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Consumer Compliance Outlook: First Quarter 2013

Servicemember Financial Protection Webinar: Questions and Answers

By Lanette Meister, Senior Supervisory Consumer Financial Services Analyst, Federal Reserve Board; Laurie Maggiano, Director of Policy, Office of Homeownership Preservation, U.S. Treasury; and Laura Arce, Policy Analyst, Office of Housing and Regulatory Policy, Federal Housing Finance Agency

Editor’s note: Effective December 1, 2015, the Office of the Law Revision Counsel of the United States House of Representatives eliminated the appendix to title 50, where the Servicemembers Civil Relief Act (SCRA) was codified as 50 U.S.C. App. §§ 501-597b, and recodified it as 50 U.S.C. §§ 3901-4043 et seq. Accordingly, we have updated the SCRA cites in the article to reflect this. We also updated the link to the Department of Defense SCRA website to verify if someone is an active member of the military. Finally, for clarity, we made a technical correction to the answer to Question 7.

On September 10, 2012, the Federal Reserve System hosted an interagency Outlook Live webinar titled “Servicemember Financial Protection.” ^* Participants submitted a significant number of questions before and during the session. Because of time constraints, only a limited number of those questions were answered during the webcast. This article addresses the most common questions received. Representatives from the Federal Reserve Board, the Federal Housing Finance Agency, and the U.S. Department of the Treasury provided responses to questions regarding their agencies’ programs.

Responses from the Federal Reserve Board

Notification of Active Duty

1. If a service member does not notify a financial institution of active duty until several months after he or she receives orders from the military, does this institution need to go back to the original date of the orders, or make the maximum 6 percent effective as of the date it receives notification?

   The reduction in the interest rate and the adjustment of the periodic payments under section 3937 of the Servicemembers Civil Relief Act (SCRA) should be effective as of the date on which the service member is called to active duty. The service member has up to 180 days after the date of his or her release from military service to provide this notification.

2. If the customer provides copies of orders from the military to begin active duty, but the customer does not request SCRA benefits, can the bank contact the customer and accept a verbal response as a request for benefits?

   With respect to the maximum interest rate on debt, section 3937 of the SCRA states, “In order for an obligation or liability of a servicemember to be subject to the interest rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of the military orders calling the servicemember to military service and any orders further extending military service, not later than 180 days after the date of the servicemember’s termination or release from military service.” The statute does not prohibit lenders from providing SCRA benefits without a written request.

   However, there is no similar requirement that the service member’s notice be in writing to receive foreclosure, eviction, and repossession protections dealing with rent, installment contracts, mortgages, liens, assignment, and leases covered in SCRA sections 3951 through 3953. Therefore, it is the lender’s responsibility to know the service member’s status prior to undertaking a foreclosure, eviction, or repossession.

3. If a service member purchases a motor vehicle on an installment contract while stateside on active duty and subsequently becomes delinquent on the loan while deployed, which sections of the SCRA apply? Does the financial institution have the right to repossess and dispose of the vehicle if the delinquency is not cured?

   The protections of the SCRA apply only to obligations or liabilities entered into before the service member enters military service. See, for example, section 3952(a)(2). In the example raised in the question, the installment contract was entered into while the service member was on active duty; therefore, the SCRA would not apply.

Maximum Rate of Interest on Debts Incurred Prior to Military Service

4. If a service member requests a rate reduction on “my mortgage loan(s)” or “my obligations” or even one specific loan in cases where he or she holds multiple loans with the creditor, are all loans held with the creditor covered?

   Section 3937 of the SCRA, which establishes the maximum interest rate, addresses any “obligation or liability” of an eligible service member, or the service member and the service member’s spouse jointly, as long as the loan was made before the service member entered active duty. When a service member provides a written request and a copy of the military orders to a lender, the lender should apply the 6 percent rate reduction to all loans with the lender made before the service member entered active duty. Loans for commercial purposes are not excluded from SCRA protections.

5. Per the information provided during the webinar, I understand that fees cannot be in excess of 6 percent for service members. Is it correct that if a service member invokes his or her rights, you cannot charge more than 6 percent for any fees (including late fees and fees for nonsufficient funds), but you can charge up to 6 percent?

   Under section 3937 of the SCRA, the maximum rate of interest on debts incurred prior to military service is 6 percent. Additionally, section 3937(a)(2) of the SCRA provides that interest on debt covered by the SCRA that exceeds the 6 percent cap must be forgiven. The SCRA defines the term interest to include “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” A creditor may seek relief from a court in order to impose additional fees and charges based on a finding that the service member’s ability to meet the obligation at a rate greater than 6 percent was not materially affected by military service. Accordingly, for obligations covered under the SCRA, creditors should include in the interest calculation any fee or charges incurred with respect to the covered debt, including late payment fees and other fees incurred after origination.

