When Your Customer is a Soldier

1. When Your Customer is a Soldier Highlighting Laws Regulating Lending to Servicemembers

2. Presented by: Lawrence A. Young HughesWattersAskanase Houston, TX

3. Soldiers’ and Sailors’ Civil Relief Act NowServicemembers’ Civil Relief Act

4. From “Soldiers and Sailors” to “Servicemembers” • The Servicemembers’ Civil Relief Act (Act) traces its origins to the Civil War. • After World War I, Congress enacted the Soldiers’ and Sailors’ Civil Relief Act of 1918. • Congress enacted the 1940 version of the Act and further amended it from time to time as additional conflicts occurred • Extensively amended by the Servicemembers’ Civil Relief Act in 2003 • The purpose was to clarify and update the provisions of the prior statute

5. Purposes of the Act • (1) to provide for, strengthen, and expedite the national defense through protection extended by this Act [said sections] to servicemembers of the United States to enable such persons to devote their entire energy to the defense needs of the Nation; and • (2) to provide for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service

6. Applicability of the Act Generally • The SCRA Covers: • all Active Duty Servicemembers • Reservists (while on active duty) • Members of the National Guard (while on active duty) • The Protection Begins: on the date of entering active duty • The Protection Ends:generally within 30 to 90 days after the date of discharge from active duty.

7. Who is Covered by the Act? • Army • Navy • Air Force • Marine Corps • Coast Guard • National Guard • Public Health Service(Commissioned Officers) • National Oceanic and Atmospheric Administration(Commissioned Officers)

8. When Are Servicemembers Protected by the Act? • Military Service Includes: • Active duty service • Full-time training • Annual training duty • Attendance at a designated school while on active duty • Any period during which a servicemember is absent from duty on account of sickness, wounds, leave, or other lawful cause • Military Service Ends: • When the servicemember is released from such service or dies while in such service. • Reservists and Inductees are Protected by the Act: • From the time they receive orders to appear until they report for active duty or induction at which time the active duty provisions of the Act begins.

9. A Note on “Active Duty” • Enlistment in a Delayed Entry/Enlistment Program (DEP) may NOT constitute “active duty” • See Donahou v. Presidential Limousine and Auto Sales, Inc.* • Donahou enlisted in the military on Jan. 18, 2006 • Was in a DEP and was not required to report until August 14, 2006. • The Vehicle was purchased June 9, 2006 *Donahou v. Presidential Limousine & Auto Sales, Inc., 06 6070, 2007 WL 1229342 (W.D. Ark. Apr. 24, 2007)

10. A Note on “Active Duty” (cont.) Enlists in DEP Auto Loan Reports for Active Duty • The Lender argued that because he was enlisted when he made the loan, SCRA did not apply • The Court found that because while in the DEP he: • Had a full-time civilian job • Had not been issued a military ID or uniforms • Was not otherwise prepared for any military duties • “[Donahou] only had the promise of service to his country and like many other service members, the jobs and paychecks ceased upon entering active duty.” • Therefore the court GRANTED SUMMARY JUDGMENT for Donahou holding • DEP is NOT “active duty” • Repossession of the vehicle without a court order was in violation of the SCRA January 18, 2006 June 9, 2006 August 14, 2006

11. National Guard • Full-time National Guard Duty: • training or other duty as a member of the National Guard for which the member receives, or is entitled to receive, pay from the United States. • This Includes: • when called to active duty • when called by the President or the Secretary of Defense to active duty for more than thirty consecutive days in connection with a national emergency declared by the President.

12. Commissioned Officers of the Public Health Service or the National Oceanic and Atmospheric Administration • Military Service Includes: • when on active service • when the servicemember is absent from duty due to sickness, wounds, leave or other lawful purposes.

