The Military Lending Act: Financial Protection for Active-Duty Personnel and their Families – February 2018
Terry Jessop & Bitner Newsletter
Issue 49, February 2018
The Military Lending Act (MLA) was enacted by Congress in 2006 to shield active-duty service members and their dependents from certain lending practices. Lenders must comply with strict requirements under the MLA.
Who is Covered by the MLA?
The MLA protects active-duty service members, their spouses, minor children, children who are 23 or younger and are presently attending an institute of higher learning, and any other child of any age who is physically or mentally incapacitated (“covered borrowers”). To identify covered borrowers, lenders should check the Department of Defense’s database for active-duty service personnel. Checking the database provides a safe harbor. Lenders may rely on the database even if it is wrong. But the search must be done at the time the borrower initiates the transaction or 30 days before the transaction is to occur.
When Does the MLS Apply?
The MLA applies when a covered borrower attempts to obtain credit for personal, family, or household purposes if that credit is subject to a finance charge, or is payable, by written agreement, in more than four installments. However, the MLA does not govern secured residential mortgages. The MLA also does not apply to vehicle or personal property loans where the loan is secured by the vehicle or personal property.
How Do Lenders Comply?
The MLA requires lenders to disclose the borrower’s payment obligations both orally and in writing. Lenders must issue a Military Annual Percentage Rate (MAPR) statement. The lender can create its own MAPR statement or use the one provided by the federal government. Either way, the lender must explain that the cost of consumer credit to a member of the Armed Forces and his/her dependent may not exceed an annual percentage rate of 36 percent. The rate must include: the costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged; and any participation fee charged.
Lenders are prohibited from including certain terms in the credit agreement. A lender may not impose unreasonable notice requirements or charge for early payments. A lender cannot require arbitration or require a covered borrower to establish an allotment to repay. A lender cannot use a check or other means to access a deposit account maintained by a covered borrower, except in certain situations.
However, when attempting to collect or allow for payment, lenders may accept checks. Lenders may require electronic payments unless otherwise prohibited by law. A lender can require direct deposit of a covered borrower’s salary. A lender may also assert a statutory lien right under applicable law or assert a contractual lien right in deposits made before and after entering into the loan.
What are the Penalties?
If a loan is non-compliant then it is void at the outset. The covered borrower may recover payments and any attempt to collect the debt may be considered a deceptive collection practice. Non-compliant lenders are liable for $500 or actual damages (whichever is greater), for punitive damages, and for attorneys’ fees and costs.
Complying with the MLA and other federal lending acts is a minefield. Give us a call. We can help.
© Terry Jessop & Bitner February 2018