The Military Lending Act ("MLA") was initially enacted in 2007 to protect military borrowers (and their dependents) from predatory lending practices (primarily payday lending). The MLA was amended in 2015, and its protections and scope were significantly expanded. The Department of Defense ("DOD") issued a final rule under the MLA that took effect in October of 2015 (the "DOD Rule"), with delayed implementation dates of an October 3, 2016 effective date for covered consumer loan products and October 3, 2017 for credit card accounts.
The categories of credit extensions covered by the MLA were expanded by the 2015 amendments to include virtually all consumer loan and credit card products (with certain exceptions). Under the DOD Rule, lenders must provide specific written and oral disclosures concerning the protections of the MLA to "covered borrowers" (defined below). The DOD Rule imposes interest rate limits and other significant restrictions for loans to covered borrowers.
The amended MLA applies to credit extended to "covered borrowers" ("MLA credit") except for residential mortgages and purchase-money transactions secured by the motor vehicle or personal property being purchased. Under the DOD Rule, a "covered borrower" is a consumer who, at the time the consumer becomes obligated under a consumer credit transaction, is a "covered member" (a member of the armed services who is serving on active duty or a dependent of a covered member - including a spouse, dependent parent or parent-in-law residing in the same household, and a child or ward).
All extensions of MLA credit are subject to the military annual percentage rate ("MAPR") limit of 36 percent. The MAPR is the interest rate charged on the credit plus costs associated with credit insurance premiums, fees for ancillary products sold in connection with the credit transaction, finance charges associated with the consumer credit, and any application fee or participation fee.
Lenders must determine if any loan applicants are "covered borrowers" under the amended MLA. The DOD Rule permits the identification of covered borrowers by: (a) using information relating to the consumer from the database maintained by the DOD (available at https://mla.dmdc.osd.mil); or (b) using a statement, code, or similar indicator describing the status that is contained in a consumer report obtained from a credit reporting agency that compiles and maintains files on consumers on a nationwide basis (or a reseller of such consumer reports). Lenders must maintain a record of the determination of a covered borrower's status at the time: (1) a consumer initiates the transaction or 30 days prior to that time; or (2) when a lender develops or processes a firm offer of credit that includes the status of the consumer as a covered borrower (as long as the consumer responds to the offer not later than 60 days after the time the lender has provided the offer to the consumer; if a consumer responds later than 60 days after a firm offer is provided, a new determination must be made).
In addition to credit disclosures under the Truth-in-Lending Act, new MLA disclosures are required to be provided in writing before or at the time a covered borrower becomes obligated on a loan that include: (a) a statement of the MAPR applicable to the extension of credit using specific DOD language; and (b) a clear description of the payment obligation of the covered borrower. The DOD Rule also requires oral disclosures that include a clear description of the payment obligation of the covered borrower. The required oral disclosures may be satisfied by providing a general description of how the payment obligation is calculated or a description of what the borrower's payment obligation would be, based on an estimate of the amount the borrower may borrow. The oral disclosures may be provided through a toll-free telephone number included on either the application for credit or the separate written disclosure.
Under the amended MLA and the DOD Rule the following additional restrictions apply to MLA credit: (a) a covered borrower may not be required to waive any right to legal recourse under State or Federal law; (b) a covered borrower may not be required to submit to arbitration in the case of a dispute; (c) a lender may not use a check or other method of access to a deposit, savings, or other financial account maintained by a covered borrower (except that a lender may accept repayment by voluntary electronic funds transfer); (d) MLA credit extended to a covered borrower may not be secured by a lien on a motor vehicle; (e) military allotments to repay MLA credit are prohibited; and (f) prepayment fees are prohibited. The DOD Rule also prohibits "roll-over" or refinances of the same loan unless the new loan provides more favorable terms for the covered borrower.
All lenders making consumer loans need to be familiar with the requirements of the MLA and all active duty members of the armed services should be familiar with their rights under the MLA.
A version of this article was published in the Maryland State Bar Association Bar Bulletin on April 4, 2017.