|Soldiers & Sailors Civil Relief Act (SSCRA)|
|Chapter 3, General Relief (Page 7)|
Maximum Rate of Interest
(50 U.S.C. App. § 526)
This section provides that the rate of interest on debts incurred by service members prior to service shall not exceed 6 percent per year during their period of service. To avoid application of this section, a creditor must show that the ability of the service member to pay more is not materially affected by reason of military service. The term "interest" includes both service and carrying charges.
During a Reserve Component activation, reserve soldiers regularly invoke this provision, although it also applies to new active component officers and enlisted personnel. Active component soldiers seldom invoke this provision because of the requirements that (1) the soldier's military service must materially affect the ability to pay the obligation; and (2) the obligation must predate the active service. Many new active component officers and enlisted soldiers, fresh from college or high school, actually experience enhanced financial well-being upon entering active duty. The opposite situation is often true for many reserve officers and enlisted personnel who leave well-paying civilian jobs to take financially less lucrative military assignments upon activation or voluntary active duty.
A reserve component call-up, such as Operation Desert Shield/Storm in 1990 - 1991, demonstrated this anomaly Many reserve component soldiers during Desert Storm duty experienced financial difficulties because their military pay and benefits did not match their civilian pay. Nearly all of the reserve financial commitments were pre-service. Although the reserve component soldiers may have entered these commitments while members of the reserve components, they nevertheless will have entered the commitments before entry on active duty.
Most creditors will likely assert that they will abide by the SSCRA and limit interest rates to six percent for those soldiers meeting the criteria set out above. In fact, this provision of the SSCRA puts the burden on the creditor to demonstrate that a soldier's military service is not affecting the ability to repay a loan. Attorneys should take the initiative and advise clients' creditors if financial obligations cannot be met. This is a far better course than allowing a client to go into default and then invoking the SSCRA after the fact, as a defense. One federal court has held that service members may sue creditors that fail to forgive interest above six percent.
How do you determine what constitutes "material effect" to qualify for the six percent interest cap? The SSCRA does not define the term, and leaves it up to a case-by-case factual review. The normal rule of thumb is whether the service member's pre-service income is greater than his military income. If a service member has a drop in income upon entering military service, but still has significant savings or assets that could easily pay the debt or obligation, that a creditor may challenge his claim of "material effect" for the six percent interest cap.
If they have joint contractual liability with the service member, dependents receive the 6% interest rate protection. What if a married person joins active service and his or her income increases but, because his or her non-military spouse quits his or her job to maintain a joint household with the service member, the couple's joint income decreases? Could they invoke the 6% interest cap on a joint obligation? 50 U.S.C. App. § 513 protects those primarily or secondarily liable on service member's obligation. The problem is "material effect." The creditor may try to argue that the military person's income has increased and because the dependent voluntarily gave up his or her former job, military service did not effect their income. The answer is not clear. What if the non-military spouse was not jointly liable? 50 U.S.C. App. § 536 only extends SSCRA benefits to dependents in their own right for App.§§ 530-536; other protections are derivative (see Chapter 4). The 6% interest limitations are in App. § 526. In this situation, the creditor may try to argue that the non-military spouse's income is irrelevant because credit was extended solely to the military member.
One issue invariably arising when a service member invokes this provision of the SSCRA pertains to interest above six percent. What happens when a loan agreement provides that the debtor will pay interest at an annual rate of 14 percent? Is the difference of eight percent forgiven or accrued? Some creditors will likely attempt to accrue it. For example, some bank loan servicing rules may allow a six percent cap during active service, but consider the excess to be a delinquency that must be paid within three months of leaving service. Another common ploy is for a lender to agree to reduce the interest rate to six percent, but increase the payments on principal to the point that they equal the pre-service payment amount, thereby paying off the loan early. This approach also violates the intent of the legislation. Another clever ploy by creditors is to agree to reduce the loan to the six percent cap, but to charge a series of new finance charges for “refinancing” the loan. Another variation of this approach is for the lender to agree to the six percent interest cap, but then “refinance” the loan based upon the remaining years left on the mortgage, rather than on the number of years of the original mortgage contract. This approach also violates the intent of section 526, in that the “refinanced” mortgage loan will have higher monthly payments at the six percent rate than a service member would pay if the new mortgage was based upon the original term of years.
This approach is contrary to Congressional intent when this provision was enacted as an amendment to the SSCRA in 1942. Referring to the original law, enacted in 1940, a Senate Report noted that it did not "prevent an accumulation of excess interest" and only allowed for a stay of proceeding in the event collection action was initiated. The amendment, however, was intended to correct this situation. It prohibited "interest at a rate in excess of 6 percent . . . ." During debate in the House of Representatives, Congressman Kilday, a member of the House Committee on Military Affairs, explained this provision. He stated that "while a man is in service the interest on his contract shall not exceed 6 percent per annum." Accordingly, interest in excess of six percent cannot be accrued during active service; it must be forgiven.
Although most interest rates in 1942 were very low, Congressman Kilday noted that some states at that time allowed interest rates of up to three percent per month. Consequently, Congress did anticipate interest rates substantially in excess of six percent at the time this provision was enacted, arguments of some creditors notwithstanding.
