military service. There is no requirement to ascertain military status at loan opening. There's no point to it, and maybe that's what the internal auditors are saying. If a civilian takes out a loan and then joins the military, it is incumbent on them to notify the lender. Lenders are not obligated to ascertain military status unless just before beginning foreclosure.
John B. I don't see the value of this kind of control feature. Claiming ignorance from what? The only time it would be useful to check military status in the middle of a performing loan is if they were civilian at loan opening, subsequently went active duty, and forgot to tell the bank, and then the bank finds out about it. That's proactive - but not required by regulation.

SCRA only applies to loans taken prior to military service

The SCRA applies to all loans made to a servicemember. Only the rate reduction requirement is dependent on pre active duty status.


There is no requirement to ascertain military status at loan opening.

If you make loans covered under JWNDAA then you most certainly do need to ascertain their military status and make the proper application and closing disclosures.

John B. I don't see the value of this kind of control feature. Claiming ignorance from what?

If you begin any collection action such as repossessing an automobile, foreclosing on real property, filing a law suit, etc. You need to certify the borrower is not on active duty. If they are they have certain stay rights and you must obtain a court order before you can formally begin the collection action.

You might want to review the SCRA for more detail of its applicability and protections offered to servicemembers.

It think your Audit Department is suggesting that you move in exactly the opposite direction that the rest of the industry is moving:

http://www.whitehouse.gov/blog/2014/08/26/working-together-support-our-military-families

Apparently they missed the big roll-out of this initiative last month.

On Monday there will be a DoD Federal Register proposal amending the MLA which will cause it to reach far beyond the current limited loan products it does now. Our Top Stories and Compliance Briefing will have more when it comes out, but be watching for that change!