Citizen, Soldier, Small Business Owner? Commercial Lending and the Servicemembers Civil Relief Act

The Servicemembers Civil Relief Act, 50 U.S.C.A. § 3901, provides certain protections to military servicemembers regarding their financial obligations. The act applies to virtually every type of debt that a service member may obtain. It provides benefits such as an interest rate cap and procedural limitations on foreclosure, repossession and eviction.

Over the past several years, the Department of Justice and federal banking regulators have systematically enforced SCRA compliance with creditors related to residential mortgages, student loans and motor vehicle loans held by service members. The resulting settlements have led to hundreds of millions of dollars in consumer remediation and stringent compliance management obligations for banks and non-bank financial institutions.

The world has changed dramatically in the century since Congress enacted the SCRA’s predecessor, the Soldiers’ and Sailors’ Civil Relief Act, which was the first comprehensive service member protection statute. Today, service members leave behind more than just their families when they answer the call of duty. Some leave behind businesses complete with property, employees and independent financial obligations.

Taking this into account, federal regulators are now expanding their traditional focus beyond consumer lending to include small business loans. For example, the Consumer Financial Protection Bureau recently posted an “expression of interest” in hiring an assistant director for small business lending, and members of Congress have placed renewed pressure on that agency to promulgate rules to implement the small business loan data collection provisions of the Dodd-Frank Act.

As regulators continue to review all types of financial transactions for SCRA compliance, one area of increasing interest has been service member-affiliated commercial loans. While the SCRA is relatively limited in its express treatment of commercial loans, a detailed reading of the statutory text and relevant case law provides some guidance to financial institutions that service these loans.

Originally published in the Westlaw Journal of Bank & Lender Liability; reprinted with permission.