DOD Seeks Comments on Terms Limitation of Consumer Credit Extended to Service Members and Dependents

Targeted News Service

WASHINGTON, Sept. 30 -- The U.S. Department of Defense published the following proposed rule in the Federal Register:Limitations on Terms of Consumer Credit Extended to Service Members and Dependents

A Proposed Rule by the Defense Department on 09/29/2014

Publication Date: Monday, September 29, 2014

Agencies: Department of Defense

Office of the Secretary

Dates: Comments must be submitted not later than November 28, 2014.

Comments Close: 11/28/2014

Entry Type: Proposed Rule

Action: Proposed rule.

Document Citation: 79 FR 58601

Page: 58601 -58641 (41 pages)

CFR: 32 CFR 232

Agency/Docket Number: DOD-2013-OS-0133

RIN: 0790-AJ10

Document Number: 2014-22900

Shorter URL: https://federalregister.gov/a/2014-22900

Action

Proposed Rule.

Summary

The Department of Defense ("Department") proposes to amend its regulation that implements the Military Lending Act, herein referred to as the "MLA". Among other protections for Service members, the MLA limits the amount of interest that a creditor may charge on "consumer credit" to a maximum annual percentage rate of 36 percent. The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. In addition, the Department is proposing to amend its existing regulation to amend the provisions governing a tool a creditor may use in assessing whether a consumer is a "covered borrower," modify the disclosures that a creditor must provide to a covered borrower, implement the enforcement provisions of the MLA, as amended, and for other purposes.

DATES:

Comments must be submitted not later than November 28, 2014.

ADDRESSES:

You may submit comments, identified by docket number and or Regulatory Information Number (RIN) and title, by any of the following methods;

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

Mail: Federal Docket Management System Office, 4800 Mark Center Drive, 2nd Floor, East Tower, Suite 02G09, Alexandria, VA 22350-3100.

Instructions: All submissions received must include the agency name and docket number or RIN for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT:

Marcus Beauregard, 571-372-5357.

SUPPLEMENTARY INFORMATION:

Retrospective Review

This rule is part of DoD's retrospective plan, completed in August 2011, under Executive Order 13563, "Improving Regulation and Regulatory Review." DoD's full plan and updates can be accessed at: http://www.regulations.gov/#!docketDetail;dct=FR+PR+N+O+SR;rpp=10;po=0;D=DOD-2011-OS-0036.

I. Executive Summary

A. Purpose of the Regulatory Action

The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of 10 U.S.C. 987 to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. More specifically, the Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA [1] would be defined consistently with credit that for decades has been subject to the protections under the Truth in Lending Act (TILA), namely: Credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments. [2]

After observing the effects of its existing regulation during the past six years and based on its review of information provided by a wide variety of persons and entities, the Department believes that this proposal to amend the regulation is appropriate in order to address a wider range of credit products that currently fall outside the scope of the regulation implementing the MLA, streamline the information that a creditor would be required to provide to a covered borrower when consummating a transaction involving consumer credit, and provide a more straightforward mechanism for a creditor to assess whether a consumer-applicant is a covered borrower. In this regard, the Department is aware of misuses of the covered borrower identification statement whereby a Service member (or covered dependent) falsely declares that he or she is not a covered borrower. The Department believes that, if a creditor unilaterally conducts a covered-borrower check by using the MLA Database, a Service member or his or her dependent would be relieved from making any statement regarding his or her status as a covered borrower.

The Department is provided authority in 10 U.S.C 987(h) to establish regulations to implement the MLA. As described in 10 U.S.C. 987(h)(3) the Department, at a minimum, must consult with other Federal agencies "not less often than once every two years" with a view towards revising the regulation implementing the MLA.

B. Summary of the Major Provisions of the Department's Regulatory Action

The MLA, as implemented by the Department's regulation as well as under this proposed regulation, provides two broad classes of requirements applicable to a creditor: first, the creditor may not impose a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower ("interest-rate limit"); second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information (e.g., a statement of the MAPR), both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, by refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and by refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, "other MLA conditions").

