SCRA Interest Rate Cap for Credit Unions: A Compliance Guide

The 6% interest rate cap under Section 3937 of the Servicemembers Civil Relief Act is the most operationally complex SCRA obligation for credit unions. It touches every product line. It requires retroactive adjustments. It demands that excess interest be forgiven, not deferred, not capitalized, not added to the balance. And it applies across auto loans, credit cards, mortgages, personal loans, and HELOCs simultaneously.

For credit unions near military installations, where 30-50% of membership may be active-duty servicemembers, the volume of rate cap requests can be substantial. A credit union with 2,000 military members may process dozens of rate cap requests per year across multiple product lines. A manual process that works for 3 requests per year fails at 30.

The DOJ has brought enforcement actions against financial institutions of every size for rate cap violations. BayPort Credit Union settled with the DOJ in 2022 for $109,443 after failing to properly apply the rate cap to 24 servicemembers. The DOJ found that BayPort’s policies incorrectly stated that members must be deployed to a combat zone to qualify, a fundamental misunderstanding of eligibility that turned every rate cap decision into a potential violation.

This guide covers how the 6% cap works, how to implement it across every product line, where credit unions get it wrong, and how to build a process that satisfies both the statute and your NCUA examiner.

How the 6% Cap Works

The Statute: 50 U.S.C. Section 3937

When a servicemember incurred a financial obligation before entering active duty, the interest rate on that obligation cannot exceed 6% per year during the period of military service, upon the servicemember’s written request accompanied by a copy of military orders.

This is not optional. This is not discretionary. The credit union may petition the court for relief under Section 3937(c) if military service has not materially affected the member’s ability to pay, but the credit union cannot deny the rate cap unilaterally. Until and unless a court grants relief, the cap applies.

What “Interest” Means

The 6% cap applies to interest, not just the stated APR. Under Section 3937(d), “interest” includes:

• Service charges
• Renewal charges
• Fees
• Any other charges (except bona fide insurance premiums)

This broad definition means that if you charge a late fee, an annual fee, or a service charge on a pre-service obligation during the period of military service, those charges count toward the 6% cap. If the stated interest plus fees exceeds 6% annualized, you are in violation.

The Three Requirements

1. The obligation must be pre-service. The member must have incurred the debt before entering active duty. A credit card opened during active duty is not covered by Section 3937 (though it may be covered by the Military Lending Act’s 36% MAPR cap). A credit card opened before active duty is covered, even if the specific charges were incurred during service. The obligation is the credit agreement, not the individual transaction.

2. The member must request it in writing. The servicemember must provide written notice and a copy of their military orders. The credit union cannot require additional documentation beyond what the statute specifies. Some credit unions have created elaborate application forms or required notarized orders. The statute requires written notice and a copy of orders. Nothing more.

3. Excess interest must be forgiven. This is where credit unions most commonly fail. The excess interest above 6% must be permanently forgiven. It cannot be:

• Deferred to the end of the loan
• Added to the principal balance
• Capitalized into the loan
• Collected after the servicemember leaves active duty
• Applied as a balloon payment

The excess is gone. Permanently.

Implementing the Rate Cap by Product Line

Auto Loans

Auto loans are the most straightforward rate cap implementation because they have fixed terms, fixed rates, and fixed payment schedules.

Process:

1. Receive member’s written request and copy of military orders
2. Verify active-duty status via DMDC
3. Reduce the interest rate to 6% (or the original rate if lower) retroactive to the date the member entered active duty
4. Recalculate the monthly payment based on the reduced rate
5. Forgive all excess interest already charged since the date of active-duty entry
6. Apply any excess interest already collected as a credit to the member’s account or refund it
7. Continue applying the 6% rate for the duration of military service
8. After discharge or release from active duty, the original rate resumes prospectively

Common credit union error: Reducing the rate going forward but not retroactively adjusting for excess interest already collected. The cap applies from the date of active-duty entry, not the date of the request. If the member entered active duty in January and requests the cap in March, you owe a retroactive adjustment for January and February.

Timing: The member may request the rate cap at any time during military service or within 180 days after release from active duty (Section 3937(b)(2)). A request received 6 months into a deployment is still valid and requires retroactive adjustment to the date active duty began.

Credit Cards and HELOCs (Revolving Credit)

Revolving credit is more complex because the balance fluctuates, interest compounds differently, and fees are common.

