Violators of SCRA Compliance in Regulators' Crosshairs

Bridgeforce Law provides details and analysis of Bank of America's recent penalty and consent order with emphasis on where financial institutions need to focus efforts to be compliance-ready across the enterprise.

Overview

On June 1, 2015, Bank of America (B of A) became the latest major financial institution to receive unfavorable attention in the mass media for violations of the Servicemember’s Civil Relief Act (SCRA). The Consent Order entered into between B of A and the OCC required the immediate payment of a $30 million civil penalty in addition to restitution for the approximately 73,000 customers who were harmed. Just over one year ago, in May 2014, Sallie Mae received similar public censure from the media and regulators for violations of the SCRA and related unfair and deceptive practices in violation of Section 5 of the FTC Act (i.e. UDAP). The aggregate liability incurred by Sallie Mae under its respective settlement agreements with the FDIC and Department of Justice amounted to $96.6 million. In her public statement regarding the Sallie Mae enforcement actions, CFPB Assistant Director for the Office of Servicemember Affairs Holly Petraeus delivered the following warning to the financial services industry as whole:

Today’s action should serve as warning not just to the student loan servicing industry, but to all institutions that provide or service loans to the military. Federal agencies will be vigilant about holding all financial institutions accountable for providing the protections that our servicemembers have earned through their selfless service to our nation. [1]

The fact that Sallie Mae was held accountable under both the SCRA and UDAP likewise sent a warning to the financial services industry. To this end, the CFPB has made it clear in its statements and Bulletins that acts or practices which are deemed unfair, deceptive, or abusive under any federal consumer protection law may also be deemed unfair, deceptive, or abusive for purposes of Section 1031 of the Consumer Financial Protection Act (i.e. UDAAP, and see Bulletin 2013-07 Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts). In the case of Sallie Mae, the conduct that the FDIC alleged violated both the SCRA and UDAP, included unfairly conditioning the receipt of benefits on requirements not found in the SCRA, improperly advising servicemembers that they had to be deployed in order to receive benefits, and failing to provide all of the benefits servicemembers to which they were entitled. In addition, the conduct that was alleged to violate UDAP alone concerned the inadequate disclosure of payment allocation methodologies, and the failure to adequately describe how to avoid late fees in billing statements.

SCRA Requirements and Expectations

Heightened regulatory scrutiny of SCRA compliance should be expected to continue for the foreseeable future. In this challenging environment, it is essential for institutions to possess both a firm understanding of what the Act requires and what regulators expect to see in an effective SCRA compliance program. As the following excerpt from a Federal Reserve Community Affairs Division letter from May 2005 describes, there’s a lot more to the SCRA than the familiar 6% cap on interest rates:

• Interest Rates: The SCRA provides that an obligation or liability entered into by a servicemember or the servicemember and spouse jointly before the servicemember’s entry into military service cannot bear interest in excess of six percent during the period of military service. The SCRA clarifies that creditors must forgive rather than defer interest above six percent during the time of service. Interest includes service charges, renewal charges, fees or any other charges (except bona fide insurance). The amount of any periodic payment due under the terms of the contract shall be reduced by the amount of the forgiven interest for that payment period. In order to receive the reduction in interest, the servicemember must provide written notice and a copy of the military orders to the creditor. A court, however, may grant a creditor relief from the interest rate cap if it finds the servicemember’s ability to pay the contract interest rate is not materially affected by military service.

• Mortgages: Generally, for obligations secured by a mortgage, trust deed, or similar security interest in real or personal property owned by a servicemember, the law invalidates the sale, foreclosure, or seizure of property for the breach of such a secured obligation during the period of military service or within 90 days thereafter. This provision applies only to obligations that originated prior to the servicemember’s military service, and for which the servicemember is still obligated.

• Installment Loans: Contracts for the purchase of real or personal property, such as a motor vehicle or the lease or bailment of such property, for which the servicemember made a deposit or installment payment prior to entering military service, the SCRA provides that such a contract may not be rescinded or terminated for a breach of terms occurring before or during military service without court order. Similarly, such property may not be repossessed without a court order.

• Residential or Motor Vehicle Leases: A servicemember may terminate a residential or motor vehicle lease in certain circumstances. For leases of premises (for residential, professional, business, agricultural, or similar purpose) that is occupied or intended to be occupied by a servicemember or his/her dependent, the lease may be terminated if (a) the lease is executed by or for a servicemember who subsequently enters military service during the term of the lease, or (b) while in military service, the servicemember executes the lease but subsequently receives military orders for a permanent change of duty station or to deploy for a period of not less than 90 days. For motor vehicle leases, used or intended to be used by the servicemember or his/her dependents, the servicemember may terminate the lease if (a) after executing the lease, the servicemember enters into military service under a call or order for a specified term of at least 180 days, or (b) while in military service, executes the lease but subsequently receives orders for a permanent change of station outside the continental United States or to deploy with a military unit for at least 180 days.

• Eviction: A landlord may not evict a servicemember or his/her dependents from premises either occupied or intended-to-be-occupied primarily as a residence, during the period of military service of the servicemember, if the rent does not exceed $2,400 per month (adjusted annually), without court order [For 2015, the adjusted amount is $3,329.84]. [2]

The Consent Order entered into between B of A and the OCC is instructive regarding regulator expectations for an effective SCRA compliance program. In this regard, the Order first recites broad-based weaknesses in the program that B of A had in place at the time the alleged violations occurred, including inadequacies with respect to: policies and procedures; financial, staffing, and managerial resources; internal controls, compliance risk management; internal audit; third party management; and training. The Order then describes the minimum requirements of the Compliance Plan that B of A must create and submit to the OCC for supervisory non objection. Those requirements include:

• Uniform standards and processes for determining whether a servicemember who submits a request for SCRA benefits is eligible for such benefits in all accounts that the borrower may have, not just the account that is the subject of the request;
• Policies and procedures for notifying a servicemember of the Bank’s denial to provide SCRA benefits or SCRA protection;
• Policies and procedures for determining whether real or personal secured property is owned by an SCRA-protected servicemember before referring a loan for foreclosure or repossession, and during the foreclosure or repossession process, in order to ascertain whether a court order is required prior to foreclosure or repossession;
• Processes to ensure that all factual assertions made in an affidavit of military service filed by the Bank or on behalf of the Bank are accurate, complete, and reliable;
• Procedures for when a search of the Department of Defense Manpower Data Center (‘DMDC’) database, or an equivalent database must be conducted before filing an affidavit in connection with obtaining a default judgment on an account, initiating the foreclosure or repossession process, or making a determination of eligibility for SCRA benefits;
• Procedures for filing an affidavit in connection with obtaining a default judgment on an account;
• Consistent procedures regarding state laws that provide more benefits or protection to servicemembers than those provided by the SCRA;
• Procedures requiring the Bank to obtain and maintain sufficient documentation to evidence: (i) the dates of SCRA-protected military service for servicemembers who request SCRA benefits or who are otherwise potentially entitled to SCRA protection; (ii) the method, date, and results of military status verifications prior to filing an affidavit in connection with obtaining a default judgment; (iii) dates of correspondence with covered servicemembers; and (iv) the calculation of benefits;
• Standard internal guidance, guidelines, or checklists or other formats for conveying complete and accurate information regarding the SCRA to be used by all applicable Bank employees and third party vendors; and
• Policies and procedures for ensuring that risk management, quality assurance, internal audit, vendor management, and compliance have the requisite authority and resources to identify deficiencies in the SCRA compliance program across all business lines.

In addition to the above, the Order additionally requires B of A to establish and implement an SCRA Training Program covering employees and third party agents, and make enhancements to its existing SCRA-related third party oversight.

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