SCRA, Joint Obligations and Mortgage Deferment

Issue/Inquiry

If a servicemember is one of many signers on a commercial credit obligation ?and claims relief under the SCRA, are the provisions of the statute regarding interest rate reduction and deferment of foreclosure proceedings applicable?

Response Summary

The interest rate limitations of the SCRA apply to any obligation the servicemember is personally liable for, including joint obligations with other persons, while the protections afforded by it to mortgages apply to any loan secured by a mortgage on real property of the servicemember.

Response Detail

Interest Rate Limitation

The Servicemembers Civil Relief Act of 2003 (“SCRA”) replaced the Soldiers and Sailors Civil Relief Act of 1940 (“SSCRA”) and extended the protections offered servicemembers by the earlier statute.

With respect to the maximum rate of interest allowed, section 527 of the SCRA provides the following:

(a) Interest rate limitation.

(1) Limitation to 6 percent. An obligation or liability bearing interest at a rate in  excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent—

(A)  during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage;  or

(B)  during the period of military service, in the case of any other obligation or liability.

(2)  Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven.

(3)  Prevention of acceleration of principal. The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such a payment is made.

No distinction is made by section 527 between consumer versus business debt. FRB, Consumer Compliance Handbook, SCRA, 1.

The SSCRA also provided for a six percent cap on interest charged on the obligations of a servicemember during active duty. As per the federal case of Cathey v. First Republic Bank, 2001 US Dist. Lexis 13150 (WD La, August 14, 2001), this interest rate limitation was applied to all obligations the servicemember was personally liable for, including those of a corporation which the servicemember had guaranteed.

The definition of “obligation” in the SCRA is broad. As per footnote 5 to section 527 of the statute, the definition of “obligation” is either a mortgage debt or any other obligation or liability. This was added by an amendment effective July 30, 2008 and established by section 2203 of P.L. 111-289, the Housing and Economic Recovery Act of 2008. Such a definition would cover any obligation or liability of the servicemember, including those entered into jointly with any other party. If the obligation was the guarantee of a corporate debt, as in the Cathey case, it would be subject to SCRA requirements. If it was a note co-signed with other persons, as in this case, it would also be covered, since the servicemember would be personally liable for it.

There are few cases construing section 527 of the SCRA and apparently none have reached the appellant level. One case held that the interest cap extends to corporations when they are personally guaranteed by servicemembers. In particular, the court refused to enforce an 18 percent interest rate included in a payment ordered against a servicemember’s corporation by a Canadian court. The U.S. federal court held that the servicemember’s corporation was protected under the SCRA while the servicemember was on active duty in the air force, and that the corporation was only required to pay interest at the rate of six percent during the period of active duty. Linscott vs. Vector Aerospace, No 05-CV-682-HU, 2007 WL 2220357 (D. Or, July 27, 2007). This indicates that the interest rate limitation of SCRA was given the same effect as that of the SSCRA.

It is possible that the reference in section 527(a)(1) to an obligation “that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly” are words of limitation, such that only loans which fall into those categories are covered by the interest rate restriction. In that case, the obligations of a servicemember would be covered, but no joint obligations other than those of the servicemember and the servicemember’s spouse. This would mean that any other joint obligations of the servicemember, whether of the servicemember and his/her child or sibling or, as in this case, the servicemember and other co-signers to a commercial obligation, would not qualify for the interest rate reduction.

While an argument could be made for this interpretation, based on the statutory language, we do not believe that it is consistent with the definition of “obligation” given by the SCRA, since it would necessarily exclude other joint obligations that the servicemember would otherwise be personally liable for, or with the application consistently given this provision by the lower courts.

The distinction made in the SCRA with regard to the joint obligations of the servicemember and the servicemember’s spouse was apparently intended not to restrict the applicability of the interest rate limitation to the obligations of the servicemember, but to extend it to the obligations of the servicemember’s spouse, so long as those obligations were joint obligations with the servicemember. In that regard, another federal court case held that the SCRA six percent cap applies to the obligations of a spouse only if they are jointly held with the servicemember. Rodriquez vs. American Express, No. CV F03-5949, 2006, W6 908613.

In addition, we note that a summary of SCRA provisions issued by the Office of Judge Advocate General, U. S. Army when the statute was enacted, “Servicemembers Civil Relief Act Replaces Soldiers and Sailors Civil Relief Act,” referred to the six percent interest cap as one of the most frequently used provisions of the SSCRA, indicated when the interest in excess of six percent is forgiven, deferred, or subject to some other treatment, and detailed the steps that a servicemember must take to obtain the interest rate reduction. Had it been understood that the SCRA also made a significant change in the applicability of the interest limitation, then certainly that would have been specified as well.

While we believe that the interest rate limitations of the SCRA applies to all obligations incurred by the servicemember, including joint obligations with other persons, we note that section 527(c) of the SCRA allows a court to grant relief to a creditor from those limitations “if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military status.” This is, of course, a question of fact.

Mortgage Deferment

With respect to the deferment in foreclosure proceedings provided by the SCRA, section 533 provides the following:

(a)  Mortgage as security. This section applies only to an obligation on real or personal property owned by the servicemember that—

(1) originated before the period of the servicemember’s military service and for which the servicemember is still obligated; and

(2) is secured by a mortgage, trust deed, or other security in the nature of the mortgage.

The statute does not distinguish between consumer or commercial loans or residential or commercial property, but only that the obligation is secured by a mortgage on the property. Consequently, we conclude that such deferment provided by the SCRA would apply to any real or personal property owned by the servicemember which secured an obligation, including the obligation in question.

This entry was posted on Monday, February 27th, 2017 at 1:34 pm.