Home Foreclosures: 5.15.2 Who Is Protected by the Act?
The Act applies to members of the uniformed services on active duty.
The Act applies to members of the uniformed services on active duty.
The Act provides important protections for servicemembers facing foreclosure while on active duty.
The Act also provides protections against the forfeiture of land installment contracts similar to those provided for mortgages.686 While the servicemember is on active duty, a land installment contract may not be terminated for breach of its terms occurring before or while on active duty. The property may not be forfeited without a court order.687 A deposit or an installment on the contract must have been paid prior to active duty to obtain the protections of this section.
The Act requires that a lender reduce the interest rate to six percent on any loan obligation incurred prior to active duty.690 The loan shall not bear a rate higher than six percent during the period of active duty and one year thereafter,691 unless a court decides, on application by the lender, that the servicemember’s ability to pay the higher interest rate is not materially affected by military service.692 Interest in excess of six percent must
A servicemember may waive any of the rights or protections provided by the Act.702 In certain circumstances, the agreement to waive protections under the Act must be in writing and executed during or after the servicemember’s period of active duty. The agreement must specify the legal instrument to which the waiver applies and, if the servicemember is not a party to that instrument, the servicemember concerned must be specified.703
Prior to the 2010 amendments, which expressly recognized a private right of action under the SCRA, courts recognized that the Act preserved the servicemember’s right to pursue a claim for wrongful conversion.707 In addition, most courts held that the former version of the Act created a private cause of action for violations.708 The debtor was not confined to raising the violation of the Act defensively, in response to a foreclosure or other seizure of property, but could sue affirmatively.
The SCRA applies in bankruptcy cases.721 For example, in adversary actions and in proceedings to lift the automatic stay, the bankruptcy courts must enforce the Act’s protections against default and may grant stays of proceedings.722 Bankruptcy courts must apply the reduction of interest rates to six percent for pre-military service obligations.723 One bankruptcy court held that the interest rate reduction to six percent must be applied to reduce p
Any person who breaches a warranty in connection with a substitute check or fails to comply with any requirement imposed by the Act or FRB regulations shall be liable to any person for the lesser of the amount of the substitute check or the amount of loss suffered as a result of the breach or failure.795 Liability also includes interest and expenses (costs and reasonable attorney fees, and other expenses of representation).
Any recovery under the Act is reduced by the amount attributable to a party whose negligence or failure to act in good faith contributed to the loss. In other words, the law incorporates a comparative negligence standard for determining the amount recoverable.799
The Check 21 Act supersedes inconsistent federal and state law.800 The Act specifically mentions the UCC as a state law that is superseded when inconsistent. The Act supersedes other law, however, only to the extent of the inconsistency. In all other respects, federal and state law continue to apply.
The UCC definition of “signature” is quite broad,834 and the UCC recognizes that a principal can be bound by the signature of an agent if the principal would be bound by the agent’s signature on a simple contract.835 These rules taken together mean that a drawer can authorize someone else to draw money out of his account by authorizing the creation of a check that the drawer himself does not sign.
For transactions prior to June 13, 2016, if the RCC was allegedly authorized as part of a transaction governed by the FTC Telemarketing Sales Rule (which governs more than traditional telemarketing),856 the telemarketer is not allowed to generate an RCC on behalf of the consumer unless the telemarketer has “express verifiable authorization” from the consumer.857 Authorization is “deemed verifiable” if it is written and signed by the consumer,858 it
By definition, remotely created checks (RCCs) and remotely created payment orders872 differ from traditional checks because they are not created by the payor (that is, the consumer) or the payor’s bank. Instead, another party, a payment processor,873 is typically involved in creating the RCC or remotely created payment order.
RCCs are paper drafts subject to the UCC rules addressed in this chapter.898 Telemarketers, payday lenders, and others may also initiate unauthorized transfers through the automated clearinghouse system, in which case the transaction is subject to the Electronic Fund Transfers Act and Regulation E as detailed at Chapter 5, infra.
The newest and most troubling variation on remotely created checks is known variously as a “remotely created payment order,” “electronically created payment orders,” or a “non-check e-check.”914 A remotely created payment order is similar to an RCC, but it starts as an image and not as a paper item. The payee takes the consumer’s bank account and routing number and places them in an electronic template that creates an electronic file for processing through the check clearing networks.
There are three types of involuntary takings from consumers’ bank accounts: garnishment, setoff, and taking pursuant to a security interest. This chapter deals with the latter two. Banks use the right of setoff to seize funds from the consumer’s account to pay amounts for a debt owed to the same bank, such as for an overdraft, a bank fee, or a car loan. A party (including a bank) can also take a security interest in the consumer’s bank account. When the consumer defaults on an obligation, the party seizes the bank account as its collateral.
A bank’s right to set off its customer’s funds arises by operation of the common law, by contract, or by a specific state or federal statute.2 The requisites for the bank’s common law right of setoff are: (1) mutuality of obligation between the bank and its customer;3 (2) the funds against which a setoff is exercised belong to the customer; (3) the money to be set off has been deposited into a general—as opposed to a special, reserve, or trust—account; and (4) the debt owed by the customer to the bank i
It may be difficult to avoid setoff to pay overdrafts or fees owed to a consumer’s bank. On the other hand, as is described in § 10.2.2, infra, a consumer usually has little to fear that a bank will set off bank account funds to pay a credit card debt with that bank.
Particularly with the continued growth in bank mergers and acquisitions, many credit cards are issued by banks or other financial institutions that have a deposit account relationship with the card user. The Truth in Lending Act (TILA) provides that a card issuer “may not take any action to offset a cardholder’s indebtedness arising in connection with a consumer credit transaction” against a deposit account.19
When a consumer files a petition in bankruptcy, the Bankruptcy Code’s automatic stay prohibits creditors from seizing the debtor’s assets.32 Nevertheless, the Supreme Court has held that the automatic stay does not prevent a bank from temporarily “freezing” a debtor’s bank account where the debtor owes the bank money and the bank wishes to exercise its right of setoff.33 The C
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A few states limit the banker’s right of setoff.
Case law is divided on the right of a bank to exercise setoff when the bank holds a security interest in the depositor’s property. Must the bank first sell the collateral to satisfy the indebtedness or can the bank set off the depositor’s funds without first enforcing the security interest?
Absent notice of a setoff, a customer likely will not be aware of the setoff until receiving a monthly statement. In the interim, the customer may bounce checks because the account has insufficient funds due to the setoff. Timely notice of setoff also allows a consumer to promptly seek to undo an invalid setoff.
Setoff is permitted only when there are mutual debts.63 Setoff rights arise when both the bank and the customer have the dual status of being debtor and creditor. In a typical setoff scenario, the customer has a general deposit account at the bank, making the customer a creditor in regard to that account and the bank a debtor.