Insights

Earlier this year, a major financial institution publicly admitted to overcharging approximately 4,500 servicemembers and wrongfully foreclosing on at least 18 servicemembers in violation of the Servicemembers Civil Relief Act (SCRA). This admission has set off a firestorm in the lending community, the media, and even Congress.

On the heels of this announcement, Senators John Kerry and Jack Reed sent letters to the Federal Reserve Board and the Department of Justice, respectively, asking both agencies to investigate reports of banks improperly foreclosing on servicemembers. On February 1, 2011, Holly Petraeus, newly appointed head of the Office of Servicemembers Affairs at the Bureau of Consumer Financial Protection (CFPB) sent a warning letter to 25 of the largest banking institutions calling on them to take proactive steps to ensure compliance with the SCRA.

Petraeus then testified before the House Committee on Veteran’s Affairs, and explained to the Committee that the OSA will work in partnership with the Pentagon “to see that military personnel and their families receive strong financial education, to monitor their complaints about consumer financial products and services – and responses to those complaints – and to coordinate efforts by federal and state agencies to improve consumer financial protection measures for military families.”

In her position as head of the OSA, Petraeus plans to work with CFPB examiners to make sure they are informed about military-specific issues. She also plans to encourage the CFPB’s enforcement team to take action against financial providers “who break the law to harm servicemembers and to work with the consumer response unit to be sure that it is attuned to the military community and responsive to its concerns.” She praised the Department of Justice for authorizing three lawsuits against nationwide lenders and for investigating foreclosures and failures to lower interest rates as required by the SCRA.

Petraeus want to ensure that the SCRA achieves its purpose of protecting servicemembers from domestic distractions, such as financial concerns, when they are called to active duty. The purpose of the SCRA, originally enacted as the Soldiers and Sailors Civil Relief Act in 1918, is to protect servicemembers so that they can devote their entire attention to defending the Nation. However, Petraeus testified, that according to a Department of Defense survey, finances are the second largest concern among servicemembers, behind careers. Petraeus went on to say that servicemembers should not have to fight to obtain the benefits they are entitled to receive.

Among numerous other protections, the SCRA requires lenders to reduce the interest rate on certain financial obligations to 6% and prohibits foreclosures on certain mortgages without a court order. The SCRA requires a lender to reduce an interest rate to 6% on certain obligations incurred by the servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember entered military service. The servicemember must provide written notice and a copy of his or her military orders to the creditor at any time during the period of military service and for up to 180 days after the termination of military service. The creditor must reduce the rate and forgive any excess interest during the period of military service and for one year after, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage or during the period of military service, in the case of any other obligation or liability.

The SCRA prohibits a lender from foreclosing without a court order during a servicemember’s period of military service or for nine months after the servicemember’s military service terminates. Last December, Congress passed the Helping Heroes Keep Their Homes Act of 2010 which extended the Housing and Economic Recovery Act of 2008 amendments that provided for the additional nine month protection period. Prior to HERA, the protection period was only the period of military service and for three months after service termination. The new extension imposes the nine month protection period until December 31, 2012.

Lenders, however, have fallen short in complying with these two protections. In an effort to bolster compliance, Congress passed the Veteran’s Benefits Act of 2010, which added a new subsection to the SCRA authorizing the U.S. Attorney General to bring a civil action against lenders and servicers for violating the SCRA and to obtain injunctive and declaratory relief against any person who engages in a pattern or practice of violating the SCRA or who violates the SCRA in such a way that raises an issue of significant public importance. In addition, in a civil action brought under the new subsection, the court may award a civil penalty of up to $55,000 for the first violation and up to $110,000 for any subsequent violation.

Any person who is harmed by a violation of the SCRA may also obtain injunctive and declaratory relief as well as monetary damages for the harm caused by the violation as well as the costs and reasonable attorneys’ fees associated with bringing a lawsuit. Recent litigation suggests that these “monetary damages” may include punitive damages.

In light of the potential financial exposure that lenders face and the recent attention from Congress and the media, it is essential that creditors are aware of these protections and implement compliance programs to make sure that the protections of the SCRA are not violated.

Emily G. Miller is an associate in the Maryland office of Hudson Cook, LLP. Emily can be reached at 410-865-5418 or by email at emiller@hudco.com.