Joint Hearing of the Committee on Homeland Security and Governmental Affairs of the U.S. Senate and the Committee on Veterans’ Affairs of the U.S. House of Representatives at 1:00 p.m. CDT.
Witness Testimony of Richard "Dick" Harpootlian, Esq., Richard A. Harpootlian, P.A., Columbia, SC
The Committee has invited testimony on the facts and circumstances surrounding the class action lawsuit filed in the District of South Carolina as Rowles v. Chase Home Finance, LLC. The testifying witness, Richard A. Harpootlian, is an attorney representing three members of the Armed Forces who serve as putative class representatives representing servicemembers who allegedly were denied benefits to which they were entitled under the Servicemembers Civil Relief Act by Chase Home Finance, LLC and Chase Auto Finance Corp.
Whereas the lawsuit is still in its infancy, all facts are not yet known to the servicemembers. However, in statements to the press JPMorgan Chase has confirmed that at least 4,000 servicemen and servicewoman were denied the 6 percent interest cap on preexisting debts. Also, Chase Home Finance, LLC foreclosed on the homes of numerous servicemen and servicewoman (the exact number of which is not yet known).
The individual plaintiffs in this case are Captain Jonathan Rowles of the United States Marine Corps, whose family was denied the 6 percent interest cap while he was deployed on active duty, Lieutenant Colonel Sarah Letts-Smith of the United States Army Reserve, whose home was foreclosed on while she was serving in Iraq, and Lance Corporal Martin Hupfl, whose automobile installment loan was terminated and placed into collections while he was in basic training.
The damage to the servicemembers as a result of the SCRA violations not only financially harms the soldiers but also negatively affects their ability to serve in the military. Each of the plaintiffs in the Rowles case was forced to wrestle with debt collectors and threats of loan acceleration, foreclosure, and/or repossession while he or she was on active duty. This pressure cannot be overstated as it represented a threat not only to the financial well-being of the servicemembers, but to the physical well-being of the families that they left behind.
Whatever facts this lawsuit may reveal, thus far it is clear that a systematic failure to adhere to the requirements of the SCRA has occurred. Congress should consider three areas in which the SCRA may be strengthened to deter future violations: (1) stronger criminal penalties for knowing violations; (2) civil fines for all violations with an incentive discount for self-reporting; and (3) an attorneys’ fee provision for successful plaintiffs seeking to enforce their rights as servicemembers under the SCRA.
Mr. Chairman and Members of the Committee,
I thank you for the invitation to speak on behalf of my clients—Captain Jonathan Rowles of the United States Marine Corps, Lieutenant Colonel Sarah Letts-Smith of the United States Army Reserve, and Lance Corporal Martin Hupfl of the United States Marine Corps. I represent these fine men and women in uniform along with my co-counsel, William Harvey and Graham Newman.
As the committee is aware, our law firms have filed a class action complaint against subsidiaries of JPMorgan Chase alleging systematic violations of rights guaranteed to our men and women in uniform under the Servicemembers Civil Relief Act that have harmed thousands of our soldiers and their families. This litigation is in its earliest stages. No discovery has been conducted and I am limited by law as to what comments I may offer regarding the merits of these claims or any defenses thereto. I may, however, share with you the facts giving rise to my clients’ complaints, the difficulties they have suffered while serving our country, and suggestions that the Committee might entertain in hopes of preventing such occurrences in the future.
The opening words of the Servicemembers Civil Relief Act establish that the purpose of the law is “to provide for, strengthen, and expedite the national defense through protection extended by this Act to servicemembers of the United States to enable such persons to devote their entire energy to the defense needs of the Nation.” The venerable nature of these goals is undeniable. But to truly grasp the importance of the Act to our nation as a whole, one must examine the history of the legislation through the last two centuries.
