Aug 22, 2019

Lending within the bounds of the Servicemembers Civil Relief Act

In 2003, Congress enacted the Servicemembers Civil Relief Act (SCRA), which was an extension and update to the Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA). The purpose of the law is to ease financial burdens on servicemembers for existing debt when they are called onto active duty.[1] Similarly, “[t]he [SCRA] must be read with an eye friendly to those who dropped their affairs to answer their country’s call.” LeMaistre v. Leffers, 333 U.S. 1, 6 (1948). Military Service, the term applicable to those covered by the SCRA, encompasses the following:

  • Full-time active duty members of the five branches of the military;
  • Reservists on federal active duty; and,
  • Members of the National Guard on federal orders for more than 30 days.[2]

According to the Civil Rights Division of the Department of Justice, which has the authority to enforce the SCRA, there are five common protections which creditors should be particularly aware of.[3]

1. Six percent interest cap
The SCRA places a limit on some financial obligations incurred before Military Service, such as credit cards, mortgages and federally guaranteed student loans, to no more than 6% per year.[4] However, the 6% cap does not apply to debts incurred after entry into military service.[5] In the event a creditor charges more than 6%, they must forgive any interest greater than the 6% threshold, retroactive from the effective date of Military Service.[6] In addition, a creditor is prohibited from altering any terms or adding fees to adjust for the 6% statutory rate limit. To be entitled this protection, the servicemember must provide the creditor with written notice and a copy of the servicemember’s orders within 180 days of the end of Military Service.[7]

2. Default judgment protection
Typically, default judgment issues arise in foreclosure proceedings, though they are applicable in other civil lawsuits, including child custody disputes. Before default judgment can be entered against a defendant servicemember who fails to make an appearance, a plaintiff creditor must file an affidavit with the court stating one of the following: (1) the defendant is in military service; (2) the defendant is not in military service; or (3) the creditor is unable to determine whether the defendant is in military service after making a good-faith effort to determine the defendant’s military service status.[8]

If it appears to the court that a servicemember is in Military Service, a court may only enter a default judgment after it has appointed an attorney to represent the servicemember.[9] In addition, if the appointed attorney cannot reach the servicemember, then the court must stay the proceedings for at least 90 days and any actions by the attorney do not waive the legal rights of the servicemember.[10]

3. Non-judicial foreclosure protection
The SCRA provides some protection for servicemembers who incurred an obligation on real or personal property before he or she entered military service.[11] Because state law governs how a foreclosure happens within its own borders, the SCRA requires a party, in a state that may allow non-judicial foreclosures, to obtain a court order before they may foreclose on a mortgage.[12] This section applies to the term of Military Service plus one year. In addition, a knowing violation of this section of the SCRA can result in fines or imprisonment for up to one year.[13]

4. Installment loan repossession
The SCRA prohibits anyone who has taken a partial payment or collected a deposit on an installment contract from repossessing property, canceling a sale, lease, or bailment, because of the failure to meet the terms of the contract, if the buyer enters Military Service after making the deposit or payment and then breaches the contract, unless the enforcing party has obtained a court order.[14]

5. Residential leases and evictions
The SCRA states that unless there is a court order to the contrary, a landlord or person with “paramount title” may not evict a servicemember or their dependents from a rented home if the rent is less than the maximum rate set by the Secretary of Defense.[15] Similarly, servicemembers are typically allowed to terminate a lease early if they receive military orders requiring them to permanently change stations or deploy for at least 90 days.[16] The types of leases covered by this section of the SCRA include dwelling, professional, businesses, farm use, or other similar uses. In addition to applying to obligations incurred before service, this section also applies to servicemembers who incur the obligation while on Military Service but who receive orders as mentioned above.