As a consequence of this section, when a service member owes money and the interest rate is more than 6 percent per year, the rate must be reduced to 6 percent when the debtor enters military service. The protection ends, however, if the creditor convinces a court that the service member's ability to pay is not materially affected by military service. What if your client comes to see you to assert the six percent interest cap, after they have been on active duty for over a year, or they are back from deployment. Does a creditor have to backdate any interest cap and credit the service member? Arguably, the recent Moll v. Ford Consumer Finance Company, Inc., case provides service members with a means to privately sue creditors and lenders that wrongly refuse to credit service members with the six percent interest cap. One can argue that the law would still apply, and the creditor still has the burden to prove no material effect. The creditor has a very strong argument in such cases that the service member must not have been materially affected if the soldier had paid the full amount owed for the past year or deployment. In such cases, legal assistance attorneys need to argue the intent of the law to protect service members "with an eye friendly to those who dropped their affairs to answer their country's call."
May a creditor demand proof of material effect upon entry to active duty? Technically, no: the burden of proof is on the lender. Still, service members are best advised to notify their lenders of their intent to invoke the 6% interest cap in writing, along with proof of mobilization/activation to active duty and evidence of the difference in the debtor’s military and civilian pay. What if the lender requires the service member debtor to fill out a list of current debts, assets, and other sources of income, or a new loan application before they will consider granting a 6% interest cap request? Such conduct would violate the spirit of section 526 and section 518, by indicating the creditor’s intent to reappraise the customer’s creditworthiness. The lender did an evaluation of the debtor when it approved the debt, and the debtor may not be subjected to further questions as to creditworthiness. Ultimately, the burden lies on the creditor.
How do you enforce this provision short of defaulting on a loan or obligation and raising the interest cap as a defense, when a creditor refuses to honor the SSCRA? You seek the assistance of the local U.S. Attorney, after coordinating with your supervisors or advise your client to sue the lender/creditor. Be creative in utilizing state consumer protection statutes, the Fair Credit Reporting Act, and the Truth in Lending Act, in fashioning a remedy.
This section does not apply to transactions entered into after entry into military service. Attorneys should consider this section, however, in connection with section 700 (50 U.S.C. App. § 590) in making any application for relief from pre-active duty financial obligations.
Many soldiers upon entry to active duty have student loan debts. A Department of Education (DE) memorandumaffects application of the six percent limitation. It states that this limitation of interest rates is ineffective with respect to guaranteed student loan obligations (formerly called GSL's now FFLEP'. According to DE, Section 1078(d), Title 20, United States Code, affects the scope of the SSCRA protection. Section 1078(d) states that no provision of any Federal or State law that limits the interest rate on a loan will apply to the government student loan program. DE's position is that this renders ineffective the section 206 interest cap if the loan in question is federally insured. All other types of loans and credit arrangements, however, remain unaffected by section 1078(d). Accordingly, other provisions of the SSCRA, including those providing for a stay of proceedings and reopening default judgments remain available to debtors.
While the six percent protection is not available for holders of FFLEP's, the DE will permit lenders to forbear or to defer payments. A soldier may apply to a lender for an emergency forbearance. "'Forbearance' means permitting the temporary cessation of payments, allowing an extension of time for making payments, or accepting smaller payments than were previously scheduled." According to the DE memorandum, a lender may grant an emergency forbearance for up to six months based on a phone call or written request from the borrower or a close family member. The borrower and lender must enter a written agreement for an extension of forbearance beyond six months.
Borrowers serving on active duty, including Reserve Component personnel on active duty, would probably be better served by applying for a military deferment of their federally insured student loans. The Higher Education Amendments of 1992, Pub. L. 102-325, significantly changed deferments available to borrowers under FFELP. Under 20 U.S.C. § 1078(b)(1)(M), as revised, there is no longer an automatic deferment for military personnel. Borrowers receiving loans on or after 1 July 1993, are entitled only to deferments on limited grounds (for military personnel, the most likely ground to use is economic hardship or military mobilization). DE has developed regulations to implement the provisions.
For older loans, borrowers serving for up to three years on active duty in the Armed Forces or the Commissioned Corps of the Public Health Service may receive an automatic (upon application) military deferment. In most cases, a deferment means a borrower will have periodic installment payments of principal deferred during active service of up to three years. If a soldier entered a GSL agreement before October 1, 1981, he or she may also apply for a six month grace period of deferment that begins after the completion of the deferment period for military service. Interest, however, will usually accrue and must be paid by the borrower during the deferment period, and during any post-deferment grace period.
Soldiers will often be unaware of the availability of military deferments and not submit requests concurrent with orders to active duty. DE regulations should be checked to see if there is authorized a late filing period. The request for deferment should include documentation sufficient to establish eligibility for deferment. In most cases, a copy of orders calling a soldier to active duty should be sufficient.
The Higher Education Technical Amendments of 1991 (Public Law 102-26 signed April 9, 1991) provided additional assistance to reservists called to duty during Operation Desert Shield/Storm. The amendments include extended deferment periods.
For loans that do not qualify for the six percent cap on interest, such as those in which nonmilitary spouses are separately obligated, as well as loans that do not qualify for military deferments, negotiation remains the key. Lenders will often agree to reduced or deferred payments when informed that an individual who has either directly or indirectly been making payments has been ordered to active duty.
Federal Income Taxes
(50 U.S.C. App. § 527)
Section 205 of this Act shall not apply with respect to any period of limitation prescribed by or under the internal revenue laws of the United States.
Above Information Courtesy of United States Army JAG Corps