Limitations on Terms of Consumer Credit Extended to Service Members and Dependents
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Proposed rule.
CFR Part: "32 CFR Part 232"
RIN Number: "RIN 0790-AJ10"
Citation: "79 FR 58602"
Document Number: "
Page Number: "58602"
"Proposed Rules"
SUMMARY: The
EFFECTIVE DATE: Comments must be submitted not later than
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SUPPLEMENTARY INFORMATION:
Retrospective Review
This rule is part of DoD's retrospective plan, completed in
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/
FOOTNOTE 1 The forms of "consumer credit" that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). END FOOTNOTE
FOOTNOTE 2 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). END FOOTNOTE
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
Figure 1--Summary of Estimated Effects of Proposed Rule [2013 dollars in millions] First Annual, PV PV year ongoing 10-year, 10-year, 7% 3% discount discount rate rate Sensitivity Analysis: Low$0 $13 $96 $128 Benefits to the Department High 0 137 970 1,304 Primary Analysis: Costs 96 20 144 194 to Creditors of Compliance Primary Analysis: Low NA 101 717 958 Transfer Payments High NA 120 856 1,139
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/
FOOTNOTE 3 32 CFR part 232 (2013). END FOOTNOTE
FOOTNOTE 4 Public Law 109-364, 120 Stat. 2266. END FOOTNOTE
FOOTNOTE 5 Public Law 112-239, 126 Stat. 1785. END FOOTNOTE
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
FOOTNOTE 6 Id. See section 662(a) of the 2013 Act. END FOOTNOTE
FOOTNOTE 7 126 Stat. 1786. See section 662(b) of the 2013 Act. END FOOTNOTE
FOOTNOTE 8 126 Stat. 1786 (defining "dependent" to be a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2)). END FOOTNOTE
In
FOOTNOTE 9 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 50580 (
FOOTNOTE 10
FOOTNOTE 11 72 FR at 50585. END FOOTNOTE
FOOTNOTE 12 32 CFR 232.3(b)(1)(i) (definition of "consumer credit"). END FOOTNOTE
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
FOOTNOTE 13 See, e.g., section III.A.1 (describing information submitted by various persons in response to the Department's
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.
FOOTNOTE 14 The forms of "consumer credit" that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). END FOOTNOTE
FOOTNOTE 15 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). END FOOTNOTE
FOOTNOTE 16 12 CFR part 1026 (2013). END FOOTNOTE
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.
FOOTNOTE 17 72 FR at 50588. END FOOTNOTE
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/
FOOTNOTE 18 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 18157, 18165 (
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
FOOTNOTE 19 U.S. Dep't of Def., 2012 Demographics Profile of the <org>Military Community, at 36. Available at http://www.militaryonesource.mil/12038/MOS/Reports/2012_Demographics_Report.pdf. END FOOTNOTE
FOOTNOTE 20 Id. at 17. END FOOTNOTE
FOOTNOTE 21 Id. at 44. END FOOTNOTE
FOOTNOTE 22 Id. at 128. END FOOTNOTE
FOOTNOTE 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."
