In August 2018, the Trump administration moved to decrease key financial protections for military service members. The administration proposed weakening Department of Defense (DOD) regulations that make it difficult for automobile dealers to bundle overpriced add-on products, such as gap insurance, into car loans issued to military service members.
Separately, the Consumer Financial Protection Bureau (CFPB), an executive branch agency, moved to dial back its monitoring of payday lenders and other alternative financial services providers. The expected enforcement changes would significantly weaken the Military Lending Act, leaving service members and their loved ones vulnerable to predatory lending practices that experts believe hurt military readiness.
The administration’s proposed changes to DOD regulations appear stalled, but that hasn’t stopped the CFPB from loosening oversight of alternative financial services providers. The CFPB’s shift sparked at least one lawsuit, and while its full ramifications remain unclear, it’s as good a time as any to take a comprehensive look at the various federal laws and regulations providing financial protection for military service members and their families.
If you’re an active-duty service member or plan to join the military anytime soon, take a few minutes to familiarize yourself with your rights under the law.
Military Lending Act (MLA)
Enacted in 2006, the Military Lending Act provides a host of financial protections for active-duty military service members, their spouses, and certain dependents. National Guard and Reserve members on active duty also enjoy protection under the MLA.
Loan types regulated under the MLA include:
- Overdraft lines of credit (not including traditional overdraft protection, which the MLA doesn’t consider a loan)
- Payday loans
- Tax refund anticipation loans
- Vehicle title loans
- Deposit advance loans
- Unsecured installment loans (such as personal loans)
- Credit cards
- Certain types of student loans
Loan types not regulated under the MLA include:
- Residential mortgages (including conventional mortgages, specialty products like VA home loans and FHA loans, reverse mortgages, and home equity lines of credit)
- Secured car loans
- Purchase loans secured by the purchased property (such as home appliance loans)
Protections Under the MLA
Key Military Lending Act protections include:
1. Interest Rate Cap
The MLA sets a mandatory interest rate cap on most consumer loans made to military borrowers. This special capped rate is known as the Military Annual Percentage Rate (MAPR), which is distinct from the standard Annual Percentage Rate (APR).
Under the MLA, lenders may charge no more than 36% MAPR after accounting for:
- Finance charges (interest)
- Loan fees (including application and participation fees)
- Credit insurance premiums (private mortgage insurance is an example of credit insurance, though the MLA doesn’t cover mortgages themselves)
- Add-on credit products bundled into eligible loans (such as identity theft protection or credit monitoring)
2. No Mandatory Arbitration
The MLA forbids creditors from requiring customers to resolve disputes in arbitration. In other words, you can’t be forced to waive your right to take your creditor to court.
3. No Waivers of Rights Under Certain State or Federal Laws
The MLA forbids creditors from requiring customers to give up certain rights under state or federal law as a condition of service. Most importantly, you can’t be forced to waive your rights under the Servicemembers Civil Relief Act (more on this act below).
4. No Mandatory Military Allotments
The MLA prohibits creditors from requiring customers to make a voluntary military pay allotment, or payroll deduction, as a condition of loan approval. Though service members may choose or be compelled to make military allotments for obligations like child support or back taxes, private lenders can’t force them to make one to guarantee payment of a future loan.
5. No Prepayment Penalties
The MLA prohibits prepayment penalties on covered credit products. Creditors can’t levy financial penalties when you pay back part or all of your loans ahead of schedule.
Filing an MLA Complaint
Despite reported efforts to weaken enforcement around certain add-on products and loan types, the MLA remains the law of the land. If you believe a lender is violating the MLA, you’re within your rights to file a complaint with your local Judge Advocate General (JAG) or your military installation’s financial readiness office.
Alternatively, you can file a complaint directly with the CFPB using the bureau’s online complaint portal. Most complaints produce a response within 15 days.
Servicemembers Civil Relief Act (SCRA)
The Servicemembers Civil Relief Act is the latest iteration of a package of financial protections first passed in 1918 as World War I wound down. Service personnel protected under the SCRA include:
- Active-duty Army, Marine Corps, Navy, Air Force, and Coast Guard members
- National Guard members on active duty for more than 30 consecutive days
- Reserve members on active duty
- Commissioned active-duty officers of the Public Health Service or the National Oceanic and Atmospheric Administration
Some dependents are afforded SCRA protection, as well. Protections generally begin on the date the covered service member enters active-duty service. For reservists, protections start upon receipt of military orders.
Protections Under the SCRA
Per the Department of Justice (DOJ), the SCRA’s key protections include:
1. Interest Rate Cap on Pre-Service Obligations
The SCRA caps interest rates on certain financial obligations incurred before the covered service member began their eligible active duty. The cap is 6% APR, including most fees not prohibited by law.
