Regulators have raised some questions in recent exams about the Servicemembers' Civil Relief Act and the Military Lending Act. This article summarizes some of the things your bank should already be doing along with some recent developments.
Existing Law. Beginning as a federal effort to protect soldiers from deteriorating financial circumstances while at war, the SCRA has evolved to include caps on some interest rates and protections from things like foreclosures, repossessions, evictions, and default judgments while a servicemember is on active duty. Enacted in 2007, the Military Lending Act sought to protect servicemembers from certain high interest rate loans. Some of the particular provisions of these laws that may apply to your bank follow:
- 6% Interest Rate Cap. For debt incurred prior to active duty, interest rates on all debt are capped at 6% during the period of active duty. Interest above the cap is not deferred, it is forgiven. The interest rate reduction applies equally to debts of the servicemember and joint debts with the servicemember's spouse. The cap applies to all debt including mortgages, installment loans, credit cards, HELOCs and even student loans. For a mortgage or deed of trust, the rate cap extends for one year following the end of active duty.
- Repossession, Foreclosure, and Collection. Without a court order, repossessions and foreclosures are almost always prohibited when a borrower is on active duty. An attempted repossession or foreclosure in violation of the SCRA is void and can result in criminal penalties. The protection against foreclosure of a mortgage or deed of trust extends for 12 months after a servicemember returns from active duty (reverts to 9 months on 1/1/16). Protection also extends to termination of installment contracts for the purchase or lease of personal property entered into prior to active duty. As a result, some examiners have questioned whether banks incorporate SCRA compliance into their safe deposit box policies and procedures.
- Litigation. A court may stay any action in which a servicemember is a plaintiff or defendant, and such a stay may also apply to things like executions of judgments and garnishments. Default judgments are generally unavailable against a servicemember in military service. Also, time in military service is usually excluded from the calculation of statutes of limitations.
- "Consumer Credit." The Military Lending Act protects "covered borrowers" in "consumer credit" transactions. A "covered borrower" is a person who is on active duty at the time of becoming obligated to repay consumer credit, as well as that person's spouse and dependents. In general, "consumer credit" includes most payday loans (closed-end credit of $2000 or less with a term of 91 days or less), vehicle title loans (vehicle secured, non-purchase money, closed-end credit with a term of 181 days or less), and tax refund anticipation loans (closed-end credit where the borrower agrees to pay an income tax refund to the lender). The following applies when consumer credit is extended to a covered borrower.
- MAPR. The Military Annual Percentage Rate, or MAPR, is capped at 36% for consumer credit to "covered borrowers. MAPR is a broader calculation than finance charges or APR under Regulation Z and includes credit insurance premiums, fees for credit-related ancillary products, and some other fees.
- Particular Disclosures. The MAPR must be disclosed together with the total of all charges included in the MAPR. A specific disclosure regarding rights under the SCRA must be provided verbally and in writing in addition to Regulation Z disclosures.
- Prohibited Terms. Several terms are prohibited, including mandatory arbitration, prepayment penalties, and waivers of rights under the SCRA. Rollovers, renewals, refinancings, or consolidations by the same covered borrower and creditor are prohibited unless they result in more favorable terms to the borrower.
Practical Challenges. A central challenge for many banks is how to know which customers are protected. Some suggestions include:
- Lender Training. Make sure your lenders are trained. For example, your lenders should know what to do if a customer mentions that their spouse has been called to active duty.
- Create a Regular Process Before Collection. When a loan is in default, ask your customer if they or their spouse has been called to active duty. Consider including a statement on your collection correspondence directing your customer to contact you if they believe they are eligible for benefits under the SCRA.
- DOD Database. Use the Department of Defense's database to determine whether your customers have been called to active duty. Some banks periodically check their entire customer list in this database while other banks check particular customers on a case by case basis.
- Written Borrower Statement. When extending any type of loan that would be considered to be "consumer credit" as it is defined in the Military Lending Act, make sure the borrower certifies in writing whether the borrower is a "covered borrower."
Recent Developments. In January, HUD revised the SCRA notice required to be delivered to past due borrowers. The new form has an expiration date of 12/31/2017.
Also, in September 2014, the Department of Defense proposed regulations to expand the definition of "consumer credit" and to create a new safe harbor for determining whether a borrower is a "covered borrower."
- Consumer Credit. The definition of "consumer credit" and the overall application of the Military Lending Act is proposed to mirror more closely the types of loans subject to Regulation Z. For example, the proposed definition would include all forms of payday loans, vehicle loans, and tax refund anticipation loans (instead of only those on the particular terms in the current regulation), as well as loans such as installment loans, unsecured open-end lines of credit such as overdraft lines of credit, and credit cards (with some particular exceptions for credit cards). Residential mortgages and purchase money loans (such as loans for the purchase of an automobile) would remain outside the scope of "consumer credit."
- Safe Harbor. Under existing law, lenders can rely on a written statement from a borrower confirming whether the borrower is a "covered borrower." The proposals would require lenders to confirm a borrower's status on the Department of Defense database to benefit from the safe harbor.
Most banks have been careful to avoid making covered "consumer credit" loans under the existing rules because of the difficulty in calculating the MAPR and complying with the additional requirements. The proposed expansion of coverage could make that approach next to impossible. We will continue to monitor developments in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.