FOOTNOTE 24
FOOTNOTE 25 Id., Question 13: "Which of the following best describes [your financial condition][the financial condition of you and your spouse][the financial condition of you and your partner or significant other]?" END FOOTNOTE
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
FOOTNOTE 26 Id., Question 15: "Which of the following best describes [your saving habits][the savings habits of you and your spouse][the savings habits of you and your partner or significant other]? I[We]:" END FOOTNOTE
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/
FOOTNOTE 27 Id., Question 28: "During the past 12 months, did any of the following happen to [you][you and your spouse][you and your partner or significant other]? [I was][We were] . . ." END FOOTNOTE
FOOTNOTE 28 Id., Question 29: "In how many of the past 12 months were [you][you and your spouse][you and your significant other] short on cash, unable to use a credit card because of the credit limit was reached, or unable to pay bills or other debts?" END FOOTNOTE
The results of the
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
FOOTNOTE 29 U.S. Dep't of Def., Instruction 1344.09, Indebtedness of Military Personnel (2008) ("Members of the Military Services are expected to pay their just financial obligations in a proper and timely manner [to include alimony and child support]. A Service member's failure to pay a just financial obligation may result in disciplinary action under the Uniform Code of Military Justice [10 U.S.C. 801-940] or a claim pursuant to Article 139 of [10 U.S.C. 801-940]."). END FOOTNOTE
FOOTNOTE 30 U.S. Gov't Accountability Office, GAO-11-170, Military Personnel: Personnel and Cost Data Associated with Implementing DOD's Homosexual Conduct Policy (
FOOTNOTE 31 Scott Carrell and
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
FOOTNOTE 32
FOOTNOTE 33 Average score for high school seniors was 48.3% and 62.2% for college students on a financial literacy test measuring (1) Income; (2) money management; (3) saving and investing; and (4) spending and credit. Jump$tart Coalition survey of high school seniors and college students, 2008, page 8. www.jumpstart.org/assets/files/2008SurveyBook.pdf. END FOOTNOTE
FOOTNOTE 34 Military Saves 2013 Report, page 2, http://www.militarysaves.org/in-the-newsroom/military-saves-week-reports. END FOOTNOTE
FOOTNOTE 35 " Military Financial Readiness Program--Accomplishments To Date," SaveandInvest.org, About the Program, http://www.saveandinvest.org/MilitaryCenter/About/P124822. END FOOTNOTE
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
FOOTNOTE 36 DoD Instruction 1342.22, Family Readiness Program,
FOOTNOTE 37 "Fiscal Year 2012 Annual Report on Family Readiness Programs" (internal DoD report), which reflects activities of installation-based Military and Family Support Centers/Reserve Family Program Sites.] END FOOTNOTE
FOOTNOTE 38 Military OneSource internal report for Fiscal Year 2012. END FOOTNOTE
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
FOOTNOTE 39 "Fiscal Year 2012 Annual Report on Family Readiness Programs" (internal DoD report), which reflects activities of installation-based Military and Family Support Centers/Reserve Family Program Sites.] END FOOTNOTE
FOOTNOTE 40 Military OneSource internal report for Fiscal Year 2012. END FOOTNOTE
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,
FOOTNOTE 41 See Army Emergency Relief, Soldiers Helping Soldiers: Army Emergency Relief 2012 Annual Report, at 13 (2013) (in 2012, Army Emergency Relief provided
FOOTNOTE 42 See Army Emergency Relief, Soldiers Helping Soldiers: Army Emergency Relief 2012 Annual Report, at 13 (2013);
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
FOOTNOTE 43 Dep't of Defense, Report: Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents,
FOOTNOTE 44 See, e.g.,
FOOTNOTE 45 April 2014 Report, at 2. END FOOTNOTE
FOOTNOTE 46 Id. END FOOTNOTE
FOOTNOTE 47 Id. END FOOTNOTE
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.
III. Key Aspects of the Department's Proposal
A. Proposal To Amend the Scope of "Consumer Credit"
The Department proposes to revise the scope of the definition of "consumer credit" to cover a broader range of closed-end and open-end credit products, to be generally consistent with the credit products that for decades have been subject to the requirements of the Bureau's Regulation Z. When adopting its initial regulation in 2007, the Department focused on three narrowly defined types of products that the Department believed, at that time, most directly acted as sources of the "debt trap" for Service members and their families. /48/ In addition, the Department expressed its concern about the "potential for unintended consequences that could adversely affect credit availability if it were to adopt a broadly applicable regulation." /49/ At the same time, the Department was careful to avoid engendering any reliance interests in the narrow scope of its initial rule, and, in this regard, expressly stated that "[t]he Department maintains the ability to issue additional rules in the future .. . . " /50/ When the Department adopted its initial regulation, financial-institution creditors, Service members, and others who have an interest in the administration of the MLA were appropriately cautioned that the Department had committed itself to review various sources of data, including "input from regulatory agencies, consumer protection groups and the credit industry to assess the level of protection provided by the final rule," in order to determine whether "further revisions [to its regulation] are needed." /51/
FOOTNOTE 48 See 72 FR at 50582 (observing that "[t]he combination of little-to-no regard for the borrower's ability to repay the loan, unrealistic payment schedule, high fees, and interest and the opportunity to roll over the loan instead of repaying it can create a cycle of debt for financially overburdened Service members and their families."). END FOOTNOTE
FOOTNOTE 49 72 FR at 50584. END FOOTNOTE
FOOTNOTE 50 72 FR at 50585. In this context, the Department drew attention to its "ability" to issue additional rules. There can be no doubt, especially in light of section 661(b) of the 2013 Act, that the Department has the authority to amend the regulation implementing the protections of the MLA. 10 U.S.C. 987(h)(3) (requiring the Department, at a minimum, to consult with other Federal agencies "not less often than once every two years" with a view towards revising the regulation implementing the MLA). END FOOTNOTE
FOOTNOTE 51 72 FR at 50585. END FOOTNOTE
The Department continues to believe that certain payday loans, vehicle title loans, and refund anticipation loans present the most severe risks to Service members and their families, and remains mindful that more broadly defining the "consumer credit" that would be subject to 10 U.S.C. 987 may present unintended consequences, including a reduction in "credit availability." At the same time, however, the Department recognizes--particularly in light of its experiences administering the existing regulation--that a broader range of closed-end and open-end credit products carry high costs, many of which far exceed the interest-rate limit established in 10 U.S.C. 987(b), and thereby pose the risks to Service members and their families that the Department has long sought to significantly reduce or eliminate.