6. Does the bank have to recalculate the monthly payments to reduce the loan interest rate to 6 percent, or is it acceptable to extend the maturity date and provide the borrower with a new payment schedule?

   Section 3937 of the SCRA requires both the forgiveness of interest in excess of 6 percent and the prevention of acceleration of principal. Therefore, the creditor should adjust the interest rate and reflect that reduction in the periodic payment. Any extension of the loan’s maturity date would not represent forgiving the interest.

7. Is there a specific requirement to implement the interest rate cap if, for example, notification of active duty is delayed or if late charges are assessed in error? Can we make the choice to issue a cash refund and apply it to a future monthly payment or to the principal balance of the loan? Should we offer the service member the option of reimbursement?

   As noted in the FAQs above, the SCRA requires that the interest rate be reduced as of the date of active duty, that interest in excess of 6 percent be forgiven, and that the periodic payment be adjusted. If the interest rate reduction is delayed until after the period of active duty begins, the servicemember is entitled to be reimbursed for the excess interest paid during that delayed period. The SCRA does not require a specific method for reimbursing the excess interest, and does not prohibit a creditor from providing it to the servicemember as a cash refund or timely applying it to current or future monthly payments. However, as also noted, the SCRA prohibits accelerating principal. Therefore, applying the reimbursement to the principal balance of the loan is permitted only if the servicemember chooses that method after being offered other options.

8. If you know that a customer has been deployed and you contact the customer to ask him or her to get the required paperwork from the military and the customer fails to do so, do you have to lower the rate and reduce payments?

   Section 3937 of the SCRA requires the service member to provide written notice and a copy of the orders calling the service member to active duty in order for a loan to be subject to the interest rate limitations.

9. When a spouse is on active duty and the insurance on the collateral, be it a home or a car, has been canceled, can collateral-placed insurance (CPI) be put on the loan? With the general public, when CPI is put on vehicles, the payment does go up, so the loan will mature correctly and it is mentioned in the disclosures at loan signing. When a mortgage has insurance added, it increases only the principal balance of the loan. Is this allowed on service member loans?

   As noted in question 5, bona fide insurance is excluded from the 6 percent cap because the SCRA does not define it as interest. With respect to this insurance and the practice you describe, other federal or state laws may apply.

10. What if a bank offers a credit card through a third party? The credit card balances do not sit on the bank’s books. Does the bank have to reduce the interest rate on those accounts?

    The obligation to reduce the interest rate and payments under section 3937 of the SCRA rests with the creditor. If the financial institution is the creditor, it is responsible for ensuring that the third party reduces the interest rate and payment.

11. How does the term materially affected impact a service member’s ability to claim an interest rate reduction on a loan? If, for example, a borrower with a loan voluntarily joins the army, but his or her income does not decrease, do the rate reductions under the SCRA apply?

    The rate reductions under section 3937 of the SCRA apply unless a court grants the creditor relief. If the court concludes that the service member’s ability to pay interest on the obligation at a rate in excess of 6 percent is not materially affected by the military service, it can order the service member to continue to pay the loan at the original contract rate.

Foreclosure Protection

12. Do foreclosure rules apply only to the service member`s primary residence, or do they apply to all loans secured by a mortgage on a residence? Does it matter if the loan is for business purposes?

    The SCRA’s foreclosure protections in section 3953 apply to any obligation on real or personal property owned by a service member that is secured by a mortgage, trust deed, or other security in the nature of a mortgage. The obligation must have been originated before the service member’s military service, and the service member must still be obligated on it. The statute applies to loans for business purposes and loans secured by the service member’s residence, even if it is not the service member’s primary residence.

Homeownership Counseling Act

13. According to HUD’s Mortgage Letter 2006-28, the SCRA notice is to be sent to all homeowners who are delinquent on a residential mortgage. Could you please clarify what meets the definition of a “residential mortgage”? It clearly includes conventional mortgages and mortgages insured by the Department of Housing and Urban Development (HUD). But does it include junior lien mortgages (home equity loans/lines) and business loans that have a guarantor who gives the bank a mortgage on his or her personal residence? In other words, should the bank send the notice to any individual homeowner with a mortgage on a single-family residence regardless of lien status or purpose?

