What is the Military Lending Act (MLA)?
The Military Lending Act (MLA) went into effective in 2006. It’s designed to protect active duty military members and their dependents from bad lending practices. Ones that take advantage of their finances.
The Military Lending Act gives special protections to active duty service members, to include:
- A Military Annual Percentage Rate, or MAPR, cap of 36% for consumer loan products. That number includes costs such as finance charges, credit insurance premiums and various fees.
- Banning early repayment penalties for paying back part or all of your loan.
- Prohibiting lenders from forcing servicemembers into mandatory arbitration. Or giving up other legal rights they have as servicemembers under state or federal law. One example is the Servicemembers Civil Relief Act.
- A creditor can’t require you to create a voluntary military allotment to get the loan. An allotment is an automatic amount of money taken from your paycheck to pay back your loan.
The Department of Defense since has added additional rules to include more types of loans and credit cards.
Who’s covered by the Military Lending Act?
Active duty members of the Army, Navy, Marine Corps, Air Force, and Coast Guard are fully covered by the act if they’re serving for more than 30 days.
Active National Guard or National Guard reserve duty and National Guard troops serving on Title 10 orders.
Dependents such as spouses, children younger than 21 years old and full-time students younger than 23 are covered. Children of any age may also qualify as a dependent if incapacitated.
Military dependents are specifically defined under MLA as follows:
- Children under age 21
- Children under age 23 enrolled full-time at an approved institution of higher learning and dependent on an MLA-protected military member for at least half of their support
- Dependents of a covered member who has died and was providing at least half the dependent’s support
- Children of any age with mental or physical incapacity that occurred while being dependent on the covered member under certain circumstances including receiving at least half support from the MLA-covered member
What loans are covered under the Military Lending Act?
Government officials wanted to give active duty service members extra protections because of the high rate of military personnel who had taken out small loans to bolster their finances. A 2013 Pew Charitable Trust study found that 5.9% of payday loan and auto title loan borrowers lived in a household with a service member.
The Military Lending Act originally applied to certain payday loans, vehicle title loans and tax refund anticipation loans with certain terms.
In 2015, new rules updated the act to include new types of consumer loans. Some examples include:
- Payday loans. Short-term loans for $500 or less that must be repaid when borrowers receive their next paycheck. They often come with high fees and interest rates and can lead to financial hardship.
- Deposit advance loans. These are similar to payday loans except banks pay themselves back automatically when the next electronic deposit lands in the borrower’s account. Deposit advances charge fixed fees that are usually much more expensive than other forms of credit.
- Overdraft lines of credit. An overdraft line of credit is a loan attached to your checking account. If you run out of money and you’re approved by your bank for this type of add-on. The line of credit can cover expenses so that you don’t bounce checks, miss payments, or have your debit card denied.
- Vehicle title loans. This allows borrowers to use their vehicles as collateral and receive short-term loans. These loans typically have higher interest rates and shorter loan terms than most loans, making them very risky.
- Installment loans. Allow borrowers to get a set amount of money that they can repay in installments. However, they’re excluded loans.
What is not covered under the Military Lending Act?
The Military Lending Act covers many loans, but there are exceptions. The most notable are loans secured by property that’s purchased such as home mortgages and auto loans.
Loans excluded from the Military Lending Act include:
- Residential mortgages to buy or build a home
- Mortgage refinancing loans
- Home equity loans or lines of credit
- An auto loan that’s secured by the vehicle purchased
- Personal property purchase loans secured by the personal property purchased
The MLA protections do not extend to lines of credit used for business, agriculture, or commercial purposes. They do not cover lending to an institution or agency. The Military Lending Act protections are only intended for “natural persons” and not corporations or other entities which may have legal “personhood” status under the law.
How to determine eligibility to a lender?
It is the responsibility of the lender to determine whether you fall under the Military Lending Act. If you think you’re covered by the MLA, familiarize yourself with your rights under the act beforehand. If you have an issue getting covered, you can visit the Legal Assistance Office.
Lenders can determine on their own but can also access the Department of Defense’s database online. They must maintain a record of your information.
They should determine your eligibility at the time you open your account or complete your transaction or 30 days before. If you receive a firm offer of credit as a covered borrower, you must respond within 60 days or the lender has to re-establish you are still covered.
If you’re protected under the Military Lending Act. A lender must give you specific written and oral disclosures such as the military annual percentage rate, or MAPR. Also, a clear description of the payment obligations.
What penalties do Lenders face?
If your rights under the Military Lending Act have been violated, file a complaint with the Consumer Financial Protection Bureau.
If a lender issues a loan that violates the Military Lending Act. It will be void from its inception.
If a lender knowingly violates the act, punishments are much stiffer. The lender will be charged with a misdemeanor that could lead to fines and even prison time.
If you are a service member, you need to familiarize yourself with the Military Lending Act before you take out a loan. Getting information about your financial rights will help you select the right products and lenders.
Another tidbit about the MLA. The Federal Register points out that the Military Lending Act does not override other existing laws. That includes state and federal laws that offer “greater protection to covered borrowers than the protections provided by the Military Lending Act.” That means there are plenty of laws to protect you and the Military Lending Act is one of many.
Learning about your rights will not only benefit you but others.