A little-known 1940 law stands to pay off more handsomely for home-owning military reservists called up for active duty in the Persian Gulf than for their counterparts who rent.

The 50-year-old law, which critics claim is as outdated as it is obscure, puts a cap on the interest rate on existing mortgages, home equity credit lines and second mortgages held by qualifying reservists at 6 percent. Consequently, lenders must forgive any interest due above 6 percent for as long as the reservist remains on active duty.

However, word of the credit relief provisions in the Soldiers and Sailors Civil Relief Act has been slow to reach eligible borrowers. Meanwhile, the lending industry, caught equally unaware, is still trying to sort out how to respond.

By Oct. 1, 46,700 of the 1.17 million civilians who belong to the U.S. reserves and the National Guard will report for active duty on orders of President Bush.

Many of these men and women will receive anywhere from 24 hours to two weeks notice to make an abrupt change in their lives that could throw their financial affairs into disarray, especially if their military pay is less than they are earning in civilian life.

The 1940 law, which has remained unchanged over the years, was originally intended to protect the volunteer service members from the possibility of having to pay much higher interest rates at a time when prevailing rates were closer to 4 percent.

Consequently, reservists who bought their homes over the past decade may find their fixed- or adjustable-rate mortgage payments reduced by hundreds of dollars a month, depending upon their current interest rate and the size of the loan. On a 10 percent, $80,000 mortgage, for example, the savings totals $480 a month.

Renters, however, do not receive any equivalent reductions in their rent payments, said Army Capt. Jessica L. Kole, a legal assistance attorney at the Pentagon.

The law acts as "an umbrella, but it has got holes in it," particularly in the case of renters, Kole acknowledged. "It is going to keep the floods out but you are still going to get wet."

The law simply allows renters to break their leases without penalty and makes it harder for landlords to evict an active duty reservist's family from lower-rent homes.

Last week, the National Apartment Association, a landlords' group, adopted a resolution asking its 45,000 members to "not cause any financial burden" for reservists on the original terms of their lease agreements or on rent increases.

Although the law may be less generous to renters, Adm. Bennett S. Sparks, deputy executive director of the Reserve Officers Association of the United States, said, "You have to remember the times. It was World War II and rent was $26 a month. No one has taken the time in the U.S. Congress in 50 years to update this thing."

Congress is scheduled, however, to take another look at the law at a hearing Wednesday before a joint House and Senate committee.

Some financial interest groups that have been asked to testify said someone is likely to raise the appropriateness of the 6 percent mortgage cap in light of today's higher interest rates, but all said their organizations are not eager to do so, lest they seem self-serving at a time when reservists and others are being asked to make sacrifices by serving overseas and potentially going to war.

By many accounts, reservists are still learning that they are entitled to the benefits. Betty and Tom Rosebrock, both reservists, are a case in point.

The couple, who are paying 9.5 percent interest on the mortgage for their $114,000 Columbia, Md., home, said what little they knew about the 6 percent cap came from news reports.

Although neither has been called up yet, Betty Rosebrock said they would "absolutely" take advantage of the 6 percent cap "if we were allowed to do it," even though they do not expect their incomes to drop. "Every little bit helps," she said.

The lending industry, for its part, is scrambling to figure out how to handle the unexpected situation. The credit relief provisions surprised many lenders because the last major deployments of reserves occurred during the Vietnam War. During the 1968 Tet offensive, 35,000 reservists were activated. Another 26,000 received the call in 1970.

At that time, however, interest rates rarely exceeded 6 percent and many reservists had not reached the prime home-buying years, lending industry officials said.

With no single government agency in charge of implementing the law, several lenders said they are expecting reservists to notify them of their eligibility for the 6 percent rate and provide proof of their active status. But nothing in the law requires that.

Consequently, lenders should exercise "extra care" to find out if any unexpected shortfall in a mortgage payment is due to a reservist taking advantage of the 6 percent cap, said Robert J. Engelstad, a senior vice president with the Federal National Mortgage Association (Fannie Mae), which buys and sells loans on the secondary market. Only after that possibility is eliminated, he said, would he advise lenders that sell mortgages to Fannie Mae to begin the normal process of sending late notices and starting foreclosure proceedings.

The law does give lenders a way out if they can prove in court that a reservist is ineligible for the 6 percent rate because the active duty does not pose a financial hardship.

Some lenders have concluded that by launching such a challenge they would look decidedly unpatriotic, while the cost of court action has dissuaded others from pursuing it, said Ronnie J. Wynne, president of the Mortgage Bankers Association of America.

Nonetheless, the Federal Home Loan Mortgage Corp. (Freddie Mac), which influences the policies affecting about 1 in 8 mortgages in the United States, "does not want to give up any of our rights," said Henry Cassidy, a senior vice president with the company.

However, Cassidy added, his company will not automatically pursue the income question, but will instead rely "first and foremost on the integrity of the service man or woman."

Both Freddie Mac and Fannie Mae have also instructed their lenders to apply "extreme forgiveness" in cases where reservists cannot handle mortgage payments lowered to a 6 percent interest rate. The law allows borrowers to petition for such relief in court, but Fannie Mae has told its lenders "that should not be necessary," Engelstad said.

Another gray area concerns new mortgages settled after a reservist goes on active status. The question of whether these loans are eligible for the 6 percent cap is particularly tricky in the case of home equity credit lines, a product that did not exist when the law was written, said Marcia Sullivan, senior legislative counsel for the Consumer Bankers Association.

Money borrowed against the equity line before the activation date clearly qualifies for the rate break. However, withdrawals made after that date could be construed as new loans, even though the borrower received approval at the outset, backed by a lien against the reservist's home, to eventually borrow such sums of money, according to Sullivan.

The major uncertainty embroiling the lending industry, though, is who will absorb the difference between the 6 percent rate and the borrower's current rate.

"It is like a feeding frenzy to figure out who is responsible," said David L. Moskowitz, general counsel for Perpetual Mortgage Corp., the Washington area's largest mortgage lender.

The question was partially answered last week when Fannie Mae and Freddie Mac announced that they, rather than their lenders or investors, would absorb the loss. The companies, which between them account for a quarter of the outstanding mortgages in the United States, would not disclose how much the new policy would cost them, but the total may be about $308,000 a month for each of them, based on assumptions about their market shares, average loan amounts and interest rates and the number of reservists involved.

The loss will come out of the companies' earnings. During the first six months of this year, Fannie Mae reported $566 million in earnings and Freddie Mac posted net income of $229 million.

Lenders that made mortgages backed by the Federal Housing Administration or the Department of Veterans Affairs will have to assume the losses themselves. Lenders that hold mortgages rather than sell them will likewise swallow the cost.

In the case of jumbo mortgages -- those that exceed $187,450 -- the Residential Funding Corp., which buys loans and packages them for sale as securities on secondary loan market, is passing the loss on to the companies and individuals that invest in its mortgage-backed securities.

"I don't think this hit is going to be a major problem for lenders," Wynne said. "Only if {the Persian Gulf crisis} goes on for a prolonged period of time could it have a major impact."