May 2011 ABA Staff Analysis: Servicemembers Civil Relief Act Compliance May 2011 Introduction: For nearly a century, Congress has provided special protections for servicemembers and their families. The primary vehicle to protect servicemembers from financial and legal distractions is the 1 Servicemembers Civil Relief Act (SCRA). Recent compliance failures have resulted in unprecedented focus on SCRA compliance by the Department of Justice, state attorneys general, and bank regulatory agencies. In addition, there has been a significant increase in media attention to these failures and an uptick in private litigation alleging SCRA failures. ABA encourages all financial institutions to review their SCRA policies, procedures, and system controls to ensure compliance with the important rights and obligations the SCRA affords our active duty military personnel. We offer the following history of the SCRA and questions and answers about SCRA compliance to assist bankers. History of the SCRA: The Soldiers' and Sailors' Civil Relief Act (the Act), originally enacted in 1918 as the United States was embroiled in World War I, was the precursor to the SCRA. The Act instituted many of the regulations that are central features of the modern law, including a stay of civil actions and a prohibition of foreclosures upon the homes of those on active duty. The Act expired six months after the end of World War I due to a sunset provision included in the initial draft, but in 1940, as conflicts throughout the globe again escalated into World War, Congress reenacted the Act’s protections and amended them in 1942. The protections in the original Act and its modern successor are intended to ensure, to the extent possible, that men and women in active duty military service are not disadvantaged by going into the service and do not suffer legal disadvantages because of their absence from their home jurisdictions. Equally important, the law is designed so financial concerns do not become a distraction from their ability to serve. In interpreting the SCRA, the United States Supreme Court has said that "the Act must be read with an eye friendly to those who drop their affairs to answer their country's call." That spirit of public service has motivated banks to comply willingly with the SCRA in the past, and should continue to do so during the current period of mobilization and sacrifice. 2 The Act remained largely unchanged from 1942 to 2003. Then in the wake of 9-11 – as wars against terrorism were waged in Afghanistan and Iraq – Congress revisited the Act, strengthening and modernizing some of its provisions to ensure that its protections meet the 21st Century needs of the armed forces. Congress also re-named the Act the Servicemembers Civil Relief Act. Among the protections recognized as necessary in modern society are five important rights: 1) 2) 3) a six percent (6%) cap of interest chargeable on debts incurred prior to military service; limits on the ability to foreclose upon servicemembers’ homes; limits on the ability to evict a servicemember from rental property occupied as a primary residence; 1 See 50 U.S.C. App. §501 et seq. The fact that many of the provisions of the SCRA date back to 1918 means that the language may not always comport with “modern” banking practices and commonly understood terms. In addition, case law that may be 70 to 80 years old may be relevant when interpreting statutory provisions. 2 ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 1 May 2011 4) 5) limits on the ability to terminate installment contracts or otherwise repossess personal property purchased via installment contract; and prohibitions on derogatory reports to credit agencies due to assertion of rights under the SCRA. Congress amended the SCRA again in the Housing and Economic Recovery Act of 2008 (HERA) to extend the time period for the 6% interest rate cap for pre-service mortgage obligations. The interest rate cap had previously only applied for actual periods of active duty. HERA extended the interest rate cap for 3 pre-service mortgage obligations for an additional year after the servicemember leaves active duty. At the same time, Congress temporarily amended the SCRA by extending the SCRA’s protections from foreclosure on pre-service mortgage obligations from 90 days to nine months after a servicemember 4 leaves active duty. Most recently, in December 2010, Congress passed the Veterans’ Benefit Act of 2010. This law clarified that servicemembers and others protected by the SCRA have a private right of action to seek civil enforcement through the courts and receive monetary damages and attorneys’ fees. It also clarified that the Attorney General has similar enforcement authority on behalf of servicemembers and other aggrieved 5 persons. Finally, the Helping Heroes Keep Their Homes Act of 2010 extends until December 21, 2012 6 the extended time periods for foreclosure protections under HERA. Caveats about the SCRA: 7 The SCRA is long and detailed; it comprises more than 50 numbered sections in the U.S. Code. However, certain provisions are critical for bankers to understand, especially as Reserve and National Guard units are called to active duty and bankers are required to provide these customers with the protections granted by the SCRA. Please keep three things in mind as you read these Q & As: First, regulatory and judicial guidance on how to implement the rule reducing interest rates on affected loans to 6% as well as what is to be included within the term “interest” is evolving. Second, answers to bankers' fact-specific questions, especially those dealing with partnership issues, interest computation methods, and property rights of married couples depend largely on relevant state laws and court decisions. We urge you to contact bank counsel to resolve questions involving those particular issues. Finally, the questions and answers presented here are based on our best information and analysis of the law. Many SCRA provisions date back to the 1940s and may not easily translate to modern financial products. 