I. History of the Servicemembers Civil Relief Act
The roots of the Servicemembers Civil Relief Act lie in the Constitution itself. Article I, Section 8 of the Constitution expressly grants to Congress the authority to build and maintain our Armed Forces in order to guarantee the security of this nation. With this in mind, as early as the Civil War Congress recognized the need to enact legislation placing certain restrictions on civil actions that would hinder the abilities of an individual soldier or sailor to dedicate all of his efforts to defending this country. In 1917, as the United States became embroiled in World War I, our government employed the services of Major John Wigmore—then Dean of the Northwestern University Law School and author of the famous treatise Wigmore on Evidence—to draft the first modern version of the SCRA, then known as the “Soldiers’ and Sailors’ Civil Relief Act.” This Act instituted many of the regulations that are central features of the modern law, including a stay of civil actions and a prohibition of foreclosures upon the homes of those on active duty.
Major Wigmore’s Soldiers’ and Sailors’ Civil Relief Act expired six months after the end of World War I due to a sunset provision included in the initial draft. Thus, in 1940, as conflicts throughout the globe again escalated into World War, Congress reenacted Major Wigmore’s bill with some amendments. At the time, Congressman Overton Brooks of Louisiana reiterated the vital role the Act played in preserving the nation’s defense and recognized the concerns the Act was intended to address.
This bill springs from the desire of the people of the United States to make sure as far as possible that men in service are not placed at a civil disadvantage during their absence. It springs from the inability of men who are in service to properly manage their normal business affairs while away. It likewise arises from the differences in pay which a soldier receives and what the same man normally earns in civil life.
The Soldiers’ and Sailors’ Civil Relief Act has been in effect since it was reenacted by Congressman Brooks and others in 1940.
In April of 2003, as Operation Enduring Freedom in Afghanistan progressed, this Committee took the lead in the 108th Congress to style a complete restatement of the Act. The bill that originated in this Committee received broad bipartisan support, boasting as its sponsors then-Chairman Christopher Smith of New Jersey and Ranking Member Lane Evans of Illinois. In its Report to the House, the Committee expressly noted the following:
Congress has long recognized that the men and women of our military services should have civil legal protections so they can “devote their entire energy to the defense needs of the Nation.” With hundreds of thousands of servicemembers fighting in the war on terrorism and the war in Iraq, many of them mobilized from the reserve components, the Committee believes the Soldiers' and Sailors' Civil Relief Act (SSCRA) should be restated and strengthened to ensure that its protections meet their needs in the 21st century.
Among the protections recognized as necessary in modern society were four rights directly implicated in the pending litigation involving my clients: 1) a 6 percent cap of interest chargeable on debts incurred prior to military service; 2) a prohibition of derogatory reports to credit agencies due to eligibility of SCRA protection; 3) limitations upon the ability to foreclose upon servicemembers’ homes; and 4) limitations upon the ability to terminate installment contracts or otherwise repossess personal property purchased via installment contract.
Once favorably reported to the House, the bill gained thirty-nine (39) co-sponsors from both parties and was passed by the full House by 425-0. The Senate passed similar legislation with the leadership of Senator Lindsey Graham from my home state of South Carolina and the differences between the two bills were negotiated without need of a conference committee. On December 19, 2003, President George W. Bush signed into law the now-restyled “Servicemembers Civil Relief Act.”
II. EXPERIENCES OF THE ROWLES PLAINTIFFS
The litigation in which we are involved began only after Jonathan Rowles and his wife, Julia, endured several years of frustration regarding their home mortgage with Chase Home Finance, LLC. Our law firms filed this lawsuit on behalf of Captain Rowles in July of 2011. Over the past several months, we have been contacted by numerous military personnel who have experienced similar denials of SCRA protection from Chase’s subsidiaries. Last week, we filed an amended complaint, adding allegations on behalf of Lieutenant Colonel Sarah Letts-Smith of the United States Army Reserve and Lance Corporal Martin Hupfl of the United States Marine Corps.
Our research has revealed systematic failures in the maintenance of SCRA protections pertaining to four classes of military men and women: 1) those denied the 6 percent maximum interest rate on debts incurred prior to military service; 2) those who received a blighted credit report as the result of their invocation of SCRA protection; 3) those whose homes were foreclosed upon despite SCRA protection; and 4) those possessing installment contracts that were cancelled or resulted in repossession of personal property such as automobiles despite SCRA protection.