    The SCRA notice requirement at issue, imposed by the Homeownership Counseling Act (12 U.S.C. §1701X(c)(5)(A)), applies to loans secured by a mortgage or lien on the principal residence of the person to whom the notice must be given — whether open- or closed-end, first- or second-lien, business purpose or consumer purpose. The notice requirement is generally triggered when a borrower applies for, or defaults on, a home loan, defined as “a loan secured by a mortgage or lien on residential property” secured by the borrower’s or the applicant’s principal residence.

Permanent Change of Station Orders

14. Is deployment considered a permanent change of station (PCS) order?

    PCS orders occur when the military orders service members to relocate to a new duty station or base. Under 10 U.S.C.
    §991(b), a service member is “deployed or in a deployment on any day on which, pursuant to orders, the member is performing service in a training exercise or operation at a location or under circumstances that make it impossible or infeasible for the member to spend off-duty time in the housing in which the member resides when on garrison duty at the member’s permanent duty station or homeport.”

Defense Manpower Data Center

15. We sometimes have difficulty determining what constitutes active duty, and the definition in the SCRA and other laws are vague. Until recently, we relied on HUD Letter 2006-28, which referred to a website and fax and phone numbers to verify military service. Can you provide us with solid guidance on how we can determine active duty status?

    The Department of Defense hosts the Defense Manpower Data Center (DMDC) to assist lenders in determining if a particular borrower is currently on active military duty. The data center can be accessed at https://scra.dmdc.osd.mil/ with the appropriate certificate. With the borrower’s name and Social Security number, lenders can use the DMDC to confirm the current military duty status of that individual. Because both foreclosure and repossession processes can extend over longer periods of time, banks are encouraged to incorporate into these procedures more than one assessment of the borrower’s service member status.

Miscellaneous

16. Could you state again the name of the law that recently amended the SCRA? Do you have the bill number or Public Law number?

    On August 6, 2012, the President signed into law the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, Pub. L. 112-154, 126 Stat. 1165 (2012). Section 710 of the act amended section 303 of the SCRA, 50 U.S.C. app. §3953. 

17. What if the service member’s spouse has a loan that is not a joint obligation?

    Under section 3937 of the SCRA, the maximum rate of interest on debts incurred before military service benefits applies only to loans incurred by a service member alone or by the service member and the service member’s spouse jointly. SCRA protections do not extend to individual obligations of the spouses of service members.

18. Our bank’s customers include National Guard members who are on active duty for two weeks a year. Are SCRA protections available to these members?

    Under Section 3911(2) of the SCRA, a national guard member is entitled to SCRA protections when called into military service, which is defined as “active service authorized by the President or the Secretary of Defense for a period of 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” (emphasis added). Active duty for two weeks a year would not qualify as “military service” under Section 3911(2) because it is less than 30 consecutive days. Therefore, a two-week training period does not qualify a member of the National Guard for SCRA protections.

Responses from the Federal Housing Finance Agency

1. Under the new Fannie Mae/Freddie Mac programs, service members with Fannie Mae or Freddie Mac loans who receive PCS orders will be eligible to sell their homes in a short sale, even if they are current on their mortgage. What does the program provision stating that a house must be a primary residence mean for current borrowers? Obviously, once service members move, a house is no longer their “primary residence” because they don’t live there anymore. Does it mean a renter is not in the home at the time of the application for a short sale?

   The primary residence criterion for current borrowers requires that the borrower, including service members with PCS orders, must be living in the home at the time of the short-sale evaluation. If the service member has already moved out of the house, the loan servicer should submit the case to Fannie Mae or Freddie Mac for review of any special circumstances.

2. What are the appraisal criteria for approving or declining a short sale request?

   Loan servicers receive property valuations from the government-sponsored enterprise (GSE, that is, Fannie Mae or Freddie Mac). The borrower is not charged for this property valuation. The GSEs use the property valuation to provide the servicer with the estimated market value of the property. Servicers provide listing price guidance to the borrower based on this estimated market value. The value is provided only for guidance and should not be presented by the servicer as a required listing price. The criteria for approving or declining a short sale can take into account both the estimated market value and the projected costs of the transaction.

3. If a service member on active duty applies for a short sale and the lender has to review the title and order an appraisal in order to review the request, can those costs be charged back to the service member?

   Expenses incurred for valuations and title reviews for short sales are not charged to the borrower.

4. In cases where Fannie and Freddie loans involve PCS orders and where deficiencies on a short sale are forgiven without requiring the borrowers to execute a promissory note for the deficiencies, what happens if the private mortgage insurer requires a promissory note to approve the short sale? Are private mortgage insurers allowed to ask for that note, despite the GSE rule?

