Chattel Lending on Manufactured Homes and SCRA

[Ken Rishel]

This is an excerpt from a client report:

Many chattel lenders are under the impression that SCRA does not apply to them based on materials published by HUD in which HUD disclaims any authority over the chattel lending on manufactured homes in relation to SCRA. Like many of the regulatory issues that chattel lenders financing manufactured homes must deal with, there are often multiple regulatory agencies involved, so the correct answer is SCRA does apply to chattel lenders.

SCRA Defined

The Servicemembers Civil Relief Act of 2003 (SCRA) was signed into law on December 19, 2003, amending and replacing the Soldiers’ and Sailors’ Civil Relief Act of 1940, and is codified at 50 U.S.C. App. 501 et seq. It was further amended December 10, 2004, by the Veterans Benefits Improvement Act of 2004. The law protects members of the Army, Navy, Air Force, Marine Corps and Coast Guard, including members of the National Guard, as they enter military service (active duty), as well as commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration engaged in active service. Some of the benefits accorded service members by the SCRA also extend to service members’ spouses, dependents, and other persons subject to the obligations of service members. The Housing and Economic Recovery Act of 2008 (HERA) recently amended several sections of this law, extending the time period for certain activities.

The CFPB has claimed authority for the enforcement of SCRA and has pushed the OCC to do the same with depository institutions which they have stated they are now doing with every examination visit “because of the significant risk (editor’s note: fines and penalties) associated with an institution’s failure to comply.” A Rishel Consulting Group client has just informed us that a state regulator is now including it in their examination as well.

Chattel Lender’s Responsibilities

Like all compliance issues, the lender must include SCRA into their Compliance Management System with a written Policy and Procedure Manual adapted by their Board of Directors or their Managing Partner(s), a training program for employees expected to assist in the compliance effort, and regular audits to make sure the program is achieving the goals set forth in the Policy and Procedure Manual with corrective action when necessary. This is the responsibility of the Compliance Officer for the Lender and they should be qualified to administer this program as well.

Basic Points

Upon receiving a written request for relief and a copy of a servicemember’s military orders, creditors must, for the duration of the servicemember’s military service, reduce the interest rate on debts incurred by the servicemember, or a servicemember and spouse jointly, before entry into military service to no more than 6 percent per year. (This applies to the individual servicemember’s debt or joint debt with a spouse.) Creditors must maintain the interest rate reduction for the period of military service, except in the case of a mortgage, trust deed, or other security in the nature of a mortgage, where the interest rate reduction extends for one year after the end of the servicemember’s military service. Creditors who reduce the interest rate on the obligations of a servicemember must forgive interest in excess of 6 percent.

The reduced interest rate provision applies unless a court finds the ability of the servicemember to pay interest on the debt at a higher interest rate is not materially affected by his or her military service. In such cases, the court may grant a creditor relief from the interest rate limitations of the Act.

Contracts for the purchase of real or personal property , for which the servicemember has paid a deposit or made a payment before the servicemember enters military service, may not be rescinded or terminated after the servicemember’s entry into military service for a breach of the terms of the contract occurring before or during their military service, or the property repossessed because of the breach without a court order.

Termination of certain residential or motor vehicle leases may be made at the option of the lessee servicemember if the servicemember provides to the lessor or the lessor’s agent written notice of the request for termination along with a copy of the military orders. Manufactured homes leased by the servicemember or his dependent may be terminated if the servicemember, after the lease is executed, enters military service for a period of 180 days or more. Additionally, an manufactured home lease entered into while the servicemember is on active duty may be terminated if the servicemember receives military orders for a permanent change of station (PCS) outside the continental United States (this would include a PCS to Hawaii or Alaska) or deployment for a period of 180 days or more. These same provisions shall extend to certain credit transactions referred to as Lease with Option to Purchase extended for the purpose of extending credit for the purchase of a manufactured home.

Termination is permitted of pre-service “residential” leases occupied or intended to be occupied by a servicemember or a dependent as well as those leases executed during military service where the servicemember subsequently receives orders for a PCS or a deployment for a period of 90 days or more.

Personal property owned by a servicemember before the servicemember’s military service that secures a mortgage, trust deed, or similar security interest cannot be sold, foreclosed upon, or seized based on a breach of such a secured obligation during the period of military service or months thereafter without a court order. Additionally, in an action filed during or within 9 months after a servicemember’s military service, a court may, after a hearing on its own, or shall, upon application by a servicemember, stay a proceeding to enforce an obligation as described above or adjust the debt, when the member’s ability to comply with the obligation is materially affected by reason of the member’s military service.

A landlord may not evict a servicemember or his or her dependents from certain residences occupied primarily as a residence during a period of military service except by court order.

The fact that a servicemember applies for, or receives a stay, postponement, or suspension of his or her obligations or liabilities pursuant to the SCRA may not in itself provide the basis for the following:

A determination by a lender or other person that the servicemember is unable to pay the obligation or liability in accordance with its terms; A creditor’s denial or revocation of credit, change in terms of an existing credit arrangement, or refusal to grant credit to the servicemember in substantially the amount or on substantially the terms requested; An adverse report relating to the creditworthiness of the servicemember by or to a consumer reporting agency; A refusal by an insurer to insure the servicemember; An annotation in a servicemember’s record by a creditor or a person engaged in the practice of assembling or evaluating consumer credit information identifying the servicemember as a member of the National Guard or a reserve component; or a change in the terms offered or conditions required for the issuance of insurance.

Whenever a court grants a stay, postponement, or suspension to a servicemember on an obligation, it may similarly grant a person primarily or secondarily liable such a stay, postponement, or suspension.

Conclusion

Those engaged in purchase money lending as chattel for manufactured homes, and those engaged in lease with option to purchase are equally bound to comply with these regulations, but not in the same format required for government backed mortgages.

All purchase money agreements should contain, or by separate notice of equal importance at the time of closing for which the borrower(s) affirm in writing receipt of a copy of, their rights under SCRA in a format acceptable to the CFPB and other regulators.

The same regulations apply to land-lease communities renting lots to manufactured home owners, those renting or leasing homes and lots, as well as those engaged in offering credit to purchase in the form of lease with option to purchase.

All end notes and references included in the original client report are omitted from this post.