Why Do So Many Servicemembers Not Receive Mortgage Protections They Have Legal Right To?

The Servicemembers Civil Relief Act (SCRA) includes a number of protections for members of the armed forces who took out a mortgage before going on active duty. But as we have learned in recent years, there are at least 15,000 instances where banks failed to follow those guidelines — and hundreds — perhaps thousands of times where lenders have illegally foreclosed on servicemembers’ homes.

Among the protections provided by the SCRA:
1. Interest Rate Cap: Servicemembers who obtain mortgages prior to serving on active duty status are eligible to have their interest rate capped at 6% for the duration of their active-duty status and for 12 months after returning from active duty service.

2. Ban On Foreclosure Proceedings: Loan servicers cannot sell, foreclose, or seize the property of a servicemember for breach of a pre-service obligation unless a court order is issued prior to the foreclosure on the property. This protection is effective until 9 months after the term of active duty service ends.

3. Limits On Mortgage Prepayment Penalties: A court may decide that servicemembers who have mortgages that impose penalties for paying off the balance early are not subject to these penalties if the servicemember incurs such fees due to military service and the ability of the servicemember to pay the fees is materially affected by military service. If the servicer files an action in court to enforce the terms of the mortgage, the court may stay any proceedings or adjust the obligation to preserve the interests of the parties.
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4. Protections Against Adverse Credit Reporting: A mortgage servicer may not report adverse credit information to a credit reporting agency solely because a servicemember exercises his or her SCRA rights, including a request to have his or her mortgage interest rate and fees be capped at 6%.

Additionally, mortgage servicers must alert borrowers of SCRA protections if they are in default on their mortgage. This notice instructs the borrower to notify their mortgage servicer if they believe they are eligible for SCRA protections.

But according to a new Government Accountability Office report [PDF], between 2007 and 2011, the regulatory bodies that have oversight on the banking and mortgage industry — the Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Office of the Comptroller of the Currency — only reviewed 48% of all banks and credit unions for SCRA compliance.

And only half of that 48% received examinations that involved testing of compliance by reviewing loan files. So now we’re down to about one-in-four lenders receiving something that vaguely looks like an SCRA compliance review.

But, says the GAO, compliance examiners only looked at loan files which the lenders identified as involving servicemembers. Thus, regulators were only looking to see if lenders were handling known servicemembers’ files correctly. A random review of all borrowers, says the GAO, would have revealed borrowers who were incorrectly not identified as servicemembers.

There are other agencies — the Dept. of Justice, Dept. of Veterans Affairs, Federal Housing Administration, and Federal Housing Finance Agency — all of which have a hand in the oversight of SCRA compliance. And while they all gather data on compliance — the DOJ has even filed three lawsuits for SCRA violations — neither these agencies nor the aforementioned regulators actually share any of their information with each other.

In addition to failures of oversight, the GAO says that the Dept. of Defense and the Dept. of Homeland Security could do a better job of educating incoming active-duty servicemembers of their rights under the SCRA. This important information is often given to servicemembers, particularly those in the National Guard and reserve — as one of many topics covered in briefings prior to deployment.

Thus, concludes the GAO, there is no easy way to stop the problem of servicemembers not getting the protections they are due. Rather, it suggests a multi-pronged solution — Regulators must conduct more extensive loan file testing for SCRA compliance; These same regulators and the various federal agencies involved in SCRA oversight must start sharing and tracking their information; Veterans Affairs needs to expand its SCRA compliance monitoring effort; and the DOD and DHS should come up with a better way of informing its active-duty servicemembers of the rights provided by the SCRA.

The GAO says that it has discussed its findings with the various parties and that they “generally agreed and noted actions responsive to GAO’s recommendations.”

Of course, it’s easy enough to get federal agencies and regulators to agree in principal. Let’s just see how this plays out over the next few years.