Military Lending Act
Last Reviewed: October 2023
Note: Credit unions should also be reminded that there is another law they need to consider for military/service members. Please also reference the Servicemember Civil Relief Act
As required by the John Warner National Defense Authorization Act for Fiscal Year 2007 which added 10 USC 987, the Department of Defense (DOD) issued a regulation that implements the Military Lending Act (MLA) regarding the terms of consumer credit extended by creditors to service members and their dependents.
In July 2015, the changes were made that impacted the MLA and became effective on October 1, 2015. Credit unions were required to comply with most changes on October 3, 2016, and comply with the credit card provisions on October 3, 2017.
Military Lending Act: Summary
Loans Covered Under the Rule
The rule defines “consumer credit” as any credit offered or extended to a covered borrower primarily for personal, family, or household purposes and that is:
- Subject to a finance charge; or
- Payable by a written agreement in more than four installments.
The definition of consumer credit DOES NOT mean:
- A residential mortgage (any credit transaction secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling, any refinance transaction, home equity loan or line of credit or reverse mortgage);
- A credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased;
- A credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased;
- A credit transaction that is an exempt transaction for purposes of Regulation Z;
- A credit transaction for a non-covered borrower.
Credit unions should be mindful that if they are refinancing a loan for a borrower, it may be deemed a covered loan. For example, if the credit union is refinancing an auto loan from another lender in order to provide the member with a lower rate, that would not be a credit transaction that is expressly intended to finance the purchase of a motor vehicle and would therefore be a “covered loan” and subject to the MAPR limitations and disclosure requirements.
Identification of Covered Borrowers
A “covered borrower” is defined as a person with the following status at the time they become obligated on a consumer credit transaction:
- A regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or less, or such a member serving on Active Guard and Reserve duty [as defined in 10 U.S.C. 101(d)(6)]; or
- The covered borrower’s dependent(s) as described in subparagraph A, D, E or I of 10 USC 1072(2). Generally, this may include a spouse, child (under 21 or 23 if full time student or no age limit if there is a mental/physical incapacity); could also be a parent or in-law (if supported by the covered borrower); another adult in legal custody of the covered borrower.
The regulation contains safe harbor methods to determine if a borrower is considered “covered” under the rules. In general, the credit union can verify the status by using information related to the borrower, obtained directly or indirectly from the DOD database. Historic lookbacks are prohibited under the rule, so the credit union would not be permitted to obtain information from the DOD database to determine if a borrower would have been covered as of the date the transaction was conducted or account established.
The credit union is also provided with a safe harbor for determining covered borrower status if they use a consumer report from a nationwide consumer reporting agency.
The credit union who makes the covered borrower determination by using one of the safe harbor methods above shall be deemed to be conclusive with respect to that transaction or account, so long as the credit union timely creates and maintains a record of the information obtained.
Military Annual Percentage Rate (MAPR) Limitation
The MAPR, defined as “the cost of consumer credit expressed as an annual rate," and includes the following:
- Finance charges associated with the consumer credit;
- Application Fees (exclusion for application fees for Federal Credit Unions or an insured depository institution for short-term small amount loans provided that the fee is not charged more than once in any rolling 12 month period) and any fee imposed for participation in any plan or arrangement for consumer credit;
- Credit insurance premiums or fees, including charges for single premium credit insurance;
- Fees for debt cancellation or debt suspension agreements; and
- Fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction.
The MAPR may not exceed 36%.
Under the rule, the credit union must provide covered borrowers the following information before or at the time the borrower becomes obligated on the transaction or establishes an account:
- A statement of the applicable MAPR (*model statement provided by regulation is listed below);
- Any disclosures required by Regulation Z;
- A clear description of the payment obligation of the covered borrower, as applicable (i.e., payment statement pursuant to Regulation Z); and
- To meet the requirements of providing a statement of the applicable MAPR as required by the MLA, the credit union can use this model statement or something substantially similar: “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 their dependent may not exceed 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with the 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)."
These disclosures (including a clear description of the payment obligation) must also be provided orally before consummation of the loan. The credit union can satisfy the oral requirement of the MLA by providing the information to the covered borrower in person; or providing a toll-free number in order to deliver the oral disclosures to a covered borrower when they contact the credit union for that purpose.
The toll-free number must be included on a form the credit union directs the covered borrower to use to apply for the credit transaction or in a written disclosure included with the other required disclosures.
The refinancing or renewal of a covered loan requires new disclosures only when the transaction would be considered a new transaction that requires Regulation Z disclosures.
This regulation would preempt any inconsistent State or Federal law, rule or regulation, including any State usury law, unless such a law, rule or regulation provides additional protection to covered borrowers.