A review of the facts pertaining to each plaintiff is helpful in explaining how these violations came about.
In February of 2004, the Jonathan and Julia Rowles entered into a purchase money mortgage with BNC Mortgage, Inc. In May of 2004, Chase Manhattan Mortgage Corporation purchased this loan and, from that point in time, the Rowleses made all payments to Chase. After a year of making payments on this mortgage, Jonathan Rowles executed a United States Marine Corps Reserve contract on August 16, 2005 and received Assignment to Active Duty Orders which became effective on January 22, 2006. Shortly thereafter, Rowles requested in writing that Chase reduce the interest rate on the loan to 6 percent pursuant to the SCRA. In this letter, Rowles specified January 22, 2006 as the date he entered active duty and produced two sets of orders to verify his current status. Again on May 2, 2006, Rowles wrote to Chase to request the 6 percent rate protection under the SCRA. This letter also specified Rowles’ active duty date and included additional copies of his orders and a copy of his previous letter.
On May 8, 2006, in response to this series of correspondence, Chase requested that Rowles provide “orders and/or an enlistment agreement showing the date of original call to duty.” Again Rowles sent faxes to Chase customer service representatives that included handwritten cover sheets explaining his active duty orders as well as copies of his letters of April 14 and May 2. In a letter dated July 27, 2006—seven months after Rowles received his active duty orders—Chase informed Rowles that because he had qualified for the protection of the SCRA, the company had adjusted the interest rate on the loan to 6 percent effective with his May 1, 2006 payment. However, Chase failed to apply the statutory interest rate to the loan until August 17, 2006, which was the date of the first statement received by Rowles that reflected the 6 percent rate. The July 27 letter also informed Rowles that his “loan is protected against late fees, adverse credit reporting, and default activities. These protections will remain in effect for 90 days following your return from active duty.”
Though Rowles’ SCRA protection had been in place for less than four months, Chase mailed Rowles a letter on December 1, 2007 which it characterized as a “required quarterly verification.” The letter included a form which Rowles was instructed to complete and sign in order to continue to receive the protection of the SCRA. Rowles duly completed the form and returned the letter to Chase. Chase sent additional verification letters on December 17, 2008, March 25, June 22 and December 29 of 2009 and March 22, 2010. In addition to the periodic verification letters, no fewer than four times per year since July of 2006, Rowles has had to call various Chase customer service representatives after being verbally informed or receiving documentation indicating that the interest rate on the loan was going to be adjusted above 6 percent if he failed to do so. In March of 2008, Rowles was forced to request that his commanding officer at Training Squadron Eighty-Six in Pensacola, Florida, write to Chase on his behalf in order to confirm that he was in fact an active duty Marine.
In a letter dated January 16, 2007, Chase again informed Rowles that he had qualified for the protection of the SCRA and that the company had accordingly extended the adjustment on the 6 percent interest rate effective February 1, 2007. On April 2, 2008, Chase informed Rowles in writing that the company was “in receipt” of his “request for relief” under the SCRA and that he should allow three to four weeks for review of the request. A subsequent letter dated April 25, 2008, again informed him that his rate adjustment would be extended effective October 1, 2008.
From the time that Chase applied the 6 percent interest rate to the loan until April 2009, Chase would send loan statements to the Rowles family indicating the interest rate charged on their loan was, in fact, substantially above 6 percent. On information and belief, during this time Chase would use various formulas and accounting methods to reconcile the higher stated interest rates while effectively only charging Rowles at 6 percent.
Beginning in April 2009, the Rowles’ loan was to shift from “interest only” to an amortized loan over remaining 25 years per the terms of the original agreement. On Rowles’ April 2009 statement and each subsequent statement, Chase not only failed to accurately characterize the interest rate on the loan as 6 percent but also ceased to employ any formula or accounting method to effectively provide Rowles with the benefit of the 6 percent protection under the SCRA.
