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Servicemembers Civil Relief Act: Provisions Affecting Banking Institutions
March 22, 2013
According to December 2012 data from the federal Bureau of Labor Statistics, the unemployment rate for Gulf War Era veterans, hovering around eight percent, remains higher than the national rate.  Over the last decade, more than 2.3 million Americans were deployed to military duty in Iraq, Afghanistan or both.  Of that total, more than 1 million have since left the military.  As these servicemembers return to their families and begin to seek jobs and new career paths, many encounter financial difficulties.  It is important to keep such factors in perspective when contemplating business issues related to the ethical and legal treatment of veterans.

In our previous article, we began exploring the types of protections the Servicemembers Civil Relief Act (“the Act”) provides to servicemembers. We examined how those protections affect you as you do business with servicemembers and their families, and we addressed issues that may arise in litigation with a servicemember. 
In this article, we will review other sections of the Act that affect you.  It is important to understand the protections afforded servicemembers by the Act because a knowing violation could result in civil or criminal penalties.  Any violation – even if unintentional – could result in reputational harm to your business. 

Here is a summary what you should know:

1.    Delays in Litigation and Execution of Judgments.  The Act requires courts to stay any action or the execution of any judgment against a servicemember for at least 90 days if the servicemember makes a motion requesting a stay.  Once an action is stayed, no penalty may accrue for failure to comply with the terms of the underlying contract during the period of the stay.  

2.    Reduced Default Penalties.  A court may reduce or waive any penalty or fine assessed by a bank against a servicemember for defaulting under a contract if (1) the servicemember was in military service at the time the penalty was incurred and (2) the ability of the servicemember to perform the obligation was materially affected by his or her military service.      

3.    Six Percent Interest Rate Limitation.  The Act limits the interest rate on all interest bearing obligations to 6% during military service and for one year thereafter.  This includes interest on mortgages, credit cards, auto loans, and any other type of lending.  For mortgages, deeds of trust, and other security in the nature of a mortgage, the Act extends this interest rate limitation through the year after military service, as well.  Interest that would otherwise be incurred during this time is forgiven, not deferred.  A court may grant a bank relief from the interest rate limitation if it finds the servicemember’s ability to pay a higher interest rate is not materially affected by his or her military service.   

4.    Limitations on Rescinding or Foreclosing on an Installment Contract for the Purchase of Real or Personal Property.  If a servicemember has entered into an installment contract for the purchase of real or personal property and breaches the terms of the contract before or during military service, the Act prohibits a bank from rescinding or terminating the contract or repossessing the property without a court order.  This prohibition applies only to contracts on which the servicemember has paid a deposit or installment before entering military service.      

5.    Special Provisions Relating to Mortgages and Trust Deeds.  In an action to enforce a mortgage or deed of trust against a servicemember, filed within nine months of his or her military service, the court may order that the amount of the servicemember’s equity in the property be paid to the servicemember as a condition of foreclosing the mortgage, repossessing the property, or rescinding or terminating the contract.  Additionally, if a financial institution sells, forecloses, or seizes property for breach of the obligation during or within nine months after the servicemember’s military service, the sale, foreclosure, or seizure will be invalid unless it was made under a court order or based on an agreement with the servicemember to waive the requirement for a court order.

By understanding these five provisions of the Act, your business will be better prepared to take the necessary, proactive measures when servicing the obligations owed by servicemembers.
Consumer Finance Brienne T. Marco