I'm planning some training anticipating the call-up to active duty of some of our state's NG or reserve units.

What documentation should we request of customers regarding their call-up? I don't know the proper military terminology, but would we require a copy of their call-up orders or what other document?

Second, how can a bank be sure when the customer goes off active duty? I remember during the Gulf War that some did notify the bank, but most did not. After about 6 months we just went ahead and raised the rates back to contract rates and never heard anything negative from any of them - - although I was a little uncomfortable with that because troops were in Saudi Arabia for some time after actual fighting ceased. The end of this war may not come as soon as the Gulf War or be as readily or decisively recognizable.

[This message has been edited by Ken Holmes (edited 09-18-2001).]

Ken, I have also been researching this Act. What I found is that service members are required to notify their lenders in writing if they want to have their interest rates reduced to 6 percent or less. They must include in their notification to the lender some proof of their activitation or mobilization such as military orders or other similar documents. They must also provide documentation of the fact that their military income is lower than their previous civilian income by supplying pay slips or income statements. An interest rate reduction obtained under the SSCRA is not permanent and once their active duty term has ended, the service member is supposed to notify their creditors of their release from active duty and the higher interest rate in effect before their activation can then be reinstated. Kirchman's BOB has a short article on this act. Besides the links here at Bankers Online, I also found some good information at: http://www.defenselink.mil/specials/Relief_Act/index.html
I hope this helps.

A Web site for members of the military service provided by the American Forces Information Service says:

"Service members should notify their credit card companies or mortgage lenders in writing of their intent to invoke the 6 percent interest cap. Notification must include proof of mobilization/activation to active-duty
status, as well as documentation of reduced income, such as a leave and earnings statement."

If the individual enlists in the military (rather than being a reservist who is called up to active duty), they can provide the documents that demonstrate their formal entry into the service.

If you haven't already seen it, I urge you to read our article Understanding the Soldiers' and Sailors' Civil Relief Act". I think you will find it to be a very useful training tool.

FYI, a copy of their orders should always be available. They'll have plenty of them or surely one you can copy and it tells you when they're called to active duty.

It doesn't matter that they leave the area or go do anything, just to be called to active duty. That puts them on the military pay system and possibly on a reduced income. They may be doing service in your town, depending on what their mission is.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

With regard to when you can raise the rate back to its former level:

The copy of their orders that Andy refers to should indicate the duration of the orders. I'm telling our loan operations to set a tickler for that date and when that date arrives we conduct a follow-up to determine if the orders have been extended. If so, put a new tickler date. If not, we will process the rate increase at that time.

On a related point, I have a question:
SSCRA in refering to the rate cap is silent about the issue of reamortizing the loan on the basis of the new rate and lowering the payment amount. Obviously, if the intent is to help the service member meet their obligations on lower wages, this would make sense, but is it required? Would a service member's request to reduce the rate but leave the payment the same be evidence that there is no material impact on their ability to repay?

I think that's a great point, Jim. One of our lenders was asking today about reworking the loan. My first thought was no, but if all we do is reduce the rate is that really helping the customer? Is there any guidance on this? Thank you.

The section which mandates the 6% interest (Section 526) does not speak to the reamortization issue, but it would seem to make sense that the payment amount should be reduced because without a reduction, the burden on the serviceperson is not impacted in an immediate way.

I received another question via email that I answered. Thought it might be of interest to others, so I am copying and pasting it here:

QUESTION:
Could you please clarify when the timing begins for notes subject to the 6% rate? I was not clear after reading your article and then looking up the Act.

Section 516 of the Act states that the military personnel are "entitled to the relief and benefits accorded persons in military service under Articles I, II, and III of this Act during the period beginning on the date of receipt of such order (to report for induction) and ending on the date upon which such person reports for induction." The 6% rate is under Article II in Section
526.

Is this saying that only notes granted after receipt of the order to report and the time that the person actually reports for
service are granted the benefit of the 6% rate, or are all notes granted before induction subject to it?

