Source: https://www.rskcompliance.com/2017/02/
Timestamp: 2019-04-24 14:48:13+00:00

Document:
If a servicemember is one of many signers on a commercial credit obligation ?and claims relief under the SCRA, are the provisions of the statute regarding interest rate reduction and deferment of foreclosure proceedings applicable?
The interest rate limitations of the SCRA apply to any obligation the servicemember is personally liable for, including joint obligations with other persons, while the protections afforded by it to mortgages apply to any loan secured by a mortgage on real property of the servicemember.
The Servicemembers Civil Relief Act of 2003 (“SCRA”) replaced the Soldiers and Sailors Civil Relief Act of 1940 (“SSCRA”) and extended the protections offered servicemembers by the earlier statute.
(2) Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven.
(3) Prevention of acceleration of principal. The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such a payment is made.
No distinction is made by section 527 between consumer versus business debt. FRB, Consumer Compliance Handbook, SCRA, 1.
The SSCRA also provided for a six percent cap on interest charged on the obligations of a servicemember during active duty. As per the federal case of Cathey v. First Republic Bank, 2001 US Dist. Lexis 13150 (WD La, August 14, 2001), this interest rate limitation was applied to all obligations the servicemember was personally liable for, including those of a corporation which the servicemember had guaranteed.
The definition of “obligation” in the SCRA is broad. As per footnote 5 to section 527 of the statute, the definition of “obligation” is either a mortgage debt or any other obligation or liability. This was added by an amendment effective July 30, 2008 and established by section 2203 of P.L. 111-289, the Housing and Economic Recovery Act of 2008. Such a definition would cover any obligation or liability of the servicemember, including those entered into jointly with any other party. If the obligation was the guarantee of a corporate debt, as in the Cathey case, it would be subject to SCRA requirements. If it was a note co-signed with other persons, as in this case, it would also be covered, since the servicemember would be personally liable for it.
There are few cases construing section 527 of the SCRA and apparently none have reached the appellant level. One case held that the interest cap extends to corporations when they are personally guaranteed by servicemembers. In particular, the court refused to enforce an 18 percent interest rate included in a payment ordered against a servicemember’s corporation by a Canadian court. The U.S. federal court held that the servicemember’s corporation was protected under the SCRA while the servicemember was on active duty in the air force, and that the corporation was only required to pay interest at the rate of six percent during the period of active duty. Linscott vs. Vector Aerospace, No 05-CV-682-HU, 2007 WL 2220357 (D. Or, July 27, 2007). This indicates that the interest rate limitation of SCRA was given the same effect as that of the SSCRA.
It is possible that the reference in section 527(a)(1) to an obligation “that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly” are words of limitation, such that only loans which fall into those categories are covered by the interest rate restriction. In that case, the obligations of a servicemember would be covered, but no joint obligations other than those of the servicemember and the servicemember’s spouse. This would mean that any other joint obligations of the servicemember, whether of the servicemember and his/her child or sibling or, as in this case, the servicemember and other co-signers to a commercial obligation, would not qualify for the interest rate reduction.
While an argument could be made for this interpretation, based on the statutory language, we do not believe that it is consistent with the definition of “obligation” given by the SCRA, since it would necessarily exclude other joint obligations that the servicemember would otherwise be personally liable for, or with the application consistently given this provision by the lower courts.
The distinction made in the SCRA with regard to the joint obligations of the servicemember and the servicemember’s spouse was apparently intended not to restrict the applicability of the interest rate limitation to the obligations of the servicemember, but to extend it to the obligations of the servicemember’s spouse, so long as those obligations were joint obligations with the servicemember. In that regard, another federal court case held that the SCRA six percent cap applies to the obligations of a spouse only if they are jointly held with the servicemember. Rodriquez vs. American Express, No. CV F03-5949, 2006, W6 908613.
In addition, we note that a summary of SCRA provisions issued by the Office of Judge Advocate General, U. S. Army when the statute was enacted, “Servicemembers Civil Relief Act Replaces Soldiers and Sailors Civil Relief Act,” referred to the six percent interest cap as one of the most frequently used provisions of the SSCRA, indicated when the interest in excess of six percent is forgiven, deferred, or subject to some other treatment, and detailed the steps that a servicemember must take to obtain the interest rate reduction. Had it been understood that the SCRA also made a significant change in the applicability of the interest limitation, then certainly that would have been specified as well.
While we believe that the interest rate limitations of the SCRA applies to all obligations incurred by the servicemember, including joint obligations with other persons, we note that section 527(c) of the SCRA allows a court to grant relief to a creditor from those limitations “if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military status.” This is, of course, a question of fact.
(2) is secured by a mortgage, trust deed, or other security in the nature of the mortgage.
The statute does not distinguish between consumer or commercial loans or residential or commercial property, but only that the obligation is secured by a mortgage on the property. Consequently, we conclude that such deferment provided by the SCRA would apply to any real or personal property owned by the servicemember which secured an obligation, including the obligation in question.
Should the settlement service provider shown on the written list of service providers be the same as the one used for the fee disclosed on the Loan Estimate?
There is no requirement for the fee shown on the Loan Estimate to be that of a particular service provider, but as a matter of best practice, the fee for the service shown on the Loan Estimate should be the highest fee of the service provider on the list charging the highest amount, in order to allow the greatest tolerance cushion if the borrower chooses a provider from the list.
Under the TILA-RESPA Integrated Disclosure (“TRID”) rules of Regulation Z, a creditor must provide an itemization on the Loan Estimate of each amount and a subtotal of all such amounts the consumer will pay for settlement services for which the consumer can shop for. 12 CFR §1026.37(f)(3).
