Highway to the Danger Zone: Automotive Lending and the Servicemembers Civil Relief Act

This past March, Carl Nuss — a 75-year-old used car dealer from Birmingham, Alabama — received a letter from one of his customers, requesting that Mr. Nuss reduce the customer’s interest rate to six percent since the customer was overseas with the military.¹ Instead, because the customer was thousands of dollars behind on his car payments, Mr. Nuss repossessed and sold the car, as permitted under the contract.² Two months later, Mr. Nuss was indicted on two counts of violating of the Servicemembers Civil Relief Act³ (“SCRA”) — first for failing to reduce the customer’s interest rate, and second for repossessing the vehicle without a court order while the customer was on active duty.⁴ Each count is punishable by up to one year in jail and a $100,000 fine.⁵ On June 27, Mr. Nuss pled guilty to both SCRA violations.⁶

Over the past few years, federal regulators — led by the Department of Justice — have sharply increased their focus on SCRA compliance. Although most recent headlines related to SCRA enforcement have arisen in the area of home mortgages, several major enforcement actions and multi-million dollar settlements indicate that regulators are looking beyond residential mortgage loans to identify possible violations involving all consumer asset classes, including auto loans.⁷

For financial institutions, the costs of SCRA non-compliance can be severe. The SCRA provides that the Department of Justice may seek penalties of up to $55,000 for a first violation and $110,000 for any subsequent violations;⁸ Congress is currently weighing legislation that would double these penalties for individual violations to $110,000 and $220,000, respectively.⁹ The SCRA also permits servicemembers to file their own private causes of action,¹⁰ and some attorneys have attempted to create class action lawsuits predicated upon uniform servicing practices being applied nationwide.¹¹ Both federal and state regulators now consider SCRA compliance one of their primary areas of focus in examining institutions, and their enforcement attorneys are carefully attuned to SCRA issues. State attorneys general — most notably the Attorney General of Delaware — have requested information from auto finance companies and banks regarding their compliance with the SCRA.¹² Furthermore, the reputational risk of improperly servicing loans for active duty servicemembers is substantial. Finally, Mr. Nuss’s case demonstrates that the Department of Justice will not hesitate to invoke the SCRA’s criminal provisions to protect servicemembers. Thus, creditors ignore the SCRA at their peril.

Originally published in the Banking Law Journal; reprinted with permission.