Law Can Protect Military Personnel From Foreclosure

The woman was in a panic over the impending foreclosure of her home. She simply didn’t have enough money to keep making mortgage payments and a foreclosure sale was just a few days away. Her husband, who was overseas in thS. Navy, was not sending enough money back home to cover the mounting bills.

Her foreclosure is now temporarily on hold--thanks to little-known provisions of a 55-year-old law that protects the property of people in the military service from certain foreclosures. The Soldiers’ and Sailors’ Civil Relief Act (SSCRA) of 1940 may sound like an obscure law, but it is a powerful tool for putting off foreclosures and even lowering interest rates on loans to people who are members of the armed services.

“If you are in the military, the law can be a great help,” said the woman’s foreclosure consultant, Caroll G. Rabinowitz, a partner in Tarzana-based Cal Homes Investments, which negotiates short-sales for property owners. “Many people don’t realize that they may be protected.”

Rabinowitz recalled sending a letter via fax to the trustee who was scheduled to carry out the sale of the woman’s home. The letter stated that the woman’s husband was overseas in the military and that he and his wife might fall under the protection of the SSCRA. “The trustee was caught by surprise. He didn’t quite know how to handle it,” Rabinowitz said. But the foreclosure--at least for now--has been stopped, while the lender and trustee try to figure out how to proceed.

The SSCRA provides that court authorization is necessary to foreclose on a loan where the borrower is on active duty or has been on active duty within the past three months. Such court authorization is required whether the default or foreclosure arose before or after entry into military service.

The catch is, however, that this protection applies only if the debtor incurred his or her obligation before entering military service. Then the party seeking to foreclose has the burden of showing that the borrower’s military service had no “material effect” on the service member’s ability to defend his or her legal rights and to meet his or her loan obligation.

Many foreclosure trustees customarily require some sort of affidavit from the lender that the borrower is not a member of the armed forces before the trustee proceeds with a sale of the property.

Foreclosures taking place without the proper court authorization may be voidable. And any person who knowingly forecloses on property covered by the 1940 act may be sentenced to a prison term of up to a year and a $1,000 fine.

“It’s a judgment call as to what is a reasonable investigation to make about a person’s military status before selling a property,” said Dale Dykema, chief executive officer and chairman of T.D. Service Co., a Santa Ana company that specializes in foreclosure trustee sales. “The fact that someone has rights does not necessarily preclude holding the sale,” Dykema said.

To stop a foreclosure, it is not enough that a borrower be in the military, he said. Besides getting their mortgage before entering the service, their military service must materially affect their ability to make good on their loan obligations.

Checking these things out takes time, however, and a sale may be held off while the lender and trustee check out the facts. “We protect ourselves by requiring that the lender initial a statement that the owner of the property to be sold does not have any rights under the SSCRA,” Dykema said. “That takes the onus off us and places it on the lender.”

“If we don’t get written approval from a lender or from a commanding officer, we don’t proceed with foreclosing on someone in the military,” said Milton Katz, president of Fidelity Mortgage Trustee Service in Los Angeles. “If they don’t have some evidence of their military service, however, we consider it a bogus story and we go ahead with the process.”

The SSCRA generally applies to all service members on all types of active duty, both in peacetime and in time of war. Included are those in the Army, Navy, Air Force, Marine Corps or Coast Guard and any officer of the U.S. Public Health Service detailed for duty with any branch of the armed services. Reserve or National Guard members are also covered by the SSCRA.

Those on military reserve become eligible for SSCRA benefits any time they enter federal active duty.

Besides offering certain foreclosure protections, the SSCRA can help lower the interest rate that military personnel pay on certain loans, including mortgages.

The SSCRA provides for a 6% cap on interest rates that a lender may charge for credit extended to the service member before that person’s entry on active duty. Any existing interest obligation is supposed to be automatically reduced to no more than 6% interest per year. This provision of the SSCRA puts the burden on the creditor to demonstrate that a service member’s subsequent military service is not affecting the member’s ability to repay a loan.

While the interest rate reduction is automatically triggered by entry into active duty, a higher interest rate can be reinstated relatively easily if the mortgage company demonstrates to the court that military service did not have a “material effect” on the borrower’s ability to make mortgage payments.

During the Gulf War, several hundred Bank of America borrowers asked for and received temporary interest rate reductions when they were called into active service from the reserves, said Stephen Niles, vice president of Bank of America in Cypress.

At the time, many privately employed reservists had to take a big pay cut while they were on active duty. Now that we’re at peace, Niles said, the bank grants only a handful of similar requests.