Military Lending Act and payday loans: your protections

The Military Lending Act caps covered loans to active-duty servicemembers and their dependents at a 36% Military Annual Percentage Rate. A payday lender also can’t roll the loan over into a new one, can’t force arbitration, and can’t hold your check or bank access as security. A loan that breaks these rules is void from the start.

A typical payday loan at $15 per $100 for two weeks works out to about 391% APR, so a covered borrower shouldn’t be getting one at payday prices at all.

Who’s covered

Under 32 CFR 232.3(g), you’re covered if, when you take out the loan, you are, or are the dependent of, a member of the armed forces serving on:

• active duty under a call or order that does not specify a period of 30 days or fewer (under title 10, 14 or 32), or
• Active Guard and Reserve duty.

Coverage is set at the time of the loan. It ends when you’re no longer a covered member or dependent.

The 36% cap, and what counts toward it

A creditor can’t charge more than 36% MAPR on closed-end credit, or in any billing cycle on open-end credit (10 U.S.C. 987(b); 32 CFR 232.4(b)).

The MAPR is broader than the APR on an ordinary loan disclosure. Under 32 CFR 232.4(c) it includes:

• finance charges
• credit insurance premiums
• debt cancellation or suspension fees
• fees for credit-related add-on products
• most application fees and participation fees

Those count even when the usual federal disclosure rules would leave them out. A lender can’t get under the cap by moving cost into fees.

What a payday lender can’t do to a covered borrower

These come from 32 CFR 232.8.

No rollover with the same lender. A payday or deferred-presentment lender can’t roll over, renew, refinance or consolidate your loan with new credit from the same lender. That’s the trap described in how to get out of payday loans, and the MLA closes it. (This specific rule applies to payday-type lenders, not to banks, savings associations or credit unions.)

No forced arbitration. The loan can’t require you to settle disputes in arbitration, and can’t include unreasonable legal-notice requirements before you sue.

No check or bank-account access as security. The lender can’t hold a check or other access to your bank account as security for the loan. There’s one exception: credit at or under the 36% cap may require repayment by electronic transfer or direct deposit, or take a security interest in funds deposited after the loan into an account opened for it.

No giving up your rights. The lender can’t make you waive legal rights, including rights under the Servicemembers Civil Relief Act.

It also can’t require a military allotment for repayment, can’t ban or penalize paying early, and a non-bank lender can’t take your vehicle title as security.

If a loan breaks the rules

32 CFR 232.9 is the strongest part of the law for borrowers:

• A contract that doesn’t comply is void from inception.
• An arbitration agreement can’t be enforced against a covered borrower.
• The lender can be liable for actual damages of at least $500 per violation.
• A knowing violation is a misdemeanor.

“Void from inception” is a legal conclusion with real consequences for what you owe, so get it confirmed by a lawyer for your situation rather than just stopping payment on your own.

Where to get help

The CFPB tells servicemembers who can’t repay a payday loan to talk to a credit counselor or a legal aid attorney, or go to a JAG office. Bring:

• the loan agreement and any disclosures
• proof of your status, or your sponsor’s, on the date of the loan
• bank statements showing what the lender took

You can also file a complaint with the CFPB online or at (855) 411-2372.

If the lender is still pulling money from your account, you have the same rights as any borrower: revoke the authorization and place a stop payment at least 3 business days ahead. See how to stop payday loan withdrawals.

Paying it off for less

If you need to replace the loan, a payday alternative loan from a federal credit union is capped at 28% a year, under the MLA’s 36%. A nonprofit credit counselor can help with the rest of your budget. Your state’s own payday rules are on your state’s page.