The tens of thousands of reservists being called up nationwide for active duty in Operation Infinite Justice are likely to have their home mortgage and equity loan interest rates cut to a flat 6 percent. On top of that, they're likely to be shielded from foreclosures -- or evictions from rental housing -- for the duration of their active duty period plus 90 days.

Those are just some of the provisions of the Soldiers' and Sailors' Civil Relief Act of 1940 that are about to be triggered by the start of America's war against international terrorism.

The law was designed to cushion reservists called away from their regular jobs to the economic hardships of wartime duty, at military pay levels. Essentially it prohibits creditors of any type -- mortgage lenders, credit card companies, banks, automotive finance companies and credit unions -- from charging active-duty reservists more than 6 percent interest on their debts.

Although the law limits relief to reservists who can demonstrate that their income declines during active duty "materially affect" their ability to pay their debts, bankers say that as a practical matter most active duty reservists simply need to ask for relief, and they won't be challenged.

The interest rate reductions to 6 percent are temporary; they cover only the period of active duty plus another three months. After that, rates jump back to whatever the reservists paid prior to the date of their active duty.

Mortgage lenders and other creditors covered by the law are required to "eat" the difference in payment rates. They are not permitted to try to recoup the foregone interest at some later date.

"This is, in a sense, one of our contributions to the war effort," said Diane M. Casey, president and CEO of America's Community Bankers, a lender trade group, in an interview with Realty Times. "It's the law, and I think most financial institutions fully support the spirit of that law."

Mortgage lenders and servicers are expected to be affected almost as soon as reservists report for duty -- processing requests, recomputing payment tables, halting foreclosures, and the like. The law prohibits an active-duty reservist from being foreclosed upon during his or her service period plus 90 days, even if the foreclosure was well underway before the request for relief was received by the lender.

The same is true for evictions of delinquent tenants by landlords, and even divorce proceedings potentially involving financial settlements.

Everything freezes during the reservist's active duty period. But once the reservist returns to civilian life, the 6 percent rate cap is lifted, and creditors' full rights are restored. The law does not allow a reservist to escape any prior debts, nor does it require mortgage lenders to provide "workout" arrangements in the event the borrower is unable to pay off the mortgage after the duty period.

The 6 percent rate -- set in stone over 60 years ago -- could be especially significant for consumers with high credit card debts carrying interest rates in the double digits. "Sub-prime" home mortgage borrowers with high mortgage and equity loan rates are also likely to be big beneficiaries.

Reservists or families with questions on the law should contact their service branch for detailed information. Meanwhile, most banking and mortgage lending trade organizations are expected to send out special notices to their members in the near future to bring them up to speed on the mechanics of the rate-reduction program

For more articles by Ken Harney, please press here.

Published: September 24, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.