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Understanding the Servicemembers Civil Relief Act

Federal law sets 6% cap on interest rates for active duty military

By Steve Holt and Kristie Aronow

Men and women serving in the military carry the weight of protecting the United States, and in exchange the government protects them excessive financial burdens that service may impose. The bulwark of that protection remains a federal law that's nearing a century in age -- the Servicemembers Civil Relief Act (SCRA).

The law was called the Soldiers and Sailors Civil Relief Act when it was first passed in 1918 and rewritten in 1940. It got its current name when rewritten and expanded again in 2003, but its underlying purpose remains the same: Offer an umbrella of protections to military personnel whose service duties conflict with the financial obligations they have as civilians.

Understanding the Servicemembers Civil Relief Act

Chief among the protections is a requirement that lenders cap at 6 percent the interest rates on loans military service members incurred prior to becoming active.

The 6 percent interest cap applies to any charges -- including credit card debt, service charges and renewal charges or fees -- except bona fide insurance. The act specifies that to receive the interest rate reduction, a service member must request it in writing and include a copy of his or her military orders. This applies to the interest on all pre-service loans and obligations, including mortgages, car loans and credit cards. Federally guaranteed student loans, which were once excluded from the cap, were added in 2008, so the cap applies to them as well. The amount over 6 percent is forgiven, not deferred.

To request this reduction, service members should send a written request letter and include a copy of his or her military orders no more than 180 days after the member is released from active duty.

Additional protections under the SCRA include:

  • For renters, protection from eviction and the ability to get security deposits returned.
  • A legal shield for car buyers or leasers. If a service member took out a car loan or lease, the lender can't terminate the contract or repossess the vehicle for breach of contract without a court order as long as military service lasts.
  • Delay of all civil court actions, such as bankruptcy, foreclosure or divorce proceedings. Courts must grant active duty service members a stay in cases where current military duty requirements (or military duty in the last 90 days) "materially affect the member's ability to appear."
  • The promise that service members who claim any of the law's protections would not feel adverse effects on their credit reports or be refused future credit because of it. This protection was added during the 2003 revision of the law.

New laws, new enforcer
While the SCRA remains the mainstay for protecting servicemen and servicewomen from financial strains, the recession helped usher in a new set of protections and a new federal enforcer.

The Military Lending Act helps protects active duty soldiers from high-rate loans, such as payday loans, car title loans and tax refund anticipation loans. It caps loan rates at 36 percent, including fees for insurance and other charges. It also prohibits "rollovers" -- that is, refinances -- by the same creditor.

Should financial abuse occur, soldiers now have a new agency that may offer help. The Consumer Financial Protection Bureau, the federal consumer financial watchdog established in 2011, has added an Office of Servicemembers Affairs to help military personnel with their financial problems. Since the bureau began collecting complaints about financial problems from military members in July 2011, it has gathered more than 4,500, according to July 31 testimony before the U.S. Senate's Veterans' Affairs Committee by Holly Petraeus, the office's director.

"These complaint statistics aren't just numbers to us: They represent military and veteran families and we know the impact consumer financial issues can have on their quality of life," she testified.

Among her office's priorities is making sure that financial companies adhere to the act's provisions. "We do continue to see" compliance problems, she added, first with mortgage lenders, and now increasingly with student loan providers.

Military debt problems
U.S. military men and women can use the help.

SERVICE MEMBERS' FINANCIAL COMPLAINTS

In the two years since 2011, when the Consumer Financial Protection Bureau began collecting complaints from military families about financial products, it received 4,516 complaints. The complaints' topics were:

  • 49% mortgages.
  • 18% credit cards.
  • 13% bank accounts, service.
  • 8% credit reporting.

But service members do face a unique set of challenges. Military members find relocating to new stations cause financial hardships for their family. Moving frequently makes it hard for spouses to find a new job. This makes it difficult for them to have a steady career trajectory. The rising cost of living becomes a greater problem because spouses have difficulty finding employment. Military members face unique challenges: frequent relocation makes it difficult for spouses to find new jobs and advance in their careers, raising families when spouses are away, and, and the rising cost of living as contributing to the problem of military personnel's increased debt load.

A nationwide 2010 survey of servicemembers and their spouses disclosed that one in four credit card holders had card debt of $10,000 or more, and that one in five used a nonbank lending service such as pawnshops and payday lenders. A Department of Defense survey found that military personnel consider finances to be the second-largest source of stress in their lives, behind only career concerns but ahead of deployments, family, health -- even war.

Those debts racked up off duty can sometimes lead to on-duty problems, such as a career-limiting denial of security clearance. According to Cmdr. Amy Derrick-Frost, a Defense Department representative, "on average 1 to 2 percent of security clearance investigations result in denial or revocation ... Of the denials approximately 20 to 30 percent are based solely on financial issues," Derrick-Frost writes in an email.

This is serious business to the armed forces. As a rule, the military views personal debt as a risk to both individual service members and the interests of the armed forces overseas, as the stress of financial battles back home may distract them from their primary mission or -- even worse -- tempt them to sell secrets to an enemy.

Air Force 1st Lt. Brandon Jacobson  says personal debt is no bigger a problem in the military than the civilian world. Jacobson, who runs a financial blog called Military Finance Report, points out that servicemen and servicewomen have some extra advantages that can help them steer clear of debt.

"The military is actually provided more protections: free education, financial assistance that civilian companies would love to charge for, the Servicemembers Civil Relief Act and lending protection," Jacobson, currently stationed in South Korea, says in an email. "I wouldn't say we're any more susceptible to being in debt than civilians."

Jacobson helped a friend on base claim the act's interest rate reduction. When the friend approached Jacobson for financial advice regarding her mounting personal debt, Jacobson noticed the majority of her debt -- including credit card debt and car payments compounding at 16 percent interest -- had accrued before she joined the Air Force.

"Four of the credit card companies dropped the interest rate down to 6 percent right away," says Jacobson. "On the car loan, she faxed them her military orders, and they dropped it to 6 percent right away. That's a better rate than I had on my first car.

"With the lower interest rates the SCRA provided, my friend was able to pay off her debt and start saving for retirement."

See related:  How military couples can get interest rate relief, Q&A: Holly Petraeus takes on mission to halt financial predators

Updated: August 19, 2013


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