The Interaction of SCRA and Reg Z

SCRA’s interest-rate limitations trigger requirements under Truth in Lending and Reg Z.

March 22, 2012

The first thought a credit union has when it learns that a member is in the military or is about to go on active duty is that it will have to comply with the Servicemembers Civil Relief Act (SCRA) for any loans in existence before the date of active duty.

Upon realizing this, the credit union’s next thought should be that it will have to comply with Regulation Z when the member leaves military service before it can increase the interest rate, fees, or other charges to their pre-service levels.

Complying with the interest-rate cap

Under SCRA, active duty servicemembers may not be charged more than 6% interest on loans incurred before active duty.

This interest-rate cap also applies to joint obligations incurred before active duty that involve the servicemember and his or her spouse.

Among the loans subject to SCRA’s 6% interest-rate cap during the servicemember’s active duty are credit cards, auto loans, share-secured loans, and signature loans.

There are enhanced protections, however, for mortgages. The Housing and Economic Recovery Act of 2008 extended SCRA’s 6% interest-rate cap for one year beyond the period of military service in the case of mortgages.

To comply with SCRA’s requirements, credit unions must forgive any interest in excess of 6% that would have been incurred by the member if no rate cap was in effect.

Under SCRA, “interest” includes all fees, service charges, renewal fees, or any other charges (except bona fide insurance) with respect to a loan.

This is true whether the loan is open- or closed-end. To comply with the 6% interest-rate cap, in addition to reducing the actual interest rate, credit unions might have to decrease or eliminate fees and other charges such as annual fees.

In addition, SCRA requires credit unions to reduce the amount of any periodic payment due from a servicemember by the amount of the interest forgiven.

The 6% interest-rate limit doesn’t apply to new advances under an existing credit card account or home equity line of credit that occur after the start of active duty.

SCRA only requires that the interest rate be reduced to 6% for obligations incurred before active duty.

New open- or closed-end loans and new advances under existing open-end loans incurred after the start of active duty or at any time during the active duty period are not entitled to the interest-rate reduction.

Restoring the original rate

SCRA’s interest-rate limitation provisions trigger certain requirements under the Truth in Lending Act and Reg Z.

When the interest rate and any fees or charges that apply to a loan balance are reduced pursuant to SCRA because the member enters military service, Reg Z permits the credit union to reinstate the pre-existing interest rate and any fees and charges for that balance once the member leaves military service.

Generally, a credit union may only increase the interest rate and any fees or charges to the same amount that applied before the start of active duty.

In the case of a variable-rate loan, however, the credit union may apply any increase in that variable rate to the loan once the member leaves military service.

For mortgages, the 6% interest-rate cap must be extended for one year beyond the period of military service.

The credit union should be able to determine when the member will be discharged by reviewing the servicemember’s military orders.

For open-end loans, a 45-day advance notice of change in terms must be provided after a member is no longer on active duty before the credit union can increase the annual percentage rate from 6% to the contract rate, or increase any fees or other charges that were reduced or eliminated.

For closed-end loans, an additional disclosure will only be required for variable-rate loans secured by a member’s principal dwelling that have a term of greater than one year.

MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel. Contact him at 608-231-4185.