Servicemembers’ Civil Relief Act

1. Servicemembers’ Civil Relief Act David Head, Esq. - Weltman, Weinberg & Reis dhead@weltman.com and Meaghan Titone - First Marblehead Corporation mtitone@firstmarblehead.com

2. Purpose of SCRA • To provide for, strengthen, and expedite the national defense through protection extended by the ACT to servicemembers to enable servicemembers to devote their entire energy to the defense needs of the Nation • To provide for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service

3. SCRA Risks • Until recently, SCRA has not been a high liability concern • In the last few years, SCRA has received significant attention from, federal regulators, the plaintiffs bar, and the media • Risk of being fined and/or imprisoned for violation of SCRA

4. Servicemembers’ Civil Relief Act - History • Originally titled the Soldier’s and Sailor’s Civil Relief Act (SSCRA), it was enacted in 1918 • Reenacted in 1940 as the nation mobilized for WWII • Expanded provisions, including interest rate limitation and protections from foreclosure • Updated in 2003 with the enactment of the Servicemembers’ Civil Relief Act (SCRA)

5. SCRA • 2003 updates made in the wake of post-9/11 deployments • Expanded and modernized some provisions • Congress added the term “co-maker” to clarify case law regarding persons who qualify for the SCRA protections • Expansion of “military service” to include National Guard called to active emergency service by the President or the Secretary of Defense for a period of more than thirty days • Explicitly states that interest above 6% must be forgiven

6. SCRA Amendments in 2008 Added “including any child custody proceeding” to the sections regarding default judgments and stays of proceedings • It is the most important document in the prevention of custody battles while members are deployed • The 6% interest rate cap was extended to one year after release of active duty – for mortgages only • Makes intentional failure to grant interest rate cap a federal misdemeanor

7. SCRA Amendments in 2010 • Veterans’ Benefits Act of 2010 • DOJ enforcement for “pattern or practice” or “issue of significant public importance” • Private right of action (confirmed trend in court rulings) • Civil Penalty Structure • Helping Heroes Keep Their Homes Act of 2010 • Extends 9 month foreclosure window to December 31, 2012

8. Who does SCRA Apply to? • All active members of the U.S. armed services • All officers of the Public Health Service detailed for duty with either the Army or Navy • Members in basic training or boot camp • Members of the Reserves and National Guard who are called to active duty for one of the following reasons: • mobilized for federal service • annual training • military school • National emergency for 30+ days

9. Who does SCRA Not Apply To? • Civilian employees • Employees of government contractors • Servicemembers who incurred the debt while on active duty • Persons secondarily liable • This is at the discretion of the courts • Business partners

10. The Act - Overview • SCRA does not excuse the member from any legal obligation, it simply delays it • The protection is not automatic, a servicemember must apply for the benefit • A servicemember may opt out of protection through a written waiver • The protection will only apply if the obligation/loan was entered into prior to active duty • The protection extends from the first day of active duty through 30-90 days after discharge • A servicemember may have installment contract, credit card, and mortgage interest rates reduced to a fixed rate of 6% • SCRA benefits may be extended to the beneficiary of an active duty member • The burden is on the creditor to seek relief by proving member not materially affected by service

11. Definitions • Persons in military service – All active members of the U.S. armed services and all officers of the Public Health Service detailed for duty with either the Army or Navy. Members of the Reserves (including the National Guard called to federal service) from the time they receive the order to report until the date such order is revoked. • Persons secondarily liable – Include sureties, guarantors, endorsers, accommodation makers and others, whether primarily or secondarily subject to the obligation or liability. • Dependents – One who looks to a service member for support and maintenance for the reasonable necessities of life. Dependents are entitled to benefits of members upon application to the court. Business partners do not fall into this category. • Material affect – Determines if protections under the Act can be invoked. Two-pronged test: the member’s ability to 1) protect his or her rights and 2) meet financial obligations. Courts will also consider whether the presence of the service member is necessary to the proceeding.

12. Application for Protection • Servicemember or legal representative must notify the creditor to invoke SCRA protection • Strictly speaking, the servicemember is required to submit proof of mobilization and placement on active duty, along with notice to invoke SCRA • Many creditors have relaxed this requirement and accept verbal notice from the servicemember as they can verify this through the Department of Defense database • Servicemember must assert/demonstrate that he/she is materially affected by his/her active duty status

13. Application for Protection • FFELP and notification • Recent guidance from the Department of Education indicates that written notice must be submitted by the servicemember of his/her intention to invoke SCRA protections, along with military orders • Servicemember may avail him/herself of the protections at any time after orders are received and up to180 days after discharge • Protection relates back to the date the servicemember is called to active duty

