Ryan Labriola is a Manager in Treliant’s Regulatory Compliance & Risk Management service area, where he has worked on major projects involving some of the top banks and law firms in the country. Among those projects, Ryan recently assisted a Top 40 U.S. bank with a large-scale Servicemember Civil Relief…
Global events can always impact servicemembers and their families. For example, recent events in Ukraine resulted in the deployment of U.S. servicemembers to several NATO countries, including Poland, Germany, and other European countries. These new deployments serve as a reminder about the important protections U.S. laws afford to men and women in uniform.
While on the surface these issues do not appear to impact the financial services industry directly, the industry must remember that servicemembers have several rights afforded to them while on active duty both here and abroad. The laws passed to protect servicemembers from civil and financial issues are in place because of the great burden the country places on their shoulders, in times of both war and peace. The original protection afforded servicemembers is the Servicemembers Civil Relief Act (SCRA). The SCRA:
- Allows servicemembers on active duty to request interest rate relief on pre-service loan obligations, capping interest at 6%;
- Restricts the ability of financial institutions to foreclose on a servicemember’s home, evict servicemembers or their qualified dependents, repossess a servicemember’s vehicle, enter a default judgment against a servicemember, or drill a servicemember’s safe deposit box; and
- Permits servicemembers on active duty to cancel auto and residential leases (in some cases).
Along with SCRA, the Military Lending Act (MLA) caps what lenders may charge active duty servicemembers and their spouses and dependents, for covered loans to 36% “Military Annual Percentage Rate”(MAPR). (MAPR includes fees that are excluded from the annual percentage rate calculated under the Truth in Lending Act.) In addition, MLA requires lenders to provide oral and written disclosures, prohibits enforcement of arbitration agreements, and prohibits certain other terms.
Recent Government and Regulatory Interest in Servicemembers’ Rights
Federal regulators are increasingly interested in ensuring banks and other financial institutions comply with SCRA and MLA. In December 2021, the Consumer Financial Protection Bureau (CFPB) issued two joint letters with the Department of Justice (DOJ) to landlords and mortgage servicers reinforcing the various protections afforded military renters and homeowners (www.consumerfinance.gov/about-us/newsroom/cfpb-and-doj-put-landlords-and-mortgage-servicers-on-notice-about-servicemembers-and-veterans-rights/). The letters reiterated SCRA’s foreclosure and default judgment protections for pre-service mortgage obligations and residential lease cancellation and eviction protections. The letter to mortgage servicers even went so far as to remind recipients that the foreclosure protections are “a strict liability provision of the SCRA, and a person who knowingly violates these provisions may be fined and/or imprisoned for up to one year.” (See files.consumerfinance.gov/f/documents/cfpb_military-homeowner-protections_doj-servicer-letter_2021-12.pdf.)
In addition to these letters, on January 6, 2022, the CFPB joined the DOJ in issuing an amicus brief with the Fourth Circuit Court of Appeals in Davidson v. United Auto Credit Corporation, in which a servicemember sued his auto financing company for violating MLA. MLA and its implementing regulation exempt loans that are expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased (10 U.S.C. § 987(i) and 32 CFR 232.(f)(2)). The servicemember alleges, however, that the loan from United Auto did not qualify for this exemption because the loan was used to finance not only the purchase of the vehicle but three credit-related charges—guaranteed auto protection (GAP) insurance, a processing fee, and prepaid interest.
United Auto argues, and the District Court judge agreed, that the GAP insurance and other fees were directly connected to the auto purchase and therefore the loan was exempt from MLA. The servicemember has appealed the case, with the CFPB opining in favor of the servicemember, that “[l]enders cannot invoke the statute’s specific car loan exception and bypass its consumer protections when they choose to bundle standalone financial products into a loan. Hybrid loans that include financing for GAP coverage do not satisfy the car-loan exception to consumer credit.” (See files.consumerfinance.gov/f/documents/cfpb_davidson-v-united-auto-credit-corp_amicus-brief_2022-01.pdf.) While the appellate case has yet to be adjudicated, lenders should take note of the CFPB’s response to the District Court’s ruling.
- Be Prepared for Handling Servicemember Accounts
In light of the heightened regulatory interest in servicemembers’ rights, financial institutions should be prepared for handling new and existing servicemember accounts. Institutions should have processes in place for verifying the active duty status of loan applicants before originating a loan that might be covered by the MLA and subject to its disclosures and restrictions. For example, this could be done through active duty alerts on consumer reports from one of the three major credit bureaus or through the Department of Defense’s MLA Defense Manpower Data Center (DMDC). Financial institutions should ensure that they document the results of MLA searches and retain those records for the life of the loan, along with any communication they have with the borrower concerning MLA rights.
SCRA requires considerably more nuanced and continuous processes than MLA, and is often a high priority for financial institutions’ compliance and legal departments. While relatively short and to-the-point when compared to other consumer protection laws, SCRA is often challenging to operationalize. To maintain compliance with the letter and spirit of the law, consider the following best practices:
- Remember the key difference between benefits and protections.
SCRA can be divided into two distinct buckets of rights—benefits and protections.
Benefits are rights for which, to receive the prescribed benefit, the servicemember must provide notice or documentation to the financial institution. The interest rate relief provision that caps interest at 6% is one such benefit. The servicemember will not have their interest rate capped at 6% unless they provide the financial institution with a copy of their military orders (or other appropriate documentation) proving qualifying active duty service.
