On July 29, 2022, the Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB) issued a notification letter (the “joint letter”) to “remind” auto lenders and leasing companies of the protections provided to servicemembers and their dependents under the Servicemembers Civil Relief Act (SCRA). The joint letter provides a very basic overview and reminder of the vehicle repossession protections, early vehicle lease termination rights, and interest rate cap available to eligible servicemembers under the SCRA.
July was Military Consumer Month, which likely explains the timing of the joint letter. The CFPB press release announcing the joint letter cites to a 2020 CFPB report that was recently discussed in a July 2022 CFPB blog post titled “Protecting servicemembers from costly auto loans and wrongful repossessions.” According to that report, titled “Financially Fit? Comparing the Credit Records of Young Servicemembers and Civilians,” approximately 20 percent of young servicemembers have at least $20,000 in auto debt by the age of 24. This is a significantly higher percentage of civilian borrowers in that age cohort. According to the CFPB, young servicemembers also generally have higher delinquency and repossession rates than civilians of the same age, although those rates level off after five years of active duty service. The press release announcing the joint letter also cites to the CFPB’s Spring 2022 Supervisory Highlights, which states that CFPB examiners have continued to identify wrongful repossessions and unfair acts and practices by auto servicers, albeit not in the context of military borrowers protected by the SCRA.
The three SCRA provisions identified in the joint letter impacting auto finance companies are:
- Vehicle Repossession Protection: Under 50 U.S.C. §3952, installment contracts for purchase or lease of real or personal property (including motor vehicles), or the lease or bailment of such property, may not be rescinded or terminated for breach of contract during a person’s military service, and the property may not be repossessed without a court order. The onus is on the auto finance company to identify customers who are servicemembers entitled to this protection. The Department of Defense Manpower Data Center (DMDC) database is the primary tool used to identify customers who are on active duty and entitled to the protection.
- Early Vehicle Lease Termination: Under 50 U.S.C. § 3955, a person who leases a motor vehicle and thereafter enters into military service during the term of the lease (or is in the military when they enter the lease and then receives orders for a permanent change of station or deployment for 180 days or more) may terminate their lease early, without penalty. This provision also requires the refund of all lease amounts paid in advance.
- The 6% Interest Rate Cap: Under 50 U.S.C. § 3957, the interest rate of an obligation or liability incurred by a servicemember before they enter active duty military service is capped at 6% for their period of active duty. This benefit must be requested in writing by the servicemember and be accompanied by their orders or other appropriate indicator of military service. This request may be made up to 180 days after leaving military service. Any interest above the cap must be forgiven (not deferred) back to the first day of SCRA eligibility, which may obligate the creditor to provide a refund of the excess interest to the servicemember. In addition, the creditor may not accelerate the payment of principal when implementing the rate change, so a careful reamortization of the obligation is required. Issues with the application of the SCRA’s interest rate cap are not uncommon during regulatory exams, so we encourage loan servicers to consult with counsel to ensure their methodology for implementing the SCRA’s interest rate cap is compliant.
In addition to the SCRA provisions above that were discussed in the joint letter, DOJ has recently brought two enforcement actions involving motor vehicles that alleged violations of 50 U.S.C. § 3958, the SCRA’s prohibition against foreclosing or enforcing a lien on the property or effects of a servicemember during a period of military service (or 90 days thereafter) without first obtaining a court order. As with the SCRA’s protections against repossession (§ 3952), mortgage foreclosure (§ 3953), and default judgments (§ 3931), the burden is on the party enforcing their contractual right to proactively determine if the borrower is a servicemember. DOJ, which has enforcement authority over SCRA, has brought seven actions under the SCRA since 2021, four of which involve motor vehicles. A list of all DOJ SCRA cases, sortable by year, can be found here.
In December 2021, DOJ and the CFPB issued a similar joint notification letter to landlords and mortgage servicers. Those letters discussed the SCRA’s protections against foreclosure and evictions, as well as forbearance options under the CARES Act.
We expect renewed regulatory focus on the SCRA’s interest rate cap as the rate environment changes and interest rates continue to rise. It is clear that motor vehicles and auto finance have been a focus of DOJ in their enforcement actions and the CFPB in its use of the bully pulpit. Additionally, the SCRA’s protections against foreclosures and evictions will become more of an issue as default rates rise. Loan servicers of all products should ensure they have controls in place to comply with the SCRA’s varied provisions.