Auditing SCRA Compliance

Auditing SCRA Compliance

Internal auditors should know the financial and credit protections afforded to military servicemembers and their families.

Kimberly Topping Morris, CIA, CFSA

Thomas Giltrow, CRCM


Formerly known as the Soldiers’ and Sailors’ Civil Relief Act of 1940, and with a history that dates back to the Civil War era, the Servicemembers Civil Relief Act (SCRA) provides a wide range of protections for individuals entering or called to active duty in the military and to deployed servicemembers. Enacted in 2003, SCRA effectively postpones or suspends certain civil obligations, thereby enabling servicemembers to devote their full attention to military duties and alleviating some of the stress on family members who must handle the obligations at home in their absence. The Act covers a wide range of activities from rental, lease, and cellular phone obligations to health and life insurance protections to legal proceedings, such as evictions, foreclosures, and default judgments. 

 The Act has historically presented lower risk to institutions relative to other higher profile consumer protection regulatory requirements, such as the Bank Secrecy Act or the Truth in Lending Act. This is largely because the SCRA’s protections are only triggered when servicemembers go on active duty and only certain provisions apply to financial institutions; however, the Act has garnered significant media attention during the U.S. housing and financial crisis. This attention has increased the Act’s risk profile for financial institutions, making it a higher priority for those financial institutions that have not reviewed the sufficiency of their internal controls in recent years. 

In 2011, several large financial institutions acknowledged SCRA violations in connection with improper foreclosures of the homes of servicemembers, resulting in multi-million dollar penalties. In addition, as part of an ongoing investigation into industrywide foreclosure practices, consent orders issued in April 2011 by the federal financial regulatory agencies to the top 14 U.S. mortgage servicers require look-back reviews of all foreclosures conducted by these servicers within the last two years, including a review for compliance with the SCRA.  

Due to the significant reputation risk and the potential for civil money penalties associated with violations, financial services internal auditors need to be aware of the requirements applicable to their institutions and validate that their organizations have implemented the appropriate internal controls.


Not all SCRA provisions apply to financial institutions; for those provisions that do, coverage often varies. While some automatically cover servicemembers once they go on active duty, others require servicemembers to notify their financial institutions that they are invoking the Act’s protections. Additionally, the coverage period for when provisions apply also varies. Generally, the Act’s protection begins on the date of entering active duty and terminates within 30 to 90 days after the date of discharge from active duty; however, certain provisions have extended periods of coverage after military service has ended. The Act includes several key provisions applicable to financial institutions.

Maximum Interest Rate     
While covered by the Act, the interest rate on servicemembers’ debt obligations, including credit cards, mortgages, and student loans, is capped at 6 percent. It should be noted that the SCRA defines interest to include service and renewal charges or any other fees or charges, except for bona fide insurance. This provision applies to obligations incurred individually by the servicemember or jointly with the servicemember’s spouse, but only to those obligations incurred before entering active duty. To obtain protection, the servicemember must provide its creditor with written notice and a copy of the military orders. For mortgages, the rate limitation applies during the period of military service and for one year afterward, and for obligations other than a mortgage (e.g., a credit card), the rate limitation applies only during the period of active duty. Once invoked, the creditor must forgive any interest charged in excess of 6 percent and reduce payments by the amount forgiven. The servicemember has up to 180 days following the release from active duty to invoke coverage, and coverage applies retroactively to the entire period of active duty military service.

It should be noted that creditors could seek relief from this provision if a court determines that the servicemember’s military service did not materially affect the ability to repay the obligation. Additionally, because this provision only applies to pre-service obligations, any debt obligation incurred after entering active duty may be charged interest at the prevailing rate.

Foreclosures and Repossessions    
The SCRA affords similar protections to servicemembers for both foreclosures and repossessions, although the coverage periods vary. The protections apply to pre-service obligations and both are invalid unless the service member takes the legal action pursuant to a court order or waiver of rights. However, the restrictions on repossession of collateral securing installment contracts only applies during the period of active duty, whereas the protection against foreclosure extends for nine months after active duty has ended. The Helping Heroes Keep Their Homes Act of December 2010 extends the Housing and Economic Recovery Act’s provision for foreclosure protection, which allowed a nine-month foreclosure window post-service. This extended protection expires December 2012.

Unlike the interest rate provision, the Act does not expressly require servicemembers to notify their creditors or provide a copy of their military orders to obtain protection against foreclosures and repossessions. Simply, while on active duty, a financial institution may not seize, foreclose upon, or sell real or personal property belonging to the servicemember and owned prior to entering duty. Therefore, it is incumbent upon financial institutions to confirm that the person whom they are foreclosing or from whom they are repossessing collateral is not on active service. Specific to foreclosures, if the action is initiated within the nine months after the servicemember’s release from active duty, the servicemember or family member may still seek relief, but must still own the subject property at the time relief is sought and the ability to meet the financial obligation must have been materially affected by the servicemember's active duty.

Evictions from Real Property  
Financial institutions that own rental properties may not evict servicemembers or their dependents from dwellings occupied as primary residences during a period of military service without a court order. To qualify for this protection, the monthly rent must be less than an amount specified and determined annually by the Department of Defense and published in the Federal Register. Courts can stay an eviction for up to three months, and the landlord may be subject to criminal sanctions for violating this provision.

Leases of Real or Personal Property   
Servicemembers may opt to terminate certain automobile or property leases by providing the lessor with written notice requesting termination, together with a copy of their military orders. In the case of automobiles, this applies to leases for personal or business use by either the servicemember or a servicemember’s dependent. For leases entered into before active duty, the servicemember must be ordered to military duty for 180 days or more. For leases entered into while the servicemember is on active duty, the servicemember may terminate the lease should he or she receive a permanent change of station outside the continental United States or be deployed for 180 days or more.   

