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Bank of America Improves and Extends the Servicemembers Civil Relief Act

By (view all posts by aksekar)
at 12:57PM Wednesday April 27, 2011
under Newsworthy

Military service members who are entering or on active duty receive some financial protections from the 2003 Service Members Civil Relief Act: they cannot be foreclosed upon, they can cancel a lease if they are reassigned, and any debt incurred before or during service cannot accrue more than 6% interest--anything over the limit is forgiven entirely.

But in March, Bank of America announced that it would improve and extend the benefits even after soldiers return from active duty. As the SCRA stands, all protections end once active duty ends, though the uncapped interest rates cannot be applied retroactively to debts.

However, Bank of America will go one step further, capping interest rates at 4% and extending the protections to a year after discharge. They will also offer support to military homeowners in refinancing their mortgages.

BofA will reduce principal on military mortgages

The bank will extend protections to soldiers whose mortgages are underwater--they owe more than their homes are worth. While on active duty, the houses cannot be foreclosed upon, but this exemption ends once a soldier leaves. 

Most mortgage modification programs reduce soldiers' interest on the debt, but Bank of America has said that it will reduce the principal amount to "as low as 100% of the current market value." In today's depressed housing market, this could amount to a significant relief. 

If the balance reduction is not sufficient, the bank will also offer extended repayment terms or lower interest rates. It will also cap mortgage loan rates at 4%, below the legislated limit. A special unit was created to handle military mortgages, within its overall mortgage operations.

Bank of America also offers a suite of military credit cards with lower APRs than traditional cards. However, military credit unions generally offer lower interest rates as well as no foreign transaction fees, a great help to those deployed overseas.

JP Morgan to extend protections as well

In February, JP Morgan announced that it would attempt to alleviate military families' debt. It, too, will cap interest rates at 4% and will not foreclose on active duty members, even if they are not protected by the SCRA. According to the bank, they will offer "enhanced" loan modifications soon.

JP Morgan Chase has a tarnished reputation with military lending: it admitted to foreclosing on at least 18 active-duty families and overcharging as many as 4,500, but offered a sincere apology. "The mistakes we made on military foreclosures are a painful aberration," said Chairman and CEO Jaime Dimon. "We deeply apologize to our military customers and their families for these mistakes. We cannot undo them, but we can take accountability for them, fix them and learn from them."

Bank of America argues against principal reduction*

Interestingly, Bank of America spoke out against principal reduction just two days before announcing the military modification program. Terry Laughlin, the head of the military mortgage unit, said, ""The fundamental issue is if a borrower does not have substantial income...principal reduction is not going to help. Principal reduction is not a panacea." 

BofA CEO Brian Moynihan argued that the practice of reducing principal was not only unfair, but that it encouraged overly risky behavior from borrowers. There's a core problem that if you start to help certain people and don't help other people, it's going to be very hard to explain the difference," he said. "It's a moral hazard issue," referring to the distorted incentives that arise when someone is insulated from the full risk of what he does. Bank of America contends that an overgenerous loan modification program will encourage many more homeowners to walk away from their obligations, and cause people to take out loans in the future despite bad credit or debts, believing that they will receive assistance.

We contacted Bank of America spokesman Richard Simon, who explained the discrepancy. "We believe principal reduction is a viable solution for select groups of borrowers, including those who have served in the military, but should not be applied as a broad solution to mortgage hardship."

Still, defining the "select groups" is tricky business: as NPR reports, BofA attempted to foreclose on a blind, retired woman living with her aging mother who had never missed a payment. Her case seems proof enough that the bank does not make liberal use of loan modifications. 

On the other hand…

Bank of America is not unaware of public perception: after TARP, executive compensation, robo-signed foreclosures and soaring profits, banks are hardly the most favorably viewed institutions. Furthermore, the banking lobby is already engaged in a two-front battle over the Durbin Amendment, trying to dilute the law without seeming too concerned over profit margins. 

Despite its protests of distorted incentives, the institution will reduce the principal on US troops, after the Justice Department inquiry into military lending and a public outcry over mistaken foreclosures. They will also reduce principals for Arizonan homeowners, where the federal Hardest Hit Program picks up the tab.

Bank of America certainly has an incentive to refuse to modify loans: the moral hazard problem cited by Moynihan. If a potential homeowner believes that the bank will step in if he cannot pay off his loan, he's more willing to take out a mortgage he can't afford in the first place. However, BofA also desperately needs to rehabilitate its image. A relatively small principal reduction program that nonetheless is public relations gold fulfills both of their objectives.

Anisha Sekar is an analyst at NerdWallet, a site dedicated to helping consumers understand credit card offers.