Military Lending Act (MLA)

The Military Lending Act is the federal law limiting the terms on which consumer credit may be extended to active-duty servicemembers and their dependents. The statute sits at 10 U.S.C. 987, captioned "Terms of consumer credit extended to members and dependents: limitations," and the Department of Defense implements it in 32 CFR part 232, which states at 232.1(a) that the part is issued to implement that section. Its headline rule is a rate ceiling: 32 CFR 232.4(b) provides that "a creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit." The rest of the Act is about closing the routes around that ceiling, by defining the rate broadly enough to capture fees, by banning specific contract terms, and by making a non-compliant agreement unenforceable rather than merely penalized.

Who is covered is decided once, at the moment the credit is taken. 32 CFR 232.3(g)(1) defines a covered borrower as a consumer who, when becoming obligated on a consumer credit transaction or establishing an account, is a covered member or a dependent of one. A covered member is someone serving on active duty under a call or order that does not specify a period of 30 days or fewer, or on Active Guard and Reserve duty. Dependents are those described in subparagraphs (A), (D), (E) and (I) of 10 U.S.C. 1072(2), which reach a spouse, a child, and a parent or parent-in-law dependent on the member for over half of their support. The status test cuts in both directions, and the second direction surprises people. Someone who was not a covered borrower when they signed does not become one by enlisting afterwards. And 232.3(g)(4) provides that, despite having been a covered borrower when the obligation was taken on, a consumer "no longer is a covered member" or a dependent of one is not a covered borrower, so the status is tied to service rather than fixed for the life of the loan.

What counts as consumer credit is narrower than it first appears, and the exclusions are the practical boundary. Under 232.3(f)(1) consumer credit means credit offered or extended to a covered borrower primarily for personal, family or household purposes that is either subject to a finance charge or payable by written agreement in more than four installments. Paragraph (f)(2) then removes three familiar categories: a residential mortgage, meaning any credit transaction secured by an interest in a dwelling, including a purchase, a refinance, a home equity loan or line, or a reverse mortgage; a credit transaction expressly intended to finance the purchase of a motor vehicle when secured by that vehicle; and a credit transaction expressly intended to finance the purchase of personal property when secured by that property. The word doing the work in the last two is "purchase." A loan against a vehicle the borrower already owns is not financing its purchase, so it stays inside the Act, which is why title lending and payday lending sit squarely within the cap while a car loan from a dealership does not.

The 36 percent figure is not the rate on the note, and that is the entire design. 32 CFR 232.4(c)(1) requires the MAPR to include, as applicable, any credit insurance premium or fee, any charge for single-premium credit insurance, any debt cancellation or suspension fee, any fee for a credit-related ancillary product sold with the transaction, the finance charges associated with the credit, most application fees, and most participation fees. Paragraph (c)(1)(iv) removes the obvious escape by providing that such a charge is included "even if that charge would be excluded from the finance charge under Regulation Z." For open-end credit the rate is computed for each billing cycle, and where there is no balance in a cycle the creditor may not impose any fee at all except a participation fee capped at $100 a year, unless the fee qualifies as a bona fide credit card fee under the separate test in 232.4(d). The mechanics of how that figure diverges from an ordinary annual percentage rate belong to the page on that rate; what matters here is that a lender cannot reach 36 percent in interest and then add products on top.

The prohibitions in 32 CFR 232.8 matter as much as the rate. It is unlawful to extend consumer credit to a covered borrower where the borrower must waive any right of legal recourse, including under the Servicemembers Civil Relief Act; where the borrower must submit to arbitration or accept onerous legal notice provisions; where the creditor demands unreasonable notice as a condition of legal action; where a payday-type creditor rolls over, renews or consolidates the credit with the proceeds of new credit from the same creditor; where the creditor uses a check or other access to the borrower's deposit account, subject to narrow exceptions for electronic repayment and direct deposit; where a non-depository creditor takes a vehicle title as security; where the borrower must set up an allotment to repay; or where prepayment is barred or penalized. The remedies in 10 U.S.C. 987(f) are correspondingly hard. A knowing violation is a misdemeanor. A prohibited agreement is "void from the inception of such contract." An arbitration agreement is unenforceable against a covered member or dependent, or against a person who was one when the agreement was made, notwithstanding the Federal Arbitration Act. And civil liability runs to actual damages of not less than $500 for each violation, plus punitive damages, equitable relief and costs, subject to a bona fide error defense the creditor must prove.

