March 2011 Legal Update

 

Go grab one of your privacy notices. By now, you should be using a notice that is consistent with the new model privacy form. Use of the model form is not required, but you fall within a safe harbor of compliance if you do use it. Here’s the tricky part – and the reason we want you to pull out what you’re using: You are only protected by the safe harbor if you use the form in a manner consistent with the instructions in Appendix A to the GLB privacy rule. You may only modify the form as the instructions permit, and they don’t permit much modification at all.

What we’re worried about is what you have at the top of the form. The title of the form is “What Does [Name of Financial Institution] Do With Your Personal Information?” Do not put the words “[Name of Financial Institution] Privacy Notice” or “[Name of Financial Institution] Privacy Policy” or even just the words “Privacy Notice” or “Privacy Policy.” That would be an impermissible modification of the form, even if you also included everything else you’re supposed to include. In the prefatory comments to the published rule, the regulators explained the reason why it you are not allowed to label the document a privacy notice or privacy policy: “The research found that the terms “privacy notice” or “privacy policy” deterred consumers from reading the notice. Consumers understood these terms to mean that the institution does not share personal information.”

Don’t make this mistake. We have received a few annual privacy notices since the new form took effect and were shocked to see a large national credit card issuer with this violation.

Let’ s say Ralph is a loan officer. He primarily makes commercial loans. In connection with a loan to one small business, he takes as collateral a mortgage on the business owner’s personal residence. That makes Ralph a mortgage loan originator, right?

If you asked me that question, I would have to hedge on the answer. In the generic, ordinary dictionary definition sense of the term, he certainly would be. My question to you would be “In what context?” Before I could respond, I would need to know if you meant in the general sense, or for purposes of the SAFE Act, or for purposes of the Reg Z provisions on anti-steering and loan originator compensation. The answers would be yes, no, and no. [The latter two require a consumer purpose loan, consumer borrower.]

Add to the mix the fact that the test for activities necessary to be deemed a loan originator under Reg Z differs totally from the test under the SAFE Act for registration purposes, and you have a recipe for major confusion.

Until there is harmony in definitions and triggers among the various regulations, it is absolutely crucial to focus and compartmentalize. Failure to do so will result in inadvertent violations.

Incentive compensation for loan officers is a fairly standard practice in the banking industry and institutions have come up with some creative options over the years to boost loan volume and profitability. Changes to Regulation Z that take effect April 1, 2011 limit some of those options by prohibiting those the Federal Reserve refers to as unfair or abusive loan originator compensation practices.

The changes impact compensation only on certain types of loans.   Specifically, the rules affect loan originator compensation on closed-end consumer credit transactions secured by a dwelling. Remember that the term “dwelling” under Regulation Z means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.

The term “loan originator” is specifically defined to mean, with respect to a particular transaction, a person who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. Yes, getting a paycheck qualifies as compensation. Typically, a loan originator is going to be an individual, such as an employee of the creditor. The creditor can also be deemed a loan originator (and thus subject to the compensation restrictions) if the creditor is making a loan where the funds for the transaction at consummation are not provided out of the creditor’s own resources.

Under the amendments, for applications received on or after April 1, 2011 in connection with a consumer credit transaction secured by a dwelling, a loan originator cannot receive compensation, directly or indirectly, that is based on any of the transaction’s “terms or conditions.”

Conversely, the rule also prohibits any person from paying to a loan originator, directly or indirectly, compensation on such a transaction in an amount that is based on any of the transaction’s terms or conditions. Easy examples of terms include the interest rate, APR, loan-to-value ratio, but from there it gets more complex. For example, if you have something such as a credit score that serves as a proxy for loan terms or conditions, you cannot vary the loan originator’s compensation in whole or in part in a manner based upon that factor, because doing so would indirectly be basing the compensation on the rate, since an applicant with a much higher credit score would likely get a more favorable rate than an applicant with a lower credit score.

It is permissible to tie compensation to the amount of credit extended – but only if it is based on a fixed percentage of the amount of credit extended and the fixed percentage cannot vary based upon the amount of the loan. In other words, it would be okay to have the compensation set at x% of the amount of loans secured by a dwelling. It would not be okay to set it at x% of the amount of credit extended for loans below a certain dollar amount and set it at y% for loans with amounts over that dollar amount.

If compensation is based on a fixed percentage of the amount of credit extended, it is permissible to make the compensation subject to a minimum or maximum dollar amount. For example, you could say 2% of the amount of credit extended, but in no event less than $500 nor more than $3,000.

