9 credit facts you should know as a military service member
By Tina Orem
November 3, 2014
Military service often compromises the ability of service members to keep up with their financial obligations, especially when deployed for active duty.
Without someone in charge of a service member's financial matters, things can fall apart pretty quickly. Bills can go unpaid and homes can go into foreclosure.
That's why the Servicemembers Civil Relief Act (SCRA), enacted in 2003, helps members of the military avoid financial disaster while they're on active duty. But too often, service members don't know their rights. Here are nine things you need to know about the act.
1. The most significant financial impact of SCRA is the reduction in interest rates and the corresponding reduction in payment for the service member, says Bill Druliner, who is the community engagement manager for GreenPath Debt Solutions.
Druliner is referring to Section 527 of the act, which limits the interest rate to 6 percent a year on debt incurred by service members (with a spouse or individually) before called to active duty. This can result in huge savings, especially for people who might take pay cuts when activated to the Reserve or National Guard. The interest cap includes all fees and charges associated with the loan, and lenders have to forgive anything over 6 percent. Creditors also have to change the loan payments to reflect the reduced rate.
2. The act lets courts reduce (or even waive) fines or penalties that financial contracts may impose on soldiers. The test is whether the service member is on active duty and his or her ability to pay the bills is “materially affected” by the military service. This applies to members of the Army, Navy, Air Force, Marine Corps and Coast Guard who are on active duty, as well as commissioned officers of the Public Health Service or the National Oceanic and Atmospheric Administration.
3. The act is not the same as the Military Lending Act. The MLA, passed in 2007, caps the interest rate on certain types of consumer loans such as payday loans, auto title loans and tax refund anticipation loans at 36 percent. On Sept. 29, however, the Department of Defense proposed an amendment to the MLA that, among other things, would prohibit creditors from turning open-end credit products into what are essentially credit card accounts with super-low interest rates but high application fees, participation fees or other fees that amount to a violation of the interest rate cap.
4. The SCRA also applies to mortgages, leases, phone contracts, life insurance, storage units and even income taxes (you can take an extra 180 days to pay). But the protections are not automatic, Druliner warns.
“The most common issue that I have seen is that service members fail to communicate with their creditors, and therefore may forfeit interest rate benefits to which they are entitled,” Druliner explains.
He's right. “At one institution, 82 percent of those who could benefit from the interest rate caps still had mortgage rates above 6 percent,” the Government Accountability Office wrote in a study of the SCRA as an example of how misunderstood it is.
“I think the biggest thing too many do is not read the information for themselves.”
–Rod Powers, About.com
The key is simple: Soldiers must notify lenders in writing that they want to invoke SCRA protections. To do that, soldiers simply have to give their lenders a copy of their orders, Druliner says.
5. The SCRA prevents landlords from evicting active duty military members (unless their rent is more than $3,217.81 a month in 2014; the number is adjusted for inflation each year). A court can delay eviction proceedings, and it can even change lease terms. The SCRA can also prohibit lenders from repossessing property for breach of contract.
6. Lenders cannot use SCRA protections against you. For example, they can't reduce the interest rate on your mortgage and then put negative things on your credit report as a result. Lenders also can't use SCRA protections as a reason to refuse to lend to you or insure you.
7. You can't use the SCRA to dodge financial obligations. A court can still make soldiers pay their debts in timely manner — and at a rate above 6 percent. That's why Rod Powers, who is About.com's military expert, has words of caution about the 6 percent interest rate cap. “It only [applies] to debts such as credit cards, loans, mortgages, etc., incurred before entering onto active duty,” he warns, “and at that, it only applies if a service member's military service materially affects their ability to pay.”
8. Lenders can ask you to sign away your SCRA protections, and it's often in their best interest to do so. The waiver, however, has to be in writing and “executed as an instrument separate from the obligation or liability to which it applies,” according to the law. It also has to be in 12-point type, so that it's obvious to the borrower.
9. Lenders have to be very careful to follow the law. Fines run $55,000 for the first violation and up to $110,000 for subsequent violations. Service members can sue creditors as well. In some cases, the attorney general can even get involved. Financial institutions failed to properly reduce service members' mortgage interest rates at least 15,000 times, and they conducted over 300 improper foreclosures in recent years, according to the Government Accountability Office.
It's a lot to remember, but the SCRA is worth getting to know. “I think the biggest thing too many do is not read the information for themselves, but rely on hearsay in what the act does or does not do,” Powers says.