The other benefit under SCRA is lease cancellation for residential and auto properties. The servicemember must provide the lessor with a written notice of termination and a copy of their military orders, along with following procedures for return of the property, to receive this benefit.
Protections, on the other hand, are rights to which a servicemember is entitled without being required to provide notice or documentation—essentially, the burden of proof lies with the financial institution. Foreclosures, default judgments, repossessions, and enforcement of storage liens (e.g., safe deposit boxes) are all restricted actions against active duty servicemembers, and it is the responsibility of the financial institution to determine the active duty military status of the borrower or lessor before taking any of these actions.
- Service all requests for interest rate relief within 30 calendar days.
While not required by statute or regulation, it is a regulatory expectation and industry best practice that the financial institution will approve or deny a servicemember’s request for interest rate relief as quickly as possible upon receipt of military orders or other acceptable documentation. Communication is key—stay in contact with the servicemember throughout the review window to keep them informed of the status of their request. Financial institutions should also clearly communicate that the interest rate relief is retroactive to the applicable benefit period start date, and specifically communicate to the servicemember what amount of retroactive relief is being provided.
- Ensure processes and procedures clearly define active duty start date based upon service type.
One of the more confusing aspects of SCRA is the treatment of reservists and National Guardsmen as it relates to their eligibility for and start date of any interest rate relief. While on active duty, members of the Army, Navy, Air Force, Coast Guard, Space Force, and commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration are eligible for SCRA interest rate relief. National Guardsmen, however, are only eligible for SCRA interest rate relief if they are called to active duty (1) by order of the President of the United States, and (2) for a period greater than 30 days.
The application of the interest rate relief is another area of confusion. For all servicemembers except National Guardsmen and reservists that qualify for SCRA, the start date of the benefit is the date on which the servicemember reports for active duty. For National Guardsmen and reservists, however, the start date of the benefit is the date on which the servicemember receives the military orders, otherwise known as the notification date.
Understanding and operationalizing these nuances are critical to ensuring continued compliance with SCRA.
- Set a policy stating whether benefits are due if origination occurs after receipt of active duty orders but before reporting for duty.
SCRA is silent as it relates to a National Guardsman’s or reservist’s interim period between the notification date on the military orders and the actual active duty start date. Some view that any loan obligation taken out after the SCRA-determined start date (in this case, the notification date) is not eligible for SCRA since it is a post-service obligation. Others argue that military service starts on the date on which the servicemember reports for active duty, and therefore the interim period is considered pre-service, which makes a new loan obligation originated during that period eligible for SCRA.
While there has not been clear guidance on this issue from federal regulators, a best practice is to consult qualified attorneys to decide and then implement a process based upon that legal guidance, or to err on the side of the servicemember’s benefit and provide the interest rate relief. Whatever step the bank takes, it should be consistently applied across all eligible loans.
- Don’t forget the tail coverage periods.
SCRA not only gives servicemembers the opportunity to request interest rate relief, but also gives them additional time to request that relief. Servicemembers have 180 days from the end of active duty service to submit military orders to their financial institution and be qualified to receive interest rate relief retroactive to the date of entering active duty.
On the foreclosure side, a financial institution is prohibited from foreclosing upon a servicemember without a court order during the period of military service and one year thereafter. For storage liens (e.g., safe deposit boxes), servicemembers are protected during the period of military service and 90 days thereafter.
- Consider waiving fees associated with originated loans for servicemembers on active duty.
Once the interest rate relief is applied, financial institutions must remember that the 6% interest rate cap is not just on loan note interest—SCRA calculates interest as all interest and fees (except bona fide insurance premiums). Most financial institutions elect to waive fees associated with servicing the loan (e.g., late fees, overdraft fees, return payments, etc.) for the duration of the servicemember’s interest rate relief period. While not required, there is much less compliance risk when waiving the fees, since it is one less area in which a calculation error can lead to potential noncompliance.
- Ask the servicemember how they want to receive a refund to which they are entitled.
In the event that a servicemember submits qualifying military orders that require the financial institution to provide a refund for interest paid in excess of 6%, the financial institution should always ask the servicemember how they want to receive the funds. Some servicemembers elect to have the refund applied to the principal of the loan, while some choose to receive liquid funds. Regardless, the spirit of the law dictates the financial institution does what the service member prefers, and so the institution should ask servicemembers their preference.
- Have dedicated SCRA staff.
SCRA is a complicated, nuanced regulation. A best practice is to dedicate staff (commensurate with the SCRA risk profile of the organization) to handle all incoming SCRA interest rate relief requests. Reading the various types of military orders alone is a difficult process, so it is generally best to have specialized staff to handle or oversee these requests. Compliance and legal departments should also consider having specialized staff to help oversee monitoring efforts and advise the financial institution on key SCRA questions or issues as they arise.
Setting up a control environment to mitigate SCRA and MLA risk is only part of the compliance roadmap. Understanding the text and spirit of the laws allows control environments to be updated and augmented when new scenarios and questions come up, thus enhancing compliance. To sustain this level of compliance, financial institutions should focus especially on additional training, addressing any outstanding questions, and validating policies and processes in line with all applicable laws and regulations. Servicemembers’ rights continue to be a priority for federal regulators. The sacrifices made, both at home and abroad, warrant special consideration and rights be afforded to those who serve, and financial institutions must ensure that the needs of servicemembers are handled appropriately.
As Seen In: ABA Bank Compliance Magazine – May / June 2022 Issue