The rule provides eight other illustrative examples of permissible compensation methods and indicates that the list is not intended to be exhaustive, so there are other strategies that could also pass muster. It is not a violation of the rule to compensate the loan originator based upon:

 

The compensation restrictions do not apply when the compensation is received from the consumer. But there’s a big catch. If the loan originator receives compensation directly from the consumer, no other person may provide any compensation to the loan originator, directly or indirectly, in connection with that particular transaction. There is detailed guidance about when payments are considered to be received from the consumer.

If you have affiliates and a loan originator will originate transactions for both/all the affiliates, listen up. The affiliates will be viewed as one person for purposes of the compensation rules. That means the affiliates must compensate the loan originator in the same manner.

Other amendments to Regulation Z which take effect April 1, 2011 are referred to as the “anti-steering” provisions. These provisions stem from concerns that some consumers ended up with loans that were not in their best interests because loan officers had an economic incentive to put them in those loans.

The definition of loan originator in the context of the Reg Z anti-steering provisions is the same as it is for the compensation rules. The coverage of the anti-steering rules is broader, however, because they apply in connection with any consumer credit transaction secured by a dwelling. (The compensation restrictions were limited to closed-end credit.)

The new rules generally prohibit a loan originator from directing or steering a consumer to consummate a transaction where the originator will receive greater compensation from the creditor than the LO would have received in other transactions offered by the originator (or that the LO could have offered). There is an exception, however, if the transaction is in the consumer’s interest.

What is meant by “directing” or “steering”? Advising, counseling, or other influencing a consumer to accept that transaction.

If the transaction isn’t consummated, there is no violation. In other words, the consumer must actually be influenced to the point that he ends up in the loan that is not in his interest. [Note that the rule shies away from using the expression “best interest.” The test here is a lower standard than that.] Also, if the compensation paid to the loan originator is not greater for the undesirable loan that is consummated, there is no violation. Well, at least there’s no violation of these anti-steering rules.

There is no requirement for the LO to steer a consumer to a loan for which the LO would receive the least compensation. What makes a violation is greater compensation + not in the consumer’s interest.

To determine whether the transaction was in the consumer’s interest, you compare it with other possible loan offers available through the originator. They must be ones that would have been available at the time for which the consumer was likely to qualify.

Presenting the consumer with loan options for each type of transaction in which the consumer expressed an interest and for which he is likely to qualify will avoid a violation, but only if the loan offers presented include:

1.       The loan with the lowest interest rate;

2.       The loan with the lowest interest rate without all that bad stuff like a prepayment penalty, a balloon payment in the first 7 years, a demand feature, negative amortization, or other terms that aren’t viewed as consumer-friendly.

3.       The loan with the lowest dollar amount for origination points or fees and discount points.

In terms of the options presented, the loan originator is required to obtain loan options from a significant number of the creditors with which the originator regularly does business, looking for the loan options above for each type of transaction in which the consumer expressed an interest.

The terms “significant number of creditors” and “regularly does business” are specifically defined terms. “Significant number of creditors” with which a loan originator regularly does business means three or more of the creditors. In a situation where the loan originator does business with fewer than three, the LO needs to obtain options from all the creditors with whom he regularly does business.

The definition of “regularly does business” has three different tests, and a loan originator is deemed to regularly do business with a creditor if any one of them is met. The first test is met if there is a written agreement between the LO and the creditor governing submission of mortgage applications. The second test is met if the loan originator has submitted applications that have resulted in the creditor extending dwelling-secured credit to one or more consumers during the current or previous calendar month. The third test is met if the loan originator has submitted applications to the creditor that resulted in the creditor extending dwelling-secured credit twenty-five or more times during the previous twelve calendar months. (That period begins with the calendar month preceding the month in which the LO accepted the consumer’s application.]

Once the loan originator has obtained loan options, he must determine they are loans for which the consumer likely would qualify. If the consumer is not likely to qualify for a loan option, it should not be presented. There is also a potential for customer confusion when too many options are presented. If more than three loans are presented for each type of transaction, the originator is required to highlight the loans that satisfy the criteria specified in 1 through 3 above. While it doesn’t specifically say to do so, I think they mean you need to indicate, for example, “This is the loan with the lowest interest rate” or “This is the loan with the lowest dollar amount for origination points or fees and discount points.”

It is not necessary for the LO to present loan options from all the creditors. If there are three loans from one of the creditors that satisfy the criteria, the LO could choose to simply present those.

