Before the implementation of the Military Lending Act, military personnel had a difficult time acquiring loans. The loans were accompanied by extra charges and compulsory arbitration. However, the introduction of these new policies has enabled Servicemembers to have an easier time acquiring credit facilities.
What Is the Military Lending Act?
The Military Lending Act (MLA) was enacted in 2006 and implemented by the Department of Defense (DOD). Its fundamental role is to protect military officers, their dependents, and their spouses from particular lending practices. Such methods expose members of the military and their dependents to risks that would threaten military readiness and eventually affect retention of Service members.
The Act states that Service members are to be charged a maximum interest of 36% on all consumer loans as well as providing other important rights. It applies to both Active-duty Servicemembers and their covered dependents. Initially, it was applied to a few credit products. The new regulations have expanded, and it now covers a broad range of credit products.
How Does MLA Affect Your Business?
How Should You Apply the Final Rule?
The Final Rule expands the current regulation’s coverage to include more non-mortgage credit transactions under the Truth in Lending Act. It offers safe methods of identifying borrowers under the Final Rule as well as amending the contents of the disclosures required. It also contains new provisions concerning penalties, administration enforcement, and remedies.
As implemented in 2007, the Military Lending Act limited the rates to 36%, and it required oral as well as military written disclosures. It also restricted lenders from requiring arbitration to Service members in case a dispute came up. Initially, this was a huge setback for them.
The Department of Defense implementation of the military lending act contains requirements and limitations on specific types of credit it extended the active duty Service members and their covered borrowers. With certain exceptions, the restrictions apply to persons or entities that fit the description or definition of a creditor in Regulation Z. These entities, including their assignees and individuals, must be engaging in the business of extending loans.
In transactions covered by this Act, the implementing regulation and MLA limits the charges a creditor may impose. These include fees, interest, credit insurance costs, debt cancellation, and suspension. All these costs should not exceed the 36%.
Other Things Provided by the MLA
- Provides the covered borrowers a safe harbor from liability for specific procedures used by creditors to identify them.
- Obliges creditors to provide written and oral disclosures in addition to those required by the Truth in Lending Act (TILA).
- Prohibits creditors from implementing loan terms such as mandatory arbitration clauses, prepayment penalties, and exploitative credit requirements.
- Restricts refinancing, loan rollovers, and renewals by individual creditors.
Rules You Should Apply in Your Company to Comply with Military Lending Act Regulations
The Final Rule
The Final Rule took effect on 1st October 2015. Lenders were then expected to be compliant by 3rd October 2016. However, compliance with credit card rules is now delayed until 3rd October 2017.
Under the MLA, a ‘creditor’ is a person or entity engaging in any business that extends credit to customers. This includes their assignees. A creditor engages in offering this service it by itself meets the lender transaction standard under Regulation Z.
Under this rule, the term ‘covered borrower’ refers to a full-time Service member and those under an order of more than 30 days. It also includes members of the National Guard who are under and order to full-time for 180 consecutive days. The Final Rule also protects the Servicemembers’ dependents.
Under the Final Rule dependents include:
- The Service member’s spouse.
- A Service member’s child below the age of 21, or satisfies conditions prescribed in the act.
- A parent or parent-in-law who resides in the household while depending on the Service member for over 50% of his or her support.
- An unmarried person who, by court order, is in the custody of the Service member and meets other conditions.
One of the most significant amendments is in the calculation of the Military Annual Percentage Rate (MAPR). Covered credit transactions are at 36%. The rules determining the contents of the MAPR are very detailed and separated from the credit card sections. In short, the MAPR covers a total of all fees and interests regarding the loan.
The Final Rule also excludes application fees charged on short-term loans extended under certain conditions. In a period of 12 months rolling, the exclusion applies once. This is a fair move as it reduces the total loan charges on the borrower.
The Final Rule also retains the restriction on the use of allotments to repay loans. To achieve this, it uses pre-dispute compulsory agreements for the transactions covered, requiring protection of the waivers in Service members Civil Relief Act (SCRA). It also utilizes extensive legal notice requirements.
The Final Rule implements provisions regarding remedies and penalties in the Military Lending Act. Anyone violating the Act is liable for the damages, with a minimum of $500 per violation. The person is responsible for costs of the action, inclusive of the attorney’s fee, except if the filing the action was in bad faith or for the purpose of harassment.
There are several requirements to evaluate each applicant looking for any credit product to confirm if they are legitimate and qualified for the loan. This one is also included in the Military Lending Act. Previously, creditors acquired this information by interviewing the applicants.
Under the Final Rule, however, creditors are granted safety from liability if they employ the following two methods in determining the borrower’s qualification:
- If they access the Defense Manpower Data Center (DMDC) database which provides the Active-duty status; or
- Access a nationwide Consumer Reporting Agency (CRA)
Military Lending Act status for minor dependents is directly verified with the DMDC.
The implementation of the Military Lending Act Regulations is a significant milestone in mandating special requirements for creditors extending loans to Servicemembers. These requirements are substantial because they prevent exploitation of the very people who are willing to sacrifice their lives to protect the nation. Experts and authorities should implement more policies to curb similar financial malpractices.