DOJ and CFPB send notification letter to auto finance companies regarding SCRA protections | Ballard Spahr LLP
On July 29, 2022, the Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB) released a notification letter (the “Joint Letter”) to “remind” auto lenders and leasing companies of the protections afforded to service members and their dependents under the Military Civil Assistance Act (SCRA). The joint letter provides a very basic overview and reminder of the vehicle repossession protections, early vehicle lease termination rights and interest rate cap available to eligible members under the SCRA.
July was military consumption month, which probably explains the timing of the joint letter. The CFPB Press release announcing the joint letter cites a 2020 CFPB report that was recently discussed in a July 2022 CFPB blog post titled “Protecting military members from expensive auto loans and unlawful seizures.” According to this report, titledFinancially fit? Comparing Young Military and Civilian Credit Reportsabout 20% of young military personnel have at least $20,000 in car debt by age 24. This is a significantly higher percentage of civilian borrowers in this age bracket. According to the CFPB, young servicemen also generally have higher delinquency and repossession rates than civilians of the same age, although these rates level off after five years of active duty. The press release announcing the joint letter also quotes the words of the CFPB Spring 2022 Watch Highlightswhich indicates that CFPB examiners have continued to identify wrongful foreclosures and unfair acts and practices by auto repairers, but not in the context of SCRA-protected military borrowers.
The three SCRA provisions identified in the joint letter impacting auto finance companies are:
- Vehicle repossession protection: Under 50 USC §3952, installment contracts for the purchase or rental of real or personal property (including motor vehicles), or the lease or lease of such property, cannot be canceled or terminated for breach of contract during a person’s military service, and the property cannot be repossessed without a court order. It is the auto finance company’s responsibility to identify customers who are service members eligible for this protection. The Department of Defense Manpower Data Center (DMDC) database is the primary tool used to identify customers who are on active duty and eligible for protection.
- Early termination of vehicle lease: Under 50 USC § 3955, a person who leases a motor vehicle and then enters military service during the term of the lease (or is in the military when entering the lease and then receives orders for a permanent change station or deployment for 180 days or more) may terminate their lease early, without penalty. This provision also requires the refund of all rental amounts paid in advance.
- The 6% interest rate ceiling: Under 50 USC § 3957, the interest rate on an obligation or liability incurred by a military member prior to entering military service is capped at 6% for his period of active duty. This benefit must be requested in writing by the serviceman and be accompanied by his orders or any other appropriate indicator of military service. This request can be made up to 180 days after the end of military service. Any interest above the cap must be waived (not deferred) until the first day of SCRA eligibility, which may require the creditor to repay the excess interest to the service member. Moreover, the creditor cannot accelerate the payment of the principal when implementing the rate change, so careful re-amortization of the obligation is necessary. Issues with the application of the SCRA’s interest rate cap are not uncommon during regulatory reviews, so we encourage loan servicers to consult with counsel to ensure their methodology for implementing the cap SCRA’s interest rate plan is compliant.
In addition to the above SCRA provisions that were discussed in the joint letter, the DOJ recently filed two enforcement actions involving motor vehicles alleging violations of 50 USC § 3958, the SCRA’s prohibition on seize or exercise a lien on a member’s property or effects during a period of military service (or 90 days thereafter) without first obtaining a court order. As with SCRA protections against repossession (§ 3952), mortgage foreclosure (§ 3953), and default judgments (§ 3931), the onus is on the party enforcing its contractual right to proactively determine whether the borrower is a member of the service. The DOJ, which has enforcement authority over the SCRA, has filed seven actions under the SCRA since 2021, four of which relate to motor vehicles. A list of all DOJ SCRA cases, sortable by year, can be found here.
In December 2021, the DOJ and CFPB published a similar joint notification letter owners and mortgage managers. Those letters discussed SCRA protections against foreclosures and evictions, as well as forbearance options under the CARES Act.
We anticipate renewed regulatory focus on the SCRA interest rate cap as the rate environment changes and interest rates continue to rise. It is clear that motor vehicles and auto financing have been a focus of the DOJ in its enforcement actions and the CFPB in its use of the bully pulpit. Additionally, SCRA protections against foreclosures and evictions will become more problematic as default rates rise. Loan servicers of all products should ensure that they have controls in place to comply with the various provisions of the SCRA.