Financial obligations covered by the SCRA’s rate cap include vehicle loans (including car and boat loans), home loans, home equity loans, student loans, and credit cards. Except for mortgage loans, the cap remains in force only for the duration of the covered service member’s active-duty period. For mortgage loans, the cap remains in force for 12 months following the end of active duty.
Creditors must forgive interest subject to the 6% cap retroactively. Creditors may not simply defer interest until the service member is no longer on active duty, nor may they accelerate principal payments in anticipation of the cap.
A covered service member has 180 days from the end date of their active-duty service to provide the creditor with a written notice of eligibility and a copy of their military service orders. The cap may be waived only upon a court’s determination that the service member’s active-duty status does not materially affect their ability to repay covered obligations.
2. Protections Against Default Judgments
The SCRA does not provide blanket protection against default judgments in civil cases. However, when the covered service member (the defendant) fails to appear in court to answer a civil suit, the plaintiff (the party bringing the suit against the service member) must file an affidavit that affirms one of the following conditions:
- The defendant is presently in military service
- The defendant is not presently in military service
- The plaintiff’s good-faith effort to determine whether the defendant is in military service is inconclusive
In all cases, the affidavit must provide a factual basis for its conclusion. If the court determines that the defendant is in military service – or appears to be, in inconclusive cases – the court must appoint an attorney to represent the defendant before proceeding with a default judgment. If the appointed attorney is unable to contact the defendant, the court must wait at least 90 days to enter a default judgment.
These rules apply to a wide range of civil proceedings, including actions taken by creditors such as mortgage lenders and credit card issuers.
3. Non-Judicial Foreclosure Protections
For the duration of a covered service member’s active-duty status and one year following its conclusion, a mortgage lender must obtain a court order to foreclose on that service member’s mortgage loan, provided the service member obtained the loan before entering military service. This protection applies even in states that permit mortgage lenders to foreclose without court orders and to service members who neglected to inform their lenders of their military status.
When a covered service member’s ability to repay their mortgage is materially affected by their active-duty status, the court must honor the service member’s request to stay the foreclosure proceeding or temporarily restructure the loan’s repayment. The court may order a stay or adjustment at its discretion, as well.
4. Residential & Auto Lease Termination Protections
The SCRA provides expanded protection to service members and dependents who terminate residential leases after receiving active-duty or Permanent Change of Station (PCS) orders covering a period of 90 days or more.
Specifically, service members and dependents covered by this provision may not be penalized – for instance, with the revocation or reduction of their security deposit refund – for early lease termination. Eligible leases must be entered before receipt of military orders, and notice of termination, along with copies of the relevant military orders, must be hand-delivered to the landlord or property manager. Once delivery has been made, lease termination is effective from 30 days after the next lease payment’s due date, provided that payment is due after the military orders are issued.
The SCRA also allows active-duty service members to terminate certain auto leases without penalty. Qualifying auto leases must have been entered into:
- Before the service member entered active-duty status, followed by an active-duty period of 180 days or more coinciding with the lease
- While the service member was on active duty, but before the service member received a PCS order moving them either a) from a location inside the continental United States to a location outside the continental United States, or b) from a location outside the continental United States to any other location
- At any point before the service member’s deployment with or in support of a uniformed military operation lasting 180 days or longer
5. Installment Lease & Contract Protections
In cases where the covered service member made a deposit or at least one installment payment on a vehicle lease or loan, the lender may not repossess the vehicle for the duration of the service member’s period of military service.
Waiver of Rights Under the SCRA
A covered service member or dependent may waive any rights enumerated by the SCRA, provided certain conditions are met. For instance, waivers governing mortgages and contracts must take the form of a separate, written document in 12-point font or larger. Waivers are effective only if entered during or following active-duty military service.
For service members, there’s little advantage to waiving rights enumerated by the SCRA. However, as creditors may condition loan approval on full or partial SCRA waivers, borrowers must understand both the conditions under which waivers are appropriate and the implications of waivers themselves.
Filing an SCRA Complaint
At its discretion, the DOJ may take legal action against lenders and other individuals and entities it believes violate the SCRA.
Generally, the DOJ initiates legal action on the basis of recommendations made by JAG offices. If you believe that a lender or another contractual counter-party is operating in violation of the SCRA, contact your local JAG’s office for instruction on filing a complaint. You can also file a complaint through the CFPB’s consumer complaints process, though you may simply be referred to your JAG’s office for further action.
The MLA and SCRA are essential safeguards for overall military readiness, not to mention valuable guarantees of financial security for folks with dangerous and too often thankless jobs. It’s worth wondering why other professionals whose jobs put them in harm’s way, such as public safety officers and emergency medical personnel, don’t enjoy similar protections.
But that’s a policy question for another day. If you or an immediate family member qualify for these financial protections, consider yourself fortunate.
Does your family benefit from any of these financial protections for military service members? Have you personally taken advantage of any?