3 The Housing and Economic Recovery Act of 2008, Pub.Law 110-289, § 2203(b). HERA, supra, §2203(a). 5 Section 303 of the Veterans’ Benefit Act of 2010, Public Law 111-275, amended the SCRA by adding at the end a new title VIII, Civil Liability. This title contains new following sections of the SCRA: §801, Enforcement by the Attorney General; §802, Private Right of Action, and §803, Preservation Of Remedies. These have been codified as sections 50 U.S.C. §§ 597, 597a and 597b. 6 Finally, although not an SCRA amendment, it should be noted that on May 20, 2009, Congress recognized that because most servicemembers are not homeowners, but rather are renters, they face particular difficulties when their landlords are foreclosed. The Helping Families Save Their Homes Act of 2009 provides significant protections when servicemembers face possible displacement from a foreclosure on their landlord. See the Protecting Tenants at Foreclosure Act of 2009, Pub.Law 111-22, Title VII, §§ 701-704. 7 See 50 U.S.C. App. §§ 501-596 4 ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 2 May 2011 Questions and Answers 1. Q.Who is eligible for benefits under the Act? A. The SCRA protects all servicemembers on federal “military service,” including: Any member of the U.S. Armed Forces on active duty (Army, Navy, Air Force, Marine Corps and Coast Guard); Any member of a reserve component called to active duty (Reserve, National Guard, and Air National Guard); National Guard personnel under a call or order to active duty for more than 30 consecutive days under 32 U.S.C. § 502(f) for purposes of responding to a national emergency declared by the President and supported by federal funds; Public Health Service and National Oceanic and Atmospheric Administration Officers detailed for duty with the armed forces. In addition, many of the SCRA’s protections extend to dependents of active duty service members, but this coverage varies from section to section. SCRA protections may also extend to a partnership or a business; the test is generally whether the servicemember would be liable for the obligation of the partnership or business in which case SCRA protections generally apply. Finally, state laws may provide protections to members of state national guards that are called into service for the state. This staff analysis does not address state statutes. 2. Q. What is meant by “military service?” A. The SCRA’s protections cover periods of “military service” which, in turn, are defined as periods of active duty status. For members of the regular Armed Forces, active duty begins the day they leave civilian life; for them active duty is not synonymous with deployment. For a member of a reserve component, in contrast, the protections the SCRA offers begin when a member of the Reserves or National Guard receives mobilization orders. It is initiated upon receipt of mobilization orders in order to give the soldier time to put his or her affairs in order. There may be several active duty periods during a member of the Reserves or National Guard’s career, including the initial active duty for training ("boot camp") and subsequent callups for service, for example for service in the wars in Iraq or Afghanistan. Whether or not the servicemember volunteered for active duty is immaterial. Finally, military service also includes any period during which a servicemember is absent from duty because of sickness, wounds, leave, or other lawful cause. Section 527: Maximum rate of interest on debts incurred before military service 3. Q. What loans are affected by the rule reducing interest to 6%? A. The section of the SCRA that reduces interest rates – 50 U.S.C. App. §527 – is written very broadly. It addresses any "obligation or liability" of an eligible servicemember, or the servicemember and the servicemember's spouse jointly. The statute provides that such an obligation or liability may not bear interest at a rate above 6% per year for the period of active duty (and beyond for some indebtedness) as long as the loan was made before the servicemember entered active duty. The theory behind section 527 is that entering active duty may change a servicemember’s ability to repay. The law is designed to protect the servicemember when his or her status and income change as a result of being called to active duty. The interest rate cap does not apply to a loan entered after or during active duty. If a loan is contracted after active duty begins, it is assumed that a servicemember knows ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 3 May 2011 what he or she can afford and the underwriter will also be able to assess ability to repay based on current income. The broad language in section 527 – any "obligation or liability” – means that the SCRA applies to all of an eligible borrower's pre-existing loans, including installment loans, mortgages, credit card balances, and pre-existing draws on home equity lines of credit as well as any other preexisting loan made by any lender to the servicemember. Note: the interest rate cap was not previously applicable to federally-guaranteed student loans entered before entering active duty, but since the enactment of the Higher Education Opportunity Act (Public Law 110-315, Aug 14, 2008) it also applies to all student loans. 