• Shruti Saraf, Eric Glaas and Karl Augenstein
  • Published: 15 May 2023


‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

Although the US Department of Defense issued a third interpretive ruling regarding the provisions of Military Lending Act (MLA) in February 2020, it still fell short of explicitly answering some fundamental questions about the Act’s applicability to borrowers and loan amount thresholds that continue to puzzle lenders to this day.

Ever since the original passage of the Act in 2006, banks have struggled with its implementation, often erring on the side of caution by applying MLA criteria across all consumer loans, with the exception of residential mortgages and auto loans. 

However, this surfeit of caution has led to an unnecessary increase in the cost of compliance, directly impacting the bottom line. What, then, if lenders’ ‘correct’ interpretation of the Act just ain't so?

To understand why implementing the provisions of the Act presents challenges for banks and credit unions, let us briefly look at the background, history, and purpose of 10 U.S.C. 987.

Service members are often targeted by predatory lenders and such predation adversely affects not just the individual, but also national defense. The MLA, passed by the DoD with bipartisan support from Congress, protects active-duty military members, their spouses, and their dependents by prohibiting certain lending practices  .

The MLA determined which loans were covered, how interest rates were to be calculated, what disclosures lenders need to extend, and what contracts these rules applied to. 

The original MLA provisions covered a very narrow range of contracts. After years of study and experience, the DoD amended the Act several times between 2015 and 2020 to cover any credit extended primarily for personal, family, or household purposes that is subject to a finance charge or payable by a written agreement in more than four installments.

As a result, MLA covers a wide variety of credit except mortgages and contracts. Under the MLA’s definition, contracts are exempt if “the loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.” Some past interpretative rules created confusion about the scope of this exception and what it means for a loan to be “expressly intended” to finance a vehicle purchase. 

The DoD did not address this issue in the original 2015 rulemaking, but did issue guidance in 2017 indicating that loans which financed credit-related products like Guaranteed Auto Protection (GAP) would not fit into the rule’s exemption and therefore would be subject to the MLA.

The final September 2020 ruling expands coverage to include many non-mortgage related consumer credit transactions covered by the Truth in Lending Act (TILA) of 1968 and Regulation Z, including credit card accounts and payday alternative loans.

The Act also limits the amount a creditor may charge. A key provision of both the initial regulation and the final ruling sets a maximum military annual percentage rate (MAPR) of 36 percent for credit extended to service members and their dependents. This includes interest, fees, and charges imposed for credit insurance, debt cancellation, suspension, and other credit-related ancillary products sold in connection with the transaction under TILA and Regulation Z.

Regulation Z is a federal law that is part of TILA. It applies to home mortgages, home equity lines of credit, reverse mortgages, credit cards, installment loans and certain student loans. The regulation restricts certain lending practices and protects consumers from misleading lending practices by standardizing how lenders convey the cost of borrowing to consumers.

Generally, Regulation Z applies to consumer credit transactions that are at or below the threshold of $66,400 or less and are subject to the protection of the regulation. Here certain exemptions apply — private education loans and loans secured by real property, such as mortgages, are subject to Regulation Z regardless of the amount of the loan.

Subject to certain exceptions, the MLA generally applies to persons who meet the definition of a creditor in Regulation Z and are engaged in the business of extending credit. But the original MLA and subsequent amendment lacks clarity on one simple question: Would non-mortgage consumer loans over the Regulation Z threshold be covered by the MLA? For example, if a bank extends a $200,000 unsecured loan to a service member, would this loan be covered by MLA?

From 2015 to 2020, the DoD has issued a series of interpretive ruling, but none provide a definitive answer to the question of coverage. While most of the current guidance seems to only expressly confirm that property-secured loans are exempt, the MLA is ambiguous, stating that certain types of consumer loans that fall under the Regulation Z consumer credit definition are not covered. 

The certain types of loans under Regulation Z are described as: “Any credit transaction that is an exempt transaction for the purposes of Regulation Z (other than a transaction exempt under 12 CFR 1026.29) or otherwise is not subject to disclosure requirements under Regulation Z.”

MLA’s definition of consumer credit aligns closely with that of Regulation Z. MLA further expands that consumer credit as used in MLA regulation should, wherever possible, be interpreted consistently with Regulation Z. And under the Regulation Z definition, consumer loans above the Regulation Z threshold are not covered.

Based on this interpretation, we can conclude that exempt Regulation Z consumer loans are likewise exempt from the definition of consumer credit under MLA. Therefore, loans that exceed the Regulation Z coverage threshold are also exempt from MLA coverage. So, if a bank extends a $200,000 unsecured loan to a service member, the loan will not be covered by MLA because it exceeds the Regulation Z coverage threshold.

This is good news for lenders. Lenders are permitted to use their own method of determining whether a member is a covered borrower. The final MLA ruling also provides a safe harbor that allows lenders to conclusively determine whether a member is a covered borrower by using information obtained either from the Defense Manpower Data Center’s MLA webpage or a nationwide consumer reporting agency.

Given the importance of customer experience, knowledge and speed as competitive differentiators in the lending space, the opportunity to eliminate ambiguity and redundancy when it comes to assessing the suitability or otherwise of loans under the MLA should be welcomed.