   To date, the following mortgage insurance companies have executed agreements with Fannie Mae and Freddie Mac that allow servicers to make decisions about short sales and borrower contributions in accordance with GSE policies without obtaining the approval of the mortgage insurer: CMG Mortgage Insurance Company, Essent Guaranty, Genworth, MGIC, Republic Mortgage Insurance Company, Radian Guaranty, PMI, Triad, and United Guaranty. These companies will not pursue a separate action to recover any deficiency. For mortgage insurance companies not listed, the servicer must obtain their approval on a case-by-case basis, and it is up to the mortgage insurance company to determine whether the situation warrants a contribution (or whether the company will waive it).

5. How does a servicer find out about a service-related death? Is the onus on the surviving spouse to notify the lender? Or is the information in the DMDC (or similar data source)?

   The military will notify only the service member’s family or next of kin in case of death. It is the responsibility of the service member’s family or designated representative to handle personal affairs for the deceased; the servicer may also obtain this information from the surviving spouse when attempting to make right party contact to ascertain the reason for delinquency.

6. Does the Home Affordable Modification Program (HAMP) apply to both Fannie/Freddie mortgages and private mortgages? Where is the best place to find more information on this program?

   HAMP is a federal program that applies to many participating institutions throughout the mortgage lending industry. Both Freddie Mac and Fannie Mae have implemented requirements for HAMP that are specific to their mortgages. These requirements are not exactly the same as HAMP requirements published by the U.S. Department of the Treasury but are substantially similar. To learn more about HAMP, visit www.hmpadmin.com and select the HAMP link from the drop-down menu under the Programs tab. That link provides information on HAMP and related requirements for servicers of non-GSE mortgages. To learn more about Freddie Mac’s implementation of HAMP, see: http://www.freddiemac.com/singlefamily/service/mha_modification.html and to learn more about Fannie Mae’s implementation of HAMP, see: http://www.knowyouroptions.com/modify/home-affordable-modification-program.

7. If our bank provides a new refinance loan under the Home Affordable Refinance Program (HARP), the loan origination date is now after the start of military service and the service member no longer qualifies for the 6 percent reduction. Is there an exception to this?

   To date, an exception to the policy has not been necessary because borrowers who refinance under HARP obtain a rate well below the 6 percent rate provided for under the SCRA provisions. Only if the market interest rate increases above the 6 percent threshold would it be necessary to consider a waiver allowing the origination date of the loan to be after the military start date.

Responses from the Treasury

1. What if our loans are portfolio only and not sold to Fannie/Freddie or any other government-sponsored enterprise. Can we offer HAMP or Home Affordable Foreclosure Alternatives (HAFA)?

   Many servicers that are not enrolled in Making Home Affordable (MHA) for their non-GSE loans have created modification and short-sale programs very similar to HAMP and HAFA. These servicers are not eligible to receive Treasury-funded incentives but can offer modifications that follow the HAMP waterfall to reduce a borrower’s payment to 31 percent of the borrower’s debt-to-income ratio and provide the borrower with the same types of protections that HAMP borrowers have. For short sales, servicers that are not able to offer HAFA can still pre-approve a borrower to sell his or her home and can agree in advance to accept certain net proceeds, agree to waive all deficiencies, and pay borrowers a relocation incentive.

2. How are we supposed to know if customers are members of the military if they don’t tell us?

   In the MHA program, this information is required on the Request for Mortgage Assistance form. Servicers that don’t participate in the MHA should consider requesting this information on in-house application forms.

3. In a short-sale situation, if a bank is the second-lien holder and the first-lien holder is trying to make a HAFA loan, is the second-lien holder obligated to complete the short sale under HAFA guidelines?

   No, second-lien holders are not obligated to accept the maximum second-lien release payment of $8,500 and waive all deficiencies. However, all of the largest lenders generally do cooperate, since they also have first liens that they would like to short sell under HAFA and they need the cooperation of their peers. Some smaller second-lien holders also accept the HAFA terms because the alternative is often foreclosure.

4. Is there any guidance so that HAFA/short sales will not negatively affect the credit reports of military members?

   Unfortunately, the Treasury cannot control the way credit is reported or used by the consumer agencies. Any short sale will have some negative impact because it indicates that the borrower could not repay the entire debt. However, the impact is much less if the borrower is current at the time of the short sale, so the Treasury has encouraged borrowers to stay current on the loan until the HAFA transaction closes.

• ^* An archived version of the webinar is available online.