Each month between April 2009 and the time of the filing of the lawsuit, Rowles made a payment to Chase in the original contractual amount, which is the last correct amount billed by Chase reflecting interest at 6 percent. Despite this fact, Chase repeatedly failed to credit Rowles for payments made and began to pursue aggressive collection methods for what it characterized as a past-due balance on Rowles’ account.
Chase’s collection methods during this time included repeated phone calls and correspondence to Rowles from Chase debt collection departments in various locations. These calls often came at a rate of three per day and included calls to his mother who lives at a different address and his workplace as well as calls made to his residence after midnight, and as late as 4:00 a.m. In telephone conversations, voicemails and correspondence during this time, Chase representatives repeatedly threatened to report Rowles to the credit bureaus and to initiate foreclosure proceedings on their house.
This pattern of conduct by Chase caused Rowles to spend considerable time communicating with Chase via telephone, email and written correspondence. This time included leave from his unit which was spent traveling to meet with Chase representatives in an effort to preserve his 6 percent interest rate under the SCRA and to prevent Chase from taking threatened actions which are unlawful under the SCRA. Finally, in June of 2010, Chase denied Rowles electronic access to his account. Thereafter Rowles brought this suit.
United States Army Reserve Lieutenant Colonel Sarah Letts-Smith
Lieutenant Colonel Sarah Letts-Smith is an intelligence officer with the United States Army Reserve. On July 26, 2005, LTC Letts-Smith and her husband, Rory Smith, jointly purchased a house located in Temecula, California. At the time of the purchase, Lt. Col. Letts-Smith was not on active duty. The purchase was financed by Washington Mutual Bank, FA, popularly known as “WaMu.” For the first three years, the Smiths made all mortgage payments on time for the 44200 Sunset Terrace home.
On January 29, 2008, the Department of the Army ordered LTC Letts-Smith to active duty, instructing her to report to Fort Leavenworth, Kansas for a training period of 120 days to be followed by deployment to Iraq. LTC Letts-Smith soon thereafter faxed letters to all of her creditors—including WaMu—informing them of her active duty status and requesting any and all protection afforded under the SCRA.
During the summer of 2008—while LTC Letts-Smith was serving in Iraq—Rory Smith was laid off from his job, leaving his wife as the sole wage earner in the house. On August 5, 2008, Rory Smith sought assistance from WaMu in modifying the Smith family’s mortgage so that payments could continue to be made. Smith informed WaMu in writing that he had been laid off from his job, that his wife was on active duty in Iraq, and that the family was having difficulty making their mortgage payments.
On September 25, 2008, in the largest bank failure in American history, Washington Mutual Bank was closed by the federal government’s Office of Thrift Supervision and the Federal Deposit Insurance Corporation was named receiver. Regulators simultaneously brokered a deal selling nearly all of WaMu’s assets and liabilities to JP Morgan Chase. On October 11, 2008, WaMu—now owned by JP Morgan Chase—responded to Rory Smith’s earlier request for “Borrower Assistance” as follows.
This letter is in response to your request for assistance on the above referenced loan. Washington Mutual received and reviewed documentation regarding a potential workout. Based on the financial information received, it does not appear we are able to offer you assistance at this time, therefore your request for a loan workout Modification has been denied.
On the same date, WaMu and Chase informed the Smiths via a separate letter that their line of credit was suspended. In addition to this information, the WaMu/Chase correspondence contained the following warning.
WE MAY REPORT INFORMATION ABOUT YOUR ACCOUNT TO CREDIT BUREAUS. LATE PAYMENTS, MISSED PAYMENTS OR OTHER DEFAULTS ON YOUR ACOUNT MAY BE REFLECTED IN YOUR CREDIT REPORT.
Several weeks later on December 1, 2008—and despite the fact that the bank was fully aware of Letts-Smith’s active duty status and request for assistance—WaMu/Chase issued a “Notice of Collection Activity” to the Smiths. Contained in this notice was a threat of foreclosure.
