Military Lending Act

The Military Lending Act (MLA) became effective in 2006. It is designed to protect active duty military members, spouses, and dependents for certain lending practices. Particularly those that “pose risks for service members and their families, and could pose a threat to military readiness and affect servicemember retention,” according to the FDIC official site.

There are many different types of lending, credit, and lines of credit. A borrower is often left feeling at the mercy of the fine print on some loan agreements. The fine print may contain one or more clauses that are not beneficial to the borrower who does not know about them. Penalties for early payoff, loan rollovers, and even some kinds of refinancing may not be in the borrower’s best interests.

There are consumer protections for some of these issues. Military members and their families have added benefits in this area due to the passage of a federal law that restricts certain lending practices for active duty service members and their families.

Such protections cap interest rates. They prevent requiring a military borrower from being forced to submit to arbitration in lending. Additionally, they prevent lenders from using certain “gotcha” tactics to prevent early payoff of a loan product.

The National Consumer Law Center (NCLC) official site notes that the original 2006 version of the MLA was fairly limited by comparison to the later updates.

The NCLC site states that the MLA was “sharply restricted” by Department of Defense regulations limiting MLA coverage of consumer credit to “certain payday, auto title pawn, and refund anticipation loans.”

There were new rules in 2015 that expanded protections to include nearly any form of credit. At least those covered under the Truth in Lending Act aside from mortgage loans and “purchase money” loans, credit cards, and other forms of open-ended credit. There are also protections in place to prevent creditors from skirting the rules based on literal interpretations of the “consumer credit” definition.

The MLA Changes Over Time

There have been multiple refinements of the Military Lending Act including a 2015 Final Rule, and the 2016 Interpretive Rule of the MLA. A 2017 Interpretive Rule included dependents and family members (see below) into the protections offered under the law. The 2017 Interpretive Rule includes the following language:

“This interpretive rule does not change the regulation implementing the MLA, but merely states the Department’s preexisting interpretations of an existing regulation.” That is an important detail to keep in mind as future Interpretive Rules are possible.

Who Is Covered Under The MLA

The Military Lending Act applies to the following qualifying individuals:

• Active-duty military personnel
• Active Reserve
• National Guard troops serving on Title 10 orders
• *Dependents with a valid military identification card

The MLA has an active duty requirement of more than 30 days. Military dependents are defined as those who receive “over half support for 180 days immediately preceding an extension of credit,” according to the National Law Review.

The MLA does not cover military retirees, unless they are also dependents of a borrower who is eligible for protections under the MLA. Same-sex spouses and certain unremarried former spouses may also be covered under MLA.

*Military dependents are specifically defined under MLA as follows:

• Spouses
• Children under age 21
• Children under age 23 enrolled full-time at an approved institution of higher learning and dependent on a 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

When The Military Lending Act Applies to Eligible Borrowers

MLA’s restrictions apply to the protected accounts opened while the service member or family members are eligible. The protections do NOT apply when the consumer is no longer covered under the MLA.

The debts affected by MLA must be incurred while the borrower is eligible for the protections. For example, the borrower who retires or separates from military service would stop being covered under MLA once the nature of their military status no longer permits them to such protections.

What Is Covered Under The MLA

The MLA has gone through more than one set of changes. In 2016, the alterations included expansion of MLA protections to a larger variety of credit. Coverage under MLA can be quite specific, as we will examine below:

• Payday loans
• Deposit advance type lending
• Vehicle title loans
• Overdraft lines of credit but not traditional overdraft services

Certain types of installment loans are also covered. The Consumer Financial Protection Bureau reminds us that some types of lending (including certain installment loans) may not fall under the coverage provided by the MLA. That lending is basically known as a “collateralized loan.” This means that the loan is secured by what is purchased by the loan such as a car or a house.

The list of loans not covered by MLA requirements includes but may not be limited to the following:

• Residential mortgages to build a home
• Residential mortgages to buy an existing property
• Mortgage refinancing loans
• Home equity loans or lines of credit
• Reverse mortgages
• Auto loans when secured by the motor vehicle purchased with the loan
• A loan to purchase personal property when the loan or line of credit is secured by the property purchased including appliances, etc

There are exceptions to this “no coverage” rule. Any collateralized loan where a creditor “simultaneously extends an additional cash advance beyond the purchase price of the securing personal property” IS COVERED under MLA and is NOT included as an exception to MLA coverage.

Another exception is a credit transaction that also pays for “a credit-related product or service rather than a product or service expressly related to the motor vehicle or personal property.” This transaction type is definitely covered under MLA protections.

Borrowers should be very concerned about the details of these transactions. Know the specific nature of the credit your are applying for, how it may be affected by MLA requirements, and when your transaction is NOT MLA protected.

What Is Not Covered Under The MLA

The Military Lending Act does not apply in situations where the consumer is not an MLA protected borrower at the time the credit obligation is established. MLA protections do not extend to credit accounts or transactions beyond the limitations of the act.

That means that an account that is protected today is NOT protected once the borrower stops being covered under MLA due to a change in active duty status, retirement, or separation from the military.

Your MLA protections and the MLA coverage offered to family members are contingent on continued eligibility under the program. Once eligibility stops, protections stop also.

Business Lending And The MLA

MLA protections do not extend to lines of credit used for business, agriculture, or commercial purposes. MLA protections do not cover lending to an institution or agency. MLA protections are only intended for “natural persons” and not corporations or other entities which may have legal “personhood” status under the law.

Your Rights Under The Military Lending Act

Many consumer protection oriented websites, including the U.S. government’s own Consumer Financial Protection Bureau official site, provide lists of the protections offered to service members and their families through MLA.

• 36% Annual Percentage Rate cap
• Certain finance charges
• Certain credit insurance premiums/fees
• Add-on products sold in connection with credit
• Application or participation fees and related charges (exceptions may apply)

There are some important additional rights you should be aware of as a consumer. Under the MLA your creditors cannot force you to submit to mandatory arbitration. You cannot be required to waive your consumer protection rights under state or federal law.

MLA protected borrowers cannot be required to create a “voluntary allotment” to be approved for a loan. There is no early payoff penalty allowed.

MLA protections also restrict lenders from doing certain types of loan rollovers, refinancing, or renewals.

Creditors cannot require the borrower to provide access to any bank account used by the borrower as a condition of credit approval. Creditors are also forbidden from obtaining payment from a “remotely created” payment order.

They also cannot require you to provide a post-dated check as a condition of loan approval. They are also forbidden from taking the liberty of generating such a check or other form of payment using borrower supplied financial information.

These protections do not prevent a borrower from voluntarily offering an allotment or transfer of funds. This is “provided that it is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation.” This includes the 36 percent interest rate cap on the loan.

A Very Important Caveat About The Military Lending Act

The official website of The Federal Register points out that the Military Lending Act cannot and does not override other existing laws. That includes state and federal laws, rules, and regulations which offer “greater protection to covered borrowers than the protections provided by the MLA.”

The Federal Register cites an example which states that although the MLA regulation “does not prohibit borrowers from conveying security interests in all types of consumer credit covered by the regulation.” To include credit card accounts, these accounts may also be subject to other laws, rules and regulations governing offsets and security interests. The more “protective” law will apply in such cases.