Consumer Regulatory Compliance Focus on Servicemembers

Part of the Early Career Professional Series

The purpose of the Early Career Professional Series of articles is to help professionals who are new to second line of defense topics such as AML/CFT, Sanctions, Fraud, consumer regulatory compliance, vendor management, and other risk management areas understand the foundational concepts that support risk management.

In March, April, and May 2025, headlines highlighted a reduced compliance burden for financial institutions through either law rescissions or eased enforcement.

Concurrent with those messages were messages about the importance of treating service members fairly. Thus, it seems like a suitable time to review some important provisions about the SCRA (Servicemembers Civil Relief Act), and controls needed to maintain compliance with those provisions.

The Servicemembers Civil Relief Act provides financial and legal protections for active duty servicemembers, including National Guard and reserve members, and their families. Two areas of the SCRA that can be troublesome for loan servicers are:

• Not capping interest rates for active military personnel on certain pre-service loans at 6%.
• Not acknowledging SCRA protections in foreclosure proceedings involving a servicemember’s home.

These areas tend to be troublesome because there are so many nuances to each provision of the SCRA in terms of whether the servicemember must request protections, whether the spouse can make the request, whether the spouse/dependents are provided protections, and what the protections actually are. Because of these nuances, SCRA is a high-risk area.

Interest rate cap: Under the (SCRA), active duty servicemembers can get a 6% interest rate cap on most loans, including joint loans with a spouse, obtained before the servicemember entered military service. The servicemember must take action to get this provision and send the institution a written request and a copy of the military orders no later than 180 days after military service ends. This provision of the SCRA fell off most radars during 2020 and 2021 when interest rates fell so low, but it became a high-risk area when interest rates spiked in mid-2022. It continues to be a high-risk area.

This provision can be tricky for institutions to fully comply with because interest includes any additional charges and fees, interest has to be forgiven retroactively when applicable, any excess interest paid has to be refunded, and the monthly payment has to be reduced by the amount of the interest reduction. This is an area that requires frequent monitoring for accuracy.

Although the burden to request and obtain this 6% rate cap rests with the servicemember (or spouse), it is important that the institution have policies and procedures to receive and process the notice. Servicemembers can provide notice in many ways (written letter, electronic through a website portal, via online banking), so it’s important that institutions are prepared to receive the notice in a variety of ways and have procedures to send the notice to the right department.

Protections during foreclosure: Generally speaking, foreclosures are prohibited on service members and their dependents while the servicemember is deployed and for 12 months thereafter, unless there is a court order to do so. A court can on its own, pause or stay a foreclosure from proceeding. A court can adjust a loan if active military service significantly affects the servicemember’s ability to repay it. That leads us to one nuance of the SCRA that many are not aware of. Foreclosure protections apply only if the servicemember is obligated under the note. Those listed on the deed but not bound by the note may not receive these protections.

This provision of the SCRA differs from the 6% interest rate cap in that the servicemember does not have to be proactive in informing the institution about being an active servicemember. The burden is on the institution to ensure the borrower has no SCRA protections before proceeding with a foreclosure, so it is important for institutions to have policies and procedures in place for doing this. An illustrative example of this process involves conducting a search on the Department of Defense website for the borrower's name. It is also common to send notices and letters to borrowers that inquire as to whether the borrower is a servicemember or not. Because of the importance of SCRA protections, most institutions seek to determine if the borrower has SCRA protections immediately upon the borrower becoming past-due on a payment.

Maintaining compliance with the SCRA is not just required by law, it is the right thing for institutions to do. Solid internal controls, including written procedures, will help an institution maintain compliance, but the nuances of the SCRA are such that frequent monitoring and testing of SCRA-related transactions are a must. This would include monitoring requests for the 6% interest rate cap, and monitoring of collections/foreclosure proceedings to verify that servicemember status was obtained.