14. Legal Representatives SCRA adds a provision recognizing a legal representative of the servicemember: • An attorney acting on behalf of the servicemember; or • An individual possessing a power of attorney • Legal Representative can take the same actions as a servicemember

15. Waiver of Rights • Members may waive protections • Waiver must be in writing for • Must be made during or after period of service

16. Active Duty • Begins upon induction • Ends upon death or discharge • Includes period during which servicemember is absent from duty on account of sickness, wounds, leave, or other lawful cause • Constructed broadly by courts

17. Material Affect • Two-pronged test: • 1) The servicemember’s ability to protect his/her rights • Is he/she stationed in the United States or overseas? • 2) The servicemember’s ability to meet financial obligations • Is his/her salary while on active duty less than it would be for his/her normal job? • Servicemember will need to submit supporting documentation to establish this if the creditor challenges whether the member is materially affected by active duty

18. Interest Rate Cap • Servicemember must notify his/her intent to invoke the fixed interest rate cap • If material affect is established, the debt must not accrue interest at a rate in excess of 6% • An adjustment is made to the monthly payment to reflect the lower interest rate • The difference caused by the reduction of interest rate may not be collected • The rate cap applies during the period of military service through 30-90 days after discharge • The rate cap may apply to dependents so long as they are jointly liable on the obligation with the servicemember

19. Interest Rate Cap • Creditor may seek relief from the 6% interest rate cap if they can establish that the servicemember is not materially affected • Courts do have discretion to adjust the interest higher than 6% and lower than the original contract interest rate • FFELP and interest rate cap • Until 2008, FFELP loans were not subject to the interest rate cap of 6% • The Higher Education Opportunity Act enacted in 2008 capped FFELP interest rates as set forth in SCRA

20. Interest Rate Cap • FFELP continued • Who is covered? • HEOA only references section 527 of the SCRA, not the entire act • SCRA covers reserves called for active duty in another section • Likewise, dependents are not referenced in section 527 • Special Allowance Payments • Entitled to these from the Dept of Ed when the interest rate is below market • Ensure servicemember submitted written notice with military orders

21. Moll v Ford Consumer Finance Co. • FACTS • Moll obtained a 15 year loan from Meritor Credit Corporation at 10.25% interest • Moll was subsequently ordered to active duty • He notified Ford of his military status and requested an interest rate reduction • Interest was never adjusted

22. Moll v Ford Consumer Finance • FORD • moved to dismiss on the grounds that there was no private cause of action under the SSCRA • DECISION – In favor of Moll • The court focused on the legislative intent of the act and stated that the interest limitation was “designed to give relief to military persons called in service” • The court held that the interest limitation is consistent with the purpose of the Act to provide servicemembers with relief in meeting their financial obligations

23. Cathey v First Republic Bank • FACTS • Cathey is president of Stewart A. Cathey & Sons, Inc. Cathey and his wife, Donna Cathey, own 100% of the stock • Between 1994 and May 1996 Cathey obtained two loans to open convenience stores. He and his wife were both required to sign the note to guarantee it • May 1996 - Cathey was called to active duty in Bosnia as a Lieutenant Colonel in the Army Reserves

24. Cathey v First Republic Bank • Prior to departing for active duty Cathey notified the bank of his intent to invoke his rights under the SSCRA. He included a copy of his military orders with the request • Cathey returned home to find the bank had never adjusted interest • He then requested that the bank refund him the wrongfully charged interest - $50,000 • The bank refused repeated requests from both Cathey and the armed services

25. Cathey v First Republic Bank • DEFENDANTS ARGUMENT • SSCRA is not applicable where the loan is made to a corporation • SSCRA protects only “person(s) in the military services” • SSCRA provides assistance to soldiers only for consumer transactions and not for commercial transactions • There is no private right of action for violations of the SSCRA

26. Cathey v First Republic Bank DECISION – In favor of Cathey • Judge stated: “Any doubts that may arise as to the scope and application of the Act should be resolved in favor of the military person” • Judge stated: “While it is the serviceman, who is provided interest rate protection under SCRA and not his co-makers, the result is the same. Interest on the obligation may not be charged in an amount in excess of the statutory rate of 6% per annum.” • The court used the precedent in Moll to allow a private cause of action

27. Installment Contract Protections • Servicemember may receive relief from making payments pursuant to the terms of the contract • Generally, at least one deposit or installment payment must have been made on the contract before active duty • No fines or penalties accrue for failure to comply with contract during active duty • Creditor is prohibited from exercising rights under the contract unless approved by a court • The statute of limitations for the contract is tolled during active duty

28. Coverage of dependents • Dependent is someone who looks to the servicemember for support and maintenance for reasonable necessities of life • Dependent may be covered upon application to court • Court would determine if the dependent’s ability to comply has been reasonably impaired • Coverage does not extend to a dependent if there is no joint liability with the servicemember • Coverage does not extend to business partners, sureties, guarantors, endorsers, accommodation makers, except at the court’s discretion