Consistent with the Department's stated policy to monitor market developments that affect Service members, since adopting its initial regulation in 2007 the Department informally has gathered information from regulatory agencies, consumer protection groups, and participants in the credit industry to assess whether, and in which respects, the Department should consider revising its regulation implementing the MLA. /52/ As described above in section II.E., information was submitted for the
FOOTNOTE 52 See 72 FR at 50585 ("The Department maintains the ability to issue additional rules in the future and the Department plans to continue surveying Service members and will obtain a variety of inputs from regulatory agencies, consumer protection groups and the credit industry to assess the level of protection provided by the final rule."). END FOOTNOTE
FOOTNOTE 53 See, e.g.,
FOOTNOTE 54 April 2014 Report, app. A. END FOOTNOTE
More importantly, and directly to support the Department's rulemaking process, in
FOOTNOTE 55 78 FR 36134 (
FOOTNOTE 56 Id. END FOOTNOTE
1. The Department's
The Department received 37 comments in response to the ANPR. Most of the comments were submitted by state agencies, including state attorneys general, /57/ and consumer protection groups. Several participants in the credit industry submitted comments, /58/ as did several individuals. In addition, comments were submitted relating to whether the Department should consider revising its regulation in order to address rent-to-own transactions.
FOOTNOTE 57 California Attorney General, et al.,
FOOTNOTE 58 See, e.g.,
Generally, commenters responding to the ANPR urge the Department to take one of three actions relating to the definition of consumer credit: (1) leave untouched the current definition as three enumerated products, as well as the particular definition for each of those products; (2) extend the definition by covering certain additional products, such as overdraft services, rent-to-own transactions, and/or all payday loans; or (3) extend the definition by incorporating the definition of consumer credit in the Bureau's Regulation Z. Other commenters raise general concerns regarding the narrow scope of the existing definition of consumer credit and urge the Department to adopt a more comprehensive definition, but have not recommended a particular definition.
One commenter states that the Department's current rule has "significant gaps and loopholes, which lenders exploit to target military borrowers with high interest loans well above the MLA's [36 percent] rate cap," and is "particularly concerned with [a] multiple-payment or installment loan[ ]" that is not covered by the rule, because the loan has a term of over 91 days or exceeds
FOOTNOTE 59 Texas Appleseed,
FOOTNOTE 60 Texas Appleseed,
FOOTNOTE 61 Id. at 3. END FOOTNOTE
FOOTNOTE 62 Id. at 3-4. END FOOTNOTE
Another commenter states that under the Department's current rule, "lenders have easily circumvented the purpose and protections intended by the MLA." /63/ For example, the commenter describes the "structure of [the] payday loan law" /64/ in
FOOTNOTE 63
FOOTNOTE 64
FOOTNOTE 65 Id. END FOOTNOTE
FOOTNOTE 66 Id. at 2. END FOOTNOTE
FOOTNOTE 67 Id. END FOOTNOTE
FOOTNOTE 68 Id. END FOOTNOTE
FOOTNOTE 69 Id. END FOOTNOTE
Similarly, another commenter states that the Department's current rule has "large loopholes that permit lenders to fashion abusive or predatory transactions that avoid the MLA's protections." /70/ The commenter, more specifically, states that lenders can evade protections under the current rule "by requiring that payday loans be a minimum of
FOOTNOTE 70 California Attorney General, et al.,
FOOTNOTE 71 California Attorney General, et al.,
FOOTNOTE 72 Id.; but see
One commenter notes that "inappropriate loans and exorbitant interest payments force many members of the military and their families to forgo other necessities, such as housing or grocery bills." /73/ Financial strain "negatively affects [service member] morale and puts their ability to do their job . . . at risk." /74/ The commenter raises a concern about the "narrow definition of consumer credit" and urges the Department to "modify the definition of consumer credit to ensure that Service Members in all states are protected from all forms of high-cost credit." /75/
FOOTNOTE 73 Members of the
FOOTNOTE 74 Id. END FOOTNOTE
FOOTNOTE 75 Id. at 1-2. See also
