Since 2007 active duty armed service members have been protected by the Military Lending Act (MLA). A 2006 Department of Defense audit determined that many service members were being taken advantage of by some short term lenders.
Some unscrupulous lenders would open store front offices near military bases and offer short term loans to members of the military members in financial crisis. Some of the loans issued charged interest and fees of several hundred percent annually. The MLA was passed by a bipartisan Congress and signed into law by President Bush. In 2012, enforcement of the MLA was placed with the Consumer Finance Protection Bureau.
Features of the Current Military Lending Act
The MLA presently regulates three basic types of credit transactions:
• Payday Loans with terms no longer than 91 days and a loan amount of $2,000 or less;
• Auto title loans no longer than 181 days in duration;
• Tax refund anticipation loans.
Under current regulations, a creditor can charge no more than 36 annual percentage rate (APR). The APR includes not only interest charged, but fees included in the loan, including insurance premiums, points, credit service charges and renewal charges.
In addition, the MLA provides additional protections:
• The lender cannot force the borrower of arbitration of the lender’s choosing;
• The lender cannot require the loan be paid through allotment;
• The borrower is entitled to have an itemization of all fees and loan terms provided in writing, as well as an oral explanation of all fees charged;
• The lender cannot waive consumer protection laws.
Future Military Lending Act Regulations
The DOD has found that some creditors are changing loan terms slightly to avoid the protections of the MLA. For instance, payday loans are offered for amounts slightly over $2,000 or slightly more than 91 days, thereby taking themselves out of MLA jurisdiction.
The DOD is seeking to amend the current regulations to bring more short term lending within the scope of the Act. Proposed regulations were created in September 2014 and were published for public comment on September 29, 2014. The Act itself provides the DOD authority to amend the scope of credit transactions.
Under the proposed regulations, the 26% APR rate and current protections would remain in effect. Most closed end credit transactions would now be covered by the Act, except the following:
• Loans secured by real estate;
• Auto loans issued for the purpose of purchasing a vehicle;
• Other purchase money loans;
• Rent to own contracts;
• Credit cards borrowing, if the fees and interest charged are customary and reasonable fees.
In addition, the creditor would be required to inform the potential borrower that he or she should seek other forms of lower interest debt and to engage in credit counseling. There would also be a provision that the lender cannot waive protections of the Civil Relief Act. The amendments are expected to become new regulations after the period for public comment have expired.