Written by Summer 2024 M-VETS Student Advisor Brian Tarno.
“The MLA better protects our service men and women from predatory credit practices by expanding financial protections provided to service members, and helping ensure military families receive the consumer protections they deserve.”[1]
What is the Military Lending Act?
The Military Lending Act[2] (“MLA”) protects active-duty service members from predatory lending practices that undermine military readiness and cause undue stress and harm to service members and their dependents.[3] The MLA limits the types, terms, and conditions of consumer credit products offered to active-duty service members and certain dependents.[4] The MLA is implemented through Department of Defense (“DoD”) regulations.[5]
What Does the MLA do?
The MLA has two main functions. First, unlike many federal consumer protection laws in the United States, the MLA places substantive limitations on the terms and conditions of consumer credit products offered to service members.[6] Second, the MLA requires additional disclosures for service members who receive a consumer credit product.[7]
The MLA prohibits and limits the terms and conditions of consumer credit products.[8] First, the MLA caps the interest rate charged to service members at 36%.[9] This interest rate cap, known as the Military Annual Percentage Rate (“MAPR”), is calculated in a more expansive way than other interest rate regulations.[10] Subject to some exclusions, the MAPR includes:
- Most finance charges;
- Credit insurance premiums;
- Fees for debt cancellation contracts;
- Ancillary or add-on product fees;
- Application fees, and
- Participation fees.[11]
The annual interest rate cannot surpass 36% when all these fees and charges are calculated.[12]
Second, the MLA prohibits creditors from forcing service members to waive their rights.[13] The MLA is one of the few federal laws that expressly ban mandatory arbitration clauses in consumer financial contracts.[14] Additionally, the MLA makes it illegal for creditors to require a servicemember to waive protections under federal and state law, such as the Servicemembers Civil Relief Act.[15]
Third, the MLA prohibits creditors from charging prepayment fees to service members.[16] If a service member can pay the total amount of a loan or credit product before it is due, the creditor must accept this and not charge an early prepayment fee.[17] Fourth, the MLA makes it illegal for creditors to extend “roll-over” credit to service members, where the balance of an old loan rolls over to a new loan.[18] Finally, the MLA prohibits creditors from requiring service members to comply with “unreasonable notice” provisions.[19]
In addition to the substantive protections, the MLA requires creditors to make additional disclosures to service members. First, the MLA requires creditors to comply with the disclosure requirements found in Regulation Z.[20] Second, the MLA requires creditors to describe all fees and charges used in the calculation of the MAPR.[21] Finally, the MLA requires creditors to provide a “clear description of the payment obligations” to the servicemember.[22]
What is Covered?
DoD regulations expressly defer to Regulation Z when defining consumer credit products, which provides a much broader scope of coverage than the initial statutory grant for the MLA. Therefore, the MLA covers any consumer credit product offered for personal, family, or household purposes that is either subject to a finance charge or payable in more than four installments. This includes credit cards, payday loans, nontraditional overdraft lines of credit, some types of student loans, and installment loans.[23]
However, there are important exceptions to MLA coverage. Any loan secured by the object of the loan is not subject to the MLA.[24] This exemption covers residential mortgages that are secured by the home being purchased, vehicle loans secured by the vehicle being purchased, and loans for personal property secured by the property being purchased.[25] For instance, a loan for a washing machine, secured by the washing machine as collateral, is not covered by the MLA protections.
Who Enforces the MLA?
In 2013, Congress amended the MLA to grant federal and state administrative bodies enforcement authority.[26] The same regulators that enforce the Truth-in-Lending Act can enforce the MLA.[27] This includes the Consumer Financial Protection Bureau, National Credit Union Administration, Federal Deposit Insurance Corporation, Federal Trade Commission, and state agencies entrusted with the supervision of state-chartered financial organizations.[28]
In addition to administrative enforcement, the MLA contains a private liability provision.[29] This means that creditors who violate the MLA may be sued by private individuals who suffer harm. Service members who sue under the MLA are entitled to recover actual damages, punitive damages, equitable relief, costs, and attorney’s fees.[30]
Recent Developments
Federal courts have recently clarified two aspects of the MLA. First, the United States District Court for the Eastern District of Virginia applied a “broad reading” of the MLA’s statute of limitations.[31] Second, the United States Court of Appeals for the Eleventh Circuit — which covers Alabama, Georgia, and Florida — held that service members must be able to trace their harms to violations of the MLA in order to bring suit.[32] Taken together, these court cases showcase the need for service members to properly understand their rights to avail themselves of them under the MLA.
The MLA statute of limitations is two years from the date when the service member discovers the violation.[33] In Wood v. Omni Financial of Nevada, Inc.,[34] the district court held that the statute of limitations begins to run on the date the service member discovers the violation, not the date that the service member learns that the violation is against the law.[35] This means that a service member has two years from the date of discovery to bring suit, regardless of whether the service member knows they have the right to bring suit.[36] Therefore, service members need to know their rights under the MLA to redress their injuries adequately.
In the Eleventh Circuit, a service member does not have standing to sue under the MLA just because their contract contains illicit terms.[37] In Louis v. Bluegreen Vacations Unlimited, Inc., the court held that despite violations of the MLA, which could render a contract void, service members lack standing unless they can affirmatively trace an injury to the violations of the MLA.[38] Specifically, the court held that the plaintiffs failed to show that the alleged MLA violations caused them to sign the contract or make extra payments.[39] Therefore, service members in these states can be held to contracts that contain illicit terms if there is no directly traceable injury by the violation.
How can Service Members Protect Themselves?
Knowledge is power, and service members can only protect themselves from harms they know about. When taking out a loan or accepting a provision of credit, service members should ensure they understand every aspect of the contract. Because the statute of limitations for an MLA claim is two years from the discovery of a potential violation, service members must be able to identify illicit terms early, as ignorance of the law is not a defense to the statute of limitations. Additionally, service members should contact their local Judge Advocate General’s office for counseling on their rights. Finally, based on a recent court case, service members can be bound by terms that violate the MLA and not have standing to sue. Thus, official complaints to the FTC and CFPB take on a more comprehensive role in helping service members assert their rights. Service members who believe they have encountered a violation of the MLA should report these companies to the FTC and CFPB to protect themselves and fellow service members.
[1] Press Release, Department of Defense, Department of Defense Issues Final Military Lending Act Rule (July 21, 2015), https://www.defense.gov/News/Releases/Release/Article/612795/department-of-defense-issues-final-military-lending-act-rule/ (hereinafter “DoD Press Release July 2015”).
[2] 10 U.S.C. § 987.
[3] DoD Press Release July 2015.
[4] Consumer Financial Protection Bureau, What is the Military Lending Act and what are my rights? https://www.consumerfinance.gov/consumer-tools/educator-tools/servicemembers/military-lending-act-mla/, (last visited Aug. 20, 2024) (hereinafter “CFPB MLA Blog”).
[5] Federal Reserve, Military Lending Act – Consumer Compliance Handbook, at 1.
[6] See CFPB MLA Blog.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] National Credit Union Administration, Complying with Recent Changes to the Military Lending Act, https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/complying-recent-changes-military-lending-act-regulation, (last visited Aug. 20, 2024) (hereinafter “NCUA MLA Guidance”).
[12] Id.
[13] Id.
[14] See id.
[15] Id.
[16] CFPB MLA Blog.
[17] Id.
[18] Id.
[19] 10 U.S.C. 983(e)(3)-(4).
[20] 10 U.S.C. 983(c)(1)(b).
[21] 10 U.S.C. 983(c)(1)(a).
[22] 10 U.S.C. 983(c)(1)(c).
[23] CFPB MLA Blog.
[24] Id.
[25] Id.
[26] Federal Reserve, supra n.5, at 1.
[27] Federal Reserve, supra n.5, at 1.
[28] 15 U.S.C. § 1607.
[29] 10 U.S.C. § 983(f)(5).
[30] 10 U.S.C. § 983(f)(5).
[31] Virginia Federal Court Applies Broad Reading of Military Lending Act’s Statute of Limitation in Dismissal of Borrower Class Action, (June 9, 2023) https://www.consumerfinancialserviceslawmonitor.com/2023/06/virginia-federal-court-applies-broad-reading-of-military-lending-acts-statute-of-limitation-in-dismissal-of-borrower-class-action.
[32] See Louis v. Bluegreen Vacations Unlimited, Inc., 2024 U.S. App. LEXIS 13925 at *8-*9 (11th Cir. June 7, 2024);
[33] About the Court, United States Court of Appeals for the Eleventh Circuit, https://www.ca11.uscourts.gov/about-court#:~:text=Established%20by%20Congress%20in%201981,Northern%2C%20Middle%20and%20Southern%20Districts (last visited Aug. 20, 2024).
[34] 2023 U.S. Dist. LEXIS 95656 (E.D. VA May 31, 2023).
[35] Id. at *41-*42.
[36] Id.
[37] Louis, 2024 U.S. App. LEXIS 13925 at *8-*9.
[38] Id.
[39] Id. at *6.