The SCRA – What to Do When Compliance is the Only Option

When duty calls, our military members don’t always have the time or means to care for their finances. The Servicemembers Civil Relief Act (SCRA) requires creditors to reduce interest rates on certain loans, prohibits foreclosures without a court order and allows servicemembers to terminate motor vehicle and domicile in certain instances.

Something to come home to.

The SCRA safeguards active duty servicemembers, reservists, active-duty members of the National Guard and, in limited instances, spouses and dependents. It calls for postponing or suspending certain financial obligations taken on before service began and, for a specified period, post-service. This is how financial institutions help our troops maintain their pre-service financial standing so they can come home to something that’s still worthwhile.

Noncompliance has a cost.

SCRA examiners concentrate on key areas; no reduced APR on loans and credit cards, foreclosures without a court order, repossessions, and apartment and vehicle lease terminations. If active members are not properly identified, a financial institution may be liable for fines, penalties and settlements. In today’s pro-service atmosphere, the reputation hit can lead to the loss of current customers and the distancing of new ones.

Be proactive.

Although required to inform banks and credit unions of their service status, the onus of identifying active military members and affording them their SCRA protections and benefits falls directly upon the financial institution. When a SCRA request is submitted, it is vital to record where it is routed, who reviews it, who approves benefits and who informs the borrower about request status. Your Compliance Management System (CMS) can help make that happen with effective policies and procedures.

Training—It all begins with knowingwhat to look for and how to proceed. Offer regular SCRA training to employees, especially those extending or servicing loans and credit. They should understand compliance obligations to identify active military and ensure they receive the proper protections and benefits. Then make sure employees have the knowledge and tools to identify qualified servicemembers and their dependents.

Internal Controls—Provide clear policies and procedures for SCRA compliance requirements, servicemember identification, loan documentation and other relevant material that demonstrate your institution is doing all it can to be in compliance with the SCRA.

Monitoring—As with all compliance requirements, regular monitoring is essential to ensure SCRA policies and procedures are effective. With the often unforgiving nature of SCRA exams, internal reviews and audits can be a preemptive strike against noncompliance as they identify policy exceptions requiring corrective action.

Identification—In addition to documentation provided by the servicemember, there are two powerful tools you can easily access to identify and monitor customers eligible for protection; the Defense Manpower Data Center (DMDC) and your Customer Information System (CIS). The DMDC is essential to identify and authenticate status. Your CIS, through onboarding and other customer touchpoints, can identify and flag accounts of servicemembers and their dependents.

Complaints—A clearly documented procedure dedicated to SCRA complaints and their path to resolution may prevent issues from coming under the microscope of examiners and give a heads-up to similar problems.

The Benefit of Outside Compliance Experts

The SCRA is one of our oldest protections acts, with similar temporary statutes initiated as early as the Civil War. Made permanent law in 1940, the Act is often updated and riddled with ambiguities, making it open to interpretation, a recipe for misperception and noncompliance. Understanding and staying up to date with the SCRA create a drain on manpower for an already overworked compliance team. An outside party can help navigate these murky waters and alleviate demands, allowing the team to concentrate on other compliance issues.

Marquis Compliance Professional Services, known for their expertise and personal service, are well-versed in all aspects of compliance, including SCRA requirements. They can perform audits and assessments to ensure you have the necessary policies, processes and procedures in place and define areas that need attention. By utilizing third-party compliance experts, you’ll have a fresh view of your SCRA compliance practices and how to improve them.

Conclusion

Self-identification as active military to financial institution is not always a priority for our servicemembers. However, financial institutions are often answerable for servicemembers not afforded the protection and benefits of the SCRA. A robust CMS with clearly defined SCRA policies and procedures is essential. Third-party experts, like Marquis Compliance Professional Services, can help your bank or credit union stay in compliance and away from violations.

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Reduce Redlining Risk

Redlining is not dead. We know the story of where the term began, lenders would draw red circles or lines around certain neighborhoods and make it an unspoken policy not to lend to anyone within the circle or past a certain line on the map. These lines were usually drawn around struggling or distressed areas, and more often than not, a majority of the citizens in these neighborhoods were minorities.

Then there’s Reverse Redlining, these are instances where minorities and other protected classes are offered loans, but at a higher cost than those offered to non-minority applicants. This practice was chief among major factors that led to the 2008 financial crisis.

Whatever form redlining takes, it results in harm to groups of a protected class by either denying access to credit or offering credit at exploitative rates with a much greater chance of default.

HMDA, CRA, the Fair Housing Act and other regulations have provisions contained within them which prohibit this behavior. If a pattern or practice of redlining is found through the examination process, it could have a profound negative affect upon the offending financial institution.

It is a primary responsibility of the compliance officer to identify and report redlining risks before they become an issue.

The Cost of Non-Compliance

Over the years, compliance examinations have yielded less redlining enforcement than in other fair lending areas; however, there has been a recent uptick, and it’s an uptick more than anyone should be comfortable with. If an institution is found liable for redlining, remediation efforts, fines and penalties can be tremendous.

Monetary loss is not the only concern. Redlining can also lead to loss of integrity, reputation and, ultimately, customer abandonment. What happens if word gets out that Anybody’s Bank has had a redlining enforcement action levied against them? Will today’s consumer, deeply concerned with brand identity and community, initiate or maintain a relationship with a bank they don’t trust? For larger financial institutions, this could be a speedbump that heals over time. But for local, mid-size and smaller institutions, the reputational hit from a redlining accusation and enforcement can be devastating.

Preventative Measures

When working to identify and mitigate redlining risks, nothing is more valuable than routine monitoring. By taking quarterly or at least bi-annual looks at the geographic dispersion and penetration patterns of originations within the institutions loan portfolio, a determination can be made of where the institution is making its loans to help determine if there are areas where loan volume could be improved. More importantly, this will allow pro-active targeting of risk areas to try and improve performance and also allow time to determine if the methods employed are working before regulators start asking questions.

Get the right tools.

If your institution’s Compliance Management System (CMS) does not include automated data management and collection as well as a way to map the data, human interpretation and error can cloud the issue. In today’s connected world, compliance software is everywhere and can be found at all price points. Compliance personnel must make sure the systems used will provide reliable data that is easy to use and interpret.

For Instance, Marquis’ CenTrax NEXT software provides immediate access to all lending performance metrics through easy-to-read reports, maps, and exam tables. We also offer Compliance Professional Services, where our seasoned compliance experts conduct file reviews, risks assessments and more, ultimately delivering a comprehensive report you can take to your board with confidence.

With all this information at your fingertips, you’ll be able to easily identify redlining risks and tell if the steps taken to identify and mitigate the risk were effective. Collecting and organizing this data manually, or with a less robust system, can cost you in objectivity and accuracy.

Bottom line? Monitor your loan data at least twice a year, although quarterly is better.

Conclusion

Redlining is still an issue in the financial community. CRA, HMDA, and the Fair Housing Act are consistently evolving (think HMDA 2018) to aid in the prohibition of biased approaches to lending. Now, it’s up to compliance officers to identify redlining risks, report them, and be on the ball with helping to resolve any issues that may be discovered. Staying informed allows time to adjust and respond through peer analysis, mortgage credit demand analysis and other methods. Without intermittent monitoring and automated data collection and analysis, risks can go unnoticed right up to the last minute – making it too late to adjust or respond. With the right tools and consistent monitoring, your financial institution will be able to identify, respond to, and mitigate redlining risks.