“Operation Enduring Freedom”
Requires Attention to SSCRA
ith the call up of Reservists and deployment of regular armed services members as a prelude to the start of “Operation Enduring Freedom,” the U.S.-led response to the terrorist attacks on the World Trade Center and the Pentagon, the banking community may need to reacquaint themselves with the Soldiers’ and Sailors’ Civil Relief Act (SSCRA).
The SSCRA enables “persons in the military service” of the United States to devote their energies to the defense of the nation by temporarily suspending certain legal proceedings and financial transactions that may prejudice their civil rights. As the name of the Soldiers’ and Sailors’ Civil Relief Act denotes, the SSCRA only applies to civil proceedings and courts have not applied the SSCRA to stay criminal proceedings.
COVERED PERSONS
“Persons in military service” includes all active members of each branch of the armed service, the Coast Guard and all officers of the Public Health Service detailed by proper authority for duty with either the Army or the Navy. Reserve members of the armed services and National Guard units are also considered to be components of the armed services; therefore these service members could take advantage of the protections afforded by the SSCRA.
In addition to service members, other persons may also be able to take advantage of the SSCRA’s protections.
Third-Party Protection
First, there is “derivative” or third-party protection, which extends to those persons who have joint liability on an obligation with another person who subsequently has entered military service; this would include sureties, guarantors, endorsers, accommodation makers. The protections afforded to these third parties allow them to “stay, postpone, or suspend” an obligation or liability. Although not expressly mentioned in the SSCRA, co-makers are also able to invoke the SSCRA’s protections.
Despite this third-party protection, the banking and credit industry are safeguarded. A third party can waive its SSCRA protections which, in turn, permits a creditor to seek continued payment from the third party when the other obligated party enters military service and is eligible for protection under the SSCRA. To have an effective waiver, it must be in writing and be a separate instrument from the underlying obligation.
Dependents
The second type of protection benefits dependents of service members in their own right. However, this safeguard is limited those remedies found in Article III of the SSCRA. These remedies include protection from eviction, protection from installment contract termination, protection from mortgage foreclosure, and authority for early termination of leases.
STAY PROVISIONS
Article II of the SSCRA, known as the “heart of the Act” provides, in appropriate circumstances, stays at any stage of a legal proceeding or by reopening a judgment, including a default judgment, on application by a service member within 90 days of termination of military service. This Article applies to contract actions originating either before or after entry into military service.
A person in the military service seeking relief under the SSCRA should establish, before a court, that the military service has a “material effect” on his or her position. An individual seeking a judgment or any other action against a military person must make a showing that the service member’s position is not “materially affected” by military service.
“Material Effect”
The “material effect” of military service may be divided into three factual patterns: the effect on the person’s ability to protect his or her rights; the effect on the person’s ability to meet his or her financial obligations; and the incidence of an unsolicited change of station, such as a transfer. The burden of proving material effect will depend on the relative circumstances of the parties. For instance, service members who are not overseas and who are assigned to nearby installations can expect to be assigned the burden of proving material effect.
FINANCIAL OBLIGATIONS
Article III of the SSCRA provides for relief from, among other things, evictions, lease terminations, installment sale contracts, repossessions and mortgage foreclosures. There is another important limitation to the SSCRA’s Article III protections in that the financial obligations must have been entered into before the service member’s entry into active service. Therefore, these protections are available mainly to Reserve component service members as opposed to career service members since these individuals routinely enter into financial obligations during their active service.
Mortgage Foreclosures
The SSCRA only applies to mortgages “upon real or personal property owned by a person in military service at the commencement of the military service and still owned by him, which obligations originated prior to such period of military service.” The SSCRA will protect the legal and equitable ownership interests of the service member and his or her dependents who are entitled to the benefits of the SSCRA.
Leases
The SSCRA also permits a service member to cancel or terminate a lease where he or she is the lessee, provided that the lease was entered into prior to entering the service. The service member need not show that military service is materially affecting the ability to meet obligations under the lease, particularly rent payments.
Installment Contracts
The SSCRA also prohibits any seller or lessor who has received a deposit or installment payment, under a contract or lease to purchase real or personal property, from rescinding or terminating the contract or lease for nonpayment of an installment or breach of the contract occurring prior to or during the period of military service. This SSCRA provision also prohibits repossession of the property. This protection is only available for a service member who entered into an obligation before beginning active service. A seller or lessor seeking termination of an installment contract or a lease must obtain a court order.
Automobile Leases
In the past number of years, leasing has been an alternative over purchasing an automobile. The SSCRA provisions regarding the termination of installment contracts and leases for missed payments could benefit Reservists. The determining factor as to whether the SSCRA could apply to car leases is there a “view to purchase” the car. An option to purchase at the conclusion of the lease may meet this requirement, particularly if any part of the lease payments is credited toward the purchase price.
INTEREST RATE
CAP
One of the most “helpful” provisions of the SSCRA for a service member is the six-percent cap on the interest that a lender may charge a service member for credit extended to the service member before his or her entry on active duty. The term “interest” is defined under the SSCRA to include service charges, renewal charges, fees or any other charges, except bona fide insurance, in connection with an obligation or liability. The rate cap applies to all loans including residential mortgages, home equity lines, car loans and credit cards. The rate does not apply to guaranteed student loans.
This interest rate cap will benefit Reservists more so than active service members since Reservists’ military pay and benefits do not match their civilian pay. This dilemma was demonstrated with the call up of Reservists during Operations Desert Shield and Desert Storm in 1990 and 1991. When a service member is seeking this relief, a creditor has the burden to demonstrate that the service member’s military service is not affecting the ability to repay a loan.
A number of issues arise in applying the six-percent interest rate cap. First, what to do when the interest rate is above six percent? When the rate cap was added in 1942, Congress intended for excess interest to be forgiven.
Mortgages
Another problem arises when a mortgage has a contract rate above six percent. This problem was addressed during the call up of Reservists during Operations Desert Shield and Desert Storm. At that time, members of the mortgage banking industry agreed that interest above six percent should be forgiven if a service member otherwise qualified for that protection. For example, the Mortgage Bankers Association of America, Fannie Mae, Freddie Mac and Ginnie Mae agreed that mortgages issued by lenders backed by their organizations would not accrue interest above six percent during active service of qualifying individuals. For the interest rate cap to have taken affect, mortgage issuers were required to obtain a copy of a Reservist’s orders to active duty before granting the reduction in interest.
Home Equity Loans
The interest rate cap also presents special issues for home equity lenders. For instance, these lenders need to evaluate whether their loan agreements and applicable state and federal laws allow them to suspend the right to obtain additional advances as a result of the lender’s inability to charge the contracted rate of interest.
