Compliance Blog

Written by Bernadette Clair, Regulatory Compliance Counsel

In a previous blog, Steve mentioned the release of the First Quarter 2013 issue of the Philadelphia Federal Reserve's Consumer Compliance Outlook.

One of the articles, Servicemember Financial Protection Webinar, Questions and Answers, provides answers to some of the most common questions received during an interagency Outlook Live webinar the Federal Reserve System hosted back on September 10, 2012.

Here are a couple questions from the article that we often get asked here at NAFCU too, dealing with the maximum rate of interest that may be charged on debts incurred prior to military service:

Question No. 5

“Per the information provided during the webinar, I understand that fees cannot be in excess of 6 percent for service members. Is it correct that if a service member invokes his or her rights, you cannot charge more than 6 percent for any fees (including late fees and fees for nonsufficient funds), but you can charge up to 6 percent?

Under section 527 of the SCRA, the maximum rate of interest on debts incurred prior to military service is 6 percent. Additionally, section 527(a)(2) of the SCRA provides that interest on debt covered by the SCRA that exceeds the 6 percent cap must be forgiven. The SCRA defines the term interest to include “service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.” A creditor may seek relief from a court in order to impose additional fees and charges based on a finding that the service member’s ability to meet the obligation at a rate greater than 6 percent was not materially affected by military service. Accordingly, for obligations covered under the SCRA, creditors should include in the interest calculation any fee or charges incurred with respect to the covered debt, including late payment fees and other fees incurred after origination.”

Question No. 6

“Does the bank have to recalculate the monthly payments to reduce the loan interest rate to 6 percent, or is it acceptable to extend the maturity date and provide the borrower with a new payment schedule?

Section 527 of the SCRA requires both the forgiveness of interest in excess of 6 percent and the prevention of acceleration of principal. Therefore, the creditor should adjust the interest rate and reflect that reduction in the periodic payment. Any extension of the loan’s maturity date would not represent forgiving the interest.”

See the article for the full set of Q&A’s from the webinar.  You can also access the archived Outlook Live webinar here.