By Michael S. Archer
Legal Assistance Director
Marine Corps Installations East

1. Recognizing that troops are often targeted by commercial predators, and that such predation adversely affects not only individual victims, but also the national defense, Congress passed and President George W. Bush signed into law the Military Lending Act (10 USC 987). The MLA, enacted in 2006, attempts to prevent victimization of troops and their families by (a) requiring covered lenders to determine whether the prospective borrower is a service member or dependent, (b) limiting the interest that can be charged in covered loans to 36% annual percentage rate, and (c) prohibiting lenders from engaging in certain practices with respect to covered loans.

2. Secretary of Defense Authority. The MLA gave the Secretary of Defense broad authority to make regulations determining which loans will be covered, what disclosures must be made, and how the annual percentage rate (APR) of interest is to be calculated. The law specifically exempts residential mortgages, as well as loans made to purchase personal property where the loan is secured by that property, for example, the typical auto finance loan.

3. Original Implementing Regulation. In the original implementing regulation (32 CFR 232) the Secretary of Defense used its authority very cautiously and sparingly, promulgating a regulation that severely limited the scope of the MLA’s coverage. As originally implemented, the MLA covered only the following types of loans: payday loans, car title loans, and refund anticipation loans. The initial regulation did not address credit cards, nor did it address installment loans, or any other type of credit. Further, even the loans that were covered were defined in a very restrictive way. Early on, the Judge Advocates General of each branch of the armed forces recommended a more expansive approach. Experience showed that the regulation’s limitations and definitional restrictions were exploited by some to continue to gouge troops with triple digit interest rates: loans were couched or structured as open ended rather than close ended credit to avoid coverage; payday loans were provided in amounts exceeding $2,000, or with a final payback period in excess of 91 days to evade the interest limitation; and of course, installment loans weren’t covered at all. The problem was exacerbated by installment lenders evading, or attempting to evade state law prohibition on excessive interest by providing loans over the internet, or on a Native American reservation, or inserting choice of law provisions favoring whatever state had the highest allowable APR. As a result, Department of Defense proposed a far more expansive regulation, which after two years of review and comment, was finally adopted and published on July 21, 2015. 

4. New Implementation Regulation.

a. Scope. The most important change is the far more expansive scope of the new Regulation. Coverage under the new Regulation is not limited to certain narrowly defined types of credit. Rather, it is applicable to credit extended to a covered borrower primarily for personal, family, or household uses and which is subject to a finance charge OR is payable by written agreement in four or more installments. Essentially, the Regulation covers all credit unless an exception has been carved out. There are two principal exceptions, first, credit extended to purchase a home, i.e., a residential mortgage; and secondly, credit extended to finance the purchase of the personal property (including a motor vehicle) when the credit is secured by the property being purchased. Covered borrowers are all active duty military service members and their dependents.

b. Limitation on Interest. In any transaction covered by the MLA, the creditor may still sell the product to a service member or dependent; however, there are certain limitations, the most important of which is the interest rate. The maximum Military Annual Percentage Rate (MAPR) on covered transactions is 36%.

c.  Military Annual Percentage Rate. The Department of Defense was concerned that a lender could nominally comply with interest rate limitations, but nonetheless charge unreasonable, predatory costs through the expedient of charging the consumers various loan “fees” and junk products associated with the loan. Accordingly, in calculating the MAPR, the lender must include application fees, as well as credit insurance premiums, debt cancellation, and similar products. Generally, with these products, consumers pay a fee or premium in exchange for debt cancellation in the event of the borrower’s death. As discussed below, a credit card issuer need not include any “bona fide fee” in its calculation of the MAPR.  

d. Credit Cards and Bona Fide Fees. The Department of Defense was concerned that the extension of credit via credit card account was substantially different than other types of credit and that therefore additional fees might be justified in the context of credit cards that would not be either applicable or justified in other contexts. Accordingly, the Department carved out an exception by which the credit card issuer could charge a fee and exclude that fee from calculation of the MAPR if the fee was a bona fide fee and reasonable for that type of fee.

(1) Bona fide credit card fees. Certain types of fees are precluded from ever qualifying as bona fide fees; such as credit insurance, debt cancellation or suspension policies, and fees for any credit related product sold in connection with the credit transaction. Additionally, the Rule is intended to prevent credit card issuers from nominally complying with MAPR restrictions by shifting costs to fees.