4. Q. Does the interest rate reduction apply to charges on credit cards or draws on lines of credit incurred after the borrower goes on active duty? A. Section 527 limits the application of the interest rate cap to obligations or liabilities “incurred" prior to the borrower's entry on active duty. Thus, the rule limits the application of the 6% ceiling to the account balance that existed when the borrower went on active duty. Although there is no clear guidance from the courts or from the regulators, it does not appear that charges or draws made after active duty commences are entitled to the interest rate reduction, even though the credit arrangement pre-exists active duty. In cases where it is not clear whether a debt was incurred before or after the borrower entered active duty, local counsel should be consulted, because the result will probably depend on provisions of state law that determine when the debt was legally incurred. In some instances, banks have allowed the cap as a public service even to charges on a line of credit incurred after active duty started. 5. Q. How is “interest” defined in the SCRA? A. For the purposes of this interest rate cap, the term interest includes all “service charges, renewal charges, fees, and any other charges (except those for bona fide insurance)." The creditor should re-compute payments so that interest and all fees stay within the 6% cap per annum. All interest and fees in excess of 6% must be forgiven. Interest above six percent does not accrue while the borrower is on active duty and cannot be added to principal. Note: a lender may apply to a court for an order allowing it to collect more than 6% interest on a loan covered by this provision. For the court to issue such an order, the lender must show, and the court must find, that the ability of the servicemember to pay more than 6% interest is "not materially affected by reason of the servicemember's military service." The term "court" includes "any court of competent jurisdiction of the United States or of any State, whether or not a court of record." However, the lender's court action seeking authority to charge more than 6% interest may be stayed under other provisions of the SCRA staying civil proceedings. Lenders should also factor reputation risk into the decision to seek such a court order. 6. Q. Are late fees charged on pre-service debt intended to be included in the calculation of the 6% interest rate cap? A. As stated above, section 527 defines interest as including “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” The term “fees” is not defined, but ABA does not believe that the term “fees” was intended to include late fees. That would have the effect of forcing a bank to calculate the ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 4 May 2011 interest cap to include any potential late fees and write off the difference. In addition, this would result in encouraging a servicemember not to pay bills in a timely manner, as there would be no incentive for doing so. This is not the intent of the SCRA which was written to ensure fair treatment and relief from excess liability due to income reduction and absence from a job. It was not intended to allow a servicemember to be irresponsible in regard to his or her debt. However, banks should be aware that because section 527 does not define the term “fees,” a servicemember could dispute a bank’s decision to charge a late fee under section 523 (governing fines or penalties under a contract) or section 527. In either case, this would force the bank to go to court. Therefore, it is up to the bank to decide whether a late fee is worth the cost of hiring counsel and going to court. In addition, the bank should consider any reputational damage that might result. Ultimately, this is a business decision each bank must make for itself. 7. Q.How far back in the history of an eligible loan will the reduction to 6% reach? A.The reduction to 6% applies back to the first day of active duty as long as the loan preexisted active duty. Therefore, banks should be prepared to re-calculate any interest and fees that may have accrued between the time active duty commenced and the time that the loan is adjusted. 8. Q.How long does the reduction to 6% stay in effect? A.The interest on most pre-active duty loans is reduced to 6% as long as the borrower remains on active duty. However, for obligations or liabilities secured by a mortgage, trust deed, “or other security in the nature of a mortgage,” the period during which a creditor may 8 not charge interest in excess of 6% is extended for one year following the end of active duty. 9. Q.When can a soldier request the interest rate reduction? A. A servicemember may request the interest rate reduction at any time but not later than 180 days after the end of active duty. 10. Q.How does a servicemember request the interest rate reduction? A.Section 527 requires a servicemember to make the request in writing and places the burden on the service member to provide proof of his or her active duty status. Proof of active duty status is normally shown by a copy of the orders calling a person to active duty and any orders extending the period of active duty. 11. Q.Can a lender choose not to grant the interest rate reduction until the borrower sends a copy of his orders or other certificate of service? A.Although nothing in section 527 