By
Alan Steven
Wolf of The Wolf Firm
(Reprinted with permission from Servicing Management Magazine - June 1999)
Nato Campaign Triggers Act
Soldiers Called To Serve May Be Eligible For Mortgage Relief
Under A Simple, But Often Misunderstood Civil Relief Act
By
Alan Steven
Wolf of The Wolf Firm
During the 1991 Gulf War, over 230,000 troops were called into active duty
triggering the application of a federal statute known as Soldiers’ and
Sailors’ Civil Relief "Act ("SSCRA" or Act") on a scale unknown in modern
history. Servicers were often caught ill prepared to efficiently service
loans as required by the Act and sometimes acted in ways that violated the
Act subjecting them to significant liability. Today, NATO has a growing campaign
against Yugoslavia, and President Clinton has authorized the defense department
to call up as many as 33,102 part-time so-called ``Weekend Warriors'' under
the Presidential Selected Reserve Call-Up. Should the conflict spread, even
more troops will be called into active duty. Given these facts, it is wise
for the industry to take another look at the Act in the hope of avoiding
the servicing problems that occurred during the Gulf War.
Some Background
The SSCRA was passed by Congress in 1940 and has been amended periodically. The basic concept of the Act is that service members should not be disadvantaged either legally or financially when called to active service. As the United States Supreme has stated, the SSCRA should be interpreted "with an eye friendly to those who dropped their affairs to answer their country’s call. Le Maistre v.Leffers, 333 U.S. 1, at 6.
Generally, the Act provides two main protections to persons on active duty in the armed services. It controls the interest rate which may be charged (currently the Act provides for a maximum rate of six percent), and it limits legal proceedings, including all judicial and non-judicial foreclosures. Most of the protections are only afforded those who enter active military service after a mortgage is originated and who can show that such entry had a "material effect" on either their ability to pay the obligation or on their ability to defend the case in court.
Although simple in concept, the Act has been described as "one of the most misunderstood statutes ever passed" and its complexity leads to difficult interpretations and applications. Bagley, "the Soldiers’ and Sailors’ Civil Relief Act- A survey, 45 Mil. L. Rev. 1 (1969). Mortgage Servicers are well advised to put on their thinking caps when attempting to apply the provisions of the act to their portfolios.
Which Borrowers are Entitled To Protection Under the SSCRA
As a general rule, the SSCRA applies to "persons in the military service." 50 USC Section 511. "Military service" is defined as "federal service on active duty with any branch of service…" but the branches are not defined. Id Section 511. Under the federal law, "persons" in military service are members of the United States Army, Navy, Air Force, Marine Corps, National Guard, Coast Guard (whether actually operating with the Navy or with the Department of Transportation) and all reserve units of these forces on active federal duty. In addition, Public Health Service officers detailed for duty with the Army or the Navy also are considered within a military branch. The SSCRA applies to all of these individuals whether they volunteer for active service or they are involuntarily called to active duty.
In addition to military members, the SSCRA may protect two other types of individuals; third parties who share liability with the military member in a transaction and those who are dependents of the military member. Third party protection extends to "sureties, guarantors, endorsers, accommodation makers, and others, whether primarily or secondarily subject to [an] obligation or liability. . . ." 50 USC Section 513. Under section 513, these persons receive the protection of any provision in the SSCRA that might "stay, postpone, or suspend" an obligation or liability. Although section 513 does not specifically contain the term "co-maker," legislative history indicates that Congress intended to protect co-makers as well. Thus if two or more people take out a home loan, and one of those parties then enters the military service, the SSCRA protections are afforded the other nonmilitary parties.