13. Servicemebers Are Aware of Their Rights • The Secretary of Defense is charged with making sure servicemembers and their dependents are aware of the provisions and protections of the Act • The DoD has prepared a short informational summary as well as brochures and training materials. • HUD in consultation with the DoD has created a military version of the Homeownership Counseling Notice for servicememebers

14. Applicable Provisions of the Act • The 6% Lending Rule • Termination of Leases • Evictions • Installment Contracts • Mortgage Foreclosures • Protection from Default Judgments • Stays on Litigation • Statutes of Limitations

15. The 6% Lending Rule • The SCRA limits to six percent the interest that can be charged on any obligation incurred prior to military service • A servicemember entering active duty has the right to have interest on debts reduced to six percent

16. Process: • The servicemember must notify the creditor in writing • provide a copy of his or her orders • request the reduction during the period of the military service or within 180 days thereafter

17. The “Materially Affects” Exception • A servicemember is NOT required to show that their active duty status affects their ability to pay • A creditor MAYseek relief from the interest-rate cap by showing a court the servicemember's status does not materially affect his or her ability to pay the contractual interest rate • For example, high school and college students who join the military directly out of school and receive a regular paycheck for the first time will often be unable to prove that their military service materially affects their ability to pay the contractual interest rate

18. Creditor’s Obligations • Upon receipt the creditor must: • reduce the interest rate to six percent • forgive interest in excess of six percent • payments are reduced by the amount of interest forgiven • NOTE: these reductions apply from the date the servicemember ENTERED ACTIVE DUTY (not the date the notice is received) • Interest includes: • service charges • renewal charges • fees, or • any other charges (except bona fide insurance) with respect to an obligation or liability • Simply extending the loan or deferring the interest will not comply with the Act

19. The 2008 Housing and Economic Recovery Act • Added provisions to the SCRA requiring the Secretary of Defense to develop and implement a program to advise servicemembers returning from active duty of actions they may take to prevent or stay foreclosures • Extended the 6% interest rate cap to include the period of service PLUS ONE YEAR • Expanded the definition of “interest” to include: service charges, renewal charges, fees, and any other charges except those for bona fide insurance

20. A Note on Creditor’s Obligations • A creditor must lower the interest rate as required. • See Rodriguez v. American Express* • In this case Rodriguez had pre-existing loans and he notified his lenders of his transition to active military duty • The lender lowered the interest rate to 6% as of the date it RECEIVED NOTICE of his active duty. • The lender then wrote his wife and offered to restructure the payments and make the interest reduction retroactive to the date he entered military service • Wife did not respond but continued to make payments at the same rate *Rodriguez v. Am. Express, CV F 03-5949 AWI LJO, 2006 WL 908613 (E.D. Cal. Apr. 7, 2006)

21. A Note on Creditor’s Obligations (cont.) • Lender never made interest rate reduction retroactive to the date Rodriguez entered military service. • The court held: “Defendant presents no authority that the obligation of Valley First to retroactively apply the credit paid between February and March of 2002 is waived by Plaintiff's non-response to Valley first's offer. Whether or not Plaintiff's wife accepted Valley First's offer to restructure the payments, Valley First should have credited the account with the excess interest paid.”

22. Termination of Leases • Servicemembers may terminate a lease for property used for the following purposes: • Residential • Professional • Business • Agricultural • The Act applies when a servicemember: • Enters active duty • Is deployed for 90 days or more • Receives permanent change of station (PCS) orders (i.e., is transferred to another post) • The termination request must be in writing and include a copy of the orders. • Termination is effective 30 days after the next rental payment is due • Note: there is NO requirement to show the service materially affects the servicemember’s ability to pay

23. Automobile Leases • SCRA specifically allows a servicemember to terminate an automobile lease • A lease can be terminated: • Upon entry onto active duty • (if that period of duty is 190 days or longer) • Upon receipt of PCS orders from a post in the continental United States to a post outside of the continental United States and vice versa • When Deploying individually or with a unit “in support of a military operation” • (if the deployment is for 180 days or more)