ANSWER:
Under the SSCRA, the timing applies as follows:

-- as to debt incurred by someone in the reserves, the reduction to 6% becomes effective when the individual is called up to active duty and remains in force until the active duty status is terminated.

-- as to debt incurred by someone in the regular service, only pre-service debt is affected, and the servicemember is entitled to the reduction to 6% effective as of the time they enter the military service. Only promissory notes entered into before their induction will be affected. Debt incurred by the servicemember DURING the period of military service will continue to bear the stated contract rate.

[This message has been edited by Mary Beth Guard (edited 09-19-2001).]

As I was reading through the various articles, I noticed that they stated the interest rate reduction applies only on mortgages and credit card debt. Did I read that correctly? So this would not apply to someone who has a car loan or debt consolidation loan, etc.?

It's not just credit card or mortgage debt. The operation section of the law, Section 526, reads as follows:

" No obligation or liability bearing interest at a rate in excess of 6 percent per year incurred by a person in military service before that person's entry into that service shall, during any part of the period of military service, bear interest at a rate in
excess of 6 percent per year unless, in the opinion of the court,upon application thereto by the obligee, the ability of such person
in military service to pay interest upon such obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of such service, in which case the court may make such order as in its opinion may be just. As used in this section the term "interest" includes service charges,
renewal charges, fees, or any other charges (except bona fide insurance) in respect of such obligation or liability."

According to Sec. 526 Maximum rate of interest -

No obligation or liability bearing interest at a rate in excess of 6 percent per year incurred by a person in military service before that person's entry into that service shall, during any part of the period of military service, bear interest at a rate in excess of 6 percent per year, unless in the opinion of the court, ....

I interpret this to mean ALL obligations. The references to credit cards and mortagages were just examples of the types of obligations afforded this protection.

Mary Beth, correct me if I'm wrong, but we should also expect this Act to include guarantors?

Similar to the way bankruptcy stays protect others on the debt, the SSCRA will as well.

If GI Joe is protected, he doesn't have to worry about some of these financial matters when he is in his fox hole. If mom and dad or his wife, etc. was suffering because they were on the debt, he'd be worrying again and that is what the Act is trying to prevent.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Dean,

Andy's point is correct. Section 513 of the Act extends the stay against certain types of actions to certain third parties, such as sureties, guarantors, endorsers, accommodation makers and others. (See my SSCRA article for details about how they're protected and under what conditions they could waive the protection.)

Does anyone know off the top of their head if SBA guaranteed loans are subject to the Section 526 six percent rate provision? I've read that guaranteed student loans are not.

If there's no response to this by Sunday, I'll do the research and post what I find.

The only exception I have seen is that the SSCRA does not apply to GSLs. Many military Web sites are putting up info now. Here is one of the better cites.

"One exception is the Higher Education Act, 20 U.S.C. 1078(d). It states that no provision of any law which limits the interest rate on a loan shall apply to the
Government Student Loan (GSL) program. Thus, the SSCRA 6% interest cap does not apply to GSL loans. In addition, it is the Office of the Judge Advocate General’s position that the SSCRA 6% interest cap does not apply to non-commercial obligations and liabilities such as a property settlement with a former spouse."

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

I came across an article on the ABA web site today that I found helpful. It is not very long and is in a Q&A format. You can go to www.aba.com, click on Compliance Center and it is in the Members Only section. The article is titled "Handling Loans Under the Military Relief Act." I wasn't sure how to do the link.

The exact URL Angela is referencing is http://207.19.80.4/Members+Only/Regulatory/ss_civil_relief_act.htm , but it is Members Only.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Mary Beth, please clarify a point you made above in regards to guarantors. Am I correct in concluding that guarantors of corporate or partnership loans are subject to the stay provisions, but that they do not trigger Section 526 (6% loans)? Your article says this:

"This section [526?] only has application if the serviceperson is personally obligated. If it is corporate or partnership debt, unless the serviceperson has personally guaranteed it, this section will not apply."

