Jan 25, 2021 MicroBilt News
The Military Lending Act (MLA) was signed into law in 2006 in an effort to protect military members, and their families, from predatory lending practices.
The gist of the act is that it places a cap on interest rates for service members while also providing additional financial protections for these service members and their dependents.
The better lenders understand the MLA lending act, the better you can serve your own interests and avoid being on the wrong side of MLA compliance issues. Here’s what you need to know.
How Does the MLA Act Protect Service Members?
Compliance is critical for lenders who work with military service members and their dependents to help you avoid the penalties and fines associated with failure to comply. These are some of the more critical details for lenders to be aware of when working to ensure you stay within Military Lending Act compliance.
- The act establishes a Military Annual Percentage Rate (MAPR) cap of 36 percent for most consumer loans. For the most part, this is inclusive of finance charges, credit insurance premiums, application fees, and other types of fees, though there are some exceptions.
- The act bans prepayment penalties for military members who repay all or a portion of their loans early.
- The act prohibits lenders from coercing borrowers to give up their legal rights afforded to them as service members according to state or federal law or from forcing them into “mandatory” arbitration.
There are additional rules that have been added to the original MLA act according to the types of loans and credit cards in question.
Lenders are responsible for understanding the rules and maintaining MLA compliance.
Who Does the Military Lending Act Protect?
Because so many service members take out small loans, such as short term loans, the federal government sought to protect active duty service members from punishing interest rates by enacting the MLA act. The act covers active-duty members of the following branches if they’re serving for more than 30 days:
- Marine Corps
- Air Force
- Coast Guard
It also extends to active National Guard or National Guard reserve duty members. Active-duty National Guard members in training are also covered by the act.
In addition to the service members themselves, the act extends protections to their dependents which include spouses and children who are younger than 21 or students who are younger than 23.
Incapacitated children of active military service members at any age may also be protected under the Military Lending Act. Each military service member and dependents are all identified as covered borrowers.
Make sure you understand who qualifies as a Military Lending Act covered borrower when lending money or extending credit so that you don’t run afoul of this important regulation.
What Types of Loans Does the Military Lending Act Cover?
Originally, the MLA act only applies to a narrow scope of loans. However, in 2015, new rules went into effect that provided protection for new types of consumer loans. These are a few of the loans subject to MLA lending regulations.
- Installment loans.
- Short term loans.
- Tax refund anticipation loans.
- Vehicle title loans.
- Pawn loans.
- Overdraft lines of credit.
Of course, there are many types of loans that are not covered by the MLA. These loans are types of loans that are usually secured by the property they are used to purchase and include things like:
- Mortgage refinance loans.
- Home equity loans and lines of credit.
- Auto loans.
- Personal property loans secured by the property (boats, RVs, etc.).
Depending on the type of loans your business issues, you may need to adhere to specific guidelines to remain in MLA compliance and avoid penalties, fines, and fees. But how do you know who is eligible?
Determining Eligibility for MLA Protections
Ultimately, the responsibility for MLA compliance rests on the shoulders of lenders.
It is up to you to determine if your borrowers qualify for the protections this act provides and whether your business falls under the requirements of the MLA act, to begin with.
Lenders have the option of conducting a Military Lending Act database search. Many lenders, however, are reluctant to go that route.
Another highly cost-effective option to consider is the use of MLA Verify.
This software not only delivers confirmation that a borrower is an MLA covered borrower but also provides the most recent name and address of record for the applicant.
Why is MLA Verify so beneficial? It allows you to do something in a matter of seconds that may take longer through other methods available to you.
In a business where time is money, what business isn’t these days, you simply use MLA verify as part of the origination process for all types of credit regulated by the MLA act.
More importantly, MLA Verify confirms the status of borrowers against the Department of Defense Manpower Database which offers current information about active-duty service members in all branches of service.
This means that you can quickly and easily identify service members and their dependents so that your organization practices appropriate MLA compliance for all your qualifying borrowers.
Why is MLA Compliance Important for Lenders?
The provisions of the Military Lending Act also include potential penalties for lenders who are found in violation of these rules. If a covered borrower lodges a complaint against a business for violating the Military Lending Act within the qualifying time frame of the infraction the lender may be subject to a wide range of penalties, such as:
- Voiding the contract and repaying the principal and interest to the borrower.
- Actual damages (not less than $500) occurring from each violation.
- Punitive damages.
- Attorney fees when covered borrower succeeds in legal actions.
- Other relief provided by the law.
In some instances, these penalties, fines, and fees may be forgiven. However, lenders need to understand that it is costly to fail to meet MLA compliance.
For this reason, remaining within compliance with the act is essential to avoid these fees – not to mention the cost to your organization of mounting a legal defense against these claims.