VIDEO: What is the 6% cap under SCRA
In this Compliance Clip (video), Adam discusses the 6% interest rate cap under the Servicemember Civil Relief Act (SCRA) and how it benefits active duty military personnel. As interest rates continue to rise, understanding these protections becomes increasingly important for both servicemembers and creditors.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about the 6% interest rate cap under SCRA or the Servicemember Civil Relief Act.
With interest rates rising over the last couple of years, we have the possibility for more loans to be subject to the 6% interest rate cap under SCRA. This is something that is required for active-duty military personnel. There are specific nuances to this so I just want to cover this 6% cap real quick in this Compliance Clip.
The SCRA limits the amount of interest that may be charged on financial obligations obtained prior to military service. This relates to loans that were taken out before active duty military service. Then when somebody is in active duty military service, they have protections where their interest rate can reduce down to a 6% cap while they're on active duty military service. So, basically, sort of help them have a little bit lower payment while they're on active duty service. So, that's what the protection is. This is 6% per year, and this includes most fees.
To get the cap rate, the servicemember has to do a couple of things. They must provide the creditor with a copy of their military orders and a written notice. So, that's what the servicemember would have to do. Both of those must be provided within 180 days at the end of military service.
Now, if a bank chose to, they could self-identify their customers to whom this SCRA cap applies to. And they could apply that cap to the consumer as well. So the two ways for the consumer to get this benefit is for them to contact you with a copy of the military orders and a written notice provided within 180 days at the end of military service, or for the bank to self-identify it and impose that cap.
Now, when a servicemember is subject to SCRA, here's what the creditor has to do. The creditor must retroactively forgive, not defer, it has to be forgiven, the interest greater than 6% per year. So anything over 6%. So, for easy numbers, if it was 8%, you have to forgive 2% per year during the time that this cap is in place.
Now, it is prohibited for a creditor to accelerate principal payments due to a request for the 6% cap. It's unfortunate from a bottom-line perspective for a creditor, but this is a benefit of the United States military personnel that they have this benefit of having a reduced interest rate and a capped interest rate while they're in active-duty military service. And so, it's just really the cost of doing business in the United States.
For mortgages, it's a little bit different. The 6% cap applies for the entire military service and one year after their service. So, the cap applies that long, even though they have to notify you within 180 days, the cap applies the entire military service and one year after for every other type of credit obligation - those are capped only during the period of military service.
Now, to really understand this, let's take a look at an example and see how this could potentially work in a real-life situation. In this example, John Doe takes out a mortgage and then enters military service. Captain John Doe is in military service continuously for 20 years. Captain Doe retires from the military service, and on the 179th day of his retirement, he asks that the interest rate on his mortgage be lowered to 6% per year. Captain Doe provides his creditor with a written notice and a copy of his military orders. Due to this, the provisions do apply, and the creditor must forgive the entire 20 years of interest that was at a rate greater than 6%, inclusive of fees, and an additional interest of one additional year of interest going forward. As you can see, it's the entire military service plus one year. The notice doesn't have to be provided until the 179th day of the day in this example. So up to 180 days after active-duty military service. So that is the 6% interest rate cap.
Let's recap these rules.
First of all, you must reduce the interest rate to 6%. Creditors cannot condition SCRA benefits upon use of a specific form or upon a requirement of specific language in a written notice. A copy of the written order shall be accepted as a written notice of eligibility for reduced interest rates. Creditors must retroactively reduce rates back to the date the service member was called to active-duty. And they must forgive the amounts in excess of 6%.
Now, only courts can change the SCRA benefits. So this is not something your management can override. And it's not something that your customers can waive.
This is a pretty deep topic, but I think it's important to understand this, especially now that we've been in this rising interest rate environment over the last few years, and there are loans out there now that are higher than 6%. We're going to see more and more of the SCRA benefits coming into effect. And so it's important to understand that. And if you're not up to speed with your SCRA and MLA (Military Lending Act) compliance requirements, we've got a program that can help you take a deep dive into these things. We talk about the 6% cap, but we talk about everything else SCRA that relates to financial institutions, as well as MLA. And that's a program that's in our store at compliancecohort.com/store. So if you want to take a deep dive into this topic, go there and check it out.
That's all I have for this Compliance Clip.