Process:

1. Receive member’s written request and copy of military orders
2. Verify active-duty status via DMDC
3. Reduce the periodic rate to the equivalent of 6% APR, retroactive to active-duty entry
4. Recalculate all interest charged since the date of active-duty entry using the 6% rate
5. Credit the difference to the member’s account
6. Ensure that annual fees, late fees, and service charges do not push the effective rate above 6% (per the broad definition of “interest” in Section 3937(d))
7. Recalculate minimum payments if applicable
8. Continue applying the reduced rate for the duration of military service

Common credit union error: Reducing the periodic interest rate but continuing to charge annual fees, over-limit fees, or late fees that push the total cost above 6% annualized. The statute’s definition of “interest” includes fees. You must account for all charges.

HELOC consideration: If the member drew on a HELOC before entering active duty, the outstanding balance is a pre-service obligation covered by Section 3937. New draws taken during active duty are less clear; consult legal counsel on whether they constitute new obligations under the MLA rather than SCRA.

Mortgages

Mortgage rate cap implementation is high-dollar and operationally intensive.

Process:

1. Receive member’s written request and copy of military orders
2. Verify active-duty status via DMDC
3. If the mortgage rate exceeds 6%, reduce to 6% retroactive to active-duty entry
4. Recalculate the monthly payment, typically by reducing the payment amount, not the loan term
5. Refund or credit excess interest already collected since the date of active-duty entry
6. If the mortgage is escrowed, ensure the escrow portion is recalculated separately (SCRA does not cap escrow for taxes and insurance)
7. Continue the 6% rate for the duration of military service plus any post-service extension

Common credit union error: Adjusting the interest rate but not recalculating the monthly payment. The statute requires that the reduced rate produce “a reduced periodic payment” (Section 3937(a)(2)). A rate reduction that keeps the same payment and shortens the term does not comply.

ARM consideration: If the member has an adjustable-rate mortgage that adjusts during service, the adjusted rate cannot exceed 6% during the protection period, regardless of what the index and margin would produce.

Personal Loans and Share-Secured Loans

These follow the same process as auto loans: fixed term, fixed rate, straightforward adjustment. The key is ensuring that share-secured loans (where the member’s savings serve as collateral) are included. A share-secured loan originated before active duty is a pre-service obligation subject to the 6% cap.

Where Credit Unions Get It Wrong

Error 1: Wrong Eligibility Standard

BayPort Credit Union’s policies stated that a servicemember must be “deployed to a combat zone” to qualify for the rate cap. This is wrong. Section 3937 applies to all active-duty servicemembers, regardless of deployment status. A servicemember stationed at Fort Liberty, North Carolina, in a training role is just as eligible as one deployed to a combat zone.

The DOJ settlement made clear: the eligibility standard is active-duty military service, not deployment, not combat, not overseas assignment.

Check your policies now. If your SCRA policy, training materials, or member-facing documents define eligibility as anything narrower than “active-duty military service,” you have BayPort’s problem.

Error 2: Deferring Instead of Forgiving

Some credit unions reduce the rate to 6% but defer the excess interest, adding it to the loan balance or collecting it after discharge. This violates the statute. Section 3937(a)(1) provides that a pre-service obligation shall not bear interest at a rate in excess of 6% per year during the period of military service. Interest above that threshold is forgiven under the statute. It cannot be collected later: not after discharge, not at loan maturity, not ever.

Error 3: Processing Delays

The DOJ considers delays of 60 or more days in processing a rate cap request to be unreasonable. Some credit unions have taken months to apply the reduction, especially when the request involves multiple product lines and requires coordination between departments.

Best practice: Process rate cap requests within 30 days. This means the rate reduction, the retroactive adjustment, the payment recalculation, and the member notification should all be completed within 30 days of receiving a valid request.

Error 4: Incomplete Product Coverage

A servicemember with an auto loan, a credit card, and a personal loan at your credit union is entitled to the 6% cap on all three, with a single request. Some credit unions apply the cap to the loan the member specifically mentions but fail to apply it across all pre-service obligations.

Best practice: When you receive a rate cap request, review the member’s entire relationship. Identify every pre-service obligation. Apply the cap to all of them. Confirm with the member in writing which obligations have been adjusted.

Error 5: Not Applying Retroactively

The rate cap applies from the date the servicemember entered active duty, not the date they made the request, not the date you processed it, and not the date you verified their status via DMDC. If a servicemember entered active duty on January 15 and you receive the request on June 1, you owe a retroactive adjustment for January 15 through June 1.

Additionally, Section 3937(b)(2) allows members to request the cap within 180 days after release from active duty. A request received after discharge is valid and requires retroactive adjustment for the entire period of service.

