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The Military Lending Act: A Comprehensive Guide to Compliance and Helpful Tools

The Military Lending Act: A Comprehensive Guide to Compliance and Helpful Tools

In 2006, the Military Lending Act (MLA) was signed into law to protect military members and their families from predatory lending practices. Since then, the MLA has been adjusted and reworked, allowing it to adapt to the present financial environment. While these changes are crucial for military members, this can cause some confusion for lenders who want to remain compliant and support their military customers. Failing to comply with the MLA can result in civil penalties, statutory damages, and reputational harm, making it all the more important that financial institutions remain on top of the changes and stay on the lookout for predatory practices or negligence in their lending processes.

Continue reading to learn more about the provisions of the Military Lending Act, seamlessly comply with current MLA rules and regulations, and find out what tools are designed to assist institutions and individuals alike.

What is the Military Lending Act?

The Military Lending Act (MLA) is a U.S. federal law established to protect active-duty service members, their spouses, and dependents from certain predatory lending practices. Enacted in 2006, the MLA has undergone various modifications since its inception. The key provisions and objectives of the MLA include:

  1. Interest Rate Cap: The MLA limits the interest rate that can be charged to covered borrowers, known as the Military Annual Percentage Rate (MAPR), which is capped at 36%. 
  2. Types of Covered Credit: While the MLA initially had a more limited scope, its coverage was expanded over the years. Its most recent iteration covers many types of consumer credit, with minor exceptions.
  3. No Mandatory Arbitration: Creditors are prohibited from including mandatory arbitration clauses in contracts with covered borrowers.
  4. Special Disclosures: Lenders must provide specific disclosures to military borrowers. These disclosures include a clear description of payment obligations and a statement about the MAPR. 
  5. No Prepayment Penalties: Lenders can’t charge a penalty if a service member decides to repay their loan early.

These key provisions encompass much of what the MLA hopes to accomplish, but there is always more for lenders to be aware of. Be sure to check the official website for up-to-date information and helpful guides to follow. 

Who Does the Military Lending Act Protect?

The act covers active-duty members of the following branches if they’re serving for more than 30 days:

  • Army
  • Navy
  • Marine Corps
  • Air Force
  • Coast Guard

The MLA also applies to active National Guard and National Guard reserve members, including those in training.

Apart from the service members themselves, the act also protects their dependents. This includes spouses, children who are below the age of 21 years, students who are under 23 years of age, or incapacitated children of active military service members, regardless of their age.

Ensure you understand who qualifies as a Military Lending Act-covered borrower when loaning money or extending credit so you don’t break this important regulation.

What Types of Loans Does the Military Lending Act Cover?

The Military Lending Act (MLA) covers a broad range of consumer credit. As a result of modifications made to the MLA, especially the significant changes in 2015, the types of loans and credit products covered were expanded. Here are the types of credit products generally covered by the MLA:

  1. Payday Loans: Short-term, small-amount loans are often due by the borrower’s next payday.
  2. Vehicle Title Loans: Loans where the title of a vehicle is used as collateral.
  3. Tax Refund Anticipation Loans: Loans based on an expected tax refund.
  4. Installment Loans: Consumer loans that are repaid over time with a set number of scheduled payments.
  5. Overdraft Lines of Credit with Finance Charges: However, traditional overdraft services are not covered.
  6. Deposit Advance Loans: Short-term cash advances some banks or credit unions offer.
  7. Credit Card Accounts: Rules specific to credit card accounts were implemented, with certain fees and terms being considered in the MAPR (Military Annual Percentage Rate) calculation.

It’s essential to note what the MLA does not cover. Some types of credit exempted from the MLA include:

  • Residential mortgages: This includes credit secured by the consumer’s dwelling, such as mortgages, refinances, home equity loans, and reverse mortgages.
  • Secured vehicle loans: Credit expressly intended to finance the purchase of a vehicle, where the credit is secured by the purchased vehicle.
  • Loans secured by personal property that also finance the product’s purchase: An example would be a store credit for purchasing a large appliance where the appliance secures the credit.

As always, financial institutions and borrowers should familiarize themselves with the latest guidelines and rules to ensure full compliance and understanding.

Determining Eligibility for MLA Protections

The responsibility for complying with MLA regulations ultimately lies with lenders. It is your responsibility to evaluate if your borrowers are eligible for the benefits provided by this act and whether your business falls under the MLA Act’s requirements.

While lenders have the option of conducting a Military Lending Act database search, many are reluctant to go that route as it can be a lengthy process. 

Alternatively, financial institutions can consider using MLA Verify, a software program that not only delivers confirmation that a borrower is an MLA-covered borrower but also provides the most recent name and address of record for the applicant.

Why is MLA Verify so beneficial? It allows you to confirm the status of borrowers against the Department of Defense Manpower Database, which offers current information about active-duty service members in all service branches. This means you can quickly and easily identify service members and their dependents so that your organization practices appropriate MLA compliance for all qualifying borrowers.

Why is MLA Compliance Important for Lenders?

The provisions of the Military Lending Act also include potential penalties for lenders who violate these rules. If a covered borrower lodges a complaint against a business for violating the Military Lending Act within the qualifying time frame of the infraction, the lender may be subject to a wide range of penalties, such as:

  1. Avoiding Legal and Financial Penalties: Violating the MLA can result in significant legal and financial consequences. Lenders may be required to pay statutory damages, actual damages, and potentially punitive damages to affected borrowers. In addition, the loan or credit agreement in question may be deemed void.
  2. Reputation Management: Compliance with the MLA is critical for maintaining a positive reputation. Non-compliance can harm a lender’s public image, potentially resulting in the loss of customers and damage to the brand.
  3. Protecting Service Members: The MLA is designed to protect military service members and their families from predatory lending practices. By complying with the MLA, lenders demonstrate a commitment to supporting and protecting those who serve the country.
  4. Avoiding Regulatory Scrutiny: Non-compliance with the MLA can attract the attention of regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) and other regulatory agencies, which may result in investigations, audits, and further penalties.
  5. Customer Retention and Trust: Compliance helps build trust with customers, including service members and their families, which is essential for customer retention and attracting new business.
  6. Streamlined Operations: By implementing processes and systems to ensure MLA compliance, lenders can streamline their operations and reduce the risk of errors or non-compliance.

In summary, MLA compliance is vital for lenders as it helps them avoid legal and financial penalties and protects their customers and businesses from harm. MLA Verify can spare you the pain, the time, and the costs of non-compliance in your lending practice. Contact Microbilt today and learn more about our wide range of verification products.