If you are an active-duty military member, the last thing you want is for you or your family to fall prey to unethical lending practices, hindering your ability to complete your service. Thankfully, the Military Lending Act provides protection and regulations to keep you and your loved ones on the road to financial wellness. Here, we provide the information you’ll need to understand this Act’s implications for you and your family.
The U.S. government implemented this act in 2006 to prevent service members from falling victim to unethical lending activities that could compromise their military readiness and adversely affect service member retention.
These “lending practices” can include
- Payday loans
- Motor vehicle title loans
- Tax refund anticipation loans
- Credit cards
- Deposit advance products
- Overdraft lines of credit (but not traditional overdraft services)
- Certain installment loans (but not those that finance a vehicle or personal property purchase when the credit is secured by the vehicle or personal property being purchased)
- Title Loans
For covered consumer credit transactions, the MLA regulation will “limit the amount a creditor may charge, including interest, fees, and charges imposed for credit insurance, debt cancellation and suspension, and other credit-related ancillary products sold in connection with the transaction.”
The MLA can provide a range of financial benefits for active service members. However, many borrowers have trouble understanding what the act covers and how they can protect it. Getting information and knowing your rights under the MLA is the first step to securing the financial security and peace of mind it has to offer.
If you or your family member is in military service, read more about the Military Lending Act and how it can benefit you.
What Is the Military Lending Act?
The Military Lending Act (MLA) places certain regulations on lending practices that involve active-duty service members. Specifically, the MLA protects military service members and their families from high-interest rates, finance charges, credit insurance premiums, mandatory arbitration, and other unethical lending practices.
Though the MLA first came into effect in 2006, the Department of Defense (DOD) added statutory amendments to the Act in 2013 and updated its regulations further in 2015. The MLA originally covered a narrow scope of unsecured loans, but today, the DoD requires several types of consumer loans to comply with the act’s regulations.
The United States government enacted the MLA to create extra protections for service personnel. Information collected in a Pew Charitable Trust study found that active service individuals tend to apply for high-interest credit at a comparatively high rate, and agreeing to these terms often hinders them from completing their military orders.
One of the primary roles of the MLA is to place a cap of 36% on service members’ annual percentage rates (APR). This interest rate cap, known as the Military Annual Percentage Rate (MAPR), ensures that service members do not fall victim to outrageous interest rates that would affect their ability to serve in active duty.
Along with establishing the military annual percentage rate cap, the MLA also limits all associated consumer loan costs, including products sold in connection with the credit, finance charges, credit insurance premiums or fees, and other participation fees. Additionally, the MLA prohibits:
- Prepayment penalties
- Mandatory arbitration
- Voluntary allotment
- Certain unreasonable notice requirements
- Certain types of rollovers, renewals, and refinancing
- Any agreement that would require you to waive your rights under state or federal law
Lenders who violate this act will receive penalties ranging from fees to prison time. Further, any credit agreements that do not adhere to MLA regulation are void from inception. The lender is responsible for getting information to determine if a borrower is in active service or has a family member.
What if an Active Member Cannot Qualify for an MLA Loan?
Sometimes service members have poor credit or other financial situations that make them unable to qualify for loans within MLA regulations. If this happens to you, you may be able to find assistance through military relief societies. These organizations provide financial counseling and small loans to military members, helping them through periods of economic hardships.
Not qualifying for a loan with APR below 36% indicates that a person may need assistance to work through long-term financial issues.
Evolution of the Military Lending Act
The Department of Defense enacted the Military Lending Act in 2006. Initially, the act only limited a small selection of unsecured, unethical forms of credit, such as payday, vehicle title, and refund anticipation loans. Since then, the DoD has added several refinements to the MLA to broaden its protection.
In 2013, the DoD added statutory amendments to the MLA that grant enforcement authority to certain federal agencies, such as the Consumer Financial Protection Bureau and the Federal Trade Commission. These amendments also require state regulators to supervise state-chartered financial institutions.
In 2015, the DoD announced several revisions to MLA regulation. These revisions extend the MLA to include a broader range of credit products and alter the MAPR to include certain fees. The DoD added these revisions to counter the high rate of active members who fall prey to predatory lending and high-interest credit.
Though the pre-revision act covered several forms of unethical credit practices, members and their families still had access to high-cost credit. For example, the previous regulations applied to payday lenders with fewer than 91 days. To counteract these regulations, lenders offered terms of 92 days, and military members still fell victim to these transactions.
The DoD added an interpretive rule to the MLA in 2017 that includes dependents and family members in the act’s protections. Additional interpretive rules could come about in the future to further specify regulation.
Who Is a Covered Borrower in the Military Lending Act?
Covered borrowers of the Military Lending Act include active-duty service members of the U. S. Armed Forces:
- Coast Guard
- Marine Corps
- Air Force
Service members are only eligible for MLA benefits after completing 30 days. Along with active-duty service members, the act also covers these members’ dependents, including their spouses, children under 21 years old, full-time students under 23, and children with severe mental or physical disabilities.