The second type of protection is dependent protection. Under section 536, a service member does not have to be obligated for dependents to assert some rights under the SSCRA. Thus, a party that singularly takes out a home loan and then may become a dependent of a service member is protected from foreclosure regardless of whether the supporting service member is a party to the underlying note or mortgage. While the SSCRA does not define the term "dependent, " the determination is generally based on whether the party is financially dependent on the service member. See e.g., Balconi v. Dvascas, 507 N.Y.S. 2d 788 (N.Y.Civ. Ct. 1986). Current military definitions should also prove helpful. For example, Army Reg. 27-3: Legal Assistance, paragraph 2-4b defines dependents as spouses; children who are under 21; children who are under 23, enrolled in college full-time and dependent on the soldier for more than half of their support; and parents who are dependent upon the soldier for more than half their support.
Six Percent Interest
The Act requires Servicers to charge not more than six percent interest rate for the period of active military service on all debts incurred by a member of the military service prior to entry into active duty service, unless in the opinion of a court, the ability to pay is not materially affected by reason of such service. Interest is defined to include service charges, fees, or any other charges (except bona fide insurance).
The right to six percent interest is triggered by a borrower’s request accompanied by proof of active military service. Unfortunately, there is no time limit for making this request and experience has shown that requests are often made years after the qualifying incident.
When the six percent is claimed by the borrower, the Servicer needs to take immediate action. HUD Directive 91-6 provides some good guidance. It requires Servicers to respond to inquiries as to the amount of the monthly installment payment which would be required at the six percent rate as defined in the Act; provide revised payment cards or coupon books when appropriate; and ensure that payments in the amount allowable under the Act are not inappropriately returned to borrowers as insufficient.
Adjusting loans to the new rate takes substantial servicing dollars. In planning for the adjustments it is important to track two distinct variables; (1) the number of people called into active military service; and (2) the weighted interest rate of your portfolios. The more people called into active service and the higher your weighted portfolio average over the six percent, the greater your likely requests for interest reduction.
Who Pays The Difference Between The Six Percent And The Contract Rate?
Perhaps the most important question concerning the six-percent limitation is what happens to the interest in excess of six percent? The Legislative history is unclear. There is support that the additional interest is forgiven. There is also support that the interest continues to accrue but is not due until after active military service.
Responding to a multitude of inquiries generated by reserve call-ups during Operation Desert Shield, the House and Senate Veterans' Affairs Committees held a joint hearing on the SSCRA on September 12, 1990. In prepared testimony submitted to the committees, members of the mortgage banking industry acknowledged that interest above six percent should be forgiven if a service member otherwise qualified for that protection. Representatives of the Mortgage Bankers Association of America, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) all agreed that mortgages issued by lenders backed by their organizations would not accrue interest above six percent during active service of qualifying individuals. The Soldiers' and Sailors' Civil Relief Act: Joint Hearing before the House and Senate Veterans' Affairs Committees, 101st Cong., 2d Sess. (1990).
As a general rule, these organizations require that mortgage Servicers obtain a copy of a Reserve component service member's orders to active duty before granting the reduction in interest. Fannie Mae has taken a more lenient policy than required by the SSCRA. It will not require the mortgage issuer or Servicer to determine whether entry on active duty materially affects a service member's ability to pay interest at the contractually agreed upon rate. Upon receipt of orders,
Fannie Mae automatically will reduce interest payments to six percent. Fannie Mae and Freddie Mac will absorb the losses resulting from the reduced interest rate. However, they both require that the servicer remit at the actual interest rate per the terms of the Note and then they reimburse the servicer for the difference between the actual interest rate and the 6.00% relief rate. Fannie Mae Servicer Guide Part X, Chapter 3, Section 304. Freddie Mac Bulletin 98-4.
Ginnie Mae, unlike Fannie Mae and Freddie Mac, initially indicated it would not pay the difference between the agreed rate and six percent to those holding Ginnie Mae securities. The mortgage Servicer was expected to make up the difference. (The Soldiers' and Sailors' Civil Relief Act: Joint Hearing before the House and Senate Veterans' Affairs Committees, 101st Cong., 2d Sess. (1990). statement of Arthur J. Hill, President, Government National Mortgage Association, see also Ginnie Mae All Participants Memorandum 96-9). However, since that time Ginnie Mae has indicated a change in that position. In a recently bulletin it provides:
Issuers that have lost money because they granted relief under the Soldiers and Sailors Civil Relief Act (SSCRA) can seek reimbursement from Ginnie Mae. The SSCRA affects service personnel sent to Bosnia late last year as a peace-keeping force. At that time, Ginnie Mae said that it would make interest payments to issuers for the interest shortfall on the loans of service personnel sent to Bosnia -- the law reduces their interest rate to 6%.