Am I reading you correctly on these points? Thanks!

SBA loans. I promised an answer whether SBA loans are covered by SSCRA. Yes, it appears they are.

My sources were:
SBA Policy Notice No. 6000-742, dated 09-23-99
SBA General Counsel's Opinion Digest No. 161 dated 06-01-99, (opinion 201)

Two things worthy of note:

1. The policy notice contains some additional relief enacted in 1999 for SBA borrowers where an "essential employee" is called-up to active duty. Better consult the notice or SBA for more details.

2. The opinion interestingly deals with a loan where the serviceperson was a co-obligor when the loan was made. But after the loan was made, the obligors created a formal partnership to run the business. [It looks like the loan was not re-written to the partnership.] The GC opined that the rate could nevertheless be reduced to 6%, overrruling an SBA field office which denied the rate adjustment. So I guess we should look to the status of the serviceperson at the time the loan was made for Section 526 eligibility, rather than any changed legal status.

The SSCRA's stay provisions will not take effect unless a serviceperson is either a primary or secondary obligor.

So, if you have a debt owed by a serviceperson, with or without others on the loan, the stay will apply.

Or, if you have a debt owed by someone (or something, like a corporation) and it is guaranteed by the serviceperson, the stay will apply.

If, however, you have a debt to an entity, such as a corporation or partnership, and a serviceperson is not primarily obligated as a co-borrower, and is not secondarily obligated, such as in the role of a guarantor, the stay provisions should not be applicable.

For answers to more SSCRA questions, we've posted a second article:

Q&As on SSCRA.

It speaks to some of the issues already addressed here, and brings up some additional issues not previously mentioned in Bankers' Threads.

Couple of points to add to all the good info above:
1. The 6% loan rate cap includes late charges and other fees, so need ways to ensure they aren't inappropriately charged -- waivers, turning off those parts of loan systems, etc.
2. Re: kinds of loans covered: we think brokerage account margin loans are, too
3. Variable rate loans should get a ceiling (as opposed to a fixed rate of 6%)
4. Re: reamortizing loans & reducing payments, we're "defaulting" to that as the right thing to do, and in the spirit of the law -- but giving customers the option to keep payments at current amount if they wish (for ex., to get the loan paid sooner).

Maybe my local channel got it wrong, but the newscast tonight said that there was good news for homeowners. HUD was envoking a World War II era law that reduced homeowners interest rates to 6% if they were going into the service or being called up. Now isn't that nice of them to do that.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Well I saw a similar piece on ABC this morning.

They make it sound like this is a government benefit, which is partially true. They don't say anything about, "the lender has to..." or indicate that the lender is the one taking the action and reducing income.

Based on the way it was presented, some people will assume that the government is making up that difference.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Maybe the newscast was prompted by a joint HUD/DOD 9/24 news release (HUD No. 01-083) about SSCRA.

The release also includes this paragraph:

"In addition to the mortgage rate reduction and expanded foreclosure protection, (HUD Sec'y) Martinez is taking the extraordinary step of encouraging mortgage lenders to postpone principal payments for all servicemen and women during their activation and three months thereafter."

Ken Holmes mentioned the SBA program that has been available. It allowed small businesses to apply for economic injury loan assistance beginning on the date an essential employee is ordered to active duty and ending on the date 90 days after the essential employee is discharged or released from active duty.

The SBA says the program applies to military conflicts occurring or ending on or after March 24, 1999 (the current conflict, since it's just beginning, would certainly be ending after March 24, 1999), and small businesses that meet all the other eligibility requirements have until November 24, 2001 to apply.

The SBA Fact Sheet states that the purpose of the Military Reservist economic injury disaster loan program (MREIDL) is to provide funds to eligible small businesses to meet its ordinary and necessary operating expenses
that it could have met, but is unable to meet, because an essential employee was "called-up" to active duty in their role as a military reservist.

Access the Fact Sheet here.

[This message has been edited by Mary Beth Guard (edited 09-25-2001).]