C. Costs and Benefits

The Department anticipates that its regulation, if adopted as proposed, might impose costs of approximately $96 million during the first year, as creditors adapt their systems to comply with the requirements of the MLA and the Department's regulation. However, after the first year and on an ongoing basis, the annual effect on the economy is expected to be between approximately $13 to $137 million. The Department has estimated the potential savings that could result if the rule reduces the involuntary separations of Service members due to financial distress in sensitivity analyses; at some points in the range of estimates the Department has used to assess the proposal, these savings are estimated to exceed the compliance costs that would be borne by creditors. Figure 1--Summary of Estimated Effects of Proposed Rule

..........First year .....Annual, ongoing .....PV 10-year, 7% discount rate .....PV 10-year, 3% discount rate

Sensitivity Analysis: Benefits to the Department .....Low .....$0 .....$13 .....$96 .....$128

.....High .....0 .....137 .....970 .....1,304

Primary Analysis: Costs to Creditors of Compliance ..........96 .....20 .....144 .....194

Primary Analysis: Transfer Payments .....Low .....NA .....101 .....717 .....958

.....High .....NA .....120 .....856 .....1,139

[2013 dollars in millions]

II. Background

A. Overview of the Proposal

The Department proposes to amend its regulation [3] that implements 10 U.S.C. 987, which was enacted in section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007, [4] and amended by sections 661-663 of the National Defense Authorization Act for Fiscal Year 2013 ("2013 Act"). [5]

The 2013 Act amended several provisions of 10 U.S.C. 987. In particular, the 2013 Act added provisions that would permit a covered borrower to recover damages from a creditor who violates a requirement of the MLA, [6] and authorizes the agencies "specified in section 108 of the Truth in Lending Act" ["TILA"] to enforce the requirements of the MLA "in the manner set forth in that section [of TILA] or under any other applicable authorities available to such agencies by law." [7] Section 663 of the 2013 Act modified the definition of "dependent" in order to make the meaning of that term consistent with parts of the definition that applies in the context of eligibility of a Service member's dependent for military medical care. [8] In addition, section 661 of the 2013 Act amended the MLA to require the Department to consult--"not less often than once every two years"--with the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau ("Bureau"), the Department of the Treasury, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, "Federal Agencies") with a view towards revising the regulation implementing the MLA.

In August 2007, the Department published its regulation to implement the MLA. [9] When initially determining the extent to which the protections of the MLA should apply, the Department "focus[ed] on three problematic credit products that the Department identified in its August 2006 Report to Congress on the Impact of Predatory Lending Practices on Members of the Armed Forces and Their Dependents[("2006 Report")] [10] : Payday loans, vehicle title loans, and refund anticipation loans." [11] The Department elected, at that time, to define the scope of "consumer credit" covered by the regulation as a narrow band of products within these three categories of credit; for example, the rule defines a "payday loan," in relevant part, as "[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000." [12]

After observing the effects of its existing regulation, the Department believes that a wider range of credit products offered or extended to Service members reasonably could--and should--be subject to the protections of the MLA, and that the extremely narrow definition of "consumer credit" permits creditors to structure credit products in order to reduce or avoid altogether the obligations of the MLA. For example, if a creditor wishes to market a "payday loan" to a Service member without regard to the 36-percent interest-rate limit under the MLA, the creditor simply needs to adjust the terms or conditions so that the loan is (i) not closed-end credit, (ii) for a term longer than 91 days, or (iii) for an amount of more than $2,000. Making any of these elementary adjustments to a credit product marketed as a "payday loan" is not illegal, however, the effect is clear: a Service-member borrower would obtain the credit without the protections afforded under the MLA. The Department's proposal aims to amend the regulation to curb this unfortunate consequence, of which there is ample evidence in the credit markets in which Service members are active participants. [13]

The Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA [14] would be defined consistently with credit that for decades has been subject to the protections under TILA, namely: credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments. [15] In general, under the Department's proposal, any charge that is a "finance charge" under Regulation Z, [16] adopted by the Bureau, as well as certain other charges that would be covered as "interest" under 10 U.S.C. 987(i)(3), must be included in the calculation of the MAPR, as applicable to the transaction for consumer credit. However, the Department also proposes to provide a broad exclusion that would allow a creditor who offers consumer credit through a credit card account to exclude from the MAPR any "bona fide" fee charged to a credit card account, as discussed more fully in this proposal. The chief consequence of the proposed exclusion from the MAPR for bona fide fees is that a creditor who, for its credit card product(s), currently charges a periodic interest rate of less than the interest-rate limit under 10 U.S.C. 987(b) coupled with one or more fees that carry reasonable costs tied to specific products or services should be able to continue to offer the same product(s) without any adjustments to those price terms. Under the proposal, that creditor would need to confirm that its fees are bona fide, reasonable and customary, and if so, it should be able to continue to offer the same credit card product(s) to covered borrowers by making limited adjustments only to the "statement of the MAPR," which would be permitted simply to be added to its credit card agreement(s) (and not required to be provided in any advertisement), as discussed below.

