Servicemembers Civil Relief Act Six Percent Rate Cap

Clarifications about the SCRA’s six percent interest rate limit, and answers to common questions.

The Servicemembers Civil Relief Act (SCRA) protects individuals on full-time active duty in the military service of the United States who have been “materially affected” (i.e., financially impacted) by their active duty service.

Following are clarifications on the SCRA’s six percent interest rate limit, and answers to common questions. However, there are a number of other SCRA protections credit unions should be aware of, including provisions that impact default judgments, foreclosures, repossessions, and other matters that may adversely affect the interests of servicemembers during their military service. See CUNA’s e-Guide for more information on the SCRA, including details on all requirements and frequently asked questions.

How the Six Percent Interest Rate Cap Works

The SCRA limits interest rates on debts incurred prior to active duty (“pre-service” debts) at six percent for the duration of the servicemember’s period of military service. The term “interest” includes service charges, renewal fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.

The six percent interest rate limit does not apply to debt incurred during or after active duty service. Therefore, the rate cap does not apply to new advances under an existing credit card or home equity line of credit program. This is true even if the open-end plans were established prior to active duty.

To receive reduced rates, the servicemember must provide the credit union with a written notice and a copy of the military orders calling the servicemember to active duty, as well as any orders further extending military service. The orders will indicate when active duty service begins and estimates when the member will leave active duty service. The notice to creditors must be provided no later than 180 days after the date of the servicemember’s termination or release from military service.

Once the credit union receives this notice, it must reduce the interest rate on any pre-service debt as of the date the servicemember was called to military service. In addition, the SCRA requires a creditor to reduce the amount of any periodic payment due from a servicemember by the amount of the interest forgiven that is allocable to the period for which the payment is made.

What if the credit union believes the member is not “materially affected” by active duty service? If a credit union believes that a servicemember is not entitled to the rate reduction, it may not automatically refuse to lower the rate. The SCRA states that the six percent rate cap applies to active duty servicemembers, unless “in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of six percent per year is not materially affected by reason of the servicemember’s military service.” In other words, the credit union must go to court and prove that the ability of the servicemember to repay the loan(s) has not been materially affected by active duty.

Can the contract rate be restored after active duty? Generally, once the member is no longer on active duty, the rate may be restored to the contract rate. However, for mortgage loans, the six percent interest rate must be extended for one year beyond the period of military service.

Can the credit union recapture lost interest? No—the credit union must forgive any interest in excess of six percent that would have been incurred by the member if no rate cap was in effect.

Questions? Contact the Compliance Hotline at 1.800.546.4465 or compliance@nwcua.org.