By Carol Church
What is the Military Lending Act?
The original Military Lending Act was passed in 2006. It was created to protect service members from predatory lenders who may target these young and somewhat unsophisticated consumers. Unfortunately, the combination of a steady income and lower financial literacy can make service members prone to financial exploitation, such as when lenders charge very high interest rates.
The act’s protections are powerful because the US government has a vested interest in protecting its military from predatory lending practices. Predatory lending can negatively affect military readiness and create security risks, such as when a service member becomes prone to illegal behavior due to anxiety about debt.
Because lenders found ways around the original MLA, it was updated. New provisions went into effect in October 2017.
What types of loans does the MLA cover?
- Credit cards
- Payday loans
- Car title loans
- Tax refund anticipation loans
- Deposit advance loans
- Installment loans
- Unsecured open-end lines of credit
What types of loans are NOT covered under the MLA?
- Car loans
Who does the MLA apply to?
Active duty service members (including those on active Guard or active Reserve duty) and their dependents, including spouses, children under age 21, children under age 23 who are attending college, and children of any age who are unable to support themselves due to disabilities.
What are the MLA’s protections?
- Interest on covered loans is capped at 36% APR, which includes regular APRs as well as annual fees, application fees, finance charges, service fees, and credit default insurance.
- The idea behind this rule was to cap APRs while also protecting service members from products that advertise a low APR that is then made much higher by added fees. However, some fees, such as late payment fees, are considered typical and expected, and will not be included when making these calculations.
- Those covered may not be required to enter into mandatory arbitration.
- Many lenders require borrowers to sign papers agreeing to settle any problems through mandatory binding arbitration rather than through the court system. This rule means that service members do not have to do this if they don’t want to.
- Those required cannot be required to give up rights they have under consumer protection laws, such as the Service Members’ Civil Relief Act.
- Those covered cannot be charged a prepayment penalty for paying off their loans early.
- Those covered cannot be forced to repay loans via military paycheck allotment.
- An allotment takes money out of your military paycheck automatically, before any money gets to you.
Who is responsible for making sure the rules are followed?
The loan originator is responsible for determining whether borrowers are service members and for making sure that the rules are followed.
Are there any downsides?
A few people think so, yes. Because the MLA caps APRs, it makes it difficult for certain types of lenders, such as payday loan originators and pawnshops, to make money. Normally, these lenders would charge interest rates in excess of 36%. Rather than lower their APRs, in some cases, these businesses may simply refuse to do business with service members. This issue is still in flux.
What should service members do if they think their rights under MLA are not being respected?
Service members concerned about this can contact their local JAG office.
Consumer Financial Protection Bureau. (2016). What are my rights under the Military Lending Act? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-are-my-rights-under-the-military-lending-act-en-1783/
Hudson Cook LLP. (2016). Uncle Sam Wants YOU to Comply with the Military Lending Act. Retrieved from https://www.lexology.com/library/detail.aspx?g=492746e8-8b3e-4cb9-9899-8ba924af01eb
Meyer, B. The Military Lending Act – What You Need to Know. Retrieved from https://www.cudirect.com/blog/the-military-lending-act-what-you-need-to-know/
US Department of Defense. (2015). Department of Defense Issues Final Military Lending Act Rule. Retrieved from https://www.defense.gov/News/News-Releases/News-Release-View/Article/612795/