The NCUA Examination

NCUA examiners evaluate rate cap compliance as part of the consumer compliance examination. Key areas of focus:

Policy review: Does the credit union have a written process for receiving and acting on Section 3937 requests? Does the policy correctly define eligibility (active-duty service, not combat deployment)? Does it cover all product lines?

Transaction testing: Examiners will sample rate cap requests and verify:

• Was the rate reduced to 6% or below?
• Was the reduction applied retroactively to the date of active-duty entry?
• Was excess interest forgiven (not deferred)?
• Were monthly payments recalculated?
• Was the member notified in writing?
• What was the processing timeline?

Cross-product review: Did the credit union identify and adjust all pre-service obligations, or only the one the member specifically mentioned?

Documentation: Are military orders retained? Is the DMDC verification documented? Is the date of the request, the date of processing, and the retroactive adjustment date all recorded?

For the full NCUA examination framework, see our guide on NCUA SCRA guidance for credit unions.

Building the Rate Cap Process

Step 1: Intake

Designate a single point of contact for Section 3937 requests. This is typically someone in member services or the compliance department. Every request should be logged immediately with the date received, the member’s name, and the military orders provided.

Do not require documentation beyond what the statute specifies. Written notice plus a copy of military orders is sufficient. Do not require notarized orders, command verification letters, or deployment certificates.

Step 2: Verification

Verify the member’s active-duty status via DMDC. Document the verification with the date, the DMDC result, and the member’s active-duty entry date. The entry date determines the retroactive adjustment start date.

Step 3: Relationship Review

Pull the member’s entire account relationship. Identify every pre-service obligation:

• Auto loans originated before active-duty entry
• Credit cards opened before active-duty entry
• Personal loans, share-secured loans, HELOCs originated before active-duty entry
• Mortgages originated before active-duty entry

Step 4: Rate Adjustment

For each pre-service obligation:

1. Reduce the interest rate to 6% (or the original rate if already at or below 6%)
2. Calculate excess interest charged since the active-duty entry date
3. Forgive the excess: credit the member’s account or issue a refund
4. Recalculate monthly payments based on the reduced rate
5. Update the account record with the adjusted rate and the reason

Step 5: Member Notification

Send the member a written confirmation listing:

• Each obligation adjusted
• The original rate and the adjusted rate (6%)
• The retroactive adjustment amount credited or refunded
• The new monthly payment for each obligation
• The effective date of the reduction (active-duty entry date)
• When the reduction will end (date of discharge or release from active duty)

Step 6: Monitoring and Restoration

Track the member’s active-duty status through continuous monitoring. When the member is discharged or released from active duty, restore the original interest rate prospectively. Do not collect the forgiven excess interest. Document the rate restoration.

The MLA Distinction

Credit unions often encounter the SCRA interest rate cap and the Military Lending Act (MLA) rate cap simultaneously. They are different protections with different triggers. For a full comparison, see SCRA vs. MLA.

	SCRA Section 3937	MLA
Applies to	Pre-service obligations	Credit extended during active duty
Rate cap	6% per year	36% MAPR
”Interest” includes	Fees, service charges, renewal charges	Most fees (with specific exclusions)
Who qualifies	Active-duty servicemembers	Active-duty servicemembers + dependents
Triggered by	Member request + military orders	Automatic, no request required
Enforced by	DOJ, NCUA, OCC, CFPB, state AGs	DOD, CFPB, FTC, NCUA, and other banking regulators

A practical example: A servicemember opens a credit card at your credit union while a civilian. They enter active duty. The SCRA 6% cap applies to that credit card upon request. Two years later, while still on active duty, they open a second credit card. The MLA 36% MAPR cap applies to the second card automatically, with no request needed.

Your compliance program must handle both, across all product lines, for every military member.

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BayPort Credit Union paid $109,443 for an incorrect SCRA rate cap policy, and they only have a few thousand members. What would an NCUA exam find in your SCRA procedures?

Check Your Exposure → · Solutions for Credit Unions →

Sources: 50 U.S.C. Section 3937; DOJ Press Release: United States v. BayPort Credit Union (E.D. Va., March 18, 2022); NCUA Federal Consumer Financial Protection Guide: SCRA; OCC Comptroller’s Handbook: Servicemembers Civil Relief Act (March 2021); FFIEC Interagency Examination Procedures: SCRA.

This guide is for educational purposes only and does not constitute legal advice. Consult qualified legal counsel for guidance specific to your institution.