States may not charge MAPRs that are higher than the limit for residents of the State, or permit the violation or waiver of any State consumer lending protection that is for the benefit of the residents of that State, solely on the basis of the borrower’s non-resident or military status.
The rule prohibits creditors and their assignees from the following activities:
- Extending consumer credit to a covered borrower in order to roll over, renew, or refinance consumer credit that was previously extended by the same creditor to the same covered borrower. This limitation would NOT apply to workout loans or other refinancings that benefit the borrower.
- Requiring covered borrowers to waive their legal recourse under any applicable State of Federal law, including any provision of the Servicemembers Civil Relief Act.
- Requiring covered borrowers to submit to arbitration or imposing other onerous legal notice provisions if the event of a dispute.
- Demanding unreasonable legal notice as a condition for legal action.
- Using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower. However, creditors may do the following:
- Require an EFT to repay the debt, unless otherwise prohibited by law;
- Require direct deposit of the covered borrower’s salary as a condition of eligibility for credit, unless otherwise prohibited by law; or
- Take a security interest in the funds that are deposited after the extension of credit in an account established in connection with the transaction.
- Requiring that the covered borrower establish an allotment to repay the obligation.
- Prohibiting the borrower from prepaying the debt, or charging a fee for prepaying all or part of the debt.
Penalties and Remedies
In addition to any remedies otherwise available to borrowers, creditors or assignees that knowingly violate the regulation will be fined or imprisoned for not more than one year, or both.
Additionally, any credit agreement, promissory note, or other contract that does not comply with the regulation will be void from the inception of the contract, and any arbitration clause will be unenforceable.
Effective January 1, 2023
A new California Law (Senate Bill (SB) 1311 - Military and Veteran Consumer Protection Act of 2022) will directly impact credit unions who are lending to borrowers for motor vehicles in the state of California. Specifically, if a loan is made to a covered member and also funds the purchase of a credit insurance product or credit-related ancillary product (like GAP), the security interest cannot be perfected.
Covered borrowers under SB 1311 has the same meaning as in the Military Lending Act. Important distinction for this state laws is the coverage of members living in California and/or doing business in California.
Section 408.1(c) of the Military and Veterans Code was added and specifically reads:
(c) A security interest in a motor vehicle is void, and cannot be perfected, if it would cause a loan procured by a covered member in the course of purchasing the motor vehicle to be exempt from Section 987 of Title 10 of the United States Code, and the loan also funds the purchase of a credit insurance product or credit-related ancillary product.
Therefore, this state law specifically focuses on motor vehicle loans that finance the purchase of a credit insurance product or credit-related ancillary product.
Credit unions need to amend their procedures to include the following provisions when making or purchasing a motor vehicle loan:
- Determine if the member is a covered borrower under the Military Lending Act.
- If the borrower is a covered borrower under the MLA, determine if the member is a resident and/or doing business in the state of California.
- If the covered borrower is located or doing business in the state of California, the credit union needs to ensure (to protect their security interest) that the transaction is not also financing the purchase of a credit insurance product or credit-related ancillary product (like GAP).
- If the covered borrower is located or doing business in the state of California and needs to finance the purchase of a credit insurance product or credit-related ancillary product, the credit union will consider an unsecured loan, following the proper protocol for disclosure requirements under the Military Lending Act.
Credit unions that are purchasing loans through indirect lending channels need to ensure that the loans they are purchasing do not include the financing of GAP (any credit insurance product or similar credit-related product). Under the California law, the credit union will not be able to perfect their security interest.
In addition to the risk of losing a security interest in the vehicle, there are civil penalties associated with non-compliance.
Military Lending Act: Laws & Regulations
- 10 USC 987, Terms of Consumer Credit Extended to Members and Dependents: Limitations
- 32 CFR 232, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents
- California Law: Senate Bill (SB) 1311 - Military and Veteran Consumer Protection Act of 2022
- MLA Interpretive Guidance
- MLA Interpretive Guidance – 2
- MLA Interpretive Rule – 2/28/2020
Military Lending Act: Additional Resources
- CFPB Examination Procedures – Military Lending Act
- CFPB - Serving servicemembers, veterans, and military families
- MAPR Calculator (FFIEC)
- Military Lending Act – Record Look Up
- Military One Source
- NCUA Letter 09-CU-12 (with encl) Interagency Examination Procedures on Credit Extended to the Military and Dependents
- Servicemembers Civil Relief Act – Record Look Up
Military Lending Act: Model Policies
CU PolicyPro contains the following model content which can be used to help you craft your own policies and guidance on this topic:
- Model Policy 7213: Military Personnel Loans
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