expressly prohibits this, ABA urges banks to consider the reputational risk of that course of action. Banks should be aware that there may be a delay in a servicemember’s receipt of orders. Because copies of orders for an individual may be delayed until after deployment, banks are often willing to accept unit or troop orders accompanied by some verification that the servicemember is part of the unit being activated or deployed. Equally important, a bank that has received a request for an interest rate reduction from a servicemember can check the Department of Defense’s Defense 8 In its final CARD Act clarifications, the Federal Reserve clarified that once the SCRA no longer applies, a credit card issuer is permitted to increase the interest rate and fees to those that applied prior to being called to active duty, and that the right to reject does not apply in this instance. See Regulation Z, 12 CFR §§226.9(B) and 226.55(B)(6). ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 5 May 2011 Manpower Data Center website to verify status (for more information about this process, see Q. 20). 12. Q.Can a lender choose not to comply until a borrower submits pay stubs or other financial data demonstrating a “material effect” on the borrower's ability to pay the contracted for rate? A.No. 13. Q.Must the payment be reduced when the interest rate is reduced? A.Yes. 14. Q.What happens to the interest rate on loans affected by this provision of the Act after the servicemember is released from active duty? A.Generally, the loan reverts to the contracted-for rate of interest after active duty ends. However, HERA extended the interest rate cap for pre-service mortgage obligations for an additional year after leaving active duty. 15. Q.How does a lender know when a borrower has ceased active duty? A.The statute is silent on this point. Some bankers, when they notify the customer of compliance with a request to lower the rate to 6%, simultaneously remind the borrower to notify the lender at the completion of active duty. In this notice, and in later communications with the borrower, the lender may want to remind the borrower that the interest rate returns to the contracted-for rate when the borrower's active duty is completed. With regard to preservice mortgage obligations, the lender should remind the borrower that the interest rate cap remains in effect for one year following the end of active duty status. A lender does have the option of including a tickler in the system as a reminder when the customer’s active duty is 9 scheduled to end. However, before any adjustments to the rate can be made, the bank must confirm that active duty has ended and has not been extended. 16. Q.If a loan, such as a mortgage, has been sold or securitized, who bears the burden of the reduced interest rate? A.The SCRA provides that affected loans shall not bear interest at a rate in excess of 6%. However, this provision does not change the relationship of the parties involved with the loan. The party which was entitled to receive the interest from the loan before the rate was reduced is still entitled to receive interest at the reduced rate. A party which merely services a loan is not required to make up the difference in interest, absent contractual arrangements to the contrary. Fannie Mae and Freddie Mac have announced that they will bear the losses from any loan affected by this provision of the Act. Section 533: Mortgages and Trust Deeds 17. Q.Does the SCRA have any effect on a foreclosure of real property which is subject to a mortgage? A.As explained above, although section 527’s interest rate cap of 6% applies to mortgage obligations incurred prior to active duty, another provision of the statute, section 533, applies 9 In the interest of good customer service, some banks take the opportunity to welcome the individual home and acknowledge their service and offer to help with any financial needs the servicemember may need. ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 6 May 2011 to sales, foreclosures, or seizures of property initiated to enforce a security interest securing an obligation incurred before entering active duty. As explained more fully below, while servicemembers must request the interest rate cap under section 527, the protections under this provision of the statute do not require any action on the part of the servicemember. It also is important to understand that section 533 does not preclude foreclosures (a fact frequently misunderstood by the press), but it does impose significant limitations on foreclosure actions. These restrictions are designed to protect the servicemember who has been called to active duty. 18. Q.What limitations on foreclosure actions are imposed by section 533? A.Section 533 provides that no sale, foreclosure, or seizure of property for a breach of a preactive duty service “mortgage, trust deed or other security in the nature of a mortgage” is valid if made during or within nine months after the period of active duty service except upon a valid court order. In other words, if a mortgage is protected by the SCRA, no self-help or non-judicial foreclosure is allowed. There are 23 states in which some form of non-judicial foreclosure is ordinarily allowed. In those states, the lender may have obtained a waiver of any legal proceedings in the event of a default in the mortgage documents themselves. However, such a waiver is invalid under 50 U.S.C. App. §517. When a lender wants to foreclose on mortgage protected by the SCRA, it must seek a court order. The servicemember is then entitled to a