Banking in the Ninth

Servicemembers Civil Relief Act

Consumer Affairs Update - December 2011

Published December 1, 2011  | December 2011 issue

Under the Servicemembers Civil Relief Act (SCRA), lenders must provide certain lending-related accommodations for members of the armed forces. The law’s primary provisions are:

  • Interest rate reduction. Upon receiving written notice and a copy of an individual’s military orders, a bank must reduce an existing loan’s interest rate to 6 percent during the period of military service. For mortgage loans, the reduced interest rate is extended for one year after military service.
  • Foreclosure limitations. A lender may not foreclose on a service member’s real property during military service and the nine months thereafter without a court order or written agreement of the service member. The rule applies to property owned prior to military service. Failing to comply with this requirement voids the sale or foreclosure.

Failing to include a loan’s service charges, renewal charges and fees when calculating the maximum rate of 6 percent is a common SCRA error. In addition, banks need to remember to forgive rather than defer interest above the 6 percent threshold. Although many banks reduce the interest rate, they often fail to reduce the corresponding periodic payment amount by the amount of the forgiven interest.

An institution can protect itself from violating the SCRA’s foreclosure limitations by confirming prior to initiating foreclosure proceedings that the borrower is not on active military duty. The Department of Defense’s Manpower Data Center provides a website that financial institutions can use for confirming a borrower’s current military status. Access the data center here.

The bottom line for lenders: Appropriate controls and procedures are critical for ensuring compliance with SCRA’s requirements given the rule’s complexities.

We encourage you to review the following additional SCRA-related guidance: