Military Lending Act (MLA)

FAST FACTS  

  • A creditor may not impose on a borrower a “military annual percentage rate (MAPR)” that’s greater than 36 percent. The MAPR is defined differently than the APR we are familiar with. The MAPR “includes all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary products sold, and any other charge or premium with respect to any extension of credit to a servicemember or the servicemember’s dependent.”
  • Mandatory written disclosures must be provided as well as oral disclosures (including the MAPR and Truth in Lending Act disclosures).
  • Creditors are prohibited from requiring arbitration agreements and the exclusion of class action lawsuits.

You have probably read or heard about the Department of Defense’s new interpretation of the Military Lending Act (MLA) and how it affects dealers. To ensure that you are in compliance, I offer the following recap of the law and how it would affect your dealership. It is strongly recommended that you consult with counsel, if you haven’t already.

The Military Lending Act was enacted by Congress in 2006 and implemented by the Department of Defense in 2007. The purpose of the Act is to protect servicemembers and their dependents against predatory lending practices. Motor vehicle financing transactions were exempt from the requirements of this Act. However, through changes in the rule and through Department of Defense interpretations, certain types of dealer transactions were then included under the requirements of the Act.  These changes took effect on October 3rd, 2016.

First, a summary of what the Act entails:

  1. A creditor may not impose on a borrower a “military annual percentage rate (MAPR)” that’s greater than 36 percent. The MAPR is defined differently than the APR we are familiar with. The MAPR “includes all cost elements associated with the extension of credit, including fees, service charges, renewal charges, credit insurance premiums, any ancillary products sold, and any other charge or premium with respect to any extension of credit to a servicemember or the servicemember’s dependent.”
  2. Mandatory written disclosures must be provided as well as oral disclosures (including the MAPR and Truth in Lending Act disclosures).
  3. Creditors are prohibited from requiring arbitration agreements and the exclusion of class action lawsuits.

With the amended rule and the newest interpretations issued by the Department of Defense in a “guiding document” on December 14, 2017, the changes that directly affect motor vehicle dealership lending transactions, requiring compliance with the MLA, include:

  1. When the borrower obtains a loan to purchase an automobile that exceeds the purchase price and keeps the additional money or uses it for something unrelated to the purchase of the motor vehicle.
  2. When dealerships finance credit-related products such as Guaranteed Auto Protection (GAP) insurance or credit life or credit disability insurance. (However, the purchase and financing of a service agreement or the upgrading of the unit, such as adding leather seats, would not fall under the requirements of the MLA.)

Thanks to the aggressive lobbying efforts of several trade organizations,  as of February 28, 2020, the Department of Defense withdrew its interpretive rule which did not allow dealers and lenders to sell GAP and credit insurance because it was concerned that creditors were unable to technically comply with the MLA “if the purchase included products not expressly related to the purchase of the vehicle…because [the MLA] would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.” 

Effective Date:  February 28, 2020

Failing to comply with the MLA can result in civil liability for actual damages, punitive damages, equitable or declaratory relief, and attorney’s fees. For knowing violations, there is criminal liability including fines and imprisonment.

Reference:

Military Lending Act Limitations on Terms of Consumer Credit Extended to Service Members and Dependents 

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