The impact that active military service can have on the lives and livelihoods of service members is well documented. The dangers, rigors and stresses of active military service are all too often accompanied by a host of social, psychological and financial stress points that can make maintaining – and returning to – a civilian life both more complex and challenging than necessary.
It was with the understanding of just how daunting those challenges can be that Congress first passed the Servicemembers Civil Relief Act (SCRA), a federal law outlining a number of civil and financial protections for our men and women in uniform. Although the current version of the SCRA was originally passed in 1940 and has subsequently undergone a number of revisions over the years, the origins of the law actually extend back as far as the Civil War, when Union soldiers benefited from a wartime moratorium on civil proceedings, including divorce, bankruptcy and foreclosure.
Formerly known as the Soldiers and Sailors Civil Relief Act, the extensive history of this legislation is a testament to the degree to which the everyday issues facing soldiers resonate strongly with the U.S. government and the American people, and reflects a general willingness to balance the civil and financial rights and responsibilities of a group of people whose lives may be disrupted to the point where it becomes extraordinarily difficult to fulfill their everyday obligations on the homefront.
Today, the SCRA temporarily protects active-duty or deployed service members – and, to some degree, their immediate family members – from legal obligations relating to mortgage payments, credit card debt, unpaid taxes, lease terminations, civil trials and a whole host of other civil and financial responsibilities.
In today's current environment, with two wars being fought and an extended economic recession that has helped elevate foreclosures and default-related issues to the forefront of the national consciousness, the issues raised by the SCRA are both relevant and topical. With more people on active duty, more people being deployed and more people staying in the military for longer periods of time, the number of active service members has spiked, and it has become abundantly clear that addressing the special circumstances faced by active members of the military is perhaps more important than ever.
For lenders, the SCRA presents a host of complicated issues that must be handled with tact, forethought and careful consideration for the best interests of both the lending institution and the service member/borrower who is likely putting his or her life on the line. The creditor who ignores this legislation could end up paying the military member's damages, attorney fees and costs, and punitive damages.
The implications of the SCRA for lenders center on four primary issues: interest-rate reduction, mortgage protection, judicial default protection and judicial stays. Despite the enduring legacy of the SCRA and other similar legislation, the precise details of the law are often not well understood, and a number of myths and misunderstandings have muddied the waters, creating unnecessary confusion.
While the general thrust of the SCRA remains clear, many lenders are uncertain about some of the details surrounding issues such as eligibility, process and enforcement. Taking a closer look at these four main areas of interest to the mortgage banking industry is an important first step toward not only better understanding the SCRA, but also ensuring that the legislation functions as it is intended.
One of the most talked about components of SCRA is the statute's interest-rate ‘cap.’ The SCRA mandates that once a borrower enters into the military, the borrower have the right to contact his or her lender and inform the lender that the borrower is now eligible for the SCRA interest-rate reduction. Ironically, in today's low-interest-rate climate, what was once frequently a reduction to the statute's mandated 6% fixed interest rate seems like less of a bargain. Although less impactful currently, this part of the law can still be a significant help to some active service-member borrowers with older mortgages that may have higher interest rates in the 9% to 11% range.
In rare cases, lenders that misunderstood the law have mistakenly used a request for an interest-rate reduction as a basis for introducing a negative mark in the borrower's credit history, or have made an attempt to charge the borrower back interest. While rare, these actions are legally indefensible, have resulted in hefty lawsuits against creditors and should obviously be avoided.
The SCRA provides that a court may grant a creditor relief from the rate cap. Service members are only entitled to that cap if they meet two important criteria: The service members must have entered into the debt before their military service began, and the service members' ability to meet their financial obligations has subsequently been ‘materially affected’ by the circumstances of active duty. This section of the SCRA is centered on the notion that the borrowers' ability to pay has been adversely impacted by their getting called into service.
Under the terms of the SCRA, active service members who obtained a mortgage before they entered active military service are protected from foreclosure. Such a member is protected from nonjudicial foreclosures. In addition, a service member in this situation may apply under this provision for a stay of proceedings or apply to the court to ‘adjust the obligation to preserve the interest of all parties.’ Thus, a court could alter the terms of the note and mortgage. It is important to note that this debt is not forgiven and must ultimately be repaid.
Protection from default
This is an area that can cause confusion for a lender. In all civil cases, foreclosure-related or otherwise – service members are protected from civil judgments if they fail to appear in those actions. The provision of the SCRA applies, regardless of when the service member entered service relative to the debt. In such a case, the creditor must apply to the court to have the court appoint an attorney to ascertain whether or not the service member has a defense to the action.
The SCRA has no provisions with respect to paying the attorney. However, several cases have said the intent of the law is that such attorney should be willing to perform this service on a pro-bono basis out of a sense of patriotism. Creditors should not voluntarily pay attorneys who have been appointed by the court.
Stay on judicial proceedings
The portions of the SCRA dealing with stays on judicial proceedings are also frequently misunderstood or misinterpreted. One pervasive myth is the idea that if a lender finds out that a debtor is in the armed services, the lender is unable to commence an action against the debtor. This is not entirely true; the reality is much more complex.
Although many lenders may choose to have a policy to the contrary, they can commence an action against an active military member. The member may apply for a stay once the action has been commenced. Just claiming active military status is, in and of itself, not enough to get a stay. The service member must inform the court, propose a more amenable schedule when he or she will be able to appear and must provide a letter from his or her commander supporting the assertion.
Determining eligibility accurately, efficiently and consistently is an important part of ensuring that the SCRA functions as intended, as well as in preventing abuse. The SCRA applies to all active-duty service members and active-duty reservists and National Guard members beginning when they receive orders and concluding shortly after discharge (currently 90 days) from that duty. Reservists and National Guard members who are not on active duty do not qualify. For lenders, verifying eligibility can seem like a formidable headache, but the process is usually as simple as plugging a date of birth and Social Security number into a Department of Defense database.
While the SCRA provides straightforward, black-and-white provisions describing what, who, when and how service members are protected under the law, many lenders also carefully consider both the moral and public relations implications of foreclosing on an active-duty borrower.
Whether out of sympathy, patriotism or even just fear of negative publicity, some lenders are, perhaps understandably, less likely to pursue aggressive action against an active-duty service member. At the same time, however, while lenders are generally aware of and sympathetic to the plight of active-duty service members regarding their civil and financial obligations, the protections from default are significant and can be abused. In some states, for example, a defaulting borrower's failure to show for a hearing requires the lender to draft a motion to proceed.
For the most part, however, lenders that pay close attention to the details of this important law and that take the initiative to establish and maintain clear, effective and efficient lines of communication with service-member borrowers will find that they themselves are also protected. Taking the time to understand both the law and the people for whom the law is designed to protect can help ensure that the SCRA works as it is intended and does not become a costly and unnecessarily punitive drain on resources.
Jeffrey M. Knickerbocker is a managing attorney at Hartford, Conn.-based Hunt Leibert Jacobson and a lieutenant colonel in the Connecticut Air National Guard. Hunt Leibert provides legal representation in finance-, foreclosure-, bankruptcy- and mortgage-related litigation in both state and federal courts. Knickerbocker can be reached at (860) 241-1621 or firstname.lastname@example.org.