Failure to cure the default within the 30-day period may result in Washington Mutual Bank declaring the entire outstanding principal balance, accrued interest and any other fees and charges due under the terms of the Note and Security Instrument to be immediately due (“Acceleration”). If this amount is not immediately paid at such time, Washington Mutual Bank may exercise any and all remedies available under the terms of the Note and Security Instrument and applicable law, including the commencement of foreclosure proceedings which may result in the sale of your property.
On March 26, 2009—with LTC Letts-Smith still stationed in Iraq—WaMu/Chase initiated foreclosure actions against the Smith family. Lt. Col. Letts-Smith was released from active duty on August 4, 2009. Three days later, on August 7, 2009, the foreclosure trustee sold the Smith family’s home for $934,150.00—approximately $800,000 less than the original purchase price of the home.
United States Marine Corps Lance Corporal Martin Hupfl
Martin Hupfl is currently a Lance Corporal in the United States Marine Corps stationed at NAS Jacksonville. In July of 2007, Hupfl—while still a civilian—purchased a 1999 Dodge Ram truck. LCpl Hupfl financed the purchase with 72 month installment loan from Defendant Chase Auto Finance Corp. The interest rate on the Chase loan was approximately 12 percent.
In July of 2008, LCpl Hupfl enlisted in the Marine Corps. LCpl Hupfl recruiter informed him of the protections offered by the SCRA. With the recruiter’s assistance, LCpl Hupfl completed a SCRA Advice and Statement of Understanding that he signed and faxed to Defendant Chase Auto Finance Corp.
LCpl Hupfl entered boot camp at Parris Island, South Carolina on July 21, 2008. From boot camp Hupfl was transferred to Camp Lejeune, NC for further entry level training. During this period of training, LCpl Hupfl’s mother received a letter from Defendant Chase Auto Finance dated December 11, 2008 stating that Chase had finally “processed” his SCRA request and that Chase had “reduced the interest rate to 6 percent and discontinued all fee accruals from the date of your military orders.”
LCpl Hupfl completed his entry level training on March 5, 2009 and, from there, was assigned to his first duty station in Philadelphia, Pennsylvania. Hupfl telephoned Chase Auto Finance to resume his loan payments at the original contracted amount. However, Hupfl was advised by Chase Auto Finance that it had terminated the installment loan contract in December of 2008 and therefore was unable to accept any payments from him. Soon thereafter, Chase Auto Finance assigned LCpl Hupfl’s account to a collection agency that began sending him collection letters and making collection calls to his mother’s house. Chase Auto Finance also reported to various credit bureaus that Hupfl’s account had been “charged off as bad debt.”
III. Practical Effects of the Failure to Recognized SCRA Protections
The immediate effect of SCRA violations on our military men and women are obvious. Unlawful foreclosures force families from their homes. Illegal repossessions strip families of their cars, appliances, and other essential household items. Derogatory reports to credit agencies damage the ability of our soldiers and sailors to enter into future financial agreement. Excessive charges of interest demand monies which are not owed.
Perhaps more damaging than these immediate effects, however, is the financial stress endured by military families while their loved ones serve on active duty. As the stories of Captain Rowles and LTC Letts-Smith show, the spouses, parents, and children of our military men and women are those that inevitably bear the brunt of SCRA violations. While her husband was deployed to Korea, Julia Rowles was forced to negotiate with Chase representatives while caring for a small child and pregnant with another. While his wife was surviving the Iraqi war zone, Rory Smith prepared his children for to move from their home as foreclosure crept closer.
I began this written testimony by referring to the stated policy of the SCRA: “to enable [servicemembers] to devote their entire energy to the defense needs of the Nation.” Violations such as those suffered by our clients directly defeat this purpose. While on active duty, our soldiers have limited time to so much as contact their families. Sadly, according to public statements made by JPMorgan Chase to the press, it appears that over the past few years several thousand men and women like Captain Rowles, like LTC Letts-Smith, and like LCpl Hupfl were forced to spend what personal time they did have on the phone with banking officials seeking an explanation why their families were being overcharged interest, why their car was being repossessed, or why their home was being foreclosed.
