No, the APR calculation is not the correct way to calculate the total interest on a residential real estate loan under the SCRA. The SCRA limits the maximum interest rate on loans to active duty military service members to 6%. “Interest” is defined broadly to include all service charges, renewal charges, fees, or any other charges, except bona fide insurance charges. On the other hand, APR calculations exclude certain other charges in residential real estate transactions, such as document preparation fees and credit-report fees. To ensure compliance with the SCRA, your interest rate calculation must be broader than an APR calculation.

Regarding insurance, the SCRA exempts bona fide insurance from the interest calculation. “Bona fide insurance” is not defined in the SCRA, nor are we aware of any guidance that clarifies what type of insurance qualifies for that exception. However, “bona fide” generally means “in good faith.” So any insurance that you require must be a legitimate charge and not labeled “insurance” to attempt to qualify for rate-cap exception. Credit life and credit accident and health insurance are legitimate forms of loan insurance that may be excluded from the 6% interest rate cap.

For resources related to our guidance, please see:

• Servicemembers Civil Relief Act, 50 USC 3937(a)(1) (“An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent …”)

• Servicemembers Civil Relief Act, 50 USC 3937(d)(1) (“The term ‘interest’ includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.”)

• FDIC Compliance Examination Manual, Servicemembers Civil Relief Act (April 2016) (“Determine how the institution calculates the reduced interest rate. Does the institution include all service and renewal charges, as well as other fees and charges, with the exception of charges for bona fide insurance?”)

• Regulation Z, Appendix J to Part 1026 — Annual Percentage Rate Computations for Closed-End Credit Transactions

• Regulation Z, 12 CFR 1026.4(c)(7)(ii)(iii) (“The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount . . . (ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents. (iii) Notary and credit-report fees. . . .”)