For active duty military customers, additional federal law protections exist in the form of the Servicemembers Civil Relief Act of 20031, (“SCRA”). This includes insulation from litigation and judgments, the ability to delay court actions, and what is known as the “6% Rule” for finance contracts for automobile and other consumer credit financing.
What is the 6% Rule?
Quite simply, once a service
member is called to active duty where their yearly earnings are reduced as a
result thereof, the borrower has a legal right to a reduction in any consumer
finance interest rate to no more than 6% beginning on the date active duty
begins through one year after active duty is terminated. Once demanded, any
interest amount in excess of 6% is forgiven by law. The lender would have to adjust the interest
rate for this borrower down to 6% and write-off the difference. Application of this rule may cause the lender
to charge back an assigned contract, especially if military status was not
properly determined by the F&I representative and provided as part of the
financing documents submitted at the time of contract assignment.
Aside from the potential interest
rate impact, enforcing a court judgment, especially one resulting from a
customer not appearing in court (i.e. a default judgment), against an active
duty member of the military is difficult, if not impossible, in some
circumstances. At best it can be a long drawn out process.
Courts usually apply the SCRA to require that the
plaintiff (usually a dealer or lender) provide a military affidavit (also
called a non-military affidavit, SCRA Affidavit, Affidavit of Military Service,
and many other iterations) to attest to whether the defendant is subject to the
protections of the SCRA.
Students of the College of
Automotive Management are taught key compliance laws and how to ensure they do
not violate them, including proper disclosures and forms needed to protect
themselves and their dealership from both inadvertent mistakes as well as
intentional legal compliance violations.
1 The Servicemembers Civil Relief Act of 2003; Public Law 108-189; 50
U.S.C. App. §§501–596 (19 Dec 2003);as amended by Public Law 108- 454 (10 Dec 2004.)
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Submitted by Marc Bonanni, Esq. 11/26/13