Though the Department of Defense enacted the policy, each lender is responsible for determining a borrower’s eligibility. Lenders can determine your eligibility through the Department of Defense’s MLA official website when you open your account or complete your transaction.
A lending institution may ask for your tax identification number, military ID, and military orders to determine if you fall under the MLA.
What Loans Does the Military Lending Act Cover?
The Military Lending Act covers all forms of consumer credit that appear in the Truth in Lending Act of 1968. Specifically, consumer credit that must comply with the MLA includes the following:
Payday loans are small, short-term loans with uncharacteristically high-interest rates. Traditionally, borrowers seeking these loans would write a postdated check to the payday lender in exchange for part of their payday sum. Borrowers often utilize these loans to get advances on their paychecks.
Per the MLA, payday lending institutions cannot issue these loans to active military members unless they adhere to the MAPR of 36%.
Pawnshops offer secured loans that utilize your personal property as collateral. To receive this type of loan, you would take something you own to the pawnshop. If the shop is interested in your personal property, they offer you a small fraction of the item’s value in the form of a loan.
Once you receive a pawn loan, you must pay back the balance within a certain time frame or risk the pawnshop keeping and selling your item.
Because pawn loans fall under the MLA, lenders must adhere to this act’s interest rate and fee requirements.
Overdraft Lines of Credit
An overdraft line of credit is a loan that your bank may add to your checking account. If you do not have enough money to pay your credit card bill, this loan can cover your expenses and help you avoid missing payments. As with other forms of unsecured credit, banks must adhere to MLA regulations when offering checking lines of credit.
Deposit-advance loans are similar to payday loans because they charge high-interest rates and have short repayment terms. However, when a bank lends you a deposit-advance loan, it will automatically pay itself back as soon as it receives a deposit into your account.
Unscrupulous lenders charge outrageous interest rates of upwards of 400% APR. But the MLA prohibits them from implementing interest above the 36% rate.
Vehicle Title Loans
Vehicle title loans are secured loans that utilize your vehicle as collateral. When borrowers take out this loan, they must temporarily surrender a hard copy of their vehicle title to the lender. Like other fast forms of credit, this loan tends to have high fees and APR, which is why it falls under the MLA.
Tax Refund Anticipation Loans
A tax refund anticipation loan is a way for taxpayers to receive their tax refunds faster through a loan that charges high-interest rates and fees. A third-party company—not the IRS—provides these refund advances, and these companies are also subject to MLA regulations.
An installment loan is a lump-sum loan with fixed terms, including a fixed interest rate. Borrowers repay an installment loan through several payments over time, which may amount to anywhere from 30 days to 30 years.
Loans the MLA Does Not Cover
While the Military Lending Act covers a wide range of unsecured credit forms, the Consumer Financial Protection Bureau specifies that this act excludes a few types of consumer-secured loans. More specifically, the MLA does not cover credit that utilizes purchased property as collateral, including:
- Home equity
- Home equity lines of credit
- Auto loans secured by the motor vehicle
- Mortgage Refinancing
- Personal property purchase loans secured by the property
The MLA generally does not apply to any credit transaction intending to purchase personal property—including vehicles and goods—when that property secures the loan.
Under certain circumstances, the MLA may also exclude application fees for short-term, small-amount loans.
However, the Federal Register specifies that the Military Lending Act cannot override other existing state or federal laws. If several laws coincide, the most protective one will take effect.
What is the Difference Between the Military Lending Act and SCRA?
Some confuse MLA and the Servicemembers Civil Relief Act (SCRA). The SCRA has a much longer history than the MLA, as it first came into effect in 1918 and received updates in 1940 and 2003. However, while these acts have a few similar regulations, they vary in what and who they cover.
The SCRA covers all seven military branches: Army, Navy, Marines, Air Force, Coast Guard, National Oceanic, Atmospheric Administration, and Public Health Service. This coverage includes members under call-up orders for more than 30 days.
However, the MLA covers each branch except the National Oceanic and Atmospheric Administration and Public Health Service. In both acts, dependents may receive coverage under certain circumstances.
The MLA protects military members and their covered dependents if they are on active duty. For example, the MLA will apply to their transaction if an active service member wants to take out an installment loan.
In contrast, the SCRA protects service personnel retroactively once they begin active service. For example, if a service person takes out a credit line and becomes active military, the SCRA will apply once they begin their service.
The SCRA also has a much lower interest rate cap than the MLA. While the MLA limits total APR and fees to 36%, the SCRA caps interest at 6%.
Both of these acts offer protection for active military personnel, and combining their benefits means you can secure lower rates on past and present transactions.
Are Consumer Credit Cards Covered Under the Military Lending Act?
The Department of Defense added credit cards—deposit advance products, overdraft lines of credit, and certain installment loans—to MLA regulation in July 2015.
As a result, credit card companies must comply with the MLA alongside other credit unions and financial institutions. The MLA only covers cards that financial institutions have issued since the amendment in October 2017. Still, service members may be eligible to receive rate reductions on existing cards through the SCRA.