hearing before a judge, who has the power either to stay the foreclosure or “adjust the obligation to preserve the interests of all the parties.” This provision is interpreted by the courts as a broad grant of authority to alter the terms of a contract to protect a servicemember and his or her family from foreclosure. It is, however, conditioned on a finding that the servicemember's military service “materially affects” the ability of the defendant to comply with the terms of the obligation. Note: Recall that HERA amended section 533 to extend the foreclosure protections from 90-days to nine-months after the conclusion of active duty service. This amendment sunsets on December 21, 2012. Also note: Under section 513, if a court grants relief (stay, postponement, or suspension of obligation) to the servicemember, the relief may also be granted to persons primarily or secondarily liable with the servicemember, including a surety, guarantor, endorser, accommodation maker, co-maker, or any other person who may be primarily or secondarily subject to the obligation or liability. 19. Q. Are the limitations on foreclosure actions automatic – i.e., do they apply regardless of the servicemember’ failure to notify the creditor of his or her active duty status? A.Yes. Unlike section 527, which expressly requires the servicemember to “provide to the creditor written notice and a copy of the military orders calling the servicemember to military service,” section 533 includes no such requirement. In the absence of this language, the Department of Justice and the courts take the position that the limitations on foreclosure apply automatically, and that the creditor bears the burden of determining whether the borrower is on active duty prior to initiating non-judicial foreclosure proceedings. Because these protections apply without any action by the servicemember, sending the HUD SCRA notice to all delinquent borrowers takes on increased importance. 20. Q.How is a lender to determine a borrower’s status? A.The Department of Defense, through the Defense Manpower Data Center (DMDC), maintains a publicly-accessible website (https://www.dmdc.osd.mil/appj/scra/scraHome.do) that lets lenders check the active duty status of a person with only a name, social security number, and date of birth (or just a name and either a social security number or a date of ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 7 May 2011 birth). When confirming active duty status, lenders should be aware that there may be a delay in posting information to this website. The DMDC list currently provides the following information: whether the individual is on active duty as of the date of the query; whether the individual has been on active duty in the last 366 days (because the interest rate cap for pre10 service mortgage obligations extends for a year); and the first day of that individual’s active duty service for the latest active duty period. Due to concerns about protecting the safety and security of active duty members of the armed forces and their families, queries must be done manually, on an individual basis, and cannot be processed in batches. However, responding to recent concern about the inefficiencies of the process, the military is reconsidering the decision not to allow batch queries. ABA recommends that prior to initiating foreclosure proceedings, lenders check the DMDC list. Even if a borrower does not appear on the list, lenders should print a “negative finding” screen shot to document the fact that an inquiry was made and the servicemember was not listed as being on active duty on the date of inquiry. In addition, because many months may pass between the initiation of non-judicial foreclosure proceedings and sale of the property and active duty status can change quickly, ABA recommends that lenders re-check the website periodically throughout the process and document the results of those searches. 21. Q. Does it matter whether the underlying default on the mortgage obligation occurred prior to or during active duty status? A. No. The timing of the initial default is immaterial. The only limitation is that the mortgage obligation must precede active duty. 22. Q.What is meant by “other security in the nature of a mortgage?” A.It is unclear. HERA’s amendment of section 533 seems to demonstrate Congress’ intent that section 533’s protections apply only to real estate secured loans. However, there is some old case law that expands the protections of section 533 to loans secured by property other than real property. Section 591: Anticipatory Relief under the SCRA 23. Q.When is anticipatory relief available? A.If a servicemember anticipates that he or she may not be able to pay the mortgage or meet other financial obligations (on obligations incurred before entering active duty), the servicemember may go to court to ask for anticipatory relief under section 591 of the SCRA. The request must be made while on active duty or within 180 days after active duty ends. 24. Q.What relief may the court grant? A. If a court finds that the servicemember's ability to pay his or her mortgage or to meet other financial obligations has been "materially affected by reason of military service," the court can grant a stay of enforcement of the obligation during the servicemember’s period of active duty military service plus an additional amount of time equal to the period of active duty military service. The stay, however, does not result in the debt being forgiven. The amount of all deferred payments must be paid over the remaining life of the obligation after the deferral period has ended. Section 591 has rarely been used, but the military takes the position that since a court has discretion to stay the entire amount due, it may also reduce the monthly payments during the 10 Status during the last 366 days are reported to account for leap years. ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 8 May 2011 period of the stay. In other words, rather than completely writing off the payments, the court may stay only a portion. Section 531: Protection from eviction 25. Q. What protections from eviction does the SCRA give servicemembers? A. Today, many banks have bank-owned properties that may have servicemember tenants; therefore, banks need to understand the protections section 531 provides to active-duty servicemembers. Under section 531, a property owner may not evict a servicemember or his or her dependants from a primary residence without a valid court order. Section 531 applies only to certain premises: it must be occupied, or be intended to be occupied, as a primary residence, and the monthly rent must be less than $2958.53, an amount subject to an annual inflation adjustment based on the housing component of the Consumer Price Index. In addition, section 531 provides that during the eviction hearing the court may – or upon application by the servicemember whose ability to pay the rent is “materially affected” by military service, the court shall – stay the eviction proceedings or “adjust the obligation under the lease to preserve the interests of all parties.” It should also be noted that nothing in section 531 expressly requires a servicemember to provide a copy of his or her military orders, suggesting that the burden is on the property owner (i.e., the bank) to ascertain whether the tenant is on active duty prior to initiating the eviction process. Finally, financial institutions should also be aware of the protections generally provided to any tenant under the Protecting Tenants at Foreclosure Act of 2009, Pub.Law 111-22, Title VII, §§ 701-704. Section 532: Protections under installment contracts for purchase or lease 26. Q.Does the SCRA provide protections for installment contracts for the purchase or lease of personal property? A.Yes. Section 532 applies to a pre-service obligation for the purchase or lease of personal property, if a deposit or installment has been paid by the servicemember before entering active duty. In the event of a breach of contract, the protections of section 532 mirror those of section 533. The protections of section 532, however, only extend for the period of active duty. Like section 533, section 532 prohibits termination or repossession of property without a valid court order. As a condition of terminating the contract and repossessing the property, a court may order repayment to the servicemember of all of the prior installments or deposits. Alternatively, the court on its own motion may stay the proceedings or “make other disposition as is equitable to preserve the interests of all parties.” And, if the servicemember files a motion with the court and demonstrates that his or her ability to comply with the contract is materially affected by military service, the court “shall” stay the proceedings or “make other disposition as is equitable to preserve the interests of all parties.” Finally, note that under section 523, Fines and penalties under contracts, if a servicemember fails to perform a contract and a penalty is assessed as a result, the servicemember may request the court to reduce or waive the penalty. This provision has been used to avoid the payment of a mortgage pre-payment penalty assessed when a home had to be sold because a servicemember was given orders to move. ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 9 May 2011 Section 521: Protections of servicemembers against default judgments 27. Q.What are the procedural requirements for obtaining a default judgment? A.Before any judgment may be entered for the plaintiff in any civil or administrative proceeding in which the defendant does not appear, the plaintiff must file an affidavit – a signed, sworn statement declared to be true under penalty of perjury – stating: Whether or not the defendant is on active duty and “showing the necessary facts to support the affidavit” or Stating that the plaintiff is unable to determine whether or not the defendant is on active duty. Note: ABA encourages institutions to implement procedures to ensure compliance with the requirements for filing affidavits in actions in which the bank seeks a default judgment. Bank policies and procedures should assign responsibility for executing affidavits to particular personnel within the bank. Procedures should also ensure that the affiant has undertaken the necessary research to determine whether a defendant is a servicemember on active duty and has documented that research (for example, a screen shot of the DMDC list may be used to document both negative and positive search results). In addition, banks should consider implementing compliance monitoring procedures to verify that the research was in fact conducted and documented. 28. Q.What happens if the affiant cannot determine the defendant’s status? A.If based on the affidavit, the court cannot determine whether the defendant is on active duty, the court may require the plaintiff to post a bond before entering judgment for the plaintiff. If it later turns out that the defendant was on active duty, the bond is available to indemnify the defendant if the judgment is subsequently set aside. The bond will remain in effect until the expiration of any time for appeal or setting aside of a judgment. 