- The Washington Times - Friday, October 5, 2001

America is going to war, and many reservists and active enlisted now have a new financial friend the Soldiers' and Sailors' Civil Relief Act (SSCRA).

If you've been listening to the news lately, you've heard the highlights of this act, which was last amended in 1991 during Desert Storm. The legislation actually has its roots in the post-Civil War era when Congress passed a total moratorium on civil actions brought against Union soldiers and sailors, according to Air Force Maj. Amy Griese, assistant director for legal policy for the Department of Defense. The present statute was passed in 1940.

Although the act does, indeed, reduce all interest charges to enlisted personnel in active duty to 6 percent, there are some limitations that the act places on financial institutions. In addition, this act does not release active military personnel from their financial obligation, just some relief in what they are required to pay.

Low interest rates. First, let's look at the mortgages. Much of the news coverage has been on how activated military just received rate cuts on their loans (whether for consumer or mortgage debt). Keep in mind, though, that these cuts are only for debt incurred before the solder or sailor was activated.

The Coast Guard (www.uscg.mil) has some good examples of what debt is covered by this act and what isn't.

For instance, Reserve Petty Officer Jane Doe is a successful businesswoman in civilian life, has a car loan at 12 percent and she's currently on inactive status. Once she is recalled to active duty, her pay suddenly sinks she can now use the SSCRA to reduce the interest rate to 6 percent.

Here's how: She must first send a letter to the lender asking for the 6 percent interest rate under the Soldiers' and Sailors' Civil Relief Act (50 U.S.C. App. 526). The letter should include the account number for the loan, the date the loan originated, the date she entered active duty, and that her active duty status has affected her ability to repay the loan.

This letter should also include a copy of her orders to active duty and a copy of a Leave and Earning Statement (LES). If the lender refuses to reduce the interest rate, the enlistee should contact a legal assistance attorney.

Every military installation has a legal assistance department. The Web site www.Military.com has a great Installation Guide look-up to find more detailed information on the services provided at the installation.

Once you find your installation, look under Commonly Referenced Numbers for the phone number to the legal department.

Limits on lenders. Under the act, not only are financial institutions required to reduce your interest rate to 6 percent, but they are to reamortize the monthly payment to reflect that amount. The National Association of Federal Credit Unions (www.nafcunet.org) lays out some of the rules its members must follow when implementing the act with its account holders.

According to the association, "In those situations where the credit union must reduce a member's interest rate to 6 percent, the courts have interpreted this to require that the credit union also decrease the member's monthly payment amount in accordance with the lowered interest rate. Credit unions may not elect, instead, to keep the payment amount the same and shorten the maturity of the loan as this would not provide the monetary relief envisioned by the act."

The interest reduction can result in substantial savings for enlisted personnel. On a 30-year loan for $150,000 at 7.5 percent, the savings would be about $150 per month.

Just because a member of the armed forces has been called up to active duty doesn't mean he automatically gets the reduction in credit interest rate. NAFCU advises its members that "if a credit union believes that the member's ability to repay the debt has not been materially affected by his or her active duty military service, it may petition the court for relief."

If a financial institution merely denies the benefit without due process, it could be subject to additional penalties from a court. Fortunately for the military personnel, while the issue is before the court, the credit union must reduce the interest rate until relief (for the lender) is granted.

Another maneuver disallowed under the act is for a financial institution to agree to collect from a co-signer, endorser or guarantor in lieu of lowering the interest rate. The act calls for a reduction in the interest rate period.

Once a borrower ends military service, the lender may raise the interest rate back to its original contractual level; however, the borrower may apply to the court for an extension of time to repay any arrearages. The maximum time for which an extension may be granted depends on whether the loan is secured or unsecured.

Lenders also are limited on when they can foreclose on a property acting as security for a loan subject to the act. The lender must obtain a court order before repossession is allowed. Taking action without the prior court order could result in a fine and possibly incarceration.

Real estate investors beware. This act provides protection to fighting men and women while they are in the midst of hostilities and protecting us here at home. Nevertheless, I can see where the act could adversely affect some small real estate investors who have extended owner financing to a buyer.

Most loans include a due-on-sale clause, which means that if you sell your house, you must pay off the loan secured by that property. But some loans, Veterans Affairs loans in particular, allow the owner to wrap a loan around the VA mortgage. What this means is that the owner of a house that appreciated in value can sell the house for the appreciated price and accept mortgage payments from the new owner while at the same time make payments on the original note.

For instance, Mr. Smith bought his house using a VA loan for $150,000 at 7 percent and sold it years later for $175,000. Instead of paying off the VA loan, he decided to hold a note for $165,000 at 8 percent for the new owner. He is receiving payments on the $165,000 ($1,210 per month) and making payments on the $150,000 ($998). Obviously, he has created a $212 positive cash flow with this arrangement.

If his borrower is in the Reserves and is called to active duty, the interest rate must drop to 6 percent if the borrower invokes his rights under the act. This drops his monthly payment to the owner-financier to just $989, resulting in a profit margin of only $9. In essence, it may not be financially feasible for the investor-lender to continue this relationship, and he may be forced to sell the note at a discount.

Not an end to debt. Military.com provides some good common-sense advice to men and women in uniform about what the act does and does not protect with a reminder that the act "is not an end-all to your owed debts. You are still liable to pay your debts but are afforded somewhat of an extension and leniency while on active duty."

Another reminder from this Web site comes in the area of what war can do to your credit.

"Unfortunately while the Soldiers' and Sailors' Relief Act may protect you from collections and lawsuits while on active duty, it does not, however, guarantee that you will not suffer the creditors' wrath via your credit reports. Sure the loan may be deferred or your local bank may put it on hold but it may not stop the delinquency from being reported on your credit reports and ruining your good credit."

It will take some legwork on the part of soldiers and sailors to protect their credit while on active duty, but following these steps can help avoid costly credit mistakes:

Documentation. Get all deferments or agreements in writing before you leave for duty.

Credit reports. Get a copy of all three credit reports and review payment history before and after.

Family involvement. Have a spouse or trusted family member receive all bills and communications with creditors.

Power of attorney. Set up a temporary power of attorney with a trusted family member to control your accounts while you are gone.

M. Anthony Carr has written about real estate for the past 12 years. Send comments and questions by e-mail (manthonycarr@erols.com).

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