The state attorney general’s investigation of possible foreclosures involving military personnel should alert mortgage lenders and servicers to the hazards of noncompliance with the Servicemembers Civil Relief Act (SCRA).
State Attorney General Eric Schneiderman is investigating whether lenders illegally foreclosed on homes of servicemembers at Fort Drum.
Compliance experts predict a growing number of investigations across the country by both state and federal regulators, as well as more private lawsuits against lenders.
Holly Petraeus, wife of the former general David Petraeus and head of the new Consumer Finance Protection Bureau’s Office of Servicemembers Affairs, is taking a very public role in her effort to protect servicemembers.
Expect more news stories in the mainstream media, warn compliance experts. “This is a really great news story,” Kirk Jensen, a partner at the Washington, DC-based law firm Buckley Sandler, said in a recent presentation. “The press loves this story.”
Although it investigates potential violations of other regulations only after receiving multiple complaints, the Department of Justice will investigate a lender’s SCRA compliance after a single complaint, Jensen said.
“It’s under a microscope right now, and it should be,” said Mary Beth Guard, executive editor for BankersOnline.com, which provides compliance advice and training.
The law forbids lenders from foreclosing on homes of active duty military personnel except by court order. That includes members of the Coast Guard, reservists ordered to report for military service, and National Guardsmen called to active service for more than 30 consecutive days.
Lenders cannot foreclose on a servicemember’s home while they are on active duty, or within nine months after they leave military service, without court approval. After Dec. 31, 2012, the nine-month grace period reverts to three months.
Continual changes to the SCRA, which also restricts evictions of servicemembers from rental properties and repossessions of their property securing personal loans, makes compliance trickier. Congress originally enacted the law in 1918 as the Soldiers and Sailors Civil Relief Act, re-enacted it in 1940, again in 2003, and modified it in 2010. Because of that long history, sections of the law’s language, written in different financial times, are archaic, with legal definitions differing from current ones.
“Many institutions do not really have a compliance program that meets regulators’ requirements,” said Jeff Naimon, an attorney with Buckley Sandler.
The key is finding if homeowners are in active duty. “If they are, you just have to back off,” said Guard, former general counsel for the Oklahoma Bankers Association. “There’s nothing worse for your reputation than foreclosing on military personnel.”
The law does not require servicemembers to send lenders a copy of their orders or tell them they are in military service to have foreclosure proceedings stopped.
The Department of Defense has a searchable online database of servicemembers’ names, but it has shortcomings, according to compliance experts. For instance, a servicemember’s name won’t be found in the database, Guard noted, if it differs from the legal name recorded on the mortgage.
The database may not always be accurate and current, and lenders cannot do automated batch-file checks, although the Justice Department can, Jensen said. Lenders must check it at the right time in foreclosure process and be able to prove that they have used the database
Lenders should send notices to all borrowers with late payments to inform them about the SCRA, Guard advised.
“People may make assumptions on who is or is not in the military,” she said. “Send the damn notice. Don’t try to second-guess if the borrower is a servicemember.”
Yet even if lenders send notices, borrowers may not open the mail or respond.
The SCRA also requires lenders to reduce the mortgage rate of servicemembers to 6 percent or less if they submit a written request and a copy of their orders. The rate reduction is retroactive to when they entered the military or were called into active duty, and the law’s definition of interest rate, which includes all fees and chargers, differs from definitions used by other regulations, such as the Truth in Lending Act.
Banks sometimes make the mistake of shortening the term instead of lowering the payment, thinking the homeowner will be better off retiring their mortgage sooner, Guard said. “Service members need relief right away, and they need the rate lowered and the loan re-amortize for lower payments.”
Another dilemma that banks face is what to do if servicemembers have not requested a rate adjustment but employees at the local bank know they are in the military. “Our advice is, if you truly know the person is in military service, go ahead and lower the rate,” Guard said. “It’s incumbent on bankers to be proactive."