The Military Lending Act (MLA) became effective in 2006 to protect active-duty servicemembers, their spouses, and dependents from payday lenders. Originally, the MLA applied only to three limited loan types: certain payday loans, vehicle title loans, and tax refund anticipation loans.

After several years, the Department of Defense (DoD) learned payday lenders were changing loan terms and amounts to avoid compliance with the MLA.

To counter those changes, the DoD amended the act.

In July 2015, the DoD issued a final rule amending its regulation that implements the MLA. These amendments expanded the definition of “consumer credit” to provide protections to a broader range of closed- and open-end loans within the scope of the Truth in Lending Act and Regulation Z rather than the limited types of credit that defined the original MLA rule.

Compliance took effect Oct. 3, 2016, for all open- and closed-end loans not exempt from the final rule except for credit card accounts, which had a compliance date of Oct. 3, 2017.

What loans are covered?

The amended MLA rule applies to consumer credit, defined as credit offered or extended to a covered borrower primarily for personal, family, or household purposes. Such loans are subject to a finance charge or are payable by a written agreement in more than four installments.

Closed-end loans covered by the rule include installment loans, private student loans, land loans not secured by a dwelling, payday loans, vehicle title loans, and tax refund anticipation loans.

Examples of open-end loans the rule covers are overdraft lines of credit, unsecured open-end lines of credit, and credit card accounts.

The MLA rule does not apply to:

• Residential mortgages secured by a dwelling, including loans to finance the purchase or initial construction of the dwelling, refinance transactions, home equity loans or lines of credit, or reverse mortgages.
• Loans expressly intended to finance the purchase of a motor vehicle when the loan is secured by the vehicle being purchased.
• Loans expressly intended to finance the purchase of personal property when the loan is secured by the property being purchased.
• Loans exempt from the requirements of Regulation Z.
• Loans in which the consumer is not a covered borrower at the time the loan is consummated.

Covered borrowers

The MLA rule defines “covered borrower” as a member of the armed forces who is serving on active duty, someone under a call or order of more than 30 days, or a dependent of a covered borrower.

It also includes active Guard and Reserve duty, which means active duty performed by a member of a reserve component of the Army, Navy, Air Force, or Marine Corps. Also covered: National Guard duty pursuant to an order requiring full-time duty for 180 consecutive or more days for organizing, administering, recruiting, instructing, or training the reserve components.

A servicemember who is no longer on active duty, however, would not be considered a covered borrower. The MLA rule doesn’t pertain to loans for members who are not covered borrowers.

One immediate benefit is that the creditor would not be required to calculate the military annual percentage rate for an open-end loan during each billing cycle.

Servicemembers’ dependents

The MLA rule defines dependents as a servicemember’s spouse; a child under age 21; a child under age 23 if enrolled full-time in an institution of higher learning approved by the secretary of defense; or a child who’s incapable of self-support due to a mental or physical incapacity that occurs while a dependent of a servicemember.

A dependent also may be:

• A servicemember’s parent or parent-in-law residing in the servicemember’s household who is (or was at the time of the servicemember’s death if applicable) dependent on the servicemember for more than 50% of his or her support.
• An unmarried person who is not a dependent of the servicemember under other conditions over whom the servicemember has custody pursuant to a court order for at least 12 consecutive months; is under age 21; is under age 23 and is enrolled full-time at an institution of higher learning approved by the secretary of defense; or someone who is incapable of self-support due to a mental or physical incapacity that occurred while he or she was considered a dependent of the servicemember and is dependent on the servicemember for more than 50% of his or her support.

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