IV. Suggestions for More Diligent Enforcement of SCRA
The systematic failure of SCRA protections in the Rowles litigation is evidence that the enforcement provisions of the SCRA deserve reconsideration. In our review of the law and its application over the last six months, we believe that there are three areas Congress may improve to strengthen the SCRA in hopes of preventing such failures in the future.
a. Criminal Penalties for Violations of the SCRA
Criminal indictment is the ultimate sanction provided by the SCRA. Yet such punishment is extraordinarily rare as it carries the burden of proving one “knowingly” inflicted upon servicemembers the hardships prohibited by the SCRA. But even if such proof exists, the potential criminal penalties available, for example for intentionally foreclosing upon the home of a soldier serving in Afghanistan, are very limited. Of the sections directly pertaining to the Rowles litigation, three prescribe misdemeanor criminal penalties for “knowing” violations (Sections 527 (violation of interest cap), 532 (termination of installment loans and/or repossession), and 533 (foreclosure of mortgages)) and the fourth contains no criminal penalty whatsoever (Section 518 (unlawful report to credit agencies)).
Even without considering the difficulties of proving a “knowing” violation of the SCRA, the realities of criminal sentencing render the potential of a prison term for a misdemeanor “white collar” criminal offense almost nonexistent. In response, Congress should consider stiffening maximum sentences for SCRA violations beyond the current one year cap. Doing so will provide the dreaded “felony” label to violations as well as raise the specter of a potential for incarceration for egregious examples of SCRA breaches.
b. Imposition of Civil Fines for Violations of the SCRA
None of the SCRA provisions pertaining to interest rates, mortgages, or installment loans contemplate civil fines as a deterrent to SCRA violations. Fines are only contemplated in terms of a criminal violation, and thus the government must demonstrate a “knowing” violation of the SCRA in order for any monetary penalty to attach. Congress should consider the imposition of civil fines for any violation of the SCRA—regardless of the existence of preexisting knowledge or intent.
In order to encourage compliance with the SCRA and discourage additional civil and criminal litigation, Congress should consider offering a discounted fine to SCRA violators that self-report breaches of the law. A fifty percent reduction in civil penalties owed for each violation of the SCRA will provide ample incentive to lenders to monitor their business practices, rapidly correct any breaches, and promptly remedy any damage inflicted upon servicemembers.
c. Provision Providing for Attorneys’ Fees in Conjunction with Civil Relief
In addition to the provision of civil fines, Congress should consider providing for the statutory right of recovery of reasonable attorneys’ fees by servicemembers from SCRA violators. Due to the nature of SCRA protections, oftentimes damages suffered by servicemembers will be relatively small. If a servicemember were to retain the services of an attorney to attempt to enforce his SCRA rights, a typical attorney’s contingency fee would decimate an already modest recovery by one-third or more—assuming that that servicemember could retain an attorney willing to invest in such a modest potential gain. Likewise, an attorney’s hourly billable rate may exhaust a servicemember’s recovery all together.
In contrast, the statutory provision for a recovery of reasonable attorneys’ fees will enable servicemembers to seek counsel for the protection of their SCRA rights while vesting in the federal judiciary the power to ensure that the servicemembers’ attorneys are fairly compensated while prohibiting windfall fee awards. A successful example of such a statutory fee scheme may be found in civil rights litigation, more specifically that related to 42 U.S.C. 1983. Recognizing that a successful suit over a violation of civil rights may produce little or no financial reward, Congress enacted the accompanying authority of 42 U.S.C. 1988 that provides for “reasonable attorneys’ fees” to be awarded to a successful plaintiff by the defendant adjudged liable for the violation. This statute has enabled victims of civil rights violations to have access to the civil justice system and civil counsel while preventing the award of excessive fees.
I would again like to thank the Committee for the opportunity to speak on behalf of our clients and on behalf of the thousands of servicemen and servicewomen who have fallen victim to SCRA violations in the last several years. As the SCRA recognizes, its protections are essential to our national defense. It is my hope that Congress will take all steps necessary to ensure the continued vitality of this law.