The Servicemembers Civil Relief Act (SCRA) is designed to protect individuals on full-time active military duty who have been materially affected by their service. A recent CompBlog back-to-basics post examines one significant aspect of the SCRA: the 6% interest rate limit.
The SCRA limits interest rates on debts incurred prior to active duty at 6% for the duration of the servicemember's period of military service. Interest includes service charges, renewal fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.
The limit does not apply to debt incurred during or after active duty service, so it does not apply to new advances under an existing credit card or home equity line of credit program.
This is true even if the open-end plans were established prior to active duty.
In order to receive reduced rates, the servicemember must provide a credit union with a written notice and a copy of the military orders calling the servicemember to active duty, as well as any orders further extending military service, within 180 days of release from military service.
Upon receiving the notice, a credit union must reduce the interest rate on any pre-service debt as of the date on which the servicemember was called to military service.
In addition, the SCRA requires a creditor to reduce the amount of any periodic payment due from a servicemember by the amount of the interest forgiven that is allocable to the period for which the payment is made.
If a credit union believes that a servicemember is not entitled to the rate reduction, it may not automatically refuse to lower the rate. The credit union must go to court and prove that the ability of the servicemember to repay the loan(s) has not been materially affected by active duty.
Generally, once the member is no longer on active duty, the rate may be restored to the contract rate. However, for mortgage loans, the 6% interest rate must be extended for 1 year beyond the period of military service.
The credit union must forgive any interest in excess of 6% that would have been incurred by the member if no rate cap was in effect.
Information on all requirements in the SCRA can be found in CUNA’s SCRA e-Guide, which includes a detailed summary of the Act's requirements and a list of frequently asked questions.