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What Auto Dealers & Lenders Must Know About SCRA Compliance
The Servicemembers Civil Relief Act (SCRA), codified at 50 U.S.C. §§ 3901–4043, provides important legal and financial protections to active-duty servicemembers. For auto dealers, lenders, and finance companies, compliance with the SCRA is not discretionary—it's a legal obligation with significant consequences for violations. Errors related to interest rate reductions or repossessions can lead to regulatory enforcement, litigation, and even action by the U.S. Department of Justice (DOJ).
Key SCRA Protections in Auto Finance
Auto lenders and dealers should be particularly mindful of the following protections:
- 6% Interest Rate Cap (50 U.S.C. § 3937):
For debts incurred prior to active-duty service, including auto loans, the interest rate must be reduced to 6% upon written request and provision of military orders. The reduction applies retroactively, and excess interest must be forgiven, not deferred. The cap lasts for the entirety of active-duty service and remains in effect for 180 days after release. The service member must notify the lender or dealer no later than 180 days after the date of the service member's termination or release from military service.
- Repossession Protections (50 U.S.C. § 3952):
If a servicemember purchased or leased a vehicle and made a deposit or payment prior to entering military service, the vehicle may not be repossessed without a court order during active duty—even in the event of default.
Legal Exposure and Enforcement Risks
Noncompliance with the SCRA can expose dealers and lenders to serious legal and financial consequences. The DOJ has prioritized SCRA enforcement through its Servicemembers and Veterans Initiative. Recent enforcement actions have resulted in multi-million dollar settlements, consent decrees, and mandated restitution. Violations may also lead to scrutiny from the Consumer Financial Protection Bureau (CFPB) and private litigants. Common violations include:
- Repossessing vehicles without first obtaining a court order
- Failing to apply the 6% interest rate cap after a valid request
Compliance Best Practices
To mitigate legal and regulatory risk, dealers and lenders should implement the following:
- Military Status Verification:
Use the SCRA or the Department of Defense's Defense Manpower Data Center (DMDC) website to confirm the borrower's active-duty status before repossession or legal action.
- Interest Rate Adjustment Protocols:
Develop a process to efficiently handle SCRA requests, including recalculating payments and refunding excess interest when appropriate.
- Employee Training and Documentation:
Ensure that all relevant staff are trained on SCRA obligations, and maintain detailed records of all communications, requests, and compliance steps.
A well-documented compliance record can be a key defense if your business is subject to scrutiny.
How Madison Law Can Assist Dealers and Lenders
Dealers and lenders must understand their SCRA obligations and take proactive measures to avoid violations. In an era of heightened enforcement, a sound compliance program is not just best practice—it's essential risk management.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