29. Q.What happens if it appears from the affidavit that the defendant is on active duty? A.Section 521 states that if it appears from the affidavit that the defendant is on active duty, the court may not enter a judgment until after the court appoints an attorney to represent the defendant. Moreover, if the defendant is on active duty, the court shall stay the proceedings for a minimum of 90 days, if it determines that there may be a defense that cannot be presented without the presence of the defendant; or after due diligence, counsel has been unable to contact defendant or otherwise determine if a meritorious defense exists. 30. Q.What relief is available if a default judgment has been entered against a servicemember on active duty? A.If a default judgment was entered against a servicemember on active duty (or within 60 days after the conclusion of active duty), the court shall reopen the judgment on motion by or on behalf of the servicemember, if it appears that the servicemember’s ability to defend against the action was “materially affected” by the military service and the servicemember has a meritorious defense to the action or a part of it. ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 10 May 2011 Section 522: Stay of civil proceedings when servicemember has notice 31. Q.When is a servicemember entitled to a stay of a civil action? A. This protection recognizes that a servicemember usually cannot drop what he or she is doing to appear in a civil or administrative proceeding. It applies to any civil action or proceeding to which a servicemember on active duty is a party (or within 90-days of termination of active duty) and the servicemember may request a stay at any stage before final judgment. A stay is automatically granted for at least 90 days if the servicemember sends to the court: a letter or “other communication” explaining how the servicemember’s military duties “materially affect” his or her ability to appear and stating when he or she can appear, and a letter or “other communication” from his or her commanding officer stating that the servicemember’s military duties prevent appearance and leave is not authorized. The servicemember may also apply for an additional stay, and if the court denies the request, the court shall appoint counsel to represent the servicemember in the proceeding. In addition, it is important to recognize that when an action against a servicemember for failure to comply with the terms of a contract is stayed, fines or penalties for failure to comply may not be assessed. (See section 523.) Section 524: Stay or vacation of execution of judgments, attachments, and garnishments 32. Q.When may a court stay the execution of a judgment, an attachment or a garnishment order? A.If military service “materially affects” compliance with a court judgment or an attachment or garnishment order, the court shall on application of the servicemember stay the execution of the judgment or order and vacate or stay an attachment or garnishment of property, money or debts in the possession of the servicemember or a third-party. The court may also take this action on its own motion. Section 524 applies to any proceeding begun while the servicemember is on active duty and continues for 90-days after active duty service terminates. Section 518: Exercise of rights under the SCRA not to affect certain future financial transactions 33. Q.May a bank consider that a servicemember asserted rights under the SCRA when evaluating requests for financial products or services? A.Section 518 is intended to protect a servicemember who has asserted rights under the SCRA from having that affect future financial transactions. Section 518 states that assertion of rights under the SCRA “shall not itself (without regard to other considerations) provide the basis for any of the following:” A determination by a lender that the servicemember is unable to pay a debt in accordance with its terms; A denial or revocation of credit; A change in terms of an existing credit arrangement; A refusal to grant credit in substantially the same amount or on substantially the terms requested; Making notes in the servicemember’s “record by a creditor or a person engaged in the practice of assembling or evaluating consumer credit information” that identify the individual as a member of the National Guard or Reservist; ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 11 May 2011 Making an adverse report relating to the creditworthiness of the servicemember by or to a consumer reporting agency; A refusal by an insurer to insure the servicemember; Making a change in the terms or conditions of insurance. In other words, if a loan to a servicemember was modified in accordance with the SCRA or the servicemember avails him or herself to any of the protections of the SCRA, that fact cannot reflect negatively on the servicemember’s creditworthiness. Section 517: Waiver of SCRA rights 34. Q. It is possible for a servicemember to waive his or her rights under the SCRA? A.Yes, but only written waivers signed during or after a service member's period of military service are effective. In addition, the waiver must be in writing – in at least 12-point type – and must be executed as a separate document from the obligation or liability to which it applies. Questions? Contact ABA's Virginia O’Neill or Leslie Callaway for more information. ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice. 12
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