In its Summer 2019 Newsletter, the Washington Department of Financial Institutions (DFI) extended the Servicemembers Civil Relief Act’s (SCRA) 6% interest rate cap to loans entered into by the servicemember’s spouse solely. If you’re not subject to the DFI’s supervision authority you may be tempted to stop reading but I encourage you to stick around for a little while. As far as I can tell no other regulator or court has interpreted the SCRA this broadly, but the decision seems sound and I envision other regulators and courts following suit.
Historically, Section 207 of the SCRA (50 U.S.C. § 3937) has been interpreted to prohibit a creditor from charging interest in excess of 6% on any obligation that is incurred by the servicemember or the servicemember and their spouse jointly before the servicemember entered military service. In this scenario, the servicemember’s spouse received a loan in her name only prior to the servicemember entering active military service. The rate was in excess of 6%. Upon entering active military service, the servicemember requested that the creditor reduce the rate on the spouse’s loan to 6%.
The creditor, relying on the plain language of the SCRA, denied the servicemember’s request because the obligation was not incurred by the servicemember or the servicemember and the spouse jointly. The DFI stated that debts incurred during the marriage are joint obligations of the spouse’s unless there is clear and convincing evidence that the debt was incurred separately and was not used for the benefit of the community. Because the creditor did not show that this debt was the sole debt of the spouse, the DFI “requested” that the creditor reduce the spouse’s rate to 6% and refund the excess.
If the borrowers do not reside in a community property state, the debt was not incurred in a community property state, and you have nothing to indicate that they ever lived in a community property state, the analysis is fairly simple; if the servicemember is not on the loan, it is not subject to the 6% limitation. But where the borrowers live in a community property state, lived in a community property state when the debt was acquired, or have lived in a community property state at any point since the debt was incurred, you will need to look closer.
Before I get too far, let me say that what I discuss regarding state laws are general rules and is not to be construed as legal advice. I encourage you to discuss your state’s laws and your circumstances with legal counsel. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is a bit different in that it is a community property state if the spouses want to treat their assets and debts as community property. Other states are generally referred to as common law states. Typically, in a community property state, all property and debts acquired by one spouse during the marriage are owned by both spouses jointly. Property and debts acquired before the marriage are typically considered individually owned. Property and debts acquired by one spouse during the marriage that is for the sole benefit of that spouse may be treated as individually owned but that is a case-by-case determination. Generally, property and debts acquired by one spouse during the marriage in a common law state belongs solely to that spouse.
Issues can arise when a couple moves from a common law state to a community property state or vice versa. When a couple moves from a community property state to a common law state each spouse retains a one-half interest in the community property brought into that state; however, that applies to property brought into the state. I couldn’t even begin to describe all the choice of law issues involved in determining how debt incurred in a community property state is treated when a couple moves to a common law state. If a couple moves from a common law state to a community property state, whether property and debts acquired in the common law automatically become community property will depend on the state. Some states, like California, will automatically convert all property acquired during the marriage to community property. In other states, like Texas, separate property and debts acquired during the marriage only become community property to the extent that it would have been acquired if the couple had lived in Texas at the time. Obviously, this is a very fact specific determination and will necessarily involve issues way beyond what I could describe here.
If the borrowers reside in a community property state, the credit was originated in a community property state, and they lived in a community property state the entire time since the credit was extended, the issues are fairly straight forward. That is, you look at when the debt was acquired. If it was acquired before the marriage, the debt is most likely not going to be jointly owed, therefore, the SCRA would not apply. On the other hand, if the debt was acquired during the marriage, I recommend that you treat the debt as joint obligation and comply with the SCRA unless you can conclusively demonstrate that the debt was incurred for the sole use and benefit of the individual spouse.
If the borrowers do not reside in a community property state but you know the debt was acquired during the marriage and they lived in a community property state when the debt was acquired or at any time since, I recommend that you consult legal counsel. Of course, where the costs to obtain a legal opinion would be greater than the costs to comply, you can always comply and treat the debt as being subject to the SCRA.