What Creditors and Collectors Need to Know

Servicemembers give so much to our country.  Their time.  Their dedication.  And many times, their lives.  Servicemembers don’t have a choice as to when they are called up to active duty and being called up sometimes results in financial stresses to them and their families. To protect our brave service members, Congress passed the Servicemembers Civil Relief Act (SCRA), which has implications for the credit and collections industry. 

There are regulations recovery professionals should be aware of relating to servicemembers and collecting debts.  The SCRA, The Fair Debt Collection Practices for Servicemembers Act (proposed), and the CFPB all weigh in on this topic.

What is the Servicemembers Civil Relief Act (SCRA)?

The Servicemembers Civil Relief Act (SCRA) was enacted in 2003 and has been amended several times.  The law was enacted to ease the financial burdens on service members during times of military service.  It covers rental agreements, security deposits, prepaid rent, evictions, installment contracts, credit card interest rates, mortgage interest rates, mortgage foreclosures, civil judicial proceedings, automobile leases, life insurance, health insurance, and income tax payments.

The SCRA provides numerous benefits and protections to people in military service.  However, it is important to know the definition of what the SCRA defines as ‘in military service’ in order to be able to adequately create policies & procedures surrounding debt collection and military personnel. 

The SCRA is governed by the Department of Justice.  Specifically, the Civil Rights Division of the DOJ is tasked with enforcing the SCRA.

Who Receives SCRA Protections?

The definition of persons ‘in military service’ is provided in the Overview section of the SCRA, which states: “Military service is defined under the SCRA as including:

  • Full-time active-duty members of the five military branches (Army, Navy, Air Force, Marine Corps, and Coast Guard);
  • Reservists on federal active duty; and
  • Members of the National Guard on federal orders for a period of more than 30 days.
  • Servicemembers absent from duty for a lawful cause or because of sickness, wounds or leave are also covered by the SCRA.
  • Commissioned officers in active service of the Public Health Service (PHS) or the National Oceanic and Atmospheric Administration (NOAA) are also covered by the SCRA.

Additionally, certain benefits and protections are extended to servicemember’s dependents (spouse, children, other individuals that the servicemember provides more than 1/2 of the individual’s support for 180 days prior to requesting relief under the SCRA), and in some circumstances, to those who co-signed a loan with a servicemember. 

What is the Purpose of the SCRA?

The purpose of the SCRA is to provide protections to servicemembers that relate specifically to financial obligations.  Several of the protections apply to both first-party and third-party collections. 

Interest Rate Limits – Six Percent Interest Cap

The interest rate cap provision only goes into effect when the servicemember requests the interest rate reduction.  It covers the entire time the servicemember is in military service, and longer for mortgages.    

  • The SCRA limits the amount of interest that can be charged on certain financial obligations that were incurred prior to military service. The limit is six percent (6%) per year.  In order to have the reduced interest rate, the servicemember must provide the creditor with written notice and a copy of their military orders or other appropriate indicator of military service.    The written notice must be provided to the creditor within 180 days of the end of the servicemember’s military service. 
  • For mortgages, the interest is capped at six percent during the entire period of military service, and for one year after the period of military service.
  • For all other financial obligations outside of mortgage, the six percent cap only applies for the duration of the period of military service.
  • In response, the creditor must forgive (not defer) interest greater than six percent per year and it must be forgiven retroactively for the entire period of military service.
  • The SCRA notes that the following types of financial obligations, among others, are currently eligible for the six percent interest rate benefit: Credit cards, automobile, ATV, boat and other vehicle loans, mortgages, home equity loans and student loans.

Best Practice Tip: If a creditor receives this notice on an account which is in internal collections, or an account that has been forwarded to a collection at a third-party agency, the creditor should communicate immediately to the internal or third-party collection parties and adjust the interest and balance accordingly.

Protections Against Default Judgments & Judgment Execution

Not all collections move to a judgment.  But in cases where they do, certain steps must be taken if the defendant may be in the military. 

  • The SCRA states that for civil court proceedings, where a defendant servicemember has not made an appearance and he or she may be in the military service, a court may not enter a default judgment against the servicemember, until the court appoints an attorney to represent the interests of the servicemember.
  • In any civil court proceeding where the defendant servicemember does not show up at the hearing, the plaintiff creditor must file an affidavit with the court stating one of three things:
    • The defendant is in military service
    • The defendant is not in military service
    • Creditor is unable to determine if defendant is in military service or not
  • The court may stay the execution of any judgment, vacate, or stay an attachment or garnishment of property, money or debts in the possession of the servicemember, if the judge determines the servicemember’s active military status impacts such obligation.

Best Practice Tip: Check for military service prior to taking a default judgment.  See section below on how to check the DMDC Database. 

Installment Contracts and Repossessions

If an installment contract for a vehicle (car, boat, ATV, motorcycle, etc.) falls into arrears and repossession is required, creditors should first check to ensure the consumer is not in military service.

  • The SCRA states that a creditor may not repossess a vehicle during a borrower’s period of military service without a court order as long as the servicemember borrower either placed a deposit for the vehicle, or made at least one installment payment on the contract before entering military service. 

