Insights

The California Military Families Financial Relief Act (the “Act”) was adopted in 2005 to provide protections to members of the U.S. Military Reserve or the National Guard (“reservists”) called to active duty as a result of the “conflicts” in Afghanistan and Iraq. The primary purpose is to require creditors to defer payments due on certain types of loans and accounts for the lesser of 180 days, or the period of active duty plus 60 days, upon delivery of a notice to the creditor by the reservist called to active duty. The loans or accounts must have been entered into prior to active duty.

As enacted, the Act lists six types of obligations that are subject to the deferral of payment:

1. An obligation secured by a mortgage or deed of trust.

2. An obligation under a credit card (as defined in California’s Song-Beverly Credit Card Act).

3. An obligation under a retail installment contract as defined in the Unruh Act (goods and services).

4. A retail installment account under the Unruh Act.

5. Up to two obligations under the Automobile Sales Finance Act (“Rees-Levering”).

6. Any payment of property tax or special assessment in lieu of property tax imposed on real property assessed on residential real property owed by the reservist and used as his or her primary place of residence.

Effective January 1, 2011, an amendment to Military & Veterans Code Section 800 changes the reference to obligations under the Automobile Sales Finance Act. Instead, the deferral rule will apply to “up to two vehicles loans.” In the same amendment, the legislature added a reference to the definition of “vehicle” to make clear the types of vehicles covered – not just passenger vehicles, but also motorcycles, recreational vehicles, motor homes, and anything else that moves upon the highway. Cal. Stats. 2010 Ch. 124, A.B. 2455.

What the legislature failed to do was to add a reference to the types of vehicle “loans” that are covered. Technically, a retail installment sales contract is not a “loan” – it is an agreement between the seller and the buyer to accept installment payments for the purchase of the vehicle, wherein the seller retains a security interest until the vehicle is paid in full. While the legislature was attempting to be more inclusive—that is, to cover loans that are also secured by motor vehicles, such as credit union or bank loans, and in non-purchase money situations, title loans—it solved one problem and created another.

Nevertheless, looking at the protections in the deferral rule on the whole, it seems that the law is meant to cover not only loans secured by motor vehicles, but also retail installment sales contracts secured by motor vehicles. What about unsecured contracts or loans generally? The law does not provide any deferral protection for unsecured debt other than credit card debt.

Another provision of the amendments effective January 1, 2011, extends these protections to the spouse or legal dependent of a reservist or member of the National Guard called to active duty. Due to the nature of community debt in California, this seems a logical extension.

During the period of deferment, the reservist may defer the payment of principal and interest on the contracts and loans, and no interest may be charged or accumulated on the principal or interest on which the payment is delayed. No penalties may be imposed on the nonpayment of principal or interest during this period. During the deferral period, the holder of the contract or loan may not repossess a vehicle on which payment has been deferred. In addition, the postponement of debt (deferral of payments) may not provide the basis for affecting credit ratings, denial or revocation of credit, or a change in the terms of the existing credit arrangement.

In order for an obligation or liability of a reservist to be subject to the provisions outlined above, the reservist or the reservist’s designee must have delivered to the holder of the contract or loan:

1. A letter signed by the reservist, under penalty of perjury, requesting a deferment of financial obligations.

2. If required by a financial institution (the holder of the contract), proof that the reservist’s employer does not provide continuing income to the reservist while the reservist is on active military duty, including the reservist’s military pay, of more than 90% of the reservist’s monthly salary and wage income earned before the call to active duty.

Furthermore, the holder of a contract or loan with respect to which the debtor (the reservist) has purchased prepaid credit disability insurance must give notice to the debtor not less than 30 days before the expiration date of the insurance that the debtor will not be protected during the period between that expiration date and the deferred maturity date of the contract unless the insurance is extended. The debtor may, at his or her option, direct the holder to add the amount of the additional premium to the unpaid balance of the contract.

The California Military Families Financial Relief Act is not the only law in the Military & Veterans Code that protects reservists and their dependents from debt collection. To the extent permitted by federal law and the California Constitution, any principal and interest on any financial obligation or liability bearing interest and incurred by a member of the California National Guard or his or her surviving spouse, or any principal and interest on any financial obligation or liability bearing interest incurred by a member of the California National Guard for which the beneficiary of that member is liable, must be deferred for a period of six months after the death of the member without penalty or accrual of any additional interest.

This law applies to an obligation of a member of the California National Guard who is killed in the line of duty in the service of the state or federal government, when a member’s surviving spouse or other beneficiary provides written notice of the death of the member to the financial institution to which he or she is liable and from which he or she is requesting deferral of interest and payments as set forth above. The financial obligation or liability bearing interest must have been created before that member’s entry into service.

Other California laws, as well as the Servicemembers Civil Relief Act, U.S. Code Appendix Title 50, protect military service members and their dependents from other collection actions.

Elizabeth A. (Liz) Huber is a partner in the California office of Hudson Cook, LLP. Liz can be reached at 714-263-0424 or by email at ehuber@hudco.com.