SCRA Letter to Request Cap on Interest Rate is a letter requesting the lender to limit the interest rate at 6% during the period of military service and one year thereafter for mortgage loans that were obtained before entering the military service. The letter is sent in pursuance of Servicemember Civil Relief Act (SCRA) which requires the servicemember to send in writing a notice for limiting the interest rate. SCRA entitles the servicemembers who are in military service to certain protections and benefits such as interest rate limitations, protections from default judgments and foreclosure, and evictions. One of these protections is the 6% interest rate cap.
As per §527 of the SCRA, the lender is required to limit the interest rate to 6% when a servicemember is in military service for loans that were obtained before the start of the military service. For mortgage loans, the 6% interest rate cap is applied from the start date of the military service status till one year after the end of the active duty status. For all other loans (non-mortgage loans), the 6% cap is applied during the time period when the servicemember is in military service. The benefit is available when for loans incurred by the servicemember or jointly with the servicemember's spouse.
§527 (d) of SCRA defines interest to include service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability. Therefore, interest includes any service fee, account fee, admin fess, or any other charges. Therefore, you should ensure that the system is set up to factor in other fees when applying the 6% cap. However, the 6% cap does not include the premiums for property/homeowners insurance. To avoid fee-related complications most lenders forgive/stop all fees during active duty status and charge interest rate up to 6%.
SCRA requires interest above 6% interest rate cap be forgiven. There is no deferment or postponement of interest. The change in interest rate is not a subsidy. The interest rate reduction may not be achieved by changing maturity date or other ways to circumvent reduction of interest rate.
The following conditions must be met in order to avail the 6% cap:
One thing to keep in mind is that the SCRA allows a court to exempt the loan from the 6% interest rate cap if the court believes that your ability to pay interest above 6% is not materially affected by reason of your military service. Therefore, you should be prepared to show how the military service is adversely affecting your ability to pay the loan at the note rate.
The lender by itself cannot make the determination that you do not qualify for the 6% cap. They need to approach the court and seek court approval. In practice, majority of the lenders do not pursue such court action or even ask you to show documentation for the inability to pay higher interest. In fact, lenders prefer to provide the rate cap to demonstrate their commitment towards servicemembers. Contact your lender to determine what documentation they require before they extend the SCRA benefits.
Contact the lender or its servicer to identify if they have a specific process for submitting the letter. This may save you time as some lenders allow you to request the SCRA benefits by using their website. Also, confirm the address where the letter needs to be sent.
Once you are ready, complete the SCRA Letter to Request Cap on Interest Rate and include all pertinent attachments. You may use the list below as a checklist when preparing the letter.
Mail the letter at the lender's/servicer's address using certified mail or a courier with tracking number to ensure you have proof of mailing.
You should have policy and procedures for handling requests from Servicemembers for limiting their interest rate. The primary processing requirement is to verify the active duty status of the servicemember. This can be done by obtaining SCRA Certificate. SCRA Certificate is the evidence of your active duty and is issued by the Department of Defense (DOD) from its SCRA Website. Alternatively, you may rely on the copy of the orders from the commanding officer, which the borrower has provided, as evidence of military service.
Once you are satisfied that the request is properly made and the active duty status is verified, you need to set the interest rate to cap at 6%. Most loan servicing systems contain a flag for active duty servicemembers which automates the setting of the interest rate cap and preventing fees. The servicing system should be set up to apply the rate cap from the start date of the military service status till one year after the end of the active duty status.
The request from the servicemember applies to all loans with the lender, consumer or commercial purpose. The borrower is not required to make a separate request for each account level. Therefore, you need to implement the 6% interest cap for each loan account held by the borrower, whether the loan is a mortgage loan or any other type of loan.
Record retention period is not specified by SCRA. However, for audit and compliance purposes, you should keep the request letter, military orders, SCRA Certificates, and other pertinent documents for at least till the end of the interest rate cap period.
If you are denying any SCRA benefits then you should maintain the copies for the request and the documentation or information that you relied upon to deny the request. You should seek advice from legal and compliance departments for the record retention period.
The purpose of the letter is request limiting the interest rate at 6%. If your loan is below 6%, you may be tempted to not send the letter to the lender, especially when you have a fixed rate loan. However, we recommend sending in the request when called for military service in all cases for the following reasons:
Military Service covered under SCRA is the active duty as per Title 10 of the United States Code (10 USC § 101(d) (1)). It covers active duty performed by the uniformed services that include Army, Navy, Marine Corps, Air Force, Coast Guard and the commissioned corps National Oceanic and Atmospheric Administration (NOAA) and Public Health Service. SCRA extends coverage to include activation of a National Guard member for service authorized by the President or the Secretary of Defense under 32 USC § 502(f) for purposes of responding to a national emergency declared by the President and supported by federal funds. National Guard members that are activated to support a State and funded by State funds are not covered under Active Duty and for protections under SCRA.
Updated: Mar 27, 2015