Ginnie Mae will make payments of interest on pooled loans backing mortgage-backed securities to an issuer for interest in excess of 6% for payments collected. To receive a reimbursement of interest, an issuer must demonstrate that the borrower meets the criteria for interest forgiveness and must also prove the amount of interest that needs to be paid.
The documentation required to prove eligibility for the SSCRA interest reduction is a letter from the borrower stating that he/she is a member of the U.S. Military Reserves or National Guard who was called to active duty (a spouse or an attorney may also make the request). The loan must be a contractual obligation of the service member, who can be the borrower or co-borrower. Servicers must also verify:
Issuers must keep the request and appropriate records on file for Ginnie Mae’s inspection in both the loan and pool files. Before making a request for reimbursement, issuers must submit a SSCRA Loan Eligibility Information form both in hard copy and electronic format. Instructions for generating a hard copy and the data file for electronic transmission of the form are included in Ginnie Mae’s All Participants Memorandum 96-9. Each month, Servicers must account for SSCRA loans on their Monthly Accounting Report. Another attachment to the All Participants Memorandum explains how to report payments on eligible loans.
Application To Dependents
It is important to note that the six percent interest is not available to dependents in obligations to which a service member is not a party. On the other hand, sureties, guarantors, and others (such as dependents) who cosign obligations with service members may invoke SSCRA protections, which provide the six percent interest.
Avoiding the Six Percent Interest
Should a Servicer choose to avoid the six percent rule (e.g., on portfolio loans or on other loans in which the investor is not covering the difference), it may do so by bringing a court action for declaratory relief. There is no stated statute of limitations for bringing this action. In addition, it is completely unclear whether this right might be waived if the loan is first reduced to six percent pending resolution of the declaratory relief action.
What is clear is the Servicer’s burden to prove that the service member’s ability to pay interest at the stated note rate has not been "materially affected" by the service member’s active duty. A court might find that a service member’s ability to pay has not been materially affected where:
Prior Attempts by Servicers To Avoid the Six Percent Interest
Lenders have employed a variety of improper methods to avoid the six percent limitation. Some lenders have lowered the interest rate but maintained the same monthly payment (resulting in early payoff of the loan). Other lenders reduced the loan to six percent by a refinance and then charged new finance charges. Still others tried to avoid the six percent by refinancing at current rates and then claiming that the refinanced loan was not subject to the Act because it was signed after entry on active duty. All of these attempts violate the Act.
Other lenders, acting in good faith, have unknowingly violated the Act. For example, it is not uncommon for a lender to require that a service member submit proof of pre-mobilization income compared to current military income or to require the completion of new loan applications prior to allowing the six percent interest. Section 526 does not require the service member to provide any information. The lender must allow the six percent upon the mere request for the reduction in interest. A Servicer can only deny the six percent interest upon meeting its burden in court to establish that military service is not affecting the ability to repay a mortgage.
Stay of Foreclosure
The Act provides a specific provision relating to legal proceedings and foreclosures of relating a serviceman's mortgaged property. 50 U.S.C.App. § 532. This section applies to real property owned by a person in military service at the commencement of the period of military service and still so owned by him where the mortgages originated prior to such person’s period of military service. With respect these mortgages, there are two distinct provisions. First, court legal proceedings may be stayed "unless in the opinion of the court the ability of the defendant to comply with the terms of the obligation is not materially affected by reason of his military service." Section 532(2). Next,
No sale, foreclosure, or seizure of property for nonpayment of any sum due under any such obligation, or for any other breach of the terms thereof ... shall be valid if made during the period of military service or within three months thereafter except pursuant to an agreement [or]… unless upon order … by the court."
