Lawyer warns lenders on illegal repos

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The U.S. Department of Justice is rigorously enforcing the Servicemembers Civil Relief Act, and auto lenders had better take note, a lawyer who represents financial services clients says.

The act doesn’t apply to dealerships. But dealership F&I managers who routinely do a lot of business with service members — including reservists — would do well to be familiar with its provisions. After all, a lender who makes headlines for treating military customers poorly is unlikely to reflect favorably on the dealership that sent the customers to that lender.

“This is not an area where anyone wants to play fast and loose, and take any unnecessary risk,” said Sasha Leonhardt, a lawyer in the Washington office of BuckleySandler.

Leonhardt conducted an Aug. 18 webinar, aimed primarily at lenders and the repo industry, titled “How the SCRA Can Get You into Trouble,” and sponsored by Canvas Business Media, whose websites include RepoPulse.com.

Leonhardt: Protect service members

Protection

The Servicemembers Civil Relief Act is intended to protect civilians and military reservists who take out a loan and later get ordered to active duty in the military, Leonhardt said. The underlying concept is that active duty can limit service members’ ability to pay their bills in full and on time, and they shouldn’t be penalized for going on active duty.

Leonhardt said the legal roots of the act date to before World War II. It was formerly known as the Soldiers’ and Sailors’ Civil Relief Act.

The Servicemembers Civil Relief Act protects service members two ways.

1. It imposes a 6 percent interest rate cap on loans, including mortgages and auto loans.

2. It requires lenders to get a court order before foreclosing on a mortgage or repossessing a vehicle from someone who’s covered by the act.

To take advantage of the 6 percent rate cap, the borrower must notify the lender that he or she is on active duty and provide appropriate documentation, Leonhardt said.

But with regard to defaults or repos, the lender must verify whether the borrower is protected by the act before taking action.

Costly errors

Penalties for violating the law can be stiff. In the webinar, Leonhardt said on average, the Justice Department demands consumer restitution of $10,000 per improperly repossessed vehicle plus any equity in the vehicle the service member may have lost.

On Aug. 8, the Justice Department announced a consent order with HSBC Finance Corp. of Arlington Heights, Ill. HSBC agreed to pay $434,500 in compensation to the affected borrowers to resolve allegations that it violated the Servicemembers Civil Relief Act by repossessing 75 cars owned by protected service members without obtaining a court order.

In February 2015, under a consent order between the Justice Department and Santander Consumer USA, the Dallas lender agreed to pay at least $9.35 million in connection with 1,112 repos.

In 2012, Capital One Bank, of McLean, Va., reached a settlement with the Justice Department worth about $12 million. That included $7 million in damages, plus $5 million to compensate service members who did not receive the appropriate amount of Servicemembers Civil Relief Act benefits on their credit card accounts, vehicle loans and consumer loans. Alleged violations of the act involved mortgages and auto loans, and included alleged interest-rate cap violations as well as repos, the Justice Department said.

To-do list

Leonhardt said before repossessing a vehicle, lenders should routinely check borrowers’ active duty status on a website of the Department of Defense Manpower Data Center.

The Servicemembers Civil Relief Act doesn’t protect service members who were on active duty when they took out a loan, he said. Legally, what counts is whether the service member was on active duty when he or she made a down payment or made the first monthly payment.

It’s possible to repossess a vehicle that belongs to a service member covered by the act, but it takes a court order or a waiver signed by the service member, Leonhardt said.

But for getting it wrong, he warned, “The penalties are significant and can add up quickly.”

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Lawyer warns lenders on illegal repos