Six Percent Cap and the SCRA
As the title suggests, this post is a quick refresh on the six percent interest rate cap under the Servicemembers Civil Relief Act (SCRA), but first I want to highlight a couple of newly available resources (unrelated to SCRA) that might not be on your radar. In case you missed these great resources from America’s Credit Unions, there is now a compliance calendar available and also a look back at 2024 through the compliance lens…and click here (members only) if you’re curious about what’s coming out of the White House by way of Executive Orders.
Back to SCRA…the SCRA provides consumer financial protection for active-duty service members and sometimes their dependents. For credit unions this often means providing interest rate relief.
The SCRA covers servicemembers who are on active duty status and include members of the Army, Air Force, Navy, Marines, and Coast Guard. It also covers personnel mobilized (active duty) in National Guard and Reserve Units as well as commissioned officers of the Public Health Service and active service personnel of the National Oceanic and Atmospheric Administration.
Under the SCRA there is an interest rate cap on obligations incurred by servicemembers (and if applicable, jointly with their spouse) prior to active-duty status (See 50 USC 3937).This maximum interest rate is 6% and only applies to obligations/debt incurred prior to active-duty status; not for debt incurred while on active duty OR after the servicemembers active-duty status ends. Therefore, outstanding balances on auto loans, share secured loans, signature loans, and credit cards are all subject to the 6% interest rate cap while the service member is on active duty. However, the rate cap would not apply to new advances on a credit card or HELOC incurred by the servicemember while on active duty.
Mortgage loans are also covered by the SCRA and subject to the 6% interest cap, but the protection does not end once active-duty service has ended. The 6% interest rate cap is extended for one year beyond the period of military service if the debt is a mortgage, trust deed, or “other security in the nature of a mortgage.”(See 50 USC 3953).
Generally, any reduced interest rates for debts under the SCRA don’t extend to the dependents of servicemembers UNLESS it is a joint obligation. The definition of dependent under SCRA is a service members spouse, child, or an individual for whom the servicemember provided more than one-half of the individuals support for 180 days immediately preceding an application for SCRA relief.
How does a credit union know if a servicemember is covered under the SCRA? Well, the servicemember will need to alert the credit union by providing written notice to the credit union along with a copy of the servicemember’s military orders. The notice must be provided to the credit union not later than 180 days after the date of the servicemembers termination or release from active military status. Once the notice has been received by the credit union, it must reduce the interest rate on the pre-service debt as of the date on which member was called to active military service. Credit unions may also verify a servicemember’s military status via the Defense Manpower Data Center (DMDC) as an alternative to obtaining a servicemember’s notice and documentation prior to activating the 6% maximum interest rate on pre-service debts.
Upon leaving active military service the reduced rate on pre-service debt can be raised to the contract rate (except for mortgage loans as discussed above).
Reducing the interest rate on pre-service debt to a maximum of six percent is just one of the federal protections under the SCRA -- and the focus of this blog post, but I would be remiss in not mentioning the others: protection against foreclosure and, in certain circumstances, property repossession, as well as protection against default judgements in civil cases. It also gives servicemembers the ability to terminate auto leases and residential leases without incurring penalties.
Resources:
SCRA (NCUA Compliance Management Resource)
Department of Defense: SCRA Manpower Website
Department of Defense Manpower Data Center