In short, if a service member or a dependent owned the property in question before beginning active service, entered a mortgage or security agreement before entry on active duty, the SSCRA requires a court order to proceed.
A court order may be obtained in court legal proceedings where the serviceman’s ability to comply with the terms of the obligation are not materially affected by reason of military service. Courts have broad discretion in making this determination. It is unclear whether non-judicial proceedings fall within the same analysis. With non-judicial proceedings a court order or a written release to allow for the sale or foreclosure of service member’s property is required but the grounds for the court order are unclear.. See 50 U.S.C.App. § 532(3).
General Stay of Legal Proceedings
Section 521 of the SSCRA authorizes a state or federal court, either on its own motion or upon application by a service member, to stay a civil court proceeding. This provision is not limited to foreclosures; it applies to any type of legal proceeding. In addition it applies to all contracts whenever made, not just to contracts . Under section 521, the court must enter a stay unless military service is not materially affecting a service member's ability to defend or prosecute an action. This must be carefully distinguished from section 532 (the foreclosure specific statute) which generally requires an opinion of the court that the ability of the defendant to comply with the terms of the obligation (as opposed to its ability to defend an action) has not been materially affected by reason of his military service.
The court may enter such a stay at any stage of a proceeding in which a service member is either a plaintiff or a defendant. This stay may be entered in proceedings occurring up to sixty days after a service member leaves service, and it may last for up to three months following termination of service.
Factors used to determine material affect include geographic and economic challenges, amount of available leave, and specific duty requirements.
The Supreme Court has determined that the burden of proving material effect, which is not allocated in section 521, will depend on the relative circumstances of the parties. Boone v. Lightner, 319 U.S. 561 (1943). Generally, if the service member is stationed far from the proceeding, then the burden will be on the lender to prove material effect. Conversely, if the service member is nearby, the burden will be that of the borrower.
The stay of legal proceedings arises in one of two ways. First, a serviceman may apply to the court for imposition of the stay. 50 U.S.C. App. Section 521. Second, a court has discretion to stay a legal proceeding where a serviceman/defendant claims to be in active military service. 50 U.S.C. App. Section 521.
The court must appoint an attorney to represent a defendant if the judge determines the defendant is in the military and has not made an appearance. The attorney is responsible to obtain a stay and make contact with the defendant. Acts of the court-appointed attorney are not binding on the military defendant.
Where a stay is imposed, the Act provides for a discretionary extension of the stay for up to six months after discharge. 50 U.S.C. App. Section 590. In addition, the statute of limitations is suspended while the serviceman is on active duty. 50 U.S.C. App. Section 525.
Stay of Bankruptcy Motions For Relief From Stay Proceedings
Section 521 of the Act is also applicable in bankruptcy proceedings. Accordingly, the filing of a Motion for Relief From Stay to rid a servicer of the bankruptcy stay can itself be stayed where the bankruptcy court makes a determination that the debtor is materially affected by reason of his military service. Generally, a court will not stay the action on its own motion. (See, e.g., In re Robert Lee Burrell, 230 B.R. 309 (Bankr. ED Texas, 1999)). However, any showing by the debtor that he or she is materially affected could delay the Relief From Stay proceeding.
Stay of Execution
A stay of execution may be granted under section 526 of the SSCRA if military service materially has affected the member’s ability to comply with the judgment. 50 USC Section 526.
Procedures to Set Aside Default Judgments
Section 520 of the SSCRA provides protections to service members against default judgments and includes procedures for setting aside default judgments. 50 USC Section 560. Before a court enters a default judgment, the plaintiff is required to inform the court, by affidavit, of the defendant's military status. Failure to file the affidavit makes any default judgment voidable.
