For those who have been paying attention, it comes as no surprise that men and women joining the armed forces have the right to an adjustment of an interest rate so as not to exceed 6% on a financial obligation incurred prior to military service. See my August 8, 2018 blog on this subject by clicking here and my November 14, 2018 blog on the perils of not complying with the SCRA here.
Questions continue to arise as to the methodology for modifying the note or contract to effect the interest rate adjustment.
The requirement of the SCRA is that once invoked, interest computed at a rate greater than 6% is to be forgiven, retroactively to the date that the servicemember enters the armed forces. This is simple enough when interest is computed on a daily accruing or simple interest basis. The computation, however, becomes more complicated when interest is precomputed or “add on.” (See here for an explanation of the computation of interest.)
For precomputed transactions, in most states it will be necessary to compute a pay-off by the Rule of 78s as of the date that the servicemember joined the military. Fees that have been fully earned on the obligation—either at the commencement or for the time period prior to military service—should not be subject to any refund.
Then, once the unpaid balance is determined, such balance may be assessed interest at a simple interest rate not to exceed 6% per annum.
As discussed in my previous blogs, this change in interest rate is not self-executing. The servicemember should advise the creditor of his or her service; and, the creditor is entitled to insist that the servicemember first show that military service has a “material impact” on his or her ability to repay. While notice and explanation are a part of the SCRA, most creditors assume that military service will indeed materially impact the servicemember’s ability to repay; and most creditors willingly effect a change in the contract rate of interest in appreciation for the customer’s service to our country.
Practice Pointer: Make certain that you have a written policy addressing obligations when a customer either joins the military or when a reservist customer is called up to active duty.
Please note: This is the one hundred thirteenth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.