Recent enforcement activity has demonstrated the agencies have taken to viewing the SCRA as a strict liability statute. This shift in interpretation makes financial institutions legally responsible for compliance with the SCRA. According to Kirk Jensen, Partner in BuckleySandler’s Washington, DC office, “this is a big game changer in how financial institutions react to the SCRA.”

The Department of Justice has had some success in bringing litigation in these matters against the smaller, unsophisticated companies. However, it is important to note that the court is not hearing all the relevant arguments. There has been an uptick in private litigation and some of the issues raised in the enforcement matters may also be raised in court. It is our hope that the defendants will make the relevant arguments to resolve some of the outstanding issues. Read more…

The Servicemembers Civil Relief Act (SCRA) is designed to provide protection for military members as they enter active duty. The Act has origins dating back to the Civil War, but was first solidified in 1940 with the passage of the Soldiers and Sailors Civil Relief Act (SSCRA). In 2003, the SSCRA underwent modernizations, but the intent and language remained intact, to become what is known today as the SCRA.

Following the 2009 financial crisis and the rising number of foreclosures, reports began surfacing about banks and other financial institutions violating the SCRA. The Department of Justice began actively pursuing actions against institutions with the Office of the Comptroller of the Currency becoming involved later. Read more…

On April 4, the DOJ announced that two mortgage servicers will pay a combined $39 million to 316 servicemembers pursuant to SCRA settlements from 2011. Those settlement agreements resolved allegations that the mortgage servicers unlawfully foreclosed upon servicemembers between 2006 and 2010. One of the servicers also is subject to the national mortgage servicing settlement, which required an audit to identify violations of SCRA’s foreclosure provisions between January 1, 2006 and April 4, 2012 and its 6 percent interest rate cap provision between January 1, 2008 and April 4, 2012. DOJ stated that the payment is separate from the national servicing settlement review and represents only the non-judicial foreclosures conducted by the bank during the relevant time period. As the national settlement audits progress, the DOJ will require the servicer to make additional payments for alleged judicial foreclosure and interest rate violations uncovered in the audit.

On March 29, the Federal Reserve Board published its quarterly Consumer Compliance Outlook, which includes the Board’s response to questions raised during a September 2012 interagency webinar on servicemember protection issues and SCRA compliance. Because that event had limited time for questions, the Board responded in writing to the most common questions received. The publication includes answers to questions related to (i) notification of active duty, (ii) maximum rate of interest on debts incurred prior to military service, (iii) foreclosure protection, (iv) the Homeownership Counseling Act, (v) permanent change of station orders, (vi) the Defense Manpower Data Center, and (vii) other miscellaneous issues.

On March 28, the U.S. Attorney for the Northern District of Alabama announced that a federal grand jury had returned a two-count indictment against a used car dealer for violating the Servicemembers Civil Relief Act (SCRA). United States v. Nuss, No. 13-102 (N.D. Ala. Filed March, 28, 2013). According to the announcement, the indictment charged the car dealer with failing to follow the SCRA when asked to do so by an Alabama National Guard member who had been called to active duty in Afghanistan. The guardsman allegedly had sent a letter from his deployed location, in which he asked that his interest rate be reduced to six percent as required by the SCRA. According to the indictment, the dealer refused to reduce the interest rate, and hired two individuals to repossess the guardsman’s vehicle without first obtaining a SCRA-required court order. The maximum penalty for each SCRA violation is one year in prison, and a $100,000 fine.

On December 6, the Consumer Financial Protection Bureau (CFPB or Bureau) and the U.S. Department of Justice (DOJ) announced a Memorandum of Understanding (MOU) to coordinate enforcement of the federal fair lending laws, including the Equal Credit Opportunity Act (ECOA).  Simultaneously, the CFPB issued its first annual Fair Lending Report to Congress as required by the Dodd-Frank Act, which describes the Bureau’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews its fair lending accomplishments. Together, these initiatives demonstrate that the CFPB and DOJ are continuing to work together closely to aggressively enforce the federal fair lending laws.

Memorandum of Understanding Regarding Fair Lending Coordination

The new MOU supplements an existing Information Sharing Agreement Regarding Fair Lending Investigations among the DOJ, the U.S. Department of Housing and Urban Development, and the Federal Trade Commission, which allows these fair lending enforcement agencies to share confidential information related to fair lending investigations, screening procedures, and investigative techniques. It also follows a general cooperation MOU that the DOJ and CFPB entered into earlier this year.

The new MOU focuses on information sharing and referral of matters alleging ECOA violations, but also governs the agencies’ referral processes for other fair lending-related laws and joint fair lending investigations.

Referral of ECOA Violations to DOJ: The MOU explains the circumstances under which the CFPB will refer potential ECOA violations to the DOJ for further investigation or prosecution. Consistent with the established practice of the prudential federal bank regulators, the MOU requires the CFPB to refer to the DOJ all matters where it has “reason to believe” that one or more creditors has engaged in a pattern or practice of lending discrimination. The CFPB may also refer to DOJ any violation of Section 701(a) of ECOA, including a recommendation that a civil action be commenced if the CFPB cannot obtain compliance from the financial institution.

Following referral, the DOJ has 60 days to determine whether to proceed with its own investigation. Within that period, the CFPB may not unilaterally commence its own action with regard to the referred violation(s).  Even if exigent circumstances arise during the 60-day review period, the CFPB must first consult with the DOJ before taking independent action. Read more…

On November 19, the OCC issued Bulletin 2012-37, which advises all national banks and federal savings associations of the extension of certain servicemember protections afforded by the Servicemembers Civil Relief Act (SCRA). Currently, SCRA grants an individual protection from foreclosure during the period of active duty and for nine months thereafter, a benefit that was due to expire at the end of 2012. The Bulletin notes that the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, which was enacted in August 2012, provides that (i) SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013, (ii) beginning February 2, 2013, the mortgage foreclosure protection will extend to one full year after the period of active duty, and (iii) on January 1, 2015, SCRA’s expanded foreclosure protection will sunset, and the protection period will revert to the period of active duty service plus 90 days.

On October 16, CFPB Student Loan Ombudsman Rohit Chopra published the first annual report on student loans, as required by the Dodd-Frank Act. According to the report, the CFPB has received nearly 3,000 complaints regarding private student loans since it began accepting such complaints in March 2012. Based on the complaints and other data obtained by the CFPB, the report describes issues in the student loan market as similar to those seen in the mortgage servicing market including (i) improper application of payments, (ii) untimeliness in error resolution, and (iii) inability to contact appropriate personnel when facing economic hardship. Further, the report notes problems reported in the application of the Servicemembers Civil Relief Act, including obstacles to obtaining the available interest rate cap. The CFPB Student Loan Ombudsman recommends that the Treasury Secretary, the CFPB Director, and the Education Secretary assess whether efforts to remedy problems in mortgage servicing can be applied to improve student loan servicing. The Ombudsman also invites lenders to develop creative programs to help borrowers restructure debt, and recommends that the relevant Senate and House committees identify opportunities to spur the availability of loan modification and refinance opportunities. Additionally, on October 18, the CFPB released a report that expands on the servicemember-related issues presented in the Ombudsman’s annual report.

On September 10, federal banking regulators, the CFPB, and the FHFA conducted a webinar on federal servicemember financial protections, recent changes to the Servicemembers’ Civil Relief Act (SCRA), and recent changes to Fannie Mae and Freddie Mac short sale procedures for servicemembers and loan modification options for servicemembers. The event featured compliance and enforcement updates from the CFPB, the DOJ, and the OCC. Ann Thompson from the CFPB Office of Nonbank Supervision described recent joint agency guidance regarding servicemembers with Permanent Change of Station (PCS) Orders as an extension of the CFPB’s mortgage servicing exam procedures. Ms. Thompson explained that the CFPB will look at bank and nonbank servicers’ policies and procedures to determine their adequacy for handling servicemembers with PCS orders. If there are deficiencies, the CFPB may take supervisory or enforcement actions to support implementation of the guidance. Eric Halperin from the DOJ’s fair lending unit provided an update on enforcement activity and described a recent SCRA enforcement action against a national bank that covered all aspects of SCRA, not just foreclosure protections, as the model for the DOJ moving forward. Finally, Kimberly Hebb from the OCC offered some considerations for institutions seeking to comply with SCRA. She explained that the SCRA compliance process need not stand alone. For example, with regard to the law’s rate reduction requirements, compliance steps could be incorporated into existing processes for error resolution. Ms. Hebb also stressed documentation and record keeping, pointing out that while the law does not include a specific record retention requirement, examiners will want to see the full scope of compliance processes documented for use in determining compliance.

On August 9, Illinois enacted SB 3287, a bill to expand and create various new protections for servicemembers. The bill clarifies the scope of coverage of servicemember protections by amending the definition of “military service” to include any full-time training or duty, no matter how described and no matter which state, federal, or other authority ordered the service. The bill provides new relief for covered servicemembers with regard to (i) default judgments, (ii) mortgage foreclosures, and (iii) installment sales contracts. For example, the bill provides that any mortgagor who is a covered servicemember, or a family member who resides with a covered servicemember, may seek a stay of foreclosure proceedings and an adjustment of the monthly payment obligation for ninety days after the servicemember returns from service. Similarly, a covered servicemember may seek a stay of any repossession of goods subject to an installment sales contract and an adjustment of the obligation. Other protections added or expanded by the bill relate to (i) limitations on interest rates, (ii) termination of motor vehicle and property leases, (iii) cellular phone and long distance contracts, and (iv) utility services. These changes take effect on January 1, 2013.

On August 6, President Obama signed into law the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, H.R. 1627. Section 710 of this Act expands foreclosure protections for active duty servicemembers. Currently, under the Servicemembers Civil Relief Act, 50 U.S.C. app. § 533 (SCRA), an individual is entitled to foreclosure protection during the period of active duty and for nine months thereafter. This extended foreclosure protection was set to expire at the end of calendar year 2012, at which point the foreclosure protection would only last for ninety days after the end of active duty.

This bill signing makes three important changes to the SCRA that expand protections for servicemembers:

• The SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013;
• One-hundred-and-eighty days from the date of enactment (i.e., February 2, 2013), the mortgage foreclosure protection will extend to one full year after the period of active duty; and
• On January 1, 2015, the SCRA’s expanded foreclosure protection will sunset, and the protection period will revert to its 2008 level: the period of active duty service plus ninety days.

Additionally, this Act requires the Comptroller General of the United States to report to Congress information related to the use of this expanded foreclosure protection. This report is due a year-and-a-half after enactment-giving Congress several months to review the report prior to the 2015 sunset.

On July 26, the OCC and the DOJ announced resolution of actions brought against a national bank for alleged violations of the Servicemembers Civil Relief Act (SCRA). The DOJ filed a complaint and consent order in the U.S. District Court for the Eastern District of Virginia, simultaneously bringing and resolving allegations that over a roughly five year period the bank failed to provide sufficient protections to servicemembers (i) denying valid requests for interest rate reductions because the servicemembers’ military orders did not include specific end dates for the period of military service, (ii) foreclosing without a court order, (iii) repossessing motor vehicles without a court order, and (iv) obtaining default judgments without first filing accurate affidavits. Under the DOJ settlement, the bank must pay $12 million in damages to servicemembers. Concurrently, the OCC released consent orders resolving similar allegations. Under both the DOJ and OCC orders, the bank must take specific actions to enhance compliance with SCRA, including with regard to vendor management, training, and internal reporting. The OCC also is requiring that the bank report periodically to the OCC, and conduct a look-back review of its servicemember accounts. The DOJ notes that the bank already has adopted enhanced SCRA policies on its own initiative, including extending a four percent interest rate to qualifying servicemembers and giving an additional one-year grace period before de-enrolling servicemembers from the reduced interest rate program.

The federal government is increasing scrutiny of financial services companies’ practices affecting active military members, veterans and their families. Earlier this year, the CFPB along with the FTC, the Department of Defense and the New York Attorney General announced the launch of the Repeat Offenders Against Military (ROAM) database, which will track enforcement actions against companies and individuals who repeatedly scam military personnel, veterans and their families.

According to John Redding, Counsel in BuckleySandler’s Southern California office, this new effort is an important development that the financial services industry needs to be aware of. He says the firm has been advising clients on how to refine their policies and procedures for doing business with servicemembers and their families.

“We are suggesting they be aware of the increased focus on SCRA [Servicemembers Civil Relief Act] issues and, in part because of the new database and other efforts surrounding increased protections, need to review their practices to ensure continued compliance.”

According to the CFPB, law enforcement officials across the country, including state attorneys general, US attorneys, and judge advocates from all five branches of the armed forces, will be able to search the ROAM database for information about completed civil and criminal actions against businesses that have scammed military personnel, veterans, and their families.