Congress, in 2006, passed the Military Lending Act in response to concerns that predatory lenders were setting up shop on the doorstep of military bases and aggressively marketing their products to financially naive service members who had taken living paycheck to paycheck to new heights.
Since inception, the act has contained an annual finance charge rate limit of 36%. However, under a Department of Defense regulation implementing the act, this cap only applied to payday loans of $2,000 or less with terms no longer than 91 days; nonpurchase money loans secured by car titles with terms no longer than 181 days; and tax refund anticipation loans. And, for these types of loans, lenders had little trouble coming up with ways around the regulation. In 2014, however, DOD put in place a regulation pursuant to which consumer loans of all types, other than mortgage and purchase money loans secured by the property being purchased, became subject to the 36% finance charge cap and other provisions of the act.
The Military Lending Act, which applies to active-duty personnel and their dependents, adds a layer of complexity to consumer credit. For example, the annual percentage rate applicable to loans covered by the act — called the “military annual percentage rate” — differs from the APR under the Truth In Lending Act and includes additional loan-related costs, which can result in a higher APR. And mandatory dispute resolution by arbitration is prohibited. Also, there are disclosures lenders must make in addition to the many disclosures required by the Truth In Lending Act. Lenders violating the Military Lending Act face serious sanctions, including minimum civil damages of $500 per violation; a voiding of the loan transaction from inception; limitations on collection activities; administrative penalties; and even jail time for intentional violations.
The Military Lending Act has climbed up the enforcement priority ladder for the Consumer Financial Protection Bureau, which, in pursuit of deterrence, likes to go after low-hanging fruit and then widely publicize its actions. The CFPB’s most recent target is a company called LendUp Loans. In December, CFPB sued LendUp Loans and is seeking an injunction against further violations; removal of adverse information from credit reports; prohibition of collections; disgorgement of profits; damages; costs of litigation; and a civil penalty.
The message here is that active-duty service members or their dependents who might be having issues with a consumer lender should drill down on the Military Lending Act. A mere suggestion to the lender that a violation of this law might have occurred could substantially change the course of the discussion.
Jim Flynn is with the Colorado Springs firm of Flynn & Wright; firstname.lastname@example.org.