24. Evictions • A landlord must obtain a court order for eviction • If the servicemember or a dependent: • Requests a stay, • Shows that the ability to pay the rent has been materially affected by military service, and • The rent is less than $2,400/month • The court MUST grant a stay • The length of the stay is at the discretion of the court • The court also has the power to adjust the obligation under the lease to “preserve the interests of all parties”

25. Installment Contracts • SCRA provides protections for installment contracts to purchase any real or personal property, IF: • The Installment contracts were entered into BEFORE entering military service, and • The Servicemember’s service MATERIALLY AFFECTS their ability to make the payments • Rescission, termination or repossession for breach is NOT allowed absent a court order

26. Repossession Cases Chas. H. Jenkins & Co. v. Lewis, 259 N.C. 86, 130 S.E.2d 49 (1963) (holding the SSCRA did not apply to a defendant who purchased an automobile and executed a conditional sales contract as security for payment of part of the purchase price thereon while he was in the military service) Twitchell v. Home Owners' Loan Corp., 59 Ariz. 22, 27, 122 P.2d 210 (1942) (interpreting a similar provision in the mortgage and trust section of the SSCRA, the court held that the Act “was meant to protect the interests of those who were called to the defense of their country and who, for that reason, were unable to keep up the payments upon obligations which they had incurred previous to their being called into service.”) In Waldron v. Commercial Credit Corp., 5 Va. Cir. 450 (Va.Cir.Ct.1974), the court interpreted a provision similar to § 532 in the SSCRA's section on waiving rights pursuant to a written agreement. In that case, the plaintiff purchased a car from a car dealer and agreed to make a down payment and pay the balance in monthly installments. Id. The car dealer later assigned the contract and lien to a commercial credit corporation. Id. After the plaintiff joined the military, the corporation agreed to modify the payment terms. Id. The plaintiff subsequently defaulted, and the Virginia Circuit Court held that the plaintiff was not protected by the SSCRA because the “Act expressly provides that the other provisions of the Act (including §§ 520 and 531 ...) shall not apply to the modification of a contract or to the repossession and sale of property which is security for an obligation pursuant to a written agreement of the parties, or their assigns, executed during or after the period of military service.” Id. at 452. Whigham v. Chase Auto Fin. Corp., 2:11CV256, 2011 WL 4748178 (E.D. Va. Oct. 5, 2011)

27. Mortgage Foreclosures • Special protection specific to foreclosures of mortgages and other security interests • The Act applies to relief sought on any obligation secured by mortgage, deed of trust or other security device • IF: • The obligation was entered into and the property was owned by the servicemember or a dependent prior to military service • and a servicemember's ability to defend has been materially affected by their service • THEN: • any foreclosure action filed during or within 90 days after military service is covered. • Possible relief includes: • A stay • An adjustment of the obligations (extending the maturity date, etc.) • Granting foreclosure and extending the period of redemption.

28. Protection from Default Judgments • If an individual defendant does not appear in a civil proceeding, the plaintiff must file an affidavit: • Stating the military status of the defendant • The facts supporting that conclusion, or • That the plaintiff is unable to determine the military status of the defendant • If it appears the defendant is in military service, the court may NOT enter a final judgment until it appoints an attorney to represent the defendant • Proceedings are stayed for a minimum of ninety days on the motion of defendant’s counsel or the court’s own motion if the court determines that: • There may be a defense which cannot be presented without the defendant’s presence or • if counsel has been unable to contact the defendant or otherwise determine if a meritorious defense exists

29. Stays on Litigation • A servicemember may file a request to stay civil proceedings of which he or she has received notice • The court SHALL stay the proceedings for at least 90 days upon such application if it is received at any stage before final judgment • The application must contain: • The facts that prevent the appearance of the servicemember (must be material) • A statement from her or his commanding officer that current military duty prevents the appearance and that leave is not authorized • Note: the court MUST grant an INITIAL stay of at least 90 days but: • The court has the discretion to grant additional stays • If the court refuses requests for additional stays, an attorney must be appointed to represent the unrepresented service member.