In addition, the Department is proposing to revise its regulation to provide a creditor with a more straightforward mechanism to assist in assessing the status of a consumer as a covered borrower, in order that the creditor may have "some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the MLA] as implemented by Part 232." [17] The Department believes that a covered-borrower check could be conducted unilaterally by a creditor by checking the database maintained by the Department and without relying on the borrower (as currently required), akin to the process a creditor currently uses to obtain a consumer report when assessing the creditworthiness of a consumer. Accordingly, the Department proposes to amend the regulation to allow a creditor to access the Department's online database (the MLA Database) to assess the status of a consumer-applicant for consumer credit and, as discussed below, thereby provide a clearer mechanism for a creditor to obtain the protection of a safe harbor when determining whether a consumer is a covered borrower.

Consistent with the Department's longstanding policy in administering 10 U.S.C. 987, the Department intends to develop this regulation so that its provisions are true to the intent of the MLA without creating a system that unduly impedes the availability of credit that is beneficial to Service members or is so burdensome that the creditor cannot comply. [18]

The Department seeks comment on all aspects of this proposal. The Department also solicits information and data regarding the nature, scope, and prevalence of credit products offered or extended to Service members and their families.

In particular, the Department seeks comment on the following alternative:

1. Refining the Department's current rule for payday loans, vehicle title loans and refund anticipation loans--and the associated benefits and costs;

2. Refining the Department's current rule and adding all payday loans--and the associated benefits and costs; and

3. Adoption of Regulation Z for consumer credit products--and the associated benefits and costs;

As required by 10 U.S.C. 987(h)(3), in developing this proposal the Department has consulted with the Federal Agencies. The Department will continue to consult with these agencies throughout the process of considering revisions to the regulation implementing the MLA.

B. Financial Status of Enlisted Service Members

In the 2006 Report, the Department provided perspective on why the issue of maintaining the financial stability of Service members and their families is critical to sustaining the all-volunteer force and maintaining its readiness. These concerns remain relevant today.

Service members still represent a predominantly young group with 43 percent of Service members aged 25 years old or younger. [19] The junior enlisted ranks (E1-E4) comprise 44 percent of the military force. [20] Thirty five percent of E1s-E4s are married [21] and 20 percent of them have children or other legal dependents. [22] Considering only 11.7 percent of young people in the United States who are out of the military are married at a comparative age, Service members tend to take on relatively more household responsibilities than their civilian counterparts. [23]

Forty-one percent of enlisted Service members (46% of E1s-E4s) said they had used one or more sources of small dollar lending in the past 12 months. These sources included payday loans, vehicle title loans, bank deposit advance loans, pawn shop loans, cash advances on credit cards, overdraft loans, overdraft lines of credit, overdraft protection from other accounts, relief society loans, and loans from friends and family. [24] About 62% of enlisted Service members selected responses indicating that they were able to make ends meet without difficulty. Twelve percent selected the responses "tough to make ends meet but keeping your head above water," or "in over your head" to describe their financial condition. [25] About 26% selected the response "occasionally have some difficulty making ends meet."

When asked about their savings habits, 14% of enlisted Service members selected the option "spend all the income received and don't save" and 4% selected the option "don't know." Forty-four percent selected the option "regularly set aside money in savings." The remaining 39% selected the option "save whatever is left at the end of the month." When asked about their savings, about 57% of enlisted Service members indicated that they had at least $500 in savings that would be available for emergencies. Eight percent indicated that they have less than $100 and 17% indicated that they have no emergency savings. [26]