Where a foreclosure judgment has been obtained, the service member may have it reopened or set aside so as to permit him to make a defense thereto. To reopen a case, the defendant must generally show: 1) he was materially affected in presenting a defense; and 2) he has a meritorious defense to the lawsuit. However, where false affidavits are filed, courts are quick to protect the service members. For example, in Kirby v. Homan (1947) 238 Iowa 355 the court concluded that where an affidavit falsely stated that the plaintiff was unaware that the defendant was in the military service, the resulting foreclosure judgment should be set aside even though the serviceman was unable to state a meritorious defense to the foreclosure.
Extension of Redemption Periods
Section 525 of the Act provides that the "period of military service shall not be included in computing any period… provided by any law for redemption of real property sold or forfeited to enforce any obligation, tax, or assessment." Until 1993, it was unclear whether a member of the Armed Services must show that his military service prejudiced his ability to redeem title to property before he could qualify for the statutory suspension of time. In Congroy v. Aniskof, 113 S.Ct. 1562, (1993) the Supreme Court held that it was unnecessary to make such a showing, that the extension of the redemption period applies regardless of whether or not the Service Member was prejudiced.
Tolling of Statutes of Limitations
Normally, once the statute of limitations runs on a civil action, a once-potential plaintiff can no longer sue, and the intended defendant can no longer be sued. However, Section 520 of the SSCRA automatically tolls all statutes of limitations that otherwise would run against service members while they are on active duty. This section has been construed to extend the time for redemption under statutory redemption schemes to the period of active service (see, e.g., Illinois Nat’l Bank v. Gwin, 390 Ill. 345 (1945)). It also would extend the limitation periods in the myriad of class action issues now facing the industry. Unlike other provisions of the SSCRA, section 520 does not require the service member to show that military service materially has affected their ability to participate in legal proceedings.
Protection From Retaliatory Action
The Act provides protection from retaliatory action against those who invoke the Act. Basically, any sort of credit decision cannot be adversely impacted by virtue of the Act being invoked. Thus, if a person seeks a new loan or a workout of an existing loan, the fact that the person invoked the Act cannot be a basis for denial. Similarly, a lender cannot submit an adverse credit report to credit reporting agencies if the adverse report is based on a person invoking the Act.
Remedies
Any person who knowingly causes a foreclosure in violation of the act is guilty of a misdemeanor. 50 USC Section 532. Violating certain provisions of the Act can also lead to harsh penalties including in a prison term up to one year or a fine of up to $1000, or both. 50 US.C. App. Sections 520, 530-535. Knowingly filing a false affidavit is also a crime.
In addition to specific penalties under the Act, at least one court has held that military members have a private cause of action under the SSCRA for violation of the six percent interest rate cap. Mollv. Ford Consumer Finance Co., Inc. 1998 U.S. Dist. Lexis 3638, 1998. This can lead to class action liability.
Creditor violations of section 526 might also subject the lender to violations of the Truth in Lending Act (TILA) disclosure provisions. 15 USC Section 1601-1667 (1994). Specifically, credit disclosure violations might include the following: (1) violation of the creditor’s duty to disclose the proper interest rate (15 USC Section 16379b)(6)); (2) failure to properly adjust any finance charge to reflect the six percent interest cap (15 USC Section 1637(b)(4); and (3) failure to credit retroactively reduce interest resulting in erroneous disclosure of the balance due on the loan or credit transaction (15 USC Section 1637(b)(2)). Misstating rights under the Act or denying the six percent interest also raises potential violations of the Fair Debt Collection Practices Act.
Minefields abound.
Conclusion
The call to war is also a call to Servicers to carefully reevaluate their systems and procedures relating the SSCRA. The situation in Yugoslavia may lead to increasing numbers of borrowers claiming entitlement to the protections afforded by the Act. This complex statute is riddled with danger for Servicers. In addition to criminal and civil liability found directly within the Act there is potential liability under TILA and the FDCPA. Finally, courts have recently allowed a private cause of action, and class action liability, for violations of the Act.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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