The federal Servicemembers Civil Relief Act (SCRA) has come back into prominence as the country welcomes home veterans from two wars against the backdrop of the foreclosure crisis. The purpose of the SCRA is to strengthen the protections afforded to those serving in the U.S. Armed Forces so that they may “devote their entire energy to the defense needs of the nation.”
The law provides members of the military in active service with protection regarding a wide range of financial matters including repossession, eviction, early lease termination, taxation and insurance. It also provides relief from installment and cellular phone contracts and stipulates interest rate ceilings for members of the military. The SCRA applies in every state and territory of the U.S. and to all civil and administrative proceedings in federal, state or municipal venues. It does not apply, however, to criminal proceedings.
The Department of Justice (DOJ) Civil Rights Division and the Consumer Financial Protection Bureau Office have both stepped up SCRA investigations and enforcement actions against the financial services industry in the past year. SCRA compliance was also a feature of the recent landmark settlement between the DOJ and the country’s five leading mortgage servicers and lenders.
As part of the settlement, lenders and servicers will hire an independent consultant to review SCRA compliance. Failure to comply will lead to an award to borrowers of at least $116,785, plus lost equity and interest. There are also two pending class action lawsuits alleging lenders failed to comply with the SCRA.
With so much attention being paid to SCRA compliance, and the potential penalties at stake, this is a significant area of current liability for the financial services industry. It is therefore important for all financial services companies to review and assess SCRA compliance when pursuing actions against delinquent borrowers who may be active military personnel.
The main step in this process is to put in place procedures to determine whether a delinquent borrower is in active service with the military. The Department of Defense (DOD) provides access to a database, the Defense Manpower Data Center, for creditors to use in verifying the status of an applicant. Additional information can also be requested in writing from the applicable military branch.
Because the database may not provide complete information, creditors should also use other means to verify a borrower’s military status, such as requesting a copy of the borrower’s military orders. Additional verification techniques include requesting a copy of the Servicemember’s military orders, or including verification of a Servicemember borrower’s status when affecting service of process. It is important to note that most servicers now require preservation of the DMDC search results as part of a best practice for compliance. We also recommend preserving both the input and results pages for each DMDC search.
Once a borrower’s active military status is verified, creditors should ensure they follow the SCRA as they pursue any action, such as assessing penalties, foreclosure and initiating court proceedings. Another issue to keep in mind is when a Servicemember borrower submits active duty orders, he or she may be entitled to an interest rate reduction to 6 percent on the obligation for the period of active service plus one year. This reduction includes a waiver of service charges, late fees and renewal charges. The Servicemember borrower has 180 days following the period of active service to submit orders and the lender must apply the interest rate reduction retroactively.
Additionally, procedural protections include limitations on default judgments against Servicemembers and an expanded ability to vacate default judgments stays of civil and administrative proceedings, and tolling of civil statutes of limitations.
SCRA compliance scrutiny is not going away. In fact, with the country’s continued involvement in military conflict and a struggling economy, the financial services industry will be open to liability for some time. For this reason, it is important to put in place effective SCRA compliance procedures.