With regard to real estate leases entered into before the servicemember’s active duty for residential, professional, agricultural, or other similar use, the servicemember may terminate the lease. Additionally, for those leases entered during a period of military service, the servicemember may terminate the lease should he or she receive a permanent change of station or be deployed for 90 days or more.   

Other key points to note are that although servicemembers may, at their discretion, waive their benefits under the Act, they cannot waive them in advance of active duty service. That is, the servicemember must be eligible for the Act’s protections, before waiving any rights to them. With regard to legal proceedings, servicemembers are entitled to an automatic stay of 90 days upon request. Additionally, before a court can enter a default judgment because the defendant failed to appear, the plaintiff must provide an affidavit stating the defendant is not in military service and accompanied by supporting documents — such as a copy of the borrower's military status from a public database available on the Department of Defense's website — or disclose if the status is unknown. In addition, financial institutions cannot take adverse action on an application for credit taken from servicemembers based on the fact that the applicant has exercised his or her rights under the Act, nor seize non-business assets to satisfy the debt of a servicemember’s business interest(s). It should also be noted that institutions must refrain from furnishing adverse credit report information to credit reporting agencies regarding a servicemember during active military status. 

In light of the recent enforcement actions and increased publicity regarding SCRA compliance, financial institutions should expect and prepare for heightened regulatory scrutiny and the increased potential for reputational risk. While the scope of an SCRA compliance audit will vary according to the nature, size, and complexity of the institution, there are certain basic steps that internal auditors should take to determine whether their institutions have implemented appropriate controls to comply with SCRA requirements.   

SCRA Compliance Risk Management
  • Inventory the institution’s products and services and evaluate how SCRA requirements apply to these offerings. Evaluate whether the institution’s compliance risk assessment incorporates the applicable SCRA requirements and reflect the increased inherent risk associated with the requirements. 
  • Review the timing and scope of procedures performed for the most recent SCRA-compliance internal audit and evaluate for adequacy against the institution’s primary regulator’s published SCRA-related examination procedures. Recently, the regulatory agencies have updated their procedures to reflect the regulatory requirements more comprehensively. 
  • Review the content of policies, procedures, call scripts, and training for accuracy and consistency with regulatory requirements. Determine if the institution administered supplementary SCRA compliance training timely and appropriately to employees with SCRA-related compliance responsibilities, particularly mortgage servicing and loss mitigation employees.
  • Determine if the institution performs self-monitoring of its compliance with SCRA requirements and determine if the program is commensurate with the results of a documented compliance risk assessment. Review the scope, nature, and frequency of the reviews performed for adequacy.
  • Assess whether the institution provides adequate oversight of third-party vendors responsible for SCRA-related processes. For instance, an institution may engage third parties to research servicemembers’ military status or to conduct foreclosure proceedings; although the vendor performs these functions on the institution’s behalf, ultimately the institution is responsible for compliance with SCRA and accountable to its regulators and customers if deficiencies occur. 
  • Evaluate the institution’s process for identifying, tracking, and responding to consumer complaints and how these complaints are escalated to senior management. Identify the institution’s methodology for tracking consumer complaints for SCRA-related impacts and periodically analyzing complaints for potential trends. 
Maximum Interest Rate
  • Determine how the institution limits to 6 percent the interest rate on debt obligations by active servicemembers. Verify that the institution retroactively addressed all debt obligations on receipt of notice from a servicemember of active military service. Verify that interest accrued above 6 percent during active military service is permanently forgiven, and validate that the calculation includes service fees and charges appropriately in the interest rate reduction. Verify that obligations were not re-amortized or otherwise modified such that the borrower would be responsible for paying the interest at a later date.
  • Document the mechanisms by which the institution identifies and tracks notices of active military duty received from its customers. For systems controls, review the logic by which active military status is identified, tracked, and communicated timely throughout the enterprise. 

 Repossession, Foreclosure, Judgment, and Eviction   

  • Determine what controls have been implemented to prevent foreclosures on properties for which the borrower is an active duty servicemember. 
  • For instances in which the institution did sell, foreclose, or seize the property of an active duty servicemember, determine whether it obtained a court order, properly and in advance, permitting such action.  
  • For rental properties owned by the institution, determine how the institution prevents the eviction of servicemembers and/or their dependents during the period of military service, except by court order.


Adverse Action and Credit Reporting   
  • Inquire with management regarding the controls in place to ensure that credit applications received are not denied or offered less favorable terms as a result of such action because of the applicant’s military status or previous invocation of protections under the SCRA. 
  • Review the mechanisms by which the institution refrains from furnishing adverse credit information to credit reporting agencies regarding active duty servicemembers. 
Purchase and Lease Contracts for Residential Property and Motor Vehicles  
  • Discuss with management the process by which the institution obtains a court order or otherwise refrains from rescinding or terminating a purchase contract for which a deposit has been made in advance of active military duty. 
  • Determine how the institution permits a servicemember, notified of deployment or a permanent change in station within 90 days of entering into a residential property lease, to terminate a lease or purchase contract without incurring a fee, and refunds to the lessee any amounts paid within 30 days of termination.
  • Identify the circumstances under which a service member is permitted to terminate a lease for a motor vehicle.

It is important that internal auditors understand how their institutions have implemented controls to address SCRA requirements applicable to their particular product and service offerings. As part of their risk-based internal audit plan, internal audit departments also should perform independent testing to determine transaction-level compliance with internal SCRA procedures and standards. Moreover, by understanding the SCRA’s regulatory requirements and taking a proactive approach to validating that appropriate internal controls are in place, internal auditors not only help their institutions avoid media scrutiny and reputational risk, but also help servicemembers concentrate on their orders at hand without worrying about things at home while deployed overseas.  

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