(2) Reasonable credit card fees. To be exempt from the requirement that it be calculated in the MAPR, a fee must not only be bona fide, it must also be reasonable. Whether the fee is reasonable is determined by comparing it to the fees other creditors charge for a similar service. A fee is presumptively reasonable if it is less than or equal to the amount charged for a similar product by five or more credit card issues with an outstanding loan balance of at least $3 billion. A fee may be outside of this safe harbor and nonetheless be considered reasonable as determined by a list of regulatory criteria.        

e. Determination of Covered Borrower. The original Rule required creditors to obtain a statement from the borrower in which the borrower declared whether he was an active duty service member or dependent thereof. The Department of Defense study of the MLA concluded that there were widespread abuses of the self-reporting of military status. The new Rule allows the creditor to adopt any method to determine whether a borrower is a service member or dependent. However, creditors who use the Department of Defense Manpower Database (DMDC) for this purpose are entitled to a safe harbor, a conclusive legal presumption that the borrower was / was not, covered as indicated by the DMDC. Such a safe harbor would shield a lender from later claims, for example, that a loan in excess of the MAPR was sold to a covered borrower in violation of the law.

f. Required Disclosures. Creditors must continue to make all disclosures currently required under Regulation Z and the Truth in Lending Act. These include the familiar “TILA Box” disclosing the APR, the number and amount of monthly payments, and so forth. In addition, the creditor must make a clear statement of the payment obligation. Finally, the creditor must disclose orally and in writing a statement of the MAPR. The creditor is not required to disclose the numerical percentage rate MAPR that will be charged to the consumer; rather, the creditor need only make a general statement. The Rule provides a model statement:

Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account). 

g. Other Limitations on Covered Credit Transactions. The Rule imposes important consumer protections, in addition to interest limitations.  

(1) The creditor (other than a federally chartered bank or credit union) may not roll over consumer credit extended to the loan. This provision is intended to prevent lenders from churning the same loan over and over again; that is, knowingly extending credit to people who will be unable to pay, and then renewing the loan over and over when they inevitably are unable to make timely payment. 

(2) Creditors cannot require the borrower to waive any the Servicemember Civil Relief Act or any other right to legal recourse otherwise applicable under State or Federal law.

(3) Creditors cannot require the borrower to submit to arbitration or impose onerous legal notice provisions in the case of a dispute. 

(4) Creditors cannot demand unreasonable notice from the borrower as a condition for legal action.

(5) The creditor cannot use a check or other method of access to the borrower’s bank account. Notwithstanding this provision, a creditor may, unless otherwise prohibited by law, require payment by EFT, require payment via direct deposit of the service member’s salary, or take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.

(6) The creditor (excluding a state or federally chartered bank or credit union) cannot use the title of a vehicle as security for the obligation. This provision applies to the car title loan; e.g. the lender advances $3,000 and the borrower agrees that his car is forfeit upon default. This provision does NOT apply to the typical auto purchase loan; i.e., the lender extends credit for the purchase of a motor vehicle and then takes a security interest in that vehicle.

(7) The creditor (other than a service relief society or state or federally chartered bank or credit union) requires the borrower to establish a military allotment to repay the obligation as a condition of the extension of credit.   

(8) The lender cannot prohibit prepayment or charge a prepayment penalty.

h. Remedies. The knowing violation of the Rule is a crime punishable by a fine and up to one year imprisonment. Contracts in violation of the Rule are void. Creditors who violate the Rule may be obligated to compensate the actual damages of the borrower of not less than $500 per violation, punitive damages, court costs, equitable or declaratory relief, and any other damages authorized by law. The creditor defendant shall not be liable if it can show that the violation resulted from an unintentional error which occurred despite the maintenance of procedures reasonably designed to prevent such errors. If the creditor plaintiff is found to have initiated the lawsuit in bad faith and for harassment, the plaintiff may be liable to pay the defendant’s attorney fees. The action may be brought in federal court two years from the date of the borrower’s discovery of the violation or five years from the creditor’s commission of the violation, whichever occurs first. Administrative enforcement of the Rule may be brought by several federal agencies, including the Federal Trade Commission and the Consumer Finance Protection Bureau. The CFPB takes on line consumer complaints concerning credit, debt collection, and financial services, including matters relating to the MLA.

i. Relationship to State Law. The Rule preempts state law except to the extent that state law provides greater protection than the Rule.

j. Effective Date. Except for credit card accounts, the new Rule is effective to covered credit transactions consummated on or after October 3, 2016. It is effective as to credit card accounts October 3, 2017. The civil liability provisions apply to transactions occurring on or after January 2, 2013.

5. Summary. The MLA is designed to be a bulwark against predatory lending practices directed at service members and their dependents. It limits interest on covered transactions to 36% and prohibits various other onerous contractual provisions. The current implementing regulation expands MLA coverage to virtually all credit transactions except mortgages and loans made to purchase property where the loan is secured by that property. Military legal assistance attorneys, financial counsellors, and others advising service members and their dependents should be familiar with the statute. It may be enforced through private litigation or government agency enforcement action. Additionally, the Consumer Finance Protection Bureau takes on line complaints concerning the MLA and other matters.    

Rev 23 Nov 2016