Lending to servicemembers within the confines of SCRA is not overly burdensome, but it does rightfully vest servicemembers with extra protections that may not be available to typical borrowers. In general, the SCRA only applies when pre-Military Service obligations are impacted by a subsequent Military Service period. While the statute does not distinguish between consumer and commercial transactions, Section 4026(a)(1) may extend protection to the servicemember for commercial loans where the servicemember may be personally liable. [17]

To that end, it is important for a creditor to identify the military status of any borrowers to determine if SCRA protections are triggered. Whether or not the loan obligation was incurred pre or post Military Service is also relevant under the SCRA. Navigating litigation within SCRA, however, is manageable. Judgments and orders can be obtained just as in any other case, with the understanding that the SCRA creates certain safeguards for servicemembers. One important note, however, pursuant to the SCRA, judges are given very wide latitude to craft arrangements, modify judgments, including total revocation, and even alter contract provisions to ensure that a servicemember is not negatively impacted by their Military Service.[18] Similarly, if the servicemember is awarded a stay by a judge, no penalty can accrue during the stay period.[19]

If you are interested in learning more about the Servicemembers Civil Relief Act or have any questions about navigating the facets of lending, contact one of Chuhak & Tecson’s experienced Banking attorneys.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert co-authored by: Francisco Connell, Principal and Zachary Beaver, Associate

[1] The SCRA only applies to debt which existed before the servicemember went onto active duty. For instances where a servicemember is on active duty and then incurs a debt obligation, the Military Lending Act (“MLA”) is typically more relevant. 50 U.S.C. §§ 3901-4043

[2] In addition to the three classes of servicemembers listed, those absent from duty for a lawful reason, sickness, or injury, as well as officers of the Public Health Service (“PHS”) and National Oceanic and Atmospheric Administration (“NOAA”) are also covered by the SCRA. 50 U.S.C §. 3911(2)(B)-(C).

[3] The Department of Justice is statutorily entrusted with the authority to bring SCRA suits and the Attorney General has the authority to seek civil penalties and monetary damages on behalf of servicemembers. 50 U.S.C. § 4041(b). The statute and the courts entitle a servicemember to a private right of action. 50 U.S.C. § 4042; see  Moll v. Ford Consumer Finance Company, Inc., 1998 WL 142411 (N.D. Ill. 1998) (holding a private action could be brought under SCRA if the 4-part Ash Test, promulgated in Cort v. Ash, 422 U.S. 66 (1975), had been satisfied).

[4] 50 U.S.C. § 3937(a)(1).

[5] Pub. L. No. 109-364, § 670(a)

[6] 50 U.S.C. § 3937(a)(2).

[7] 50 U.S.C. § 3937(b)(1).

[8] 50 U.S.C. § 3931(b)(1).

[9] 50 U.S.C. § 3931(b)(2).

[10] 50 U.S.C. § 3931(b)(2).

[11] 50 U.S.C. § 3953(a)(1).

[12] 50 U.S.C. § 3953(a)(1).

[13] 50 U.S.C. § 3953(d).

[14] 50 U.S.C. § 3952.

[15] This rate is typically adjusted every year and in 2018 it was $3,716.73 per month. The rate is required to be published in the Federal Register.

[16] 50 U.S.C. § 3955.

[17] Federal courts have disagreed as to how to treat a servicemember’s business loans under the SCRA. See Newton v. Bank of McKenney, 2012 WL 1752407 (E.D. Virginia 2012) (holding the corporate entity was entitled to no protection but the individual servicemember behind the entity could only be personally liable for the 6% cap); see also Linscott v. Vector Aerospace , 2006 WL 1310511 (D. Ore. 2006); Fifth Third Bank v. Schoessler’s Supply Room, LLC, 190 Ohio App. 3d 1 (Ohio 2010) (holding even if the corporate entity is the only borrower but a servicemember formed and was intimately involved in the corporation, SCRA protection still applied).

[18] Courts may reduce or waive any fines for failing to adhere to a contract if the servicemember’s performance was hindered by their Military service. In addition, a court can, on its own motion, stay or vacate any judgment, or the execution thereof, for any action brought either before or during active service or within 90 days of termination of service. See 50 U.S.C. §§ 3933; 3934.

[19] Id.