How the Military Lending Act protects service members

Two U.S. Soldiers are silhouetted at dawn.

Jackie Veling | Dow Jones Newswires | July 14, 2023

What is the Military Lending Act? Here’s what you need to know.

Military members face several financial challenges while on active duty — unpredictable deployments, base relocations, spouse unemployment — and may need to borrow money to help cover expenses.

But needing access to credit can also leave them vulnerable to predatory lenders offering high-interest products. The federal government enacted the Military Lending Act to help protect service members from these lenders.

By establishing regulations around lending, the MLA helps service members access credit without enduring more financial hardship.

An overview of the Military Lending Act

The Military Lending Act is a federal law enacted in 2006 by the Defense Department to increase protections for active-duty service members, their spouses and dependents.

A report from the Defense Department, issued before the MLA rolled out, found that predatory lending was common among the military, with 17% of military personnel taking out payday loans. These short-term, high-interest loans can lead to a cycle of debt.

“When the law was signed into effect, there was a lot of attention on the military community,” says Jim Rice, assistant director of the office of servicemember affairs at the Consumer Financial Protection Bureau. “That was the peak of the call of reserve forces to active duty, but it also opened up the aperture for bad actors to prey on that population.”

The MLA established automatic protections — most notably, a 36% interest rate cap on payday loans, vehicle title loans and tax refund loans. That means lenders can’t charge more than a 36% military annual percentage rate on these types of credit. This percentage is widely considered the maximum rate at which credit can still be affordable.

The MLA established other protections, too, including eliminating prepayment penalties and mandatory military allotments, in which creditors require service members to make repayments through direct withdrawals from their paychecks.

Types of credit covered by the Military Lending Act

In 2015, the Defense Department expanded the MLA to include more types of credit.

The new legislation covers payday loans, credit cards, unsecured loans, vehicle title loans, deposit advance loans, some installment loans, certain student loans and tax refund anticipation loans.

The MLA doesn’t apply to all credit, though. Mortgages, home equity loans, lines of credit and certain secured loans, including secured auto loans, are not covered under the MLA.

The MLA differs from the Servicemembers Civil Relief Act. The SCRA also provides financial protections to active duty service members, but it only covers debt taken on before active duty service began.

How to report predatory lenders

Predatory lending is still a concern in the military community. Rice said the CFPB has recovered $175 million in monetary relief through 39 public enforcement actions that involved harm to service members and veterans. This includes six enforcement actions for violations of the Military Lending Act.

Service members, therefore, need to stay diligent, Rice says. If you believe a lender is violating the MLA, you can file a complaint online with the CFPB or by phone at 855-411-2372. You are not required to identify as a service member, he says.

Other ways to get financial assistance

If you’re on active duty and need financial help, you have built-in options, says Lacey Langford, accredited financial counselor and founder and CEO of the podcast “Military Money Show.”

Langford says service members should start with military aid societies, which may be available on your military installation and offer free grants or loans at 0% interest. Some even have surplus cash, she says, due to service members’ hesitancy about asking for assistance. These include Army Emergency Relief, the Navy-Marine Corps Relief Society, the Air Force Aid Society and Coast Guard Mutual Assistance.

“There’s often this thought of you’re going to get in trouble if you go in there and ask for help,” Langford says. “But that’s not the way it works. You can go in and tell them your situation, that you’re not able to make your car payment, and your boss doesn’t even have to know.”

Aid societies also have free financial counselors, Langford says. A financial counselor can help you look at your income and expenses and work up a plan to prevent cash-flow shortages in the future.

If there are no military aid societies in your area, the American Red Cross can help you access financial assistance, Langford says. Its Hero Care Center is available every day, 24 hours a day, by phone, computer or mobile app.

“There are so many people who think they have to do it alone, but the full protections and benefits that are allotted to you as an active duty service member are so powerful, and you should take advantage of them,” she says.