As with any disclosure on the Loan Estimate, the amounts of the fees must be disclosed in good faith. If any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer. The “reasonably available” standard requires that the creditor, acting in good faith, has exercised due diligence in obtaining the information. Official Interpretations, 1026.19(e)(1)(i) – 1.
This means that the creditor cannot simply enter an arbitrary amount. If the disclosure is made in good faith, then it must correspond to a charge that will likely be made by a service provider.
If the creditor permits the consumer to shop for a settlement service, it must provide the consumer with a written list identifying at least one available provider for that service. The settlement service providers listed must correspond to the settlement services for which the consumer may shop. Official Interpretations, 1026.19(e)(1)(vi) – 3.
The creditor is not required to disclose on the written list the fees charged by the settlement providers. Rather, only sufficient information needs to be provided that will enable the consumer to contact the provider. This would include the business name, address, and telephone number of the service provider. Official Interpretations, 1026.19(e)(1)(vi) – 4.
There is no requirement that the charges on the Loan Estimate must be the same as that of any service provider listed on the written list of service providers. However, as a practical matter, a charge itemized on the Loan Estimate should be the highest one charged by any of the listed providers. The reason for this is that if the creditor permits the consumer to shop for a service, and the consumer chooses a provider on the written list of service providers, the charges for third party service providers will be grouped together and subject to a 10 percent cumulative tolerance. The creditor can charge the consumer more than the amount disclosed on the Loan Estimate for any one of the charges, as long as the total sum of the charges does not exceed the sum of all such charges by more than 10 percent. 12 CFR §1026.19(e)(3)(ii).
If there is more than one service provider listed for the service and the estimated charge on the Loan Estimate is based on that of the service provider charging the most, the creditor will have more of a cushion, if the consumer chooses a service provider charging less. This cushion will militate against the creditor being out of tolerance, if the charges for other services are more than was estimated.
On the hand, if there is only one service provider listed, the charge itemized on the Loan Estimate should be based on the charge of that provider. If the creditor disclosed a lesser sum on the Loan Estimate than that service provider would charge, and the consumer selected that service provider, it would simply increase the fees paid by the consumer over such disclosed in the Loan Estimate. If this increase, either alone or with other third party service fees, causes the aggregate amount to exceed the amount disclosed on the Loan Estimate by more than 10 percent, the creditor would have the choice of either reimbursing the consumer or paying the difference itself.
Therefore, in answer to the Bank’s question, it would not be required to disclose a fee on the Loan Estimate that was the same as that of a particular service provider listed on the written list of service providers, but the amount should correspond to that of the charge of a service provider on the list, and it would be prudent if the fee disclosed was that of the service provider charging the highest amount for its services.
The Bank recently received several reports of ACH fraud. Is it acceptable to require a copy of a police report before crediting anything back to the customer? The Bank understands that this cannot be done for VISA debit cards, but it would like to know if it can do so for other ACH transactions and electronic checks.
What the Bank can require in writing with respect to an unauthorized ACH transaction or whether it can require anything in writing at all will depend on whether the transaction is subject to the error resolution requirements of Regulation E or those of the NACHA Operating Guidelines. Generally, the Regulation E rules will prevail for consumer transactions, unless the NACHA rules are more favorable.
If the Automated Clearing House (“ACH”) transactions were electronic funds transfers for the purposes of Regulation E, then the error resolution of the regulation will apply. An electronic fund transfer (“EFT”) is any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account. The term includes a transfer sent via ACH. 12 CFR §1005.3(b)(1); Official Interpretations, §1005.3(b)(1) – 2.
Under Regulation E, the Bank must comply with the error resolution rules of the regulation when it receives a written or oral notice of error from a consumer that meets the timing requirements and enables the Bank to determine the name and account number of the consumer and why he/she believes an error exists. The Bank cannot require anything in addition to this. It may request additional documentation to assist in its investigation, but it may not condition the investigation on whether or not the documentation is provided. 12 CFR §1005.11(b)(1).
This means that the Bank can request a copy of a police report as part of its investigation, but it must comply with the error resolution requirements of Regulation E whether or not the consumer provides this documentation.
The Bank may also require the consumer to provide written confirmation of an error within 10 business days of an oral notice. If it requires written confirmation, it must have informed the consumer of the requirement and provided the address where confirmation must be sent when the consumer gives the oral notification. If the consumer does not provide written confirmation, the Bank is not required to provisionally credit the consumer’s account if it requires more than 10 business days to complete its investigation, but it must still investigate the claim and credit the account if it determines that the claim is valid. 12 CFR §1005.11(b)(2); Official Interpretations, §1005.11(b)(1) – 2.
The NACHA rules require the Bank to obtain a Written Statement of Unauthorized Debt (“WSUD”) or an affidavit from the accountholder. The statement must be given under penalty for perjury in order for the Bank as the Receiving Depository Financial Institution (“RDFI”) to use the ACH system's adjustments procedures to return the item. The NACHA rules suggest that the Bank consult its legal counsel to determine whether a WSUD or an affidavit should be obtained, in order to have a written statement subject to the penalty of perjury. NACHA Operating Guidelines, OR71, OG107.
The NACHA rules concern the relationship between the Bank as RDFI and the Originating Depository Financial Institution. Such does not affect in any way the Bank’s Regulation E obligations. The Bank can treat consumers more favorably under the NACHA rules (or the VISA or MasterCard rules), if they provide equal or greater protection to the consumer, but it must provide them with, at least, the protections of Regulation E.

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