Financial Protections and the Military Lending Act
Increasingly concerned about predatory lending practices targeting members of the military, Congress enacted the Military Lending Act (MLA) in 2006 to protect active-duty service members from unscrupulous lenders. This federal law initially covered only direct personal loans but has since been expanded to cover other consumer credit transactions. It also covers things like payday loans, application fees, and credit insurance premiums.
The MLA does not apply to the general public. Only active-duty service members (including active Guard Reserve), their spouses, and certain dependents are covered. You can check whether you are currently covered through the Defense Manpower Data Center (DMDC) website. Read on for a brief introduction to the MLA.
What Loans Are Covered by the MLA?
The MLA protects against “creditor[s] who extend consumer credit to a covered member of the armed forces or a dependent . . . ." "Consumer credit" is defined as “credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is:
- Subject to a finance charge; or
- Payable by a written agreement in more than four installments."
Though this language initially had a narrow interpretation, Department of Defense (DoD) regulations have significantly expanded its meaning over the years. The MLA now covers a much wider variety of credit products, including things like:
- Payday loans
- Motor vehicle title loans
- Tax refund anticipation loans
- Credit cards
- Student loans
- Deposit advance products
- Vehicle title loans
- Overdraft lines of credit (traditional overdraft services are excluded)
- Certain installment loans and refinances
Credit agreements issued in violation of the MLA are void from the moment they are entered.
What Loans Are Not Covered by the MLA?
Again, the Military Lending Act covers a wide variety of consumer credit transactions. This is reflected in current DoD regulations, which instruct that the MLA should be interpreted where possible in alignment with Regulation Z of the Truth in Lending Act.
However, there are important exceptions to this general guideline. Unlike Regulation Z, the MLA does not apply to the following types of loans:
- Residential mortgages, reverse mortgages, and home equity loans
- Loans financing the purchase of a motor vehicle (motor homes, recreational vehicles (RVs), golf carts, or motor scooters do not count)
- Loans financing the purchase of personal property where the loan is secured by the purchased property
Other Key Provisions of the MLA
The MLA is a complex piece of consumer-protection legislation and covers lots of ground. This section highlights some of the most important protections it offers service members shopping for credit-related products:
- Interest Rate Cap —The MLA caps interest rates offered to protected individuals. Specifically, a creditor may not charge a rate exceeding 36%, which is calculated at an annualized rate known as the Military Annual Percentage Rate (MAPR). The 36% cap applies to both closed-end and open-end credit.
- Oral and Written Disclosures —The MLA requires that lenders disclose annual interest rates verbally and in writing. They must also provide a clear description of the payment obligations.
- No Prepayment Penalties — Lenders are prohibited from imposing a penalty or charging a fee for prepaying a loan in part or in full.
- No Mandatory Arbitration - The MLA prohibits lenders from forcing service members into mandatory arbitration when resolving disputes.
- No Waiver of Rights — Protected individuals cannot be forced to waive their rights under state and federal consumer protection laws.
Penalties for Violating the MLA
The MLA is implemented primarily by the DoD. It is also enforceable by other government agencies, such as the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).
Violations of the MLA are classified as misdemeanors. Penalties include fines, imprisonment for up to one year, or both. Violators may also face civil liability. The MLA explains that victims may broadly pursue:
- Any actual damage sustained as a result, but not less than $500 for each violation
- Appropriate punitive damages
- Appropriate equitable or declaratory relief
- Any other relief provided by law
Again, loans and other credit transactions issued in violation of the MLA are subject to automatic cancellation. Victims may also recover the costs of their lawsuits, including attorneys' fees.
The deadline for filing a claim is two years from the date the underlying violation is discovered. However, the violation must be discovered within five years.
Other Protections for Service Members
In addition to the MLA, there are many other federal and state laws in place to protect consumers against unfair lending practices. This section introduces two of the most prominent at the national level:
The Truth in Lending Act (TILA) —This law protects consumers by forcing lenders to make certain disclosures before entering a wide variety of credit transactions. The TILA is implemented through Regulation Z by the Federal Reserve Board. The law applies to things like mortgages, vehicle loans, credit cards, and other consumer loans. Unlike the MLA, its protections are available to the general public.
The Servicemembers Civil Relief Act (SCRA) — This law postpones or eliminates certain civil obligations for service members. This ensures that individuals entering active duty can devote their full attention to their duties in the military. The SCRA provides many protections, including:
- Protection against default judgments,
- Stays of court proceedings,
- Stay or vacation of execution of judgments, attachments, or garnishments,
- Tolling of most statutes of limitations,
- Interest rate caps (at 6%) for debts incurred prior to active duty service,
- Early termination of leases, and
- Mortgage foreclosures.
Dealing With an MLA Violation? Consult an Expert
Service members enjoy many legal protections when transacting with banks, credit unions, and other lenders. The most robust protections come under the Military Lending Act. Other protections exist in laws like the TILA and the SCRA. Navigating these laws can be complex, and it may be wise to consult with an experienced attorney. Findlaw's military lawyer directory can help.
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