What is the Military Lending Act?

Woman in military dress and man sitting at a table, reviewing documentsImage: Woman in military dress and man sitting at a table, reviewing documents

In a Nutshell

The Military Lending Act is a law meant to protect active-duty service members and their covered dependents from predatory lending practices. It established an interest rate cap of 36% on most consumer loans to service members and put other financial protections in place.
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The Military Lending Act aims to keep service members’ finances safe from lending practices that could take advantage of them.

The 2006 federal law established regulations for lenders that work with active service members and their covered dependents. One of the law’s hallmarks is a clause that set a 36% interest rate cap on most consumer loans.

Let’s dive deeper into what the act requires and how it affects service members and lenders.

What is the Military Lending Act?

The Military Lending Act gives special protections to active-duty service members, including …

  • Establishing a Military Annual Percentage Rate, or MAPR, cap of 36% for most consumer loan products. That number includes costs such as finance charges, credit insurance premiums and many types of fees, including application fees, with some exceptions.
  • Banning prepayment penalties for paying back part or all of your loan early.
  • Prohibiting lenders from forcing service members into mandatory arbitration or giving up other legal rights they have as service members under state or federal law.

Since its original passage, the Department of Defense has added additional rules to include more types of loans and credit cards.

Who is covered by the Military Lending Act?

Active-duty members of the Army, Navy, Marine Corps, Air Force and Coast Guard are covered by the act if they’re serving for more than 30 days. Dependents such as spouses, children younger than 21 years old and full-time students younger than 23 are also covered, along with service members on active National Guard or National Guard reserve duty. Children of any age may also qualify as a dependent if incapacitated.

Government officials wanted to give active-duty service members extra protections because of the comparatively high rate of enlisted personnel who had taken out small loans to shore up their finances. A 2013 Pew Charitable Trust study found that 5.9% of payday loan and auto title loan borrowers lived in a household with a member of the armed services even though only 2.5% of U.S. households include active-duty members in the National Guard or who are in training.

What loans are covered under the Military Lending Act?

The Military Lending Act originally applied to a narrower set of loans including certain payday loans, vehicle title loans and tax refund anticipation loans with certain terms.

However, when new rules were finalized in 2015 updating the act, many new types of consumer loans were required to comply with the Military Lending Act. Here are some examples of these types of loans.

  • Payday loans are short-term loans usually for $500 or less that typically must be repaid when borrowers receive their next paycheck. They often come with high fees and interest rates and can lead to financial hardship.
  • Deposit advance loans are similar to payday loans except banks and credit unions pay themselves back automatically when the next electronic deposit is made in the borrower’s account. Deposit advances charge fixed fees that are usually much more expensive than other forms of credit.
  • Overdraft lines of credit can be attached to the checking accounts of borrowers. If a borrower runs out of money and has been approved for this type of loan, the expenses will be covered so they don’t have to worry about missed payments, debit card denials or bounced checks.
  • Vehicle title loans allow borrowers to use their vehicles as collateral and receive short-term loans. These loans typically have higher interest rates and shorter loan terms than most loans, making them very risky.
  • Installment loans allow borrowers to get a set amount of money that they can repay over a certain time period in installments. However, certain secured loans are excluded.

What is not covered under the Military Lending Act?

While the Military Lending Act covers many loans, there are exceptions. Most notably, loans that are secured by property that is purchased — such as home mortgages and auto loans — are excluded.

Loans that are excluded from the Military Lending Act include …

  • Residential mortgages to buy or build a home
  • Mortgage refinancing loans
  • Home equity loans or lines of credit
  • An auto loan that is secured by the vehicle purchased
  • Personal property purchase loans secured by the personal property purchased

How do lenders determine someone’s eligibility?

It is the responsibility of the lender to determine whether you fall under the Military Lending Act. However, if you think you may be covered by the MLA, familiarize yourself with your rights under the act beforehand. If you have an issue getting covered, you can visit the JAG Legal Assistance Office.

Lenders can make the determination on their own but can also access the Department of Defense’s Military Lending Act database online. They must maintain a record of your information.

They should determine your eligibility at the time you open your account or complete your transaction or 30 days before. If you receive a firm offer of credit as a covered borrower, you must respond within 60 days or the lender has to re-establish you are still covered.

If you are protected under the Military Lending Act, a lender must give you certain written and oral disclosures such as the military annual percentage rate, or MAPR, and a clear description of the payment obligations.

The lender is also required to give you an MAPR statement, a description of your payment obligation and account opening disclosures mandated by Regulation Z.

Regulation Z, which is part of the Truth in Lending Act of 1968, was created to protect consumers against misleading lending practices. Under Regulation Z, lenders must disclose certain key loan terms and conditions to borrowers in certain ways. Mortgage lenders, credit card companies and other lenders are required to adhere to this regulation.

What penalties do lenders face?

If you believe your rights under the Military Lending Act have been violated, you may file a complaint with the Consumer Financial Protection Bureau.

If a lender issues a loan that violates the Military Lending Act, it will be considered void from its inception.

However, if someone knowingly violates the act, punishments can be much stiffer. The lender can be charged with a misdemeanor that could lead to fines and even prison time. The individual responsible for the violation also may be held civilly liable, even including punitive damages.

Bottom line

If you are a service member, it is a good idea to familiarize yourself with the Military Lending Act before you take out a loan. Getting information about your financial rights can help you select the right products and lenders for your needs.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.