Morgan Stanley is the latest financial institution being investigated for allegedly foreclosing on the homes of active-duty military families despite a federal law that severely restricts such actions.

The Justice Department confirmed that it is investigating Saxon Mortgage Service, a Morgan Stanley company, along with several other mortgage firms, The New York Times reported today. Morgan Stanley had disclosed in a recent regulatory filing that it was “responding to subpoenas and requests for information” about its “compliance with the Servicemembers Civil Relief Act,” the newspaper said.

Other mortgage lenders previously accused of overcharging or wrongly foreclosing on military families include JP Morgan Chase and Wells-Fargo.

A federal judge in Michigan ruled last year that Saxon had illegally foreclosed on the home of Sgt. James B. Hurley, a Michigan National Guard member, while he was serving in Iraq. Hurley returned from Iraq in December 2005 to find that Saxon had foreclosed on his riverside home and sold it to someone else.

The Times report said that as many as 23 other Saxon foreclosures involving military families were under investigation.

SCRA

The federal Servicemembers Civil Relief Act (SCRA) strictly limits the interest rates that can be charged active-duty military members and requires a hearing before a judge before any foreclosure action is taken against military families, regardless of how strict or lax applicable state laws may be. Further, the military member must have adequate representation at any such court hearing and cannot be found in default simply by failing to appear.

Other military members, including Jose of Dallas, have complained to ConsumerAffairs.com that Saxon Mortgage charged them interest rates higher than allowed by the SCRA.

Congressional criticism

The Saxon allegations are likely to add fuel to Congressional criticism of the banks and demands for additional investigations.

Sen. Jack Reed (D-RI) in January asked Attorney General Eric Holder to examine the incidents and Deleware Attorney General Beau Biden asked all banks to review mortgage practices to make sure they comply with the law.

"Soldiers who are fighting on the front lines to protect our country shouldn't have to needlessly fight with banks to protect their homes," Reed said.

In the House, lawmakers demanded hearings. “We believe a hearing on the mishandling of mortgages of active-duty military families, including an examination of whether the improper actions of JPMorgan Chase extend to other financial institutions as well, is critical," 40 House members said in a letter.

Other violations

Chase admitted in January that it overcharged thousands of military service personnel on their mortgages and wrongfully foreclosed on 14 active-duty families, despite a federal law that limits interest rates that can be charged to active-duty military and prohibits foreclosure actions against them.

"We made mistakes and we are fixing them," the bank said in a statement. "We feel particuarly badly about the mistakes we made here."

The bank said it is mailing about $2 million to more than 4,000 military families that were overcharged and said it has already resolved 13 of the 14 foreclosures.

Wells-Fargo last month agreed to settle a class action lawsuit that alleged the bank charged military veterans improperly high fees when they refinanced their mortgages. The bank, the nation's largest mortgage originator, will refund up to $10 million in fees to eligible military veterans who refinanced their mortgages with the bank.