When asked about experiencing any shortfalls in finances, 47% of enlisted Service members reported having problems in the past 12 months. Specifically, 9% said they had been more than 60 days late in paying mortgage or other debts, 17% reported that they were unable to use bank credit card(s) because the credit limit was reached, 44% reported that they were short cash between paychecks and 12% indicated that they were unable to pay monthly bills. [27] When asked about how many months in the past 12 were they short on cash, unable to use a credit card because of the credit limit was reached, or unable to pay bills or other debts, 12% said 5 to 7 months and 11% said 8 or more months. The average response was 3.4 months in a 12-month period. [28]

The results of the Defense Manpower Data Center ("DMDC") QuickCompass on Financial Issues tends to indicate that most Service members report sufficient access to safe, low-cost credit, report few problems managing their finances, and report little use of or impact by high-cost credit products on their financial lives. Nevertheless, the DMDC survey results also tend to indicate that a substantial minority of Service members continue to report difficulty managing their finances, and little access to safe, low-cost credit options. While the relative size of these two groups varies across the different types of financial indicators surveyed, the Department estimates that between 12 and 25% of enlisted Service members may face emergency financial short-falls and indicate difficulties managing their finances and avoiding problems with credit.

C. Financial Stability and Readiness

The Department makes a significant investment in recruiting, training and retaining highly qualified Service members. The Department expects these Service members to maintain personal readiness standards, including paying their debts and maintaining their ability to attend to the financial needs of their families. [29] Losing qualified Service members due to personal issues, such as financial instability, causes loss of mission capability and drives significant replacement costs. The Department estimates that each separation costs the Department $57,333. [30] Losing an experienced mid-grade noncommissioned officer (NCO), who may be in a leadership position or key technical position, may be considerably more expensive in terms of replacement costs and in terms of the degradation of mission effectiveness resulting from a loss of personal reliability for deployment and availability for duty. A study of the potential impact of the use of payday loans on enlisted members in the Air Force found "significant average declines in overall job performance and retention, and significant increases in severely poor readiness," as a result of using payday loans. [31] Additionally, financial concerns detract from mission focus and often times require attention from commanding officers and senior NCOs to resolve outstanding debts and other credit issues.

D. Financial Readiness Program

As young people with steady pay checks and personal responsibilities which emerge earlier than their contemporaries, junior enlisted Service members need to have a commensurate level of financial acumen and maturity to succeed. Junior enlisted Service members are generally high school graduates who may have started college. [32] Prior to entering the military they may have had limited exposure to financial literacy programs within high school, but they are generally unprepared for their financial responsibilities. [33] The Department has established the Financial Readiness Program to assist Service members in dealing with financial concerns, by providing messaging, education, and assistance. Throughout each year, the Department provides key messages on personal finance to the military community as part of a strategic communications plan that includes press releases, news articles, interviews, Web sites and social media. The Department has the assistance of nonprofit organizations in delivering messages and programs to promote savings and sound money management. The Department annually promotes the "Military Saves Campaign," which occurs at the end of February each year as part of "America Saves," sponsored by the Consumer Federation of America. The campaign asks Service members and their families to pledge towards their own savings goals, and the campaigns are supported by banks and credit unions on military installations. Initiated in 2007, the campaign has signed up 31,527 savers through 2013. [34] Additionally, the Financial Institutions National Regulatory Authority (FINRA) Foundation sponsors the "Save and Invest Program" that has provided forums at military installations (33,000 participants), fellowships for 1,200 military spouses to earn a financial counselor credential and give back to the community through 355,000 practicum hours, assistance to wounded warriors (17,000 guides distributed), 800,000 booklets on managing money during military moves and deployments, and access to no cost on-line tools to assist 150,000 military families with managing credit. [35]

The Department has established policy requiring Service members to receive financial education throughout their military careers, commencing with an initial course provided within 3 months of having arrived at their first duty station. As Service members assume supervision of others, they are also provided information on policies and practices designed to protect junior military members. [36] Each of the Military Services manages its own educational program to fulfill this requirement, based on regulations from the Military Departments. For Fiscal Year 2012, the Military Services reported providing 34,867 briefings to 872,187 participants. [37] In addition, the National Guard and Reserve Commands conducted 8,912 sessions, hosted at unit events lasting one-to-three days, attended by 13,480 participants. [38]

