Protecting the Protectors – the Global Settlement Agreements’ SCRA Provisions
Given the reported violations of the provisions of the Servicemembers Civil Relief Act (“SCRA”) by some servicers, and the attendant enforcement and civil actions against those servicers, state and federal regulators clearly felt compelled to impose significant SCRA-related requirements on the nation’s five largest residential mortgage loan servicers (the “Servicers”) in the recent global settlement agreements (the “Agreements”) entered into between those regulators and Servicers, described here.
The Agreements start simply enough by requiring the Servicers to comply with all applicable provisions of the SCRA and any applicable state law offering protections to servicemembers. Of course, the devil is in the details – which has historically made SCRA compliance problematic because the SCRA is devoid of details. The Agreements address some of the details via clarifications, and also impose requirements that extend beyond those found in the SCRA.
The SCRA’s primary provisions with which loan servicers must comply involve (a) reductions in servicemembers’ interest rate to six percent in certain circumstances (including certain fees and charges that might take the interest rate above six percent, (b) limitations on initiating and completing foreclosures, (c) requirements in connection with obtaining waivers of rights under the SCRA, (d) limitations on obtaining default judgments, (e) limitations on evictions and lease terminations, and (f) prohibitions against reporting to credit reporting agencies based on a servicemember’s exercise of rights under the SCRA.
Supplementing those provisions, or in some cases, clarifying those provisions, the Agreements also require the Servicers to take the actions described below regarding eligible documentation, required review processes, timing and content of notices, and assessment of financial hardship in terms of eligibility for loss mitigation without being in default or imminent default. Although these requirements apply directly only to the five settling Servicers and their affiliates, as a practical matter they might become a de facto standard for the industry.
Determination of SCRA Protections and Use of Trained Employees
While the SCRA contains no explicit requirement that a servicer affirmatively determine that a borrower is entitled to SCRA protections, the Agreements appear to impose such a requirement on the Servicers.
One provision of the Agreements requires the Servicer to notify customers who are forty-five (45) days delinquent that, if they are a servicemember, (a) they may be entitled to certain protections under the SCRA regarding the servicemember’s interest rate and the risk of foreclosure, and (b) counseling for covered servicemembers is available at agencies such as Military OneSource, Armed Forces Legal Assistance, and U.S. Department of Housing and Urban Development- (“HUD”) certified housing counselors. That notice must include a toll-free number that servicemembers may call to be connected to a person who has been specially trained on the protections of the SCRA to respond to the borrower’s questions. The toll-free number must either connect directly to that person or afford a caller the ability to identify him- or herself as an eligible servicemember and be routed to that person.
This notice requirement appears to impose the same – and no greater – requirements that banking regulators take the position is imposed under existing law. This existing requirement evolved from the Housing and Urban Development Act of 1968, which established a requirement that loan servicers notify delinquent borrowers of the availability of homeownership counseling. The National Defense Authorization Act for Fiscal Year 2006 (the “NDAA”) amended the required content of the notification form and directed HUD to issue a disclosure form to be used by mortgagees in fulfilling the notice requirement. Following HUD’s issuance of the NDAA-mandated notice (HUD Form 92070), residential mortgage loan servicers have been required to deliver the notice to homeowners who are forty-five (45) days delinquent to inform the borrowers of certain rights available to them under the SCRA if they are servicemembers or dependents of servicemembers. This form has been modified twice since its issuance (see the current form of notice.)
The Agreements do, however, impose new obligations concerning determination of a servicemember’s entitlement to SCRA protections. When a borrower states that he or she is in active military service or is subject to military orders requiring the borrower to commence active military service, the Servicer must determine whether the borrower might be eligible for SCRA’s general protections or for the Agreement’s foreclosure protections. It appears the Servicers are to make this determination by reviewing the Defense Manpower Data Center (“DMDC”), as discussed under the Pre-foreclosure Review heading below. If the Servicer determines the borrower is in fact eligible to receive SCRA benefits, the Servicer must route the borrower to Servicer employees who have been specially trained in SCRA’s protections. Of course, if the Servicer has appointed a single point of contact (“SPOC”) for the servicemember, that SPOC must also be well versed in the SCRA’s protections. The Servicer must continue to route the servicemember to those employees until the Servicer determines that the borrower is no longer protected by the SCRA.
