In 1940, Congress passed this statue to protect people in the U.S. armed forces and their dependents. Despite its name, it covers members of the U.S. Marines, Air Force, and Coast Guard, as well as the U.S. Army and Navy. National Guard and reserve members are covered if called to active duty. Draftees and volunteers receive the same protection. Though the act uses masculine pronouns, female members of the armed services are equally covered.
The act prevents creditors from doing certain things to the protected people during their active duty. From a bank's standpoint, one of the principal provisions is a maximum rate of six percent on loans made prior to the start of the person's active military service. This interest rate limitation applies during the person's term of active service, but there is a provision for a court to adjust the rate upward if circumstances warrant. This rate protection applies only to contracts entered into before the person starts his or her active military service. Contracrts entered into once that service has begun are not covered.
The purpose of the law is to prevent loss of home, car, or the like contracted for on the basis of a (higher) civilian income, when the obligor has now, voluntarily or involuntarily, been forced to live on a (lower) military pay. A contract signed after the person has gone into active military service ought to have been made on the basis of the military pay rate.
To correctly handle the rate reduction to six percent, a lender should calculate the payment amont needed to fully amortize the loan at six percent by the originally scheduled maturity date. The resulting figure is the correct monthly (or other periodic) payment the lender may require.
Installment contracts for the purchase of real or personal property and real estate mortgages are affected by the act, as well. A creditor may not terminate such a contract or repossess the property because of nonpayment during the period of the debtor's active military service.
Dependants of people on active duty may apply to the courts for similar protection, as may co-makers and guarantors on debts incurred prior to the commencement of the primary debtor's active duty service.
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