The Military Lending Act (MLA) is a federal law that protects military service members who are on active duty status from certain lending practices. Military service members who are on active duty military status are entitled to an interest rate cap on many loan products, according to the Consumer Financial Protection Bureau (CFPB). The CFPB, an agency that ensures that people are treated fairly by banks, lenders, credit unions, and other financial institutions, states that interest rates cannot go higher than 36%.
How does the military lending act operate?
The Military Lending Act (MLA) operates under the leadership of the Department of Defense (DoD). The Department of Defense (DoD) implements the MLA to give protection to military active duty service members and their dependents. The military active service members and their dependents have several rights such as:
- 36% Military Annual Percentage Rate (MAPR) cap
- finance charges
- credit insurance premiums
- add-on credit-related products
- types of fees like application fees, participation fees, or fees for debt cancellation contracts,
- no mandatory waivers of certain legal rights
- no mandatory allotments
- no prepayment penalty
The MLA covers consumer loans or consumer credit products such as payday loans, deposit advance products, tax refund anticipation loans, motor vehicle title loans, overdraft lines of credit, installment loans, student loans, and credit cards. Certain secured loans like residential mortgages, reverse mortgages or home equity loans, motor vehicle financing loans, and personal property purchase loans are not covered under the MLA.
Which disclosures are required by MLA?
The MLA regulation requires loan disclosures if a creditor extends consumer credit, which also includes those originated or extended online, to a coveted borrower. A coveted borrower must be provided with several pieces of information coming from the creditor before the coveted borrower becomes obligated to the transaction or establishes a consumer credit account.
The first piece of information is a statement of the Military Annual Percentage Rate (MAPR). The MAPR must be applicable to the extension of consumer credit and must not be over 36%. Consumer credit that is closed-end credit or open-end credit is included in the MAPR capping.
The next piece of information is any disclosure required by Regulation Z or the Truth in Lending Act (TILA). Regulation Z requires creditors to disclose borrowing costs, interest rates, and upfront fees to consumers for the purpose of giving the true cost of credit.
Another piece of information is a clear description of the payment obligation of the covered borrower. The payment obligation in the form of a payment schedule for closed-end credits and an account-opening disclosure for open-end credits must be pursuant to Regulation Z requirements.
What are the MLA regulations?
The Military Lending Act regulations are implemented by the US Department of Defense (DoD). The Department of Defense (DoD) implements the MLA regulations such as providing optional safe harbor from liabilities for certain procedures that creditors may use in connection with identifying covered borrowers. Covered borrowers are consumers who at the time they are obligated to a consumer credit transaction are covered members of the armed forces. Covered members can also be the dependents of covered members. Covered members of the armed forces include the Army, Navy, Marine Corps, Air Force, or Coast Guard who are currently serving on active duty.
The next regulation is requiring creditors to provide oral disclosures and written disclosures. The oral and written disclosures are additional to those that are required by the Truth in Lending Act (TILA). The TILA, a federal law protecting consumers in dealings with lenders and creditors, requires lenders to provide a disclosure statement. The disclosure statement includes information about the loan amount, the annual percentage rate (APR), finance charges, a payment schedule, and the total repayment amount over the course of the loan.
Another regulation is disallowing loan terms, like prepayment penalties, mandatory arbitration clauses, and unreasonable notice requirements. Prepayment penalties are charges by lenders for paying all or part of the mortgage early. Mandatory arbitration clauses are provisions in contracts about how disagreements will be settled.
One more MLA regulation is restricting loan rollovers, renewals, and refinancing by creditors. Loan rollovers are loan renewals with fees paid for the purpose of extending previous loans, according to Consumer Financial Protection Bureau (CFPB). The CFPB states that many states limit or ban loan renewals and rollovers.
What are the MLA limitations?
The Military Lending Act (MLA) limitations are applied to certain types of consumer credit extended to military active duty servicemembers including their spouses, children, and other dependents or covered borrowers. One of the limitations is the limit of the amount a creditor may charge, which covers interest, fees, and charges imposed for credit insurance, debt cancellation contract and suspension, and other credit-related ancillary products sold in connection with the transaction. The total charge is expressed through the Military Annual Percentage Rate (MAPR). The MAPR must not exceed 36 percent and includes charges that are not in the finance charge or the annual percentage rate (APR) disclosed under the Truth in Lending Act (TILA).
Another limitation is in the rollovers and other actions performed by creditors. Creditors are not allowed to roll over, renew, repay, refinance, or consolidate any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower. The same creditor may extend the consumer credit of a covered borrower to refinance or renew an extension of credit if the said consumer was not a covered borrower at the time of the original transaction.
The next limitation is in the terms related to dispute resolution for creditors. A creditor cannot require a covered borrower to waive the covered borrower’s rights to legal recourse. The legal recourse is under applicable provisions of federal or state law, which includes the Servicemembers Civil Relief Act. Covered borrowers must not be required to submit to arbitration or other legal notice provisions in case of a dispute. Creditors must not require covered borrowers to give unreasonable notice as a condition for legal action.
Another limitation is covering payment terms and conditions for creditors. A creditor must not use the title of the vehicle as a security for the credit obligation involving consumer credit. For an extension of consumer credit, the covered borrower must be required to establish an allotment to repay the obligation. A creditor should not prohibit the borrower from prepaying the consumer credit or charge a penalty fee for prepaying all or part of the consumer credit.
One more limitation is in the account access by creditors. A creditor should not use a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower. On the other hand, a creditor may require an electronic fund transfer to repay a consumer credit transaction, require direct deposit of the consumer’s salary, and take a security interest in funds deposited after the extension of credit.
Who are covered borrowers under the military lending Act?
The covered borrowers under the Military Lending Act (MLA) regulations include covered members of armed forces, such as the Army, Navy, Marine Corps, Air Force, or Coast Guard who are currently on active duty.
Covered borrowers, under MLA regulations, also include the dependents of covered members like their spouses, children under the age of 21, children under the age of 23 who are enrolled full-time at an approved institution of higher learning and dependent on a covered member, and children of any age who are incapable of self-support due to mental or physical incapacity.
Does the MLA act cover dependents?
Yes, the Military Lending Act (MLA) covers dependents. Dependents of covered members of the armed forces, such as the Army, Navy, Marine Corps, Air Force, or Coast Guard on active duty can be one of the following:
- Children who are under the age of 21
- Children who are under the age of 23 enrolled full-time at an approved institution of higher learning and dependent on a covered member for over one-half of their support
- Children of any age incapable of self-support because of being physically or mentally disabled which occurred while a dependent of a covered member for over one-half of the support.
- A parent or parent-in-law who is a dependent of a covered member for over one-half of the support and residing in the covered member’s household.
Does the MLA apply to credit cards?
Yes, the Military Lending Act (MLA) applies to credit card accounts. Credit card accounts were included in the Department of Defense (DoD)’s July 2015 rule. The DoD’s July 2015 rule amends the MLA interpretive rule in order to extend the protections of the MLA regulations to a broader range of closed-end and open-end credit products as compared to limited credit products. Credit card accounts were not in compliance with the MLA rule until October 3, 2017.
Aside from credit cards, deposit advance products, overdraft lines of credit, and certain installment loans to finance a vehicle or a personal property purchase.
For more information on the Military Lending Act please contact Cain Mortgage Team today.