Best Practice Tip:  Check the DMDC database prior to all repossessions.

Non-Judicial Foreclosures

If a mortgage goes into default and a non-judicial foreclosure action is being considered, creditors should take extra caution when their consumer may be in the military.

  • In order for this section of the SCRA to apply the mortgage in question needs to have been taken our prior to the servicemember entering military service.
  • During a period of military service, and for one year after military service, creditors must get a court-order prior to foreclosing on a mortgage of a person in military service.

Best Practice Tip: Check the DMDC database prior to all foreclosure actions, specifically note the start and end dates of military service since the SCRA protection lasts for one year after military service has ended. 

Additional Protections Under the SCRA

There are a couple additional protections under the SCRA that may not be directly related to debt collections. 

  • Residential (apartment) Lease Terminations – grants protections for the servicemember and their dependents. There are requirements surrounding the time period when the lease was executed and also include provisions for permanent change of station of the servicemember. 
  • Enforcement of Storage Liens – these liens may not be enforced by the storage facility or a tow company without a court order during the servicemember’s period of military service and continuing for 90 days after military service.

What is the DMDC Verification Service?

You can verify a person’s military status via the DMDC’s SCRA website.  There is no charge for the search.  You may perform an individual request by entering a name + date of birth or name + social security number.   There is also an option for multiple record requests.  For both single and multiple requests, you must first set up an account and log in.

In addition to the name, DOB and/or SSN information entered, you must also enter an active duty status date.  The search will use this date to report if the individual was actively serving, received notice to serve, or was serving 367 days prior to the given date or not. 

One thing to note is that the SCRA database is only updated by the DOJ monthly.  Servicemembers may go in and update their own status individually, but as a whole, it is updated monthly.   Therefore, it is important to download the provided certificate and keep it with your file as proof of the date you checked the database if you are taking a default, repossessing a vehicle or foreclosing on a mortgage as stated above. 

Search results include a certificate from the DOJ which can be used as proof of your search.  Information contained on the certificate includes:

  • Acknowledgement of whether or not a match was found for your input criteria
  • Re-statement of the name, SSN and/or DOB entered
  • “Status as of” date
  • Certificate ID
  • Active duty start date
  • Active duty end date
  • Active duty status
  • Service component
  • Date the individual left active duty if within 367 days of the active duty status date
  • An indication of if the person, or their unit was notified of a future call-up to active duty on the active duty status date

How Do I Scrub for SCRA Status?

While you can create an account and process multiple requests in batch through the SCRA website, many companies find it easier to do this scrub through a third-party vendor.  There are limitations to file size, and the website frequently has outages, requiring files to be re-started.  There are various data companies that will provide a batch service for you if you do not wish to perform individual or batch inquiries yourself.  These companies also watch the DMDC website for outages, notification of updates, and delayed files. 

But if you do decide to scrub yourself, there is a user guide available from the home page that will walk you through the process of signing up, sending, and receiving files.

The Fair Debt Collection Practices for Servicemembers Act

The FDCPSA [H.R. 5003] was passed by the House on March 2, 2020 and referred to the Senate.  It has not been approved by the Senate as of the writing of this blog.   It proposes to amend two sections of the FDCPA to specifically address servicemembers.  While it is not yet a law, it is worth a look to ensure your collection practices will comply once it is finalized.  It is important to note here that the CFPB’s October 30, 2020 updates to the FDCPA (Regulation F) do not include these updates or any mention of servicemembers or active military. 

The FDCPSA proposes:

  • To add to the ‘Communication in Connection with Debt Collection’ section of the FDCPA, a new section entitled Communications Concerning Servicemember Debts. Which includes the definition of ‘covered member.’
  • A debt collector may not, in connection with the collection of any debt of a covered member threaten to have the covered member reduced in rank, have their security clearance revoked, or threaten to have them prosecuted under the Uniform Code of Military Justice. It also adds these activities to the “Unfair Practices” section of the FDCPA.

By making these provisions a part of the FDCPA, they would be under the CFPB’s enforcement powers.  This would allow the CFPB to sue covered entities for any failure under the FDCPSA. 

Best Practice Tip:  Write policies and procedures for collecting from servicemembers, and include both the SCRA and the proposed FDCPSA, their definitions, and their prohibitions in your documentation.

Servicemembers and Collections

While the SCRA does not require collections to completely stop during military service, special care should always be taken with these accounts. 

The SCRA is clear that it should generally be read in favor of the servicemembers.  There have been multiple lawsuits over the past few years that highlight the importance of checking the SCRA database prior to taking an adverse action against a person who may be in the military. 

Additionally, the CFPB has a page of their web site dedicated to servicemembers.  It provides resources and education for military members and their families.   The CFPB also monitors their complaints for any indication that it is related to servicemembers, veterans and military family members. 

Servicemembers and their families have enough to worry about when they are called up for active military duty.  Ensuring you are collecting debt within the rules and regulations set forth for these specific accounts will ensure one less thing they have to worry about while on duty.