29. Default Judgments • A default judgment cannot be entered against a member without his/her knowledge • Default judgment can only be granted if: • defendant has received notice of the action • defendant has had adequate time and opportunity to appear and defend himself in court, and • the proper affidavit is filed with the court • A creditor may only seek default judgment against a servicemember it knows is on active duty if the court has appointed an attorney to represent him/her

30. Default Judgments • Even if the court appoints an attorney and grants a default judgment, the servicemember may reopen the case to vacate the judgment if: • the request is made within 90 days of leaving active duty • the servicemember shows he has been prejudiced, and • the servicemember has a meritorious/legal defense

31. Affidavit • Required to obtain a default judgment • The affidavit must contain facts, not mere statements or allegations • The affiant for the creditor/plaintiff must know the defendant’s military status • The affidavit is often supplemented with the certificate obtained from the Department of Defense website

32. Certificate of Service • A certificate is prima facie evidence of a person’s military service or non-service • A certificate may be obtained from: • Department of Defense Manpower Data Center • www.dmdc.osd.mil/scra/owa/home • You will need borrower name and SSN • Military service branch • www.defenselink.mil/faq/pis/PC09SLDR.html

33. Sprinkle v SB & C LTD • FACTS • December 1, 2000 - court granted SB & C a default judgment against plaintiffs, for failure to appear in court for a suit filed against them in October 2000 • April 2, 2004 - plaintiff, Joseph Sprinkle, was called to active duty. His wife does not work as she stays home with their three children • November 4, 2004 - Attorney for SB & C filed a writ of garnishment against Sprinkle’s bank account • November 16, 2004 - Garnishment forms were received and signed for by Mrs. Sprinkle

34. Sprinkle v SB & C LTD • Mrs. Sprinkle contacted SB & C to request that the garnishment be released due to her husband’s active duty status. Her request was refused • Sprinkle’s attorney contacted SB & C with the same request and was again denied • Sprinkle filed lawsuit arguing that SB & C had violated the SCRA by failing to file an affidavit in support of the judgment that showed he was not on active duty • SB & C • Argued that SCRA is not applicable because the garnishment was taken against the bank, not Sprinkle

35. Sprinkle v SB & C LTD DECISION – In favor of Sprinkle • Defendants violated the SCRA • SCRA requires a SCRA affidavit to be filed “before entering a judgment for the plaintiff”

36. Stay of Proceedings • Pending civil litigation may be delayed or stayed at the request of the servicemember, a party on their behalf, or on court’s own motion • Need to show military responsibilities preclude proper representation in court (i.e. extended deployment or stationed overseas) • Stayed for period of service and up to the following 90 days • Stay is only available where servicemember is a party to a civil suit, a suit for paternity, child custody suit or bankruptcy debtor/creditor meeting

37. Stay of Proceedings • Stay does not apply to criminal proceedings, child support, or proceedings where the member is merely a material witness, not an actual party • Execution of judgment orders may be stayed • Creditor may object to the stay on the grounds that the servicemember is not materially affected • Court may appoint an attorney to represent servicemember’s interests if it is deemed necessary for proceedings to continue • Stay does not impact creditor’s ability to proceed against co-defendant

38. Penalties and Causes of Action • If found guilty of knowingly violating the SCRA, the violator could be fined up to $1,000.00 and/or imprisoned for up to 1 year • Attorney General may initiate civil action against creditor, seeking equitable and declaratory relief, monetary damages for the aggrieved party, and vindication of the public interest • Private cause of action can be brought seeking equitable and declaratory relief, monetary damages, costs and attorneys fees • This was codified after case law set the precedent

39. Other Relevant Cases • Cort v Ash • Established four-prong test to determine if the Act allows a private cause of action • Marin v Armstrong • Burden on the creditor to seek relief from the Act • Linscott v Vector Aerospace • Violation occurred through wrongful repossession and demand for repayment of outstanding bills while Linscott on active duty

40. Awareness • The government, press and lending industry all have SCRA high on the radar. With the current on-going wars, more and more borrowers are needing to request the benefit • Penalties for SCRA violations will be enforced! • The media may run with stories regarding violations of SCRA. Media and the public will sympathize with military borrowers. You can reduce risk using best practices when any awareness of active duty is made • SCRA mandates a zero tolerance for errors

41. Awareness • Senators Kerry and Reed have asked the DOJ and FRB to investigate SCRA compliance • DOJ has publicly acknowledged that SCRA investigations are ongoing. DOJ is accelerating investigations and enforcement • Some State’s AG offices begin to ask servicers to review SCRA compliance • Holly Petraeus is leading the CFPB’s Office for Servicemember Affairs in asking the 25 largest banks to review SCRA compliance • Banking regulators are aggressively reviewing SCRA compliance

