Many Banks Dropping Interest for Reservists : Gulf War: Bank of America goes beyond the terms of a 1940 law, freezing loan payments completely.

Many banks are widening the terms of a 50-year-old law that slashes interest rates on many loans for military reservists on active duty by dropping interest charges altogether and putting off payment deadlines.

Under the Soldiers’ and Sailors’ Civil Relief Act of 1940, banks are required to reduce to 6% the interest on existing installment debt--including home mortgages, credit card debt and student loans--while reservists are on active duty.

But several banks have gone beyond the letter of the law. San Francisco-based Bank of America, the nation’s second-largest banking company, said loan payments for all qualifying reservists are frozen. Period.

Interest and principal payments need not be paid until the reservist returns from duty. When it comes to credit cards, reservists or their relatives can continue to charge purchases up to their credit limit, and any payments are made against principal only, spokeswoman Bernice Riordan said.

Wells Fargo & Co., based in San Francisco, also has suspended debt payments for active reservists. Spokesman Paul Elias said that so far more than 800 reservists have taken advantage of the program and that another 100 applications are pending.

At Chase Manhattan Bank, roughly 3,000 customers are enjoying lower interest rates, 2,000 of them credit-card holders, spokesman Ken Mills said.

Chase is giving reservists a break by holding interest on new credit card purchases to 6%. But other banks find that because accounts are computerized in huge batches, it is often easier to discount the interest entirely than to recalculate it at a lower rate.

To date, reservists make up about 15% of the 500,000 troops already stationed in the Persian Gulf, although more than 200,000 reservists have been called to active duty, Maj. Doug Hart said.

He had no idea how many reservists are taking advantage of the lower interest rates.

The law was designed to protect reservists from financial disaster while in the service. Mortgages are currently running about 10%, while personal loan rates can approach double that.

“Anybody who is experiencing any kind of financial hardship because of the difference between private sector and military pay will want to avail themselves of this opportunity,” said Mark Burneko, a spokesman for the American Bankers Assn. in Washington.

Experts say that since the reservists’ accounts are spread across many banks nationwide, the institutions are hardly affected.

Indeed, retired Rear Adm. Wendell McHenry Jr., executive vice president of the Assn. of Military Banks of America, said no member has complained that the act is “adversely affecting earnings.”

However, the Navy Federal Credit Union admitted losing some money under the law. A spokesman said that as of the end of December, the credit union was reporting about $27,000 a month in lost interest because of lower reservists’ payments.

Against annual net income of $50 million for the 1-million-plus-member credit union, “it’s not a major factor,” the spokesman said. But he said the depth of the expense will depend on the extent of the mobilization and the length of the war.