One commenter expresses concern that "the rules initially promulgated by the Department contained gaps in the definition of consumer credit." /76/ These gaps "have been taken advantage of by certain lenders" to offer "predatory loan products at exorbitant triple digit effective interest rates and loan products that do not include the additional protections envisioned by the law." /77/ The commenter notes that "the Department was given the authority and has inherent flexibility provided under the law" to revise the rule to establish a more "expansive" definition of consumer credit to which the protections in the law would apply. /78/ The commenter urges the Department to include within the scope of the rule "payday and vehicle title loans of any duration, whether open or closed-ended," "tax refund anticipation loans of any duration," as well as to "consider extending the 36 [percent] APR cap to unsecured installment loans targeted at the military and all other forms of consumer credit." /79/ The commenter states that "[s]ervice members and their families deserve the strongest possible protections and swift action to ensure that all forms of credit offered to members of our armed forces are safe and sound." /80/
FOOTNOTE 76 Members of the
FOOTNOTE 77 Members of the
FOOTNOTE 78 Id. at 1-2. END FOOTNOTE
FOOTNOTE 79 Id. at 2. END FOOTNOTE
FOOTNOTE 80 Id. END FOOTNOTE
A group of industry commenters states the Department's current rule "is working as intended to protect members of the armed forces and their dependents." /81/ These commenters argue that the current rule strikes the correct balance between access to credit and protecting consumers from predatory lending practices. They point to several aspects of the MLA that, in their view, would prevent creditors from offering products to Service members if the current rule's definition is expanded to encompass other products. Specific concerns under the MLA include: Harsh penalties for non-compliance; duplicative and confusing disclosure requirements; oral disclosure requirements that are inconvenient for various technologies; inability to refinance or reprice debt; ban on arbitration clauses common to many loan contracts; and difficulties identifying all covered borrowers. /82/ The same commenters specifically request that the rule continue to incorporate definitions provided under the TILA because "[a]dding separate and disparate definitions undermines the ability of consumers to understand credit products and should be avoided. It would be a step backwards to disconnect the MLA and TILA." /83/
FOOTNOTE 81
FOOTNOTE 82
FOOTNOTE 83 Id. at 11. END FOOTNOTE
One commenter expressed concern that the current rule "includes limitations which reduce the [MLA's] effectiveness." /84/ This commenter states that "[a]pproximately one out of every ten veterans reported having more than
FOOTNOTE 84
FOOTNOTE 85 Id. at 1 (citing
FOOTNOTE 86
FOOTNOTE 87 Id. END FOOTNOTE
One commenter states that the Department should "not lose sight of [a] payday lender's demonstrated capacity for creative evasion." /88/ In particular, the commenter states that he has seen lenders disguise closed-end transactions as open-end, thereby evading requirements of the MLA. The commenter states that some lenders disguise short-term loans as check cashing services and others disguise loans and loan fees using the sale of phone cards or other "trinkets" at inflated prices combined with the delayed presentment of checks. The commenter also states that rent-to-own transactions should be included as consumer credit under the Department's regulation because "[i]f evaluated as interest, these extra costs amount to extraordinarily high interest, far in excess of that authorized by the MLA." /89/ The commenter also states that the rule should prohibit unreasonable choice-of-venue provisions in a loan contract, specifically pointing to one creditor who requires all lawsuits be brought in
FOOTNOTE 88 Michael S. Archer,
FOOTNOTE 89 Michael S. Archer,
One commenter states that the Department correctly "left [rent-to-own] out" of the current rule. /90/ In support of its assertion that the Department properly did not include rent-to-own transactions within the scope of the current rule, the commenter states that "the [rent-to-own] business model is not extending credit and is, instead, a personal property leasing model." /91/ To support this point, the commenter describes a typical rent-to-own transaction where the consumer "[does] not assume any debt" /92/ and instead enters into "weekly, bi-weekly, semi-monthly, or monthly rental agreements for consumer durables." /93/ The commenter further notes that because rent-to-own transactions are not included in the current rule, "there was no reason for the industry to modify its practices to escape coverage." /94/
FOOTNOTE 90
FOOTNOTE 91
FOOTNOTE 92
FOOTNOTE 93 Id. END FOOTNOTE
FOOTNOTE 94 Id. at 1-2. END FOOTNOTE