Department policy also requires the Military Services to provide one-on-one counseling to help a Service member determine appropriate short and long term actions to alleviate debt and achieve financial goals. The Military Services employ at least one certified financial counselor (civil service or contractor) at each military installation and have developed Military Service-specific programs to extend counseling into the military units through designated approved financial educators. For example, the Department of the Navy directs Navy and Marine Corps units to designate and train a Command Financial Specialist (E6 or above) who delivers financial education, conducts basic counseling and makes referrals to certified counselors. The Military Services reported 1,828,299 brief counseling contacts and 161,992 extended counseling contacts for Fiscal Year 2012. [39] To supplement the counseling services provided by the Military Services, the Department employs contract counselors through Military One Source to conduct over-the-phone counseling (available 24/7) and 12 in-person sessions for each military client (in a 12 month period). These counselors provided 32,000 in-person sessions for 35,000 Service members and spouses in Fiscal Year 2012. [40]

To provide monetary support to Service members and their families with financial hardships, the Military Services have partnered with nonprofit charitable organizations chartered to provide relief services to Service members and their families. The four relief societies for the Military Services (Army Emergency Relief, Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard Mutual Assistance) (collectively, the "Relief Societies") provide no-interest loans, grants, and scholarships, and fund other support programs for active-duty military communities. Each of these Relief Societies traditionally has provided no-interest loans and grants for shortfalls in household expenses (e.g., rent, mortgage, or utilities) and for unforeseen emergencies (e.g., auto repair, funeral, or family emergency). Since 2007, each of the Relief Societies also has offered small-dollar loans, which can be drawn without counseling. [41] In total for 2012, the Relief Societies provided $142.2 million in no-interest loans and grants to 159,745 clients. [42]

E. Regulation in Support of Financial Readiness

The Department continues to believe that, consistent with the MLA, there may be a need to limit access to high-cost borrowing, even with the Department's emphasis on delivering messages to save and control debt, education to support managing finances wisely, counseling resources to aid Service members, and financial resources to help Service members cover unforeseen shortfalls and emergencies. As initially stated, the Department expects Service members to manage their resources to cover their just debts and to take care of the needs of their families. Additionally, as messaging and education programs make clear, the Department expects Service members to seek out assistance rather than continue attempting by themselves to manage high-cost debt.

In the House Report 112-705 accompanying the 2013 Act, the Department was asked "to determine if changes to rules implementing [the MLA] are necessary to protect covered borrowers from continuing and evolving predatory lending practices." The Department responded to the request of the House Report by issuing a report in April 2014 ("April 2014 Report"). [43] The Report presents data submitted by many sources, including anecdotal information, that assisted in responding to the request of the House Report. The Department recognizes that information submitted for the April 2014 Report was provided by numerous sources, including some surveys conducted by the Department, and the information does not yield definitive results; rather, as the April 2014 Report states, the data "tend to indicate" some findings [44] and, for many issues, raise important questions that might involve further examination. The April 2014 Report states--specifically in light only of the research and consultation in preparing that Report--that "the definitions of [consumer credit] in the implementing regulation for the MLA do need to be updated and expanded to ensure that the MLA continues to provide protections to Service members and their families." [45] While observing that certain conditions "appear" to warrant revising the definition of "consumer credit," [46] the Department has drawn no conclusions regarding the scope or terms of its regulation implementing the MLA. Rather, the April 2014 Report expressly states that "the Department is working on [a more] comprehensive approach in its redrafting of the implementing regulation for the MLA." [47] The Department is committed to an open and transparent process as its work continues on any potential amendment to its regulation, and, as stated above, invites comment on all aspects of this proposal, particularly data regarding the nature, scope, and prevalence of credit products offered or extended to Service members and their families.

The majority of Service members have access to reasonably priced (as well as low-cost) credit, and, as long as they wisely use those resources, they are likely not to need high-cost loans to fulfill their credit needs. In the event that a Service member overwhelms his or her credit, or has not established credit for an emergency, the Department and the Relief Societies are prepared to assist that person in order that he or she might resolve the immediate difficulties and continue to manage his or her income and expenses to a point where he or she can develop a sound financial basis. In circumstances where Service members have taken high-cost loans because no other alternatives appeared to be available, Department counselors and the Relief Societies have found that the existing high-cost debt makes intervention more difficult; these service providers would rather have had the opportunity to have helped resolve issues sooner.

[*Federal RegisterVJ 2014-09-29]

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