42. DOJ Enforcement of SCRA • DOJ now has a SCRA enforcement section at Main Justice in Washington DC • In October of 2007, DOJ issued first known prison sentence for landlord in an unpublished SCRA case • Announced first settlement in SCRA landlord-tenant case in September 2009 (U.S. v Akhavan) • 2008 investigation of Homecoming Financial for charging a prepayment penalty for a servicemember who sold her house upon receiving a change of station order

43. DOJ Enforcement of SCRA • Investigations are triggered by a single complaint • In April 2010, DOJ lawyers identified enforcement priorities • Military Affidavits - it is important these are not “robo-signed” • Interest rate cap • Foreclosures and Repossessions • Evictions

44. Rowles v. Chase Home Finance, LLC • FACTS • February 27, 2004 - Plaintiff, Jonathon Rowles, obtained a purchase money mortgage through BNC Mortgage Inc for $225,000. The home was located in Castle Rock, CO • August 16, 2005 - Rowles signed a United States Marine Corps reserve contract. He was subsequently called to active duty on January 22, 2006 • April 14, 2006 - Rowles requested in writing that Chase reduce the interest rate on the loan to 6% pursuant to the SCRA. He specified the date of entry as January 22, 2006 and produced two sets of orders verifying his current status • May 2, 2006 - again requested reduced interest rate of 6% • May 8, 2006 - Chase requested Rowles provide “orders and/or an enlistment agreement showing the date of original call to duty”

45. Rowles v. Chase • June 6, 2006 - Rowles faxed written documentation explaining the situation as well as copies of his letters of April 14th and May 2nd • December 1, 2007 - Chase sent Rowles “required quarterly verification.” He received six more of these verifications from January 2008 to March 2010, all in violation of SCRA • March 2008 - Rowles had to have his commanding officer write to Chase on his behalf in order to confirm that he was in fact an active duty Marine • Interest continued to fluctuate during the same two year period of time. Rowles was forced to make many phone calls and send many verifications in order to have his rate adjusted each time he received a bill with a higher interest • April 2009 - Chase failed to credit Rowles for payments and began to pursue aggressive collection methods for “past due balances” caused by incorrect interest accrual

46. Rowles v Chase • Collection efforts included calls to his residences, work place and mother’s home. Calls came at all hours and Rowles was repeatedly threatened with foreclosure and negative reporting to the credit bureaus • June 2010 - after repeated contact with Chase, Rowles was denied the electronic access to his account with them • OUTCOME • Case was not decided in court as parties reached a settlement • Chase acknowledged mishandling of servicemember’s mortgage accounts • Chase agreed to pay millions to the class of thousands

47. Olson v Citibank • Captain Lyndsey Olson obtained a student loan • A national guard member, Olson was called to active duty in Iraq • Olson notified Citibank of her intention to seek SCRA protection • Citibank placed Olson’s loan into “mandatory forbearance” • “Mandatory forbearance” causes additional fees/interest to accrue

48. Olson v Citibank continued • Suit filed by Olson with class action certification being sought • Citibank argues forbearance is a benefit that relieves servicemembers from making payments on the loan while on active duty • Olson alleges she only wanted the interest rate reduction, but Citibank required forbearance in order to receive the interest reduction • Outcome – unknown, litigation remains pending

49. Ways to Reduce Risk • Perform regular checks of portfolio to ensure members are awarded their benefit. The law does not require companies to enact the benefit for the borrower, but it is urged that if the agent is made aware the borrower is on active duty they should apply the benefit. One may verify the member is on active duty by using the Department of Defense Website www.dmdc.osd.mil/appj/scra/scrahome.do • Once it has been verified that the member is on active duty, a military deferment should be applied to the loan. Not applying a deferment will cause the loan to default ultimately resulting in a default judgment

50. SCRA Statute Reference Guide • SCRA Provision U.S.C. Section SCRA Section • Definitions 511 101 • Application & Jurisdiction 512 102 • Waiver of SCRA Rights 517 107 • Legal Representatives 519 109 • Default Judgments 521 201 • Stay of Proceedings 522 202 • Stay/Vacation of Judgments 524 204 • Statute of Limitations 526 206 • Maximum Rate of Interest 527 207 • Eviction and Distress 531 301 • Installment Contracts 532 302 • Mortgage Foreclosures 533 303 • Termination of Leases 535 305 • Storage Liens 537 307 • Personal & Real Property Taxes 561 501 • Income Tax 570 510 • Certificates of Service 582 602 • Professional Liability Protection 593 703 • Reinstatement of Health Insurance 594 704