Payday/High-cost Loans

Upholding the Military Lending Act and Servicemember Rights

By: Rachel Gittleman, Financial Services Outreach Manager

The Military Lending Act was viewed as groundbreaking after its passage in 2006 and to this day, exists as one of the strongest consumer protection laws on the books. The law was passed after a Department of Defense report found that active duty servicemembers were targeted by predatory lenders, which undermined both their military readiness and national security. The report coincided with a lengthy campaign, championed by military and veterans organizations and consumer protection groups, to protect military borrowers from predatory practices.

In response to this report and campaign, Congress passed the Military Lending Act (MLA), which set forth six core protections for military members and their dependents.

The MLA:

  • Establishes a 36% interest rate cap for consumer credit. This interest rate is inclusive of all fees, charges, credit insurance and ancillary products sold with the credit.
  • Requires disclosure of the annual percentage rate and payment obligations.
  • Bans requiring the borrower to use a car title, personal check, debit authorization, or wage allotment to secure the loan.
  • Applies state consumer protections to nonresident service members and their dependents residing within the state.
  • Bans forced arbitration agreements.
  • Prohibits lenders from refinancing, renewing, or consolidating existing credit issued by the same lender.

Although these protections alone are incredibly strong, the remedy included in the law makes them particularly effective. The MLA states that “[a]ny credit agreement, promissory note, or other contract prohibited under this section is void from the inception of such contract.”[1] In sum, if a company violates a servicemember’s protections under the MLA, whether by including an arbitration agreement, exceeding 36% APR, or failing to disclose fees properly, the loan is void.

The expansive protections and absolute remedy codified in the MLA have proved to be incredibly effective. An earlier CFA study showed a 70% drop in the number of payday loan outlets surrounding Camp Pendleton in California. Another study showed that that the number of servicemembers who sought help from the Navy-Marine Corps Relief Society for paying off predatory loans dropped to 3 in 2018 from 1,577 in 2004, before the law took effect.

However, despite the strength and effectiveness of the MLA, servicemembers are still pressured into high cost loans that violate the law and harm those men and women and their families. So, when a servicemember seeks to enforce their rights in court, they should be allowed to do so per the MLA.

But that’s not what happened for Army Private Emmanuel Louis. Bluegreen Vacations, a timeshare resort and vacation company, lured newly enlisted Army Private Emmanuel Louis, his wife Tamarah, and their one-year-old child to its resort with promises of an inexpensive vacation. Once there, however, Bluegreen trapped the Louises in an office for nine hours until they finally relented and signed a contract for “membership” in the company’s Vacation Club and a hefty loan to finance that membership. If valid, this loan would cost the Louises over $25,000 over ten years.

The loan violated the MLA, failing to follow certain disclosure requirements and including a forced arbitration clause. Stuck in a $25,000 loan, the Louises filed a lawsuit against Bluegreen Vacations, claiming that these violations of the MLA should nullify the contract.

The court decided that Private Louis could not demonstrate that he experienced any concrete harm from the violations of any of the MLA provisions (interest rate cap, required disclosures, or forced arbitration) and, therefore, he did not have standing to sue. However, if lenders violate the MLA provisions, they are harming servicemembers by depriving them of their rights and protections as guaranteed under the law.

This decision, if upheld, would set a very damaging precedent for our servicemembers and our national security.

In response to their appeal, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) filed a friend-of-the-court (“amicus”) brief in the United States Court of Appeals for the Eleventh Circuit. In their brief, the CFPB and FTC argue that this decision should be reversed both because the Louises are being held to an illegal contract and because failing to do so would undermine the remedial purposes of the MLA, codified to “enhance operational readiness and safeguard the national defense.”

Another amicus brief was filed by seven military and veterans organizations, including Blue Star Families, Five Star Veterans Center, Jacksonville Area Legal Aid, the Jewish War Veterans of the United States of America, Military Officers Association of America, National Military Family Association, and the United States Army Warrant Officers Association. Their brief similarly argued the importance and significant impact of the MLA, and that this case, if upheld, could “substantially harm servicemembers and national security.”

The Louises appeal will be decided by the 11th Circuit Court of Appeals. For the sake of the Louises, servicemembers and their dependents nationwide, and the country’s national security and military readiness, the decision should be reversed and the critically important protections and remedy of the MLA should be upheld.

[1] 10 U.S.C. § 987(f)(3)