In its recently published Summer 2019 Newsletter, the Washington State Department of Financial Institutions (“DFI”) reported that it had interpreted the Servicemembers Civil Relief Act (“SCRA”) broadly to apply the SCRA’s 6% interest rate cap to a loan agreement entered into only by a servicemember’s spouse. Generally, the SCRA provides for a 6% interest rate cap during the period of military service for non-mortgage obligations and liabilities “incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service[.]” Washington has enacted its own version of the SCRA—the Washington Service Members’ Civil Relief Act (“WSCRA”), which incorporates the federal SCRA and provides additional protections to servicemembers who are residents of Washington.
In this case, the servicemember’s spouse received a loan offer in the form of a negotiable check in her maiden name, which after deposited, resulted in a loan that included interest in excess of 6%. After the servicemember commenced active military service, he provided notice and documentation of his active duty service to the creditor and requested interest rate forgiveness for his spouse’s loan pursuant to the SCRA. However, the creditor refused the request, reasoning that the loan was not taken out “jointly” because the servicemember’s name was not on the loan documents. The DFI disagreed, stating that because Washington is a community property state, debts incurred during the marriage are presumed to be community debt. To establish the debt was not community debt, the creditor would have been required to present clear and convincing evidence that the debt was not incurred for community benefit. In other words, because the loan benefitted both spouses, it was subject to the 6% interest rate cap afforded by the SCRA. Had the spouse obtained the loan for purely personal purposes, such as for her own business, the result here might have been different.
Although the DFI’s ruling is at odds with the plain language of the SCRA, the outcome is not surprising. As we have repeatedly observed, the SCRA will be applied broadly by regulators to protect servicemembers and their dependents. Accordingly, lenders should generally apply the interest rate cap to loans contracted for by servicemember spouses in Washington and should consider taking the same approach in all community property states. The exception would be for loans taken out by spouses that do not in any way benefit the marital community.