One commenter states "there is no need at this time to revise the rule as it relates to credit unions." /95/ Another commenter states that the Department should review and identify "those lending practices that are or can be predatory or abusive on a case by case basis." /96/ This commenter states that a "one issue approach could have negative unintended consequences for credit unions and other lenders that adhere to fair and equitable lending practices" and that such an approach could limit access to beneficial credit for Service members. /97/
FOOTNOTE 95
FOOTNOTE 96
FOOTNOTE 97
One commenter requesting that the current rule should not be changed states that of over 40,000 complaints in the
FOOTNOTE 98
FOOTNOTE 99 Id. at 2; see also
2. Proposal To Amend the Scope of "Consumer Credit"
As several commenters state and as the Department itself has observed, a creditor currently may lawfully provide a wide range of closed-end and open-end credit products to a Service member that carry inordinately high costs, and many of these credit products can be offered without meaningfully applying underwriting measures that consider the borrower's ability to repay or with unrealistic payment schedules--precisely the types of risks to Service members that the Department consistently has aimed to diminish.
The Department believes that the narrowly defined parameters of the credit products regulated as "consumer credit" under the existing regulation do not effectively provide the protections intended to be afforded to Service members and their families under the MLA. Accordingly, the Department proposes to amend the regulation, in
FOOTNOTE 100 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). END FOOTNOTE
The Department proposes amendments so that, in general, its rule may rely on the provisions and jurisprudence of the Bureau's Regulation Z because that regulation substantially regulates the central components of the framework of the MLA, particularly the types of charges that should be included as "interest" /101/ and the methods for calculating the annual percentage rate of interest for consumer credit. /102/ The Department believes that, even as consumer credit may be revised to apply to a broad range of credit products, aligning the key aspects of the framework under the MLA with the terms and standards that have been developed under Regulation Z will greatly facilitate a creditor's ability to comply with the Department's regulation. More specifically, the Department proposes, in SUBSEC 232.3( l) and 232.4(c), that any charge that is a "finance charge" under Regulation Z, 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), and would be subject to the interest-rate limit under 10 U.S.C. 987(b).
FOOTNOTE 101 See 10 U.S.C. 987(i)(3) (broadly defining "interest"). END FOOTNOTE
FOOTNOTE 102 See 10 U.S.C. 987(h)(2) (granting discretion to the Department to prescribe rules regarding "[t]he method for calculating the applicable annual percentage rate of interest on [consumer credit] obligations"). END FOOTNOTE
QUESTION 1: The Department solicits comment on whether an approach should be taken that would define "consumer credit" consistently with certain credit regulated under TILA, and invites suggestions on alternative approaches.
QUESTION 2: If the Department were to adopt a regulation as proposed, to what extent, and in what manner, would the Department's regulation affect the availability of consumer credit to Service members and their dependents or have other consequences?
QUESTION 3: If the Department were to adopt a regulation as proposed, to what extent would a creditor, as a practical matter, need to develop separate classes of credit products, namely, one class of products for covered borrowers and other classes for other consumers?
QUESTION 4: If the Department continues to pursue an approach that defines "consumer credit" to be generally consistent with certain credit regulated under TILA, should the Department consider a limited or complete exemption for an insured depository institution or insured credit union? What legitimate basis could there be for any exemption for an insured depository institution or insured credit union from the requirements of the MLA, particularly if under this approach other financial institutions would be subject to the Department's regulation? What other protections relating to credit products already are afforded to--or could be improved for--Service members and their dependents?
QUESTION 5: If the Department continues to pursue an approach that defines "consumer credit" to be generally consistent with certain credit regulated under TILA, should the Department consider including one or more exemptions for certain types of credit products, such as student loans? What legitimate basis could there be for any particular exemptions for certain credit products?
QUESTION 6: Apart from the conditional exclusion proposed for a credