The Service members Civil Relief Act (SCRA) is a growing area of concern for the mortgage default industry. The statute is very broad and much of it can be left to interpretation. Often times, borrowers can be afforded more relief than what was intended by the legislature in its enactment of the statute and the counter, not enough relief which could yield highly unfavorable outcomes for everyone involved. Determinations regarding the availability of these protections have often been delegated to the firms representing the servicers. While these determinations are mostly straightforward, there have been cases where the availability of the protection falls into a “grey area” that the firm is left to interpret.
One of the most recent areas of concern the firm has dealt with is the issue of spousal rights or lack thereof as it pertains to the SCRA. We know that the statute was enacted to provide protections for service members and their families in the event that their military service impedes their ability to meet their financial obligations incurred before entry into active military service but to what extent are their families protected? Consider this hypothetical: A husband was active military for over 20 years and is now discharged. He is not a party on the loan nor has he ever been in title to the subject property. His wife, who is our borrower and current title holder, believes she is covered under the SCRA. Assuming that the loan originated before his military service, can the privileges and immunities granted to him be extended to his spouse? The answer is possibly. The SCRA applies to obligations owned by the service member only. Since he was never in title or obligated under the mortgage, the act does not apply. Her next argument is that section 538 of the act extends protections to his dependents. By definition listed in this act, as his spouse she is his dependent, but it also explains that her ability to comply with the terms of the mortgage have to be materially affected by his military service in order to be extended this protection. In the instant case, this argument did not prevail because her husband was discharged and is now a member of the reserves. Section 516 clarifies that reserves are extended protections only if they are ordered to report for military service. In our case, he has not. Therefore, there is no military service that can affect her ability to comply with her mortgage.
This research can be complex as we are seeing different fact patterns yielding different interpretations of the SCRA every day. These issues become problematic because in the interim, demand letters and foreclosure notices are already being mailed out. In some cases, where the research is more extensive and requires diving further into the details behind the service member’s different periods of service, foreclose publications might also be running in local newspapers before the firm has made the determinations to cancel the sale and afford service members the protection. Thus far, we have been successful in our determinations but it is important to realize that these notices and ads can easily be construed by a judge as harassing and embarrassing. This is all assuming there is not a question of wrongful foreclosure. In the event of a wrongful foreclosure, the punitive damages and bad media publicity for putting a veteran out on the street could be very costly for the servicer and the servicer’s firm as well. Considering what is at stake, everyone should always take the conservative approach and err on the side of caution. Military checks should be conducted early on with each mortgage servicer’s in-house counsel before the loan is ever referred to the foreclosure firm to prevent unnecessary and costly cancelling of sales and ad publications. The earlier these military checks are being done, the less room for error and the more room for research the firms will be allowed.