30. Effect on Statutes of Limitations • The SCRA tolls any limitation period for filing suit during a servicemember's military service • The tolling provision does not include a spouse or dependents • Example: A soldier injured in an automobile collision while on active duty will have two years after leaving active duty to file suit but if his wife is also injured in the collision, she must file suit for her own injuries within two years of the collision. • The SCRA's tolling provision applies not only to actions by a servicemember, but also to causes of action against a servicemember • The SCRA tolling provisions do not require any showing that military service would or did prejudice a servicemember's ability to prosecute or defend a case • Theoretically a servicemember could bring a 25 year old cause of action • Note: the equitable defense of laches is likely still available • Note: REDEMPTION OF REAL PROPERTY: • A period of military service may not be included in computing any period provided by law for the redemption of real property sold or forfeited to enforce an obligation, tax, or assessment.

31. Applicability of SCRA to Business Entities • At least one court, applying the SSCRA (predecessor to the SCRA) found the interest rate protection may also apply to business loans • In Cathey v. First Republic Bank, 2001 WL 1471747 (WD La 2001), a case involving an officer who had personally guaranteed a business loan for an S corporation, a federal court held that the bank should not have refused to lower the interest rate to six percent

32. Restrictions on Predatory Lending: The Talent Amendment

33. Military Lending Act • Based on concerns of “predatory lending” • DoD issued a report revealing servicemembers are more likely to be the targets of what it considered “predatory lending” • Because of their age and financial status military personnel are particularly susceptible to predatory lending • Payday lenders disproportionately locate near military bases • Congress began regulating these loans and after initial industry backlash, focused the regulation on the three most problematic types of loans

34. The Talent Amendment • The law covers three credit products that the DoD determined pose the highest risk of predatory lending: • Payday Loans: closed-end credit with a term of 91 days or less in which the amount financed does not exceed $2,000 and the covered borrower receives funds from and incurs interest and/or is charged a fee by a creditor. Contemporaneously with the loan, the borrower either provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day, or authorizes the creditor to initiate a debit or debits to the covered borrower's deposit account (by electronic fund transfer or remotely created check) • Vehicle Title Loans: closed-end credit with a term of 181 days or less that is secured by the title to a motor vehicle owned by a covered borrower, other than a purchase money transaction • Tax Refund Anticipation Loans: closed-end credit in which the covered borrower expressly grants the creditor the right to receive all or part of the borrower's income tax refund or agrees to repay the loan with the proceeds of the borrower's refund • Unless a creditor's product falls within one of these three specific definitions, the Talent Amendment does not apply

35. The Final Regulation • Only applies to the three types of defined loans • Applied to any institution making the defined loans, including banks • Has a unique definition of Annual Percentage Rate called the Military Annual Percentage Rate (MAPR) of 36% which includes fees that would not normally be considered interest • Has additional disclosure requirements • Also covers dependents of servicemembers

36. The Final Regulation: MAPR MAPR = 36% Calculated just like closed end APR, but includes fees not normally calculated in APR including: • Interest, fees, credit service charges, credit renewal charges • Credit insurance premiums including charges for single premium credit insurance, and fees for debt cancellation or debt suspension agreements • Fees for credit related ancillary products sold in connection with and either at or before consummation of the credit transaction. MAPR does not include fees or charges for: • unanticipated late payments, default, delinquency, or for taxes or fees • taxes or fees prescribed by law and paid to a public official for determining the existence of, or for perfecting releasing or satisfying a security interest • any tax or fee for recording the instrument securing the debt • tax return preparation fees associated with a tax refund anticipation loan whether or not the fees are deducted from the loan proceeds.

