Servicemembers Civil Relief Act and Vehicle Leases

The U.S. Department of Justice (DOJ) has in recent years reported a number of settlements of alleged violations of the Service members Civil Relief Act (SCRA) relating to vehicle lease terminations.

The SCRA allows active duty service members to terminate an automobile lease without having to pay early termination charges or a penalty, under certain circumstances.

Different rules govern depending on whether the servicemember:

(a) entered into the lease prior to active duty and then was called onto active duty for 180 days or longer; or

(b) entered into the lease while on active duty and thereafter received orders for permanent change of station to certain locations or deploys for 180 days or longer.

Servicemembers seeking to terminate a lease pursuant to the SCRA must provide written notice of termination to the lessor or lessor’s agent, along with a copy of the subject military orders. They must then return the vehicle within 15 days after delivery of the written notice.

In addition to not being liable for early termination fees, covered servicemembers are entitled to recover advance payments, which must be refunded within 30 days of a covered termination. Since most leases collect lease payments in advance, servicemembers are likely entitled to some amount of prorated payment if they are current on their lease. In addition, DOJ has taken the position that at least a portion of trade-in allowances, up-front payment or other capitalized cost reduction paid by servicemembers are advance payments that must be refunded.

The SCRA also prohibits termination of a lease, or repossession of a vehicle by a creditor pursuant to a RISC, without a first obtaining a court order as long as the servicemember borrower either (a) placed a deposit for the vehicle, or (b) made at least one installment payment, before entering military service.

Finally, lessors may not make adverse reports to consumer credit reporting agencies about early lease terminations made pursuant to the SCRA.

Lessors and lessor’s agents who violate the SCRA may be subject to fines, or imprisonment, or both. A court may also order repayment to the servicemember of all or part of prior installments or deposits, or issue other equitable relief in order to preserve the interests of all parties.

In a settlement reached earlier this year, BMW Financial Services agreed to refund over $2 million to 492 servicemembers and their co-lessees, and pay a civil penalty of $60,788. In addition to requiring refund of the balance of the lessee’s CCR, DOJ insisted on indirect damages being paid to lessees amounting to three times the amount of the refund owed or at least $500.

In a separate action filed in late March, DOJ alleged that California Auto Finance (“CAF”) violated the SCRA by repossessing a servicemember’s vehicle without a court order in April 2015. Remarkably, DOJ proceeded with its lawsuit against CAF even though a year-long investigation of CAF by DOJ apparently failed to identify a single other violation of the SCRA.

As agents for creditors, dealers should take special note that there are additional legal obligation to consider when a servicemember seeks to terminate a lease and provides documentation of military orders. In such circumstances, dealers should inform the creditor in writing about the circumstances of the contact with the subject servicemember, forward to the creditor the documentation received from the servicemember, and consult with competent legal counsel in the event that the dealer is asked to take any part in processing the termination of the lease if there is any uncertainty as to the obligations of the creditor or creditor agent’s under the SCRA.