SCRA Requirements for Lenders: A Compliance Guide

Lenders are legally required to honor the rights mandated by the Servicemembers Civil Relief Act (SCRA) to avoid paying hefty penalties. But what exactly are these rights? We’ll discuss pertinent details lenders should know before lending to active duty service members.

Understanding the Servicemembers Civil Relief Act (SCRA) for Lenders

Formerly the Sailors Civil Relief Act, the SCRA is a federal legislation that grants legal and financial protections to active duty service members. Select SCRA protections extend to these military members’ dependents. This law was created to ensure people working in the military can focus on their active service.

Because of the SCRA, military personnel from the Air Force or Marine Corps don’t have to worry about penalties incurred from breaking a lease to relocate for military duty.

In particular, SCRA protections include interest rate reduction for pre-service debt, foreclosure protection, deferred income taxes, protection from default judgment, eviction protection, termination of contracts without penalties, and the option to choose one’s tax domicile. 

Interest Rate Limit for Military Service

Lenders are required to impose an interest rate cap on pre-service debt of 6%. This interest rate reduction extends to vehicle title loans, credit card debts, car loans, business obligations, some student loans, and other debts, as well as fees, service charges, and renewal fees. 

This interest rate cap is imposed during a servicemember’s military service period. It extends to a year after one’s active duty period ends for mortgage loans.

It should be highlighted that lenders are required to forgive interest, not defer it. The lender can’t charge the service member the amount lessened during their active duty service period. This is why the interest rate reduction also applies to fees, renewal charges, service charges, and other charges, except for insurance.

On the other hand, the interest rate limit isn’t automatic. The service member must provide written notice of their request to have the interest rate lowered as well as proof they’re actively serving in a military unit.

Protection from Repossession

Lenders can’t repossess cars or other vehicles because the service member failed to pay installment charges. This is provided that they can’t make payment because of their military duties. Military personnel must have made at least one vehicle installment payment before entering active duty service.

Protection from repossession is automatic. That’s why it’s vital for lenders to verify one’s military status before repossession can commence.

This particular SCRA protection also applies to reservists who receive call-up orders. Moreover, service members are granted this protection even if they’re not physically in the continental United States.

Delaying Foreclosure

A service member can’t be foreclosed upon while serving on active duty and up to a year after the service period ends. This protection applies not only to mortgages but also to any financial obligations wherein property serves as collateral. This is provided that the service member entered that obligation before entering active duty.

Service members aren’t required to proactively request this particular SCRA benefit. This is why it’s the lender’s responsibility to verify a person’s active-duty status before foreclosing someone.

Immunity from Default Judgments

Lenders should not set out to get a default judgment against a military borrower without a military status affidavit, which verifies that the borrower isn’t on active duty service. Due diligence is required because of recent banking legal scandals that have prompted the courts to take oversight seriously.

The default judgment can only move forward if the court appoints a lawyer to represent their best interests. That lawyer can’t make agreements with military members who can’t be contacted.

Interestingly, while the court may assign an attorney, the SCRA doesn’t have funding for legal fees. If state legislation doesn’t provide compensation and a pro-bono attorney is available, it might be best for the lender to shoulder the attorney’s fees for the case to move forward.

Special Considerations for Garnishments and Judgments

Service members aren’t given automatic protection from judgments and garnishments. They must prove military service has materially affected their capacity to make payment. It isn’t challenging to provide evidence, but it is a requirement. As a result, courts may delay or vacate judgments against eligible individuals.

Military personnel and their dependents can’t be evicted while the former is on active duty, but that person must proactively request to activate their SCRA protections. Select high-rent properties aren’t included in this protection, and in cases like this, courts may mandate a lower rent obligation while the military member is on active duty.

Lenders aren’t permitted to retaliate against military clients who disclose their eligibility for SCRA protections. Moreover, they can’t refuse to sell insurance, change credit agreement terms, extend credit, or unfairly spoil military members’ credit reports.

When it comes to credit reports, some courts permit accurate reporting. However, if there’s a discrepancy about what’s correct and the court issues a judgment against a lender, the lender may have to pay fines and restitution. The safest route is not to report on active-duty military personnel. Lenders can’t even disclose that a borrower is covered by the SCRA.

Payment Deferral

Service members must proactively apply to defer payments to lenders while rendering active duty service or within 180 days of leaving active duty service. However, the service member must prove that their military service has materially affected their ability to make payment.

To prove one is materially affected by military service to make certain financial obligations, one must show evidence that military duties have substantially hindered them from making payment. For example, a person deployed to overseas duties may present their deployment orders.

SCRA Waiver Validity

Lenders can ask service members to sign an SCRA waiver, but they aren’t legally obligated to do so. Moreover, the lender must follow these rules:

• The waiver must have been signed during the service member’s active duty service period and not before entering active service.
• The waiver must have been signed after that person receives their notice to report for active duty.
• The waiver must have been written in a font size of at least 12.
• The waiver must have been separate from the main contract and not attached or included in its stipulations.

The Consequences of Noncompliance

Violating the SCRA does not warrant jail time. However, the consequences can be expensive if lenders are found guilty of not honoring SCRA rights. SCRA violations have prompted courts to order companies to pay hundreds of thousands of dollars in fines. While this amount may be trivial to big companies, small businesses might suffer from SCRA noncompliance. 

Tips to Verify Active Duty Service Members

Given how the Servicemembers Civil Relief Act can have substantial financial implications for lenders, it would only be wise to ensure that a person is eligible for SCRA protections. Here are some tips to verify a person’s active military service:

• Request for deployment orders or a letter from their commanding officer: The deployment order or letters should specify when that person entered active military service.
• Interview military members for consistency: Their answers should match their military documentation. A legitimate service member would know their deployment orders like the back of their hand.
• Verify a person’s military status with a third-party service like SCRACVS: SCRACVS can secure evidence of a person’s military status as quickly as one business day.

Conclusion

Military service is both an honor and a privilege. It would only be wise for lenders to do some due diligence before granting individuals SCRA benefits. SCRACVS can help lenders verify if someone is indeed eligible for SCRA protections. Click here to sign up at SCRAVS and verify active duty status.

FAQs

What are the requirements for SCRA notice?

An SCRA notice must include that person’s military orders or a letter from a commanding officer verifying their service. It must specify which SCRA benefit is being requested. Lastly, a person’s military service must be proven.

What are lenders permitted to do under SCRA?

The SCRA allows lenders to request that a service member present proof that they’re eligible for SCRA protections. The lender can also verify if a person is eligible for SCRA rights by directly contacting a person’s military base or using a third-party service like SCRACVS.

What documents are required for SCRA?

The military member must present proof they’re eligible for SCRA protections. This proof can be their deployment orders or a letter from their commander stating they’re eligible for SCRA protections. Select SCRA rights mandate that military members proactively request that their SCRA benefits be honored. A letter must be provided to the lender explicitly stating which particular SCRA benefit they’d like to activate.

What happens if a lender fails to comply with SCRA requirements?

Lenders who don’t comply with SCRA requirements may face steep financial repercussions. The court decides the amount depending on the severity of the situation.

Can lenders garnish a servicemember’s wages while they’re on active duty?

Yes, a lender is permitted to garnish a service member’s wages. However, the garnishment may be deferred if it can be proven that military service has materially affected a military member’s ability to make payments.