Pre-foreclosure Review
The SCRA prohibits servicers from initiating a foreclosure or attempting to foreclose on a servicemember if the servicemember owns the security property, is the borrower on the loan, and the loan was made before the borrower was called to military service unless:
1. the servicer first obtains a court order authorizing the foreclosure, or
2. the servicer obtains a waiver as authorized under the SCRA.
The SCRA left open when and how to determine whether the borrower is a servicemember in military service. The Agreement resolves this issue for Servicers, and presumably for other servicers who are not subject to the Agreements.
The Agreements require the Servicers to determine whether the security property is owned by a servicemember covered under the SCRA by searching the DMDC for evidence of SCRA eligibility. The Servicers are to search the DMDC by either (a) last name and social security number, or (b) last name and date of birth. The Servicers must perform this search (i) before they refer a loan for foreclosure, (ii) within seven days before a foreclosure sale, and (iii) the later of (a) promptly after a foreclosure sale and (b) within three days before the regularly scheduled end of any redemption period.
Evidence to Support Interest Rate Reductions
Under the SCRA, a servicer is required to reduce a servicemember’s interest rate to six percent if the loan was made to the servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember entered military service. But this obligation arises only if the servicemember provides the servicer (a) written notice and (b) a copy of the military orders calling the servicemember to military service.
The Agreements require the Servicers to also accept from a servicemember who provides written notice but does not provide the Servicer military orders, a letter on official letterhead from the servicemember’s commanding officer including a contact telephone number for confirmation. The letter must:
1. be addressed in such a way as to signify that the commanding officer recognizes that the letter will be relied on by creditors of the servicemember;
2. set forth the full name (including middle initial, if any), Social Security number and date of birth of the servicemember;
3. set forth the home address of the servicemember; and
4. set forth the date of the military orders marking the beginning of the period of military service of the servicemember and, as may be applicable, that the military service of the servicemember is continuing or the date on which the military service of the servicemember ended.
Additional Mortgage Foreclosure Protections
As noted above, for the SCRA’s foreclosure protections to trigger, the servicemember must have entered into the loan prior to entering into military service. The Agreements afford servicemembers protections under certain circumstances even if the loan was originated after the borrower entered military service.
Even if the mortgage loan was originated during the period of a servicemember’s military service, subject to certain limitations, the Servicers may not foreclose on a mortgage secured by property owned by a servicemember during the SCRA protection period if the servicemember is (a) eligible for Hostile Fire/Imminent Danger Pay (the Agreements do not define what constitutes but presumably that term refers to 37 U.S. Code § 351) and (b) serving at a location (i) more than 750 miles from the location of the secured property or (ii) outside of the United States. This limitation does not apply if the Servicer has obtained either (a) a court order granted before the foreclosure, or (b) a waiver signed by the borrower that complies with the SCRA’s waiver provisions. Also, unless a servicemember’s eligibility for this protection can be fully determined by a proper search of the DMDC website, the Servicers are only obligated if they are able to determine, based on a servicemember’s military orders (or any letter from a commanding officer as described earlier in this blog), together with any other documentation provided by or on behalf of the servicemember that is satisfactory to the Servicer, that the servicemember is (a) eligible for Hostile Fire/Imminent Danger Pay and (b) serving at a location (i) more than 750 miles from the location of the secured property or (ii) outside of the United States.
Loss Mitigation
The SCRA does not address loss mitigation, but the Agreements do.
