What is the Military Lending Act?

The Military Lending Act protects active-duty military members and their families from high-interest and costly consumer lending practices. Its major provision is that it caps the amount of combined interest and fees that can be charged on certain types of credit and loans at 36%.

The Military Lending Act became law in 2006 after a U.S. Department of Defense study found that active-duty military members were prime targets for predatory consumer lenders. Service members in debt are under added pressure, since bad credit can mean losing security clearance. The study found that excessive debt among members of all military branches was a distraction that was having an impact on morale.

The original Military Lending Act targeted payday, vehicle title and tax refund anticipation loans. The MLA was revised in 2013 to give more enforcement authority to government banking and credit oversight agencies.

In 2015, after some lenders found ways around MLA requirements, it was expanded and, besides the high-interest loans it originally covered, it now covered credit cards, deposit advance products, overdraft lines of credit, and some installment loans.

Besides capping interest and fees, the Military Lending Act also requires creditors disclose to borrowers the cost of a loan or credit. It prohibits requiring borrowers to waive their rights under state and federal law, has restrictions on features like mandatory arbitration requirements and automatic rollovers, prohibits features like mandatory arbitration clauses, and restricts loan rollovers and renewals.

Who Does the Military Lending Act Apply To?

The Military Lending Act applies to members of the U.S. Army, Navy, Air Force, Marine Corps and Coast Guard, National Guard and Reserve members who are on active duty for more than 30 days.

Military dependents who qualify for MLA protection are:

• Spouses
• Children under 21
• Children under 23 who are enrolled in college full-time and dependent on a covered member for more than half of their support
• Children of any age who are incapable of self-support because of mental or physical incapacity that occurred while still a dependent child.

To qualify for the MLA, a family member must be enrolled with the Defense Enrollment Eligibility Reporting System (DEERS), the database where military families apply for benefits.

Safe Harbor for Creditors

Lenders who violate the Military Lending Act can be penalized, but the safe harbor clause protects them.

Originally, a military members could assert in writing that they were not covered by the MLA, and could therefore qualify for loans or credit that didn’t meet the law’s requirements. This gave creditors a “safe harbor,” to avoid penalties. The MLA has since been revised, and only creditors who use the Department of Defense data base or a consumer reporting agency to identify active-duty members qualify for the safe harbor provision.

What Are Your Rights Under the MLA?

The Military Lending Act does more than just limit high interest and fees, it also makes sure that lenders disclose costs and not add features that can drive them up. Some of these include:

• A creditor must disclose verbally and in writing how much the loan will cost the borrower.
• A 36% cap is set on interest; finance charges; credit insurance premiums; credit product add-ons; application, participation and debt consolidation fees (known as the Military Annual Percentage Rate, or MAPR).
• A creditor can’t require a borrower to waive legal rights established by federal and state law.
• Costly features like rollovers and automatic renewals are restricted.
• A creditor can’t require an MLA borrower to create an allotment in order to get a loan.
• A creditor can’t charge a penalty on borrowers who pay back a loan early.

What Types of Loans Are Covered Under the MLA?

Besides high-interest payday loans, as well as vehicle title and tax refund anticipation loans covered in the original MLA, the 2015 revisions added all credit covered in the Truth in Lending Act, including:

• Credit cards (applies to accounts opened after Oct. 3, 2017)
• Pawn loans
• Some installment loans (though not secured loans)
• Open-ended credit
• Overdraft lines of credit (though not other overdraft services)
• Some student loans
• Military debt consolidation loans (a home equity cash-out loan for those with a VA mortgage)

What Types of Loans are Not Covered Under the MLA?

The Military Lending Act does not cover all types of loans, for instance, those secured by using the item being bought as collateral.

Loans not covered by the MLA:

• Home mortgages, including home equity loans and lines of credit, refinancing and reverse mortgages.
• Motor vehicle loans when the vehicle being bought is used as collateral.
• Loans and financing in which the item being bought is used to secure the loan, for instance, loans to buy furniture or appliances.

Only Qualified for Credit Not Compliant with the MLA?

Because of the Military Lending Act’s 36% cap on interest, service members with poor credit may not qualify for MLA-covered loans. Creditors who make loans to service members that don’t meet MLA requirements can be penalized, which may leave service members who need to borrow money with nowhere to turn.

On the other hand, this situation is likely a signal that the potential borrower is struggling with problem debt. Military members who find themselves with too much debt to qualify for Military Lending Act loans or credit should consider nonprofit debt counseling.

There is no charge for a session with a nonprofit debt counselor, who will review your financial situation, help you develop a budget and discuss debt management options.

A counselor may suggest a nonprofit debt management plan. The nonprofit debt management company works with creditors to reduce interest rates, and credit card and other debt payments are consolidated into one monthly payment that you make to the agency. The agency pays your creditors. Nonprofit debt management takes 3 to 5 years to complete.

Or, you may qualify for nonprofit credit card forgiveness, in which you pay 50-60% of your balance in fixed payments over 36 months. What’s left after that is forgiven. To qualify, your creditors must be on the participating list of creditors, banks, law offices or debt collection agencies; the account must be charged off (you haven’t made a payment in more than 120 days); and you must have a balance of at least $1,000.