37. The Final Regulation: Additional Disclosure Requirements Two types of borrower disclosures: • covered borrower identification statement • mandatory loan disclosure The borrower identification statement must be signed by each borrower indicating whether he or she is a covered borrower • Provides “safe harbor” to a lender • Note: if the lender has other information (like a pay stub) indicating they are dealing with a covered borrower the safe harbor is not applicable The mandatory loan disclosure includes: • the MAPR • a description of the payment obligation of the loan • a statement discussing the rights of, and services available to, covered military persons. Note: The mandatory loan disclosure must be given in writing to be retained by the borrower, AND ORALLY • For an Internet or mail transaction the oral requirement is satisfied by providing borrower with a 1-800 number which gives the oral disclosure when called Disclosures under Regulation Z will likely be different, and must also be given if necessary

38. State Laws / State Action

39. Only 8 States have not Extended Any SCRA Protection to State Servicemembers • Delaware • Massachusetts • Mississippi • Missouri • Nebraska • Nevada • South Carolina • Tennessee

40. States Applying All or Nearly all SCRA Protection to State Servicemembers • Alabama • (after 30 days of active duty) • Arkansas • (when called to active duty by the governor) • Arizona • (when called to active duty, including training, camp or field duty, emergency mobilization, or volunteer duty during peacetime) • Connecticut • (when called to active state duty by the governor) • Idaho • (after 30 days of active duty) • Kansas • (adopted SCRA in its entirety) • Indiana • (after 30 days of active duty) • Kentucky • (after 30 days of active duty) • Maryland • (after 14 days of active duty) • Minnesota • (when ordered to active service) • New Hampshire • (after 30 days of active duty) • New Mexico • (after 30 consecutive state duty days, or any federally funded or homeland security duty) • North Dakota • (after 30 days of active duty) • Ohio • (when performing training or duty) • Oklahoma • (when ordered to state active duty or full-time national guard duty) • Rhode Island • (after 90 days of state active duty) • South Dakota • (when called to state active duty by governor or president) • Texas • (when called to active duty by the governor) • Virginia • (after 30 days of active duty) • West Virginia • (after 30 days of active duty) • Wyoming • (after 30 days of active duty)

41. State Laws/ State Action • All other states have enacted variations on, or parts of, the SCRA as it applies to State Servicemembers • Some of the more interesting state modifications include: • Extension of the Interest Rate Reduction to Spouses/ Dependents (SCRA only protects dependents and spouses when the servicemember is a co-obligor) • Arkansas • Illinois • Iowa • Louisiana • Wisconsin • Extension of the Default Judgment Protections to Spouses/ Dependents • Arkansas • Washington • Wisconsin • Prohibition on discriminatory Lending Practices to Servicemembers • Arkansas • Hawaii • New York • Utah • Wisconsin

42. State Laws/ State Action Some States have enacted additional protections not contemplated by the SCRA • Restrictions on Service of Process • Arkansas • Hawaii • Iowa • Minnesota • Mississippi • Nebraska • New Mexico • Pennsylvania • Tennessee • Service as a Grounds for Continuance • Georgia • South Carolina • Virginia

43. California has Extensively Modified the Statute in Regards to State Servicememembers California provided more extensive relief to its National Guard members called to active duty in Iraq and Afghanistan by allowing in particular: • Deferment of payments due on mortgages, credit cards, and certain other obligations defined in the legislation • Deferred mortgage payments are not due until sale of the property or maturity of the indebtedness, or • further encumbrance of the collateral property • Tax and insurance escrow payments must be maintained • The deferral period is the lesser of 180 days or the extent of active duty plus sixty calendar days. The maturity of the obligation is extended by the number of months payment is deferred • Penalties, interest on the deferred principal and interest, and foreclosure actions are stayed during the deferral period. • To obtain this relief, the reservist must request the deferment in writing • The creditor can require proof that the reservist's employer does not provide continuing income during the period of active military duty, that, when added to military pay, amounts to more than ninety percent of the income earned prior to active duty • The reservist or the reservist's dependent can request this letter from the employer which is required to produce it within five working days of the request Additional Discrimination Protection: • California also has additional prohibitions against a lender using status as a servicemember as a basis for discrimination in lending (approval, interest rates, etc.)

44. Questions?