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Are there compliance issues if a bank requires an active duty servicemember to refinance their loan outside of the bank's trade area?

A bank customer who is currently on active duty with the Army opened a real estate investment loan with my bank before he went on active duty, so the Servicemembers Civil Relief Act (SCRA) covers this loan. The customer has requested that the bank lower the interest rate and payments on this loan pursuant to SCRA. One of the bank’s requirements for this type of loan is that the borrower reside within our designated trade area, but the request alerted us to the fact that the servicemember no longer lives in the area. Would there be any compliance issues if the bank were to require the customer to refinance the loan elsewhere as he is now located outside of the bank’s trade area?

Yes, this would likely violate SCRA because the bank is calling the loan before maturity. Section 3937 of the SCRA prohibits the acceleration of principal repayment, which is, essentially, what the bank would be doing by requiring the servicemember to refinance the loan. In addition, if the servicemember refinances while on active duty, he will lose his SCRA interest rate, repayment, and foreclosure protections. 

In addition, servicemembers are protected from any penalty imposed due solely to their invocation of their SCRA rights. Section 3919 of the SCRA provides that, “no stay, postponement, or suspension of any… civil obligation or liability applied for, or received by, a person in military service can be the sole basis for….a decision by a creditor to deny or to revoke credit; to change the terms of an existing credit arrangement…” 

If his request for the interest rate reduction triggered the bank’s request to refinance, it appears that the bank is revoking or changing the terms of the credit. (December 2020)

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