How is the loan originator supposed to know if the consumer is likely to qualify for the various loans? The LO can get a handle on that by using rate sheets furnished by the creditors, along with any information about minimum credit scores or other eligibility criteria.

If there aren’t three options, there aren’t three options. In that instance, as long as the other criteria are met for the options presented, the LO is fine.

There is a record retention requirement as well. The creditor must maintain records of the compensation provided to the loan originator. The creditor must also keep copies of the compensation agreement in effect on the date the interest rate was set for the transaction.

Some of the amended rules we have seen in the last few months have resulted from rulemaking actions initiated long before Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That was the case with the loan originator compensation rules summarized above. The proposal was already out there, so the Federal Reserve finalized it, even though there are specific provisions in Dodd-Frank that deal with compensation of loan originators. The FRB went ahead with the amendments it had in the works, then stated that the Dodd-Frank compensation provisions would be the subject of further rulemaking in the future. Oh, joy!

With respect to appraisals, however, the Federal Reserve quickly moved to amend Regulation Z to implement the new Section 129E added to the Truth in Lending Act by Dodd-Frank. The new section and the amended regulation build on other appraisal-related provisions added to Regulation Z in the last couple of years. In the “old days,” Reg Z simply told you how to disclose the terms of your loan. Increasingly, Reg Z is also telling you what you can and cannot do, and what you must do.

The goal of the new amendments is to ensure that real estate appraisals used to support underwriting decisions are based on the appraiser’s independent professional judgment. There is also a requirement that appraisers be paid customary and reasonable fees. It harkens back to the old saying “You get what you paid for.” Apparently, low fees paid to appraisers in some transactions resulted in appraisals that were not of the quality the regulators would like to see.

This is an interim final rule. That means there will be more to come on the subject, but compliance with this set of amendments is mandatory as of April 1, 2011.

Coverage of these appraisal-related amendments is different from coverage of the Reg Z loan originator provisions, even though they are both under Reg Z and both take effect April 1, 2011. The appraisal provisions apply to consumer credit transactions, both open-end and closed-end, but only if they are or will be secured by the consumer’s principal dwelling.

There are five definitions you need to understand:

“Covered person” means a creditor with respect to a covered transaction, or a person that provides “settlement services” [as defined under RESPA] in connection with a covered transaction.

“Covered transaction” means an extension of consumer credit that is or will be secured by the consumer’s principal dwelling.

“Loan production function” means an employee, officer, director, department, division, or other unit of a creditor with responsibility for generating covered transactions, approving covered transactions, or both.

“Valuation” means an estimate of the value of the consumer’s principal dwelling, other than one produced solely by an automated model or system. The valuation may be in written or electronic form.

“Valuation management functions” means performing any one or more of the following tasks:

1.       Recruiting, selecting, or retaining a person to prepare a valuation;

2.       Contracting with or employing a person to prepare a valuation;

3.       Managing or overseeing the process of preparing a valuation, including by providing administrative services such as receiving orders for and receiving a valuation, submitting a completed valuation to creditors and underwriters, collecting fees from creditors and underwriters for servicers provided in connection with a valuation, and compensating a person that prepares valuations; or

4.       Reviewing or verifying the work of a person that prepares valuations.

The rule has an anti-coercion provision. It is wordy and convoluted, but the bottom line is that a covered person is prohibited from trying to interfere with the independent judgment of a person that performs valuations in a covered transaction via coercion, extortion, inducement, bribery, etc. [Can’t you just picture the weary attorneys sitting around the room brainstorming to come up with all the synonyms for, and permutations of, coercion?]

The rule provides examples of violations. There’s little substantive difference between the new examples and what was already in the regulation.

Then they flip it. The first part concentrates on prohibiting a covered person from attempting to wrongly influence the valuation. The next part makes it a violation for a person who prepares valuations to materially misrepresent the value of the consumer’s principal dwelling in a valuation.

Thank goodness, the rule provides that a bona fide error is not a misrepresentation. While it may seem obvious that should be the case, think of RESPA. If you make a typo on the GFE, you can’t issue a revised GFE. You are stuck with the consequences of your clunky fingers on the keyboard.

The next phase of the rule prohibits a covered person from falsifying a valuation and prohibits any person other than the person who prepared the valuation from materially altering the valuation. Just for good measure, they throw in a couple of sentences saying that no covered person shall induce a person to violate the mischaracterization or falsification prohibitions. It’s obvious that there were some problems with prosecuting appraisal-related wrongdoers in the past because the statute and rule weren’t drafted tightly enough. This should take care of that problem.