Do not confuse it with the Servicemembers Civil Relief Act. The two cover the same people and both cap a rate, which is why the numbers get swapped. The older Act reaches debt that already existed when service began, caps it at 6 percent, forgives the excess rather than deferring it, and requires the servicemember to give notice. The Military Lending Act reaches new consumer credit extended during service, caps it at a 36 percent military annual percentage rate, requires oral and written disclosure of the rate and the payment obligation before the credit is issued, and applies whether or not anyone asks. One looks backward and must be invoked; the other looks forward and operates automatically.

1. The lender checks coverage. Before extending credit it determines whether the applicant is a covered borrower, using the safe-harbor method the regulation provides and keeping the record.

2. It asks whether the product is consumer credit under the Act, which excludes a residential mortgage and purchase-money credit secured by the vehicle or personal property being bought.

3. It computes the military annual percentage rate, folding in credit insurance, ancillary product charges and most application and participation fees, whether or not Regulation Z would count them.

4. It checks the result against 36 percent, for the whole transaction if the credit is closed-end, or for each billing cycle if it is open-end.

5. It checks the banned terms, including arbitration, allotment requirements, prepayment penalties, vehicle-title security and account-access conditions.

6. It gives the disclosures before issuing the credit, orally and in writing, covering the rate, the Truth in Lending disclosures and a clear description of the payment obligation.

For example, take a $2,400 twelve-month installment loan to a covered borrower from a lender that is neither a bank nor a credit union. The contract carries $396 of interest, a $55 application fee and a $180 single-premium credit insurance charge. Under Regulation Z the application fee and a voluntary insurance premium can sit outside the finance charge, so the disclosed annual percentage rate is built on the $396 alone. Under 32 CFR 232.4(c)(1) all three go into the military annual percentage rate, so the figure tested against the 36 percent ceiling is built on $631 of cost rather than $396, which is about 59 percent more cost than the disclosed rate reflects. That gap is the reason the Act defines its own rate instead of borrowing the familiar one, and a loan priced to sit just under 36 percent on the Regulation Z figure can be unlawful on the one that counts.

Pros

• The cap is genuine and enforceable, and it is measured on an all-in rate that fees cannot be moved outside of.
• A contract that violates the Act is void from inception, which is a stronger remedy than a penalty the lender can price in.
• Mandatory arbitration is unenforceable against a covered borrower notwithstanding the Federal Arbitration Act, so disputes stay in court.
• The bans on allotment requirements, prepayment penalties and non-bank title security remove the specific terms that made military lending profitable.
• Protection attaches automatically at signing, with nothing for the borrower to invoke and no notice to give.

Cons

• Three large categories are outside it: a mortgage, a purchase-money vehicle loan and purchase-money credit for personal property, which together cover most of what a household borrows.
• Coverage is fixed at the moment of signing, so credit taken before service begins is governed by a different statute with a different cap.
• The rate is complex enough that a borrower cannot easily verify it from the disclosures alone, and the disclosed annual percentage rate is not the figure the ceiling tests.
• It protects one class of borrower, so it says nothing about what the same lender may charge anyone else, and it is not the only federal rate ceiling.
• Enforcement depends on the lender correctly identifying a covered borrower, and the safe harbor at 32 CFR 232.5(b) lets it do that with a Defense Department database search or a status indicator in a nationwide consumer report.