The Servicers may not require a servicemember to be delinquent to qualify for a short sale, loan modification, or other loss mitigation relief if the servicemember is suffering financial hardship and is otherwise eligible for such loss mitigation. Subject to certain limitations, for purposes of assessing financial hardship in relation to:
1. a short sale or deed in lieu transaction, the Servicers must take into account whether the servicemember is, as a result of a permanent change of station order, required to relocate even if the servicemember’s income has not been decreased, so long as the servicemember does not have sufficient liquid assets to make his or her monthly mortgage payments, or
2. a loan modification, the Servicer must take into account whether the servicemember is, as a result of his or her under military orders required to relocate to a new duty station at least 750 miles from his or her residence/secured property or to reside at a location other than the residence/secured property, and accordingly is unable personally to occupy the residence and (a) the residence will continue to be occupied by his or her dependents, or (b) the residence is the only residential property owned by the servicemember.
Separate Agreement
Some, but not all, of the Servicers entered into related agreements with the U.S. Department of Justice (“DOJ”) relating to the SCRA. Those agreements require the applicable Servicers to engage independent consultants to review the Servicers’ compliance with the foreclosure and interest rate reduction provisions of the SCRA and provide formulas for remediation when the consultants and DOJ determine there were violations. But more pertinent for purposes of this blog, those Servicers also agreed to additional obligations beyond those discussed above.
• Before the Servicer refers a loan to foreclosure, the Servicer must review any orders it has received from borrowers and check borrowers’ names and Social Security numbers against the DMDC website (as noted above).
• If the Servicer pursues a judicial foreclosure and the borrower fails to answer the action, the Servicer (or its agent), before seeking entry of default, the Servicer (or its agent) must query the DMDC and review information in its possession or control for orders to determine if the borrower is on active duty. If the Servicer learns that the borrower is on active duty or was on active duty at the time of the borrower’s failure to answer, the Servicer must file an affidavit stating that “the defendant is in military service” or “was in military service at the time of his or her failure to answer” prior to seeking default judgment and attaching the most recent certificate of service from the DMDC or a copy of the military orders.
• If the Servicer initiates and pursues a written waiver as provided in Section 517 of the SCRA, the Servicer must initiate the waiver process with the servicemember at least thirty (30) days in advance of any anticipated foreclosure sale date by sending a notice and a copy of the proposed waiver to the servicemember. The Servicer must use a specified form of notice and proposed waiver.
• The Servicer must accept servicemembers’ requests for reduced mortgage interest rates via electronic mail, facsimile, U.S. Mail, Federal Express or other overnight/express delivery to facsimile numbers and addresses designated by the Servicer. If the Servicer maintains full-service branch locations, under certain circumstances the Servicer must also accept servicemembers’ requests for reduced mortgage interest rates via in-person delivery at those branches.
• When a servicemember requests interest rate relief, the Servicer must accept, in addition to orders, any document the U.S. Department of Defense deems sufficient as a substitute for official orders. The Servicer may seek only orders identifying the beginning date of the applicable period of military service and may not condition providing SCRA benefits on the servicemember submitting orders that include an end date.
• Before concluding that the SCRA permits raising the interest rate on a servicemember’s loan higher than six percent, the Servicer must access the DMDC website to determine the dates, where available, of active duty military service of those servicemembers who requested reduced interest rates. If the DMDC indicates that the individual is still on active duty, the Servicer must continue to limit the charges pursuant to Section 527 of the SCRA.
• If the Servicer determines that a servicemember is not eligible for a reduced rate, the Servicer must notify the servicemember in writing of the reasons for the denial and that they may provide additional documentation or information to establish eligibility for the reduced interest rate.
• The Servicers must establish SCRA training programs for employees (including management officials): (1) providing customer service to servicemembers, (2) involved in mortgage servicing, including adjusting interest rates for mortgage loans, or (3) with significant involvement in the foreclosure process, within thirty days of the employee’s hiring, promotion, or transfer. The Servicers must also obtain confirmation from third-party vendors, law firms, and/or trustee companies involved in conducting foreclosures that their employees who are involved in the foreclosure process have been trained on their obligations to comply with this settlement and the SCRA.
There is no regulatory agency to flesh out the details of the SCRA. Rightly or wrongly, the DOJ has now stepped in to fill that void.