It is still okay to ask the person doing the valuation to take into account additional, appropriate property information, or to ask the person to correct errors, or to ask them for further detail, substantiation or explanation for their conclusions.

The part of the regulation that is giving some bankers heartburn is the part on conflicts of interest. It states that no person preparing a valuation or performing valuation management functions for a covered transaction may have a direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is or will be performed. It’s important to get to the heart of what is meant by “direct or indirect interest” as that term is used here.

First of all, you do not have a problem under this section based solely on the fact the person is an employee or affiliate of the creditor or the person is providing a settlement service in addition to preparing valuations or performing valuation management functions, or based solely on the fact that the person’s affiliate performs another settlement service.

The Reg then separates out how it treats what I am going to refer to as “big” and “small” creditors, for simplicity’s sake.    By “big” I mean a creditor that had assets of more than $250 million as of December 31st for both of the past two calendar years, and a “small” creditor is one with fewer assets under that test.

In a big institution (using the definition above), a person who is employed or affiliated by the creditor does not violate the conflict of interest provision based on that employment or affiliate relationships as long as three conditions are met:

First, the compensation of the person preparing a valuation or performing valuation management functions cannot be based upon the value arrived at in any valuation.

Second, the person preparing a valuation or performing valuation management functions must report to a person who is not part of the creditor’s loan production function, and their compensation cannot be based on the closing of the transaction to which the valuation relates.

Third, no employee, officer or director in the creditor’s loan production function may be directly or indirectly involved in selecting, retaining, recommending or influencing the selection of the person to prepare a valuation or perform valuation management functions, or to be included in or excluded from a list of approved persons who prepare valuations or perform valuation management functions.

To avoid a conflict of interest in a small institution, two conditions must be satisfied. The first is the same as the first condition for big creditors. The second is the requirement that the creditor must require any employee, officer or director of the creditor who orders, performs, or reviews a valuation for a covered transaction to abstain from participating in any decision to approve, not approve, or set the terms of that transaction.

We’ll cover more about the new appraisal requirements, as well as the recently issued interagency guidelines on appraisals in next month’s Legal Briefs.

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FDIC-supervised financial institutions were put on notice of the FDIC’s “supervisory expectations” regarding automated overdraft payment programs with the “final guidance” issued in FIL-81-2010 (Overdraft Payment Programs and Consumer Protection – Final Overdraft Payment Supervisory Guidance) on November 24, 2010. Much of the guidance document emphasizes the need for compliance with current laws and regulations, as well as with the February 2005 Joint Guidance on Overdraft Protection Programs and the FDIC’s Guidance for Managing Third-Party Risk (FIL-44-2008, 6/6/2008). However, there are some additional "expectations" included in the newest overdraft Guidance that have prompted many questions from bankers. In this article, we attempt to address several of the more frequently discussed aspects of the Guidance.

Focus on automated overdraft payments, but …

"Ad hoc" overdraft programs that "involve irregular and infrequent occasions on which a bank employee exercises discretion in a specific instance about whether to pay an item or not, as a customer accommodation and on a pre-determined or formulaic basis" are not covered by the Guidance. That leaves room for examiners to expect you to apply the Guidance when any part of your OD program is assisted through automation. Such might be the case even if only preliminary pay/return decisions are made under system parameters, subject to discretionary manual overrides. 

Board and management oversight

Overdraft programs present compliance and safety-and-soundness risks. The FDIC expects that the directors of FDIC- supervised institutions exercise oversight "consistent with their ultimate responsibility for overall compliance." That clearly does not mean your directors need to be involved in the day-to-day management of the overdraft program, but they do need to ensure that management provides ongoing and regular oversight of the program’s features and operation. Management should provide directors a review of the program at least annually.

Consumer communications

The program and all of its marketing, disclosure and other consumer communications should promote responsible use of the program. Avoid any suggestions such as "write yourself a loan before payday" or similar language. Ensure that all marketing and disclosure materials include full explanations of the costs involved in the program, including any fee for continuing overdrafts, and make it clear that there can be more than one fee imposed each day. "Transparency" is the new watchword, so don’t garbage up your disclosures and marketing materials with legalistic gobbledygook or bury important information in microprint footnotes and disclaimers.

Staff training is a critical factor in consumer communications. To put it simply, if members of your staff don’t understand the program, they can’t explain it to customers. Viewed differently, if members of your staff can’t understand the program, you can’t expect customers to understand it, either. Be sure your staff also comprehends any alternative products or services you offer consumers, and that you explain those alternatives in marketing material for your overdraft payment program.

Other key consumer communications described in the Guidance are timely low-balance alerts (via text messages, email or telephone) to customers, as well as prompt notices when consumers actually overdraw their accounts (a 2005 Guidance "best practice"). Mailed notices are better than nothing if you aren’t able to make effective use of other notice methods.

Monitoring and follow-up for excessive use

The expectation that banks will monitor an overdraft program for "excessive or chronic customer use" is certainly nothing new. It was one of the "best practices" in the 2005 Joint Guidance — "Monitor excessive consumer usage, which may indicate a need for alternative credit arrangements or other services, and inform consumers of these available options." [70 FR 9132, 2/25/2005] What is new (and controversial) is the FDIC’s express determination that overdrawing one’s account on "more than six occasions where a fee is charged in a rolling twelve-month period" constitutes excessive or chronic use. The use of "occasions" suggests six different dates on which the account is overdrawn, not a count of the items overdrawing the account.

Under the new Guidance, informing the consumer of available options would involve contacting him or her to discuss less costly alternatives to the overdraft payment program. Some bankers have asked whether a letter reminding the consumer of the potential costs of the overdraft program, with information about available options, would fulfill the expectation of "meaningful and effective" follow-up action. The answer is unclear, but the expectation of a discussion suggests a conversation with the consumer. Whether your bank’s policy calls for a mailing or a conversation, it should be carried out consistently, and followed by a reasonable chance for the consumer to decide whether to continue with the overdraft coverage or try one of the alternatives. Without suggesting that the FDIC would mandate it, it seems reasonable that you’d require the consumer to affirmatively opt into continuing with the OD program or the bank would discontinue coverage after a reasonable period following the "discussion" (perhaps a week or two).

There is no guidance suggesting what should happen after the consumer has been contacted and has decided to continue with the overdraft program. We strongly recommend that banks have written overdraft policy guidelines describing follow-up monitoring and what should happen if the consumer, for example, overdraws the account three times in the ensuing three months. Either suspension or termination of participation seems to be a reasonable consequence in such a case.

Fees for de minimis overdraft amounts

Banks are expected to consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount or "should" make the fee proportional to the amount of the overdrawing item. Depending on your bank’s system capabilities, consider variations on some of these ideas—

–          No fee, if the account is overdrawn $25 or less.

–          No fee regardless of balance if the item amount is $5 or less.

–          A reduced fee of $5 for overdraft amount of $10 or less

–          Per item overdraft fee of the lesser of $35 or the amount of the item.

Does the Guidance affect your bank?

If your bank is state-chartered and not a Federal Reserve member, and has an overdraft program that is at least partially automated, there is no doubt that FIL-81-2010 applies to your institution. There has been one claim that a national bank was told by an OCC examiner to follow the Guidance, but that appears to have been an isolated incident. Will other regulators follow the FDIC’s lead? My crystal ball isn’t working, but I would not be surprised to see the Consumer Financial Protection Bureau take on overdrafts soon after it is operational.

 

The Servicemembers Civil Relief Act (SCRA) has been in the state and national press recently, as we noted in last month’s Legal Briefs. JP Morgan Chase admitted that they overcharged some 4,000 servicemembers’ on interest, and foreclosed on fourteen homes that they should not have. The press picked up on this when Chase admitted the errors and vowed to make amends. In addition to refunding $2 million to the borrowers who were overcharged, they had to figure out how to “undo” some foreclosures or otherwise provide suitable homes to those wrongfully foreclosed upon. In this article we will review how they got to this point and the fact that there will be renewed emphasis on the SCRA in your examinations and by troubled borrowers. We will also review some basics of strong SCRA procedures so that you can ensure your bank is following the law.

Marine Capt. Jonathan Rowles and his wife Julie initiated a class action suit against Chase after the Rowles were on military duty in 2006. The suit was for all SCRA protected borrowers. Capt. Rowles had an adjustable rate mortgage. His rate was going up with his index adjustments. He had requested protections under the SCRA, primarily the 6 percent rate on his loan. Reports are that Capt. Rowles was being overcharged as much as $900 each month because of the interest rate difference.

Capt. Rowles thought the matter was corrected in late 2006. But in 2009 he and his wife began getting collection calls. They report that Chase was sometimes calling three calls a day; calls were made between 4 and 6 am, saying they were $15,000 in arrears. As it turns out, the Rowels had never missed a payment and had been paying the 6 percent adjusted payment. Chase had been accruing at 9 and 10 percent, however.

Chase has since realized that that not only was this account in error, but thousands of other accounts were as well. The bank was not properly adjusting the interest rates for protected borrowers. Capt. Rowles claims he had to update his request for SCRA protection four times a year. In at least 14 cases Chase also foreclosed on homes where they should not have. We don’t know the specifics of what Chase was doing wrong, but it would seem that employees and or management did not understand the requirements under the SCRA or how to properly implement them. To Chase’s credit they have taken ownership of the problem, formed a team to correct the problems and are working at reestablishing their reputation.

Chase is not alone. In stories of the mortgage debacle many mortgage lenders have foreclosed on properties and then realized, with a courts help, that they were not authorized to foreclose. Specifically pertaining to the SCRA in Massachusetts, U.S. Bancorp and Wells Fargo foreclosed on the mortgages of Antonio Ibanez and Mark and Tammy LaRace, respectively. These were in 2007 and were later challenged in court. After the foreclosures were completed the banks attempted to comply with the SCRA and discovered these borrowers were protected from foreclosure because of their military status.

Senators Jack Reed and John Kerry wrote to FRB Chairman Ben Bernanke, asking for an investigation into the SCRA problems, and the DOJ confirmed it was conducting investigations. Kerry was an author of the "Helping Heroes Keep Their Homes Act," which extended the foreclosure prohibitions under the SCRA to nine months after active duty. This was mentioned our last OBA Legal Briefs. Between a request such as this and the media headlines, you certainly can expect more questions about the SCRA on your next exam. And by ensuring that your procedures are adequate now, you can avoid claims from borrowers that would put your bank’s name in the headlines.

It is important to keep in mind that some protections under the SCRA are automatic and others are triggered. In the case of the 6 percent interest rate reduction the servicemember or their representative needs to request protection in writing. These debts are pre-service obligations, not those incurred after they entered the military. You can make these requirements easier for your customer, such as by accepting a request orally, but you may not make it more difficult such as by requiring a renewed request quarterly. A copy of the servicemember’s orders should accompany the written request.

When you reduce the interest rate to 6 percent, you must also reduce the payment accordingly. The benefit of the rate reduction is lost if the corresponding payment is not reduced. The changes made in 2003 when the Soldiers and Sailors Civil Relief Act was replaced with the SCRA made this clear. The interest over 6 percent is forgiven, not delayed. Some banks believed the difference could be added to the end of the loan and collected later. That is not true. This rate reduction also applies not just to a personal debt of the servicemember, but to commercial debts on which they are obligated. Protections also extend to joint debts with a spouse. Section 207 of the SCRA tells us protected debts are those of “a servicemember, or the servicemember and the servicemember’s spouse jointly…” If the spouse of a servicemember has an individual debt, that debt is not protected. Many banks will extend protections in cases like this as a courtesy, recognizing the family as a whole is dealing with the issues of military income and deployment. The rate reduction is applicable during the period of military service. This period is extended for mortgage related debt, which is explained near the end of this article.

When you read that “interest” cannot exceed 6 percent, you need to understand the SCRA definition of what constitutes “interest.” It is not only the traditional cost for the use of funds you are accustomed to, but also any service charges, renewal charges and fees, other than bona fide insurance. A loan reduced to an even 6 percent, that allows for late fees to accrue, would be usurious if a fee is added.

The interest rate reduction may be claimed at any time up until the servicemember has been released from the service for 180 days. The rate change would be retroactive back to the date the person was activated.

Internally it is recommended that a checklist be used to ensure you have what you require. This could include a copy of the orders, a written request, the customer’s name, all applicable accounts, the SSN, a start and projected end date, and internal routing or loan coding requirements you need to make to properly administer the account(s). This checklist will serve to assist in any collection activity you have as well.

As to foreclosures, these are not valid if conducted during or within nine months after a servicemember’s period of military service. This period has been extended from what it formerly was — 90 days — so ensure your procedures and checklists reflect this. There are ways to assist in verifying a borrower’s military status. Military active duty verifications are provided by the Servicemembers Civil Relief Act Centralized Verification (www.servicememberscivilreliefact.com) which now includes active duty termination dates. The interest rate reduction on loans consisting of a mortgage, trust deed, or other security in the nature of a mortgage is protected for up to one year after military service.

This article is a quick review of two of the common problem areas, as evidenced by today’s headlines. There is much more to the SCRA. You should have a thorough understanding if you have or may have any covered accounts.