Military personnel: Know your rights about predatory lending
Protecting military service members against predatory lending
- A 2015 update to the Military Lending Act expanded protections to all types of consumer credit, except for home mortgages and secured credit accounts.
- By law, military service members are essentially ineligible for most payday loans because of a 36 percent cap on annual percentage rates (APRs).
- Creditors cannot take away bankruptcy-related rights given through the Servicemembers Civil Relief Act.
- Creditors cannot force a service member to use mandatory arbitration for settling a dispute.
Military servicemen and servicewomen are generally young, often financially inexperienced, and have a steady paycheck. These factors make them prime targets for risky loans and so-called “predatory loans,” often defined as short-term, high-interest loans issued for a variety of borrowing purposes.
A U.S. Department of Defense (DOD) report from 2006 estimated that 17 percent of military personnel had used high-interest payday loans, and the Center for Responsible Lending reported that active-duty military members were three times more likely than civilians to utilize payday loans.
What does the MLA cover?
The Military Lending Act, or MLA, passed in 2006 and was updated in 2015 to offer protections to military service members. The updated law includes some key stipulations to protect active-duty service members. Here are some of the protections:
Annual percentage rates
The MLA caps APRs at 36 percent of the loan amount. This includes all interest, fees and any loan-packing items, such as credit insurance, debt suspension or debt cancellation. The cap effectively makes service members ineligible for most traditional payday loan programs, which have average APRs of 400 percent or more, the Consumer Financial Protection Bureau (CFPB) said.
Creditors may not require service members to participate in mandatory arbitration, which stops the borrower from filing a lawsuit to settle a dispute. They may not force them to waive their rights under the Servicemembers Civil Relief Act, if the borrower is involved in a bankruptcy case. They cannot require payroll allotments, or automatic transfers from a paycheck, as a condition of credit. They cannot charge penalties for early repayment of full or partial balances. And the MLA also prohibits many lenders from granting vehicle-title loans, where the lender may seize the borrower’s vehicle if they do not repay a loan.
Expansion of credit definitions
Prior to 2015, the MLA applied only to payday loans, vehicle-title loans and tax-refund anticipation loans. The updated law covers most types of consumer credit that include finance charges or more than four repayment periods. Now the only loan types that are excluded from the MLA are home mortgages, and secured credit accounts for vehicles and personal property.
What else should I know?
Some lenders and creditors target military personnel because they’re often young or less experienced with money, have steady paychecks and have little to no credit. If you’re a service member or dependent, there are resources to provide information about the types of loans and credit covered by the Military Lending Act.
The new MLA rules that went into effect in 2015 had staggered compliance dates for creditors. For example, the CFPB noted that credit-card companies had until Oct. 3, 2017, to comply with the law. After that date, it’s also possible for some charges, such as cash-advance fees and foreign-transaction fees, to be excluded from the Military Annual Percentage Rate (MAPR) cap of 36 percent.
Free legal assistance on financial and lending issues are available in many areas through a local judge advocate general (JAG). Eligible parties include active-duty service members, retirees, reservists and National Guard personnel who recently deployed or are about to deploy, certain overseas civilian employees and any DOD-eligible dependents.
The DOD notes that service members will still have access to a variety of no-interest loans, grants and scholarships from the four military relief societies: Army Emergency Relief, the Air Force Aid Society, Coast Guard Mutual Assistance and the Navy-Marine Corps Aid Society. These programs usually apply to active-duty, reserve and retired service members, as well as eligible dependents and survivors. They may be used to help with basic living expenses or one-time emergency expenses.