When Your Customer Is a Soldier (or Sailor, or Airman, or Guardsman)
The Servicemembers Civil Relief Act (SCRA) is a federal law that protects individuals in military service. Its purpose is laudable- reduce certain financial distractions so that members of the armed forces can focus their full attention on their military responsibilities without worrying about consequences for themselves or their families. The SCRA touches almost all of a servicemember's civil obligations and legal rights, including consumer financing. The protections that present the greatest challenges to buy-here-pay-here auto industry professionals are:Who Is Protected
- Six percent interest rate cap for active duty servicemembers
- Limitations on repossessing a vehicle for breach of an auto loan
- Limitations on repossessing a vehicle for breach of a storage lien
The SCRA protects members of the Army, Navy, Air Force, Marine Corps, or Coast Guard who are on active duty status. It also protects members of the National Guard who receive federal activation orders for 30 days or longer.
What SCRA Protections Affect Auto Loan Creditors
Interest Rates: A creditor must reduce a servicemember's interest rate [including all fees, service charges, renewal charges, or any other charges except bona fide insurance] on installment loans that he or she obtained prior to entering into military service to six percent per year during military service. Any interest that would have been charged but for the interest rate cap of six percent must be forgiven.
Repossession: If a servicemember purchased or leased a vehicle and made a deposit or payment before entering military service, then a creditor is prohibited from repossessing the vehicle for breach of contract without a court order. This protection lasts for the duration of the servicemember's military service.
Storage Liens: The SCRA prohibits a lienholder from foreclosing or enforcing a lien on a servicemember's property during the period of military service and for 90 days thereafter, unless the lienholder first obtains a court order. “Lien” is defined to include “a lien for storage, repair, or cleaning of the property or effects of a servicemember or a lien on such property or effects for any other reason.” Liens placed on vehicles by tow companies and repair shops fall into this category.
How Must a Dealer Be Notified that the SCRA Applies
A servicemember must provide a creditor with a copy of the military orders calling the servicemember to military service AND a written notice that states the servicemember's desire to receive the benefits of the SCRA. Both the military orders and the written notice must be provided to the creditor within 180 days of the end of the military service. These orders are critical because the SCRA protections for retail installment contracts only apply to contracts initiated prior to a customer entering military service. For example, if you sell a car to a customer who works at HEB, and three months into the contract the customer enlists in the Army, then that customer may request an interest rate reduction to 6% per year for the duration of the customer's military service. Another example: if you sell a car to a customer who is an active duty soldier stationed at Fort Hood, and that customer is deployed three months later, then the SCRA does not apply to that retail installment contract.
You can verify a customer's military orders on the Department of Defense's Military Lending Act Website, https://mla.dmdc.osd.mil. If you confirm that (1) your customer is on active military duty; (2) your customer was not on active military duty when you entered into the retail installment contract, then the SCRA applies. You must reduce the interest rate to 6% effective the date that the customer went on active duty. You must reduce future installment payments to correspond with the 6% interest rate. Finally, you must forgive the interest that would have been charged had the customer not enlisted in the military.
By understanding the statute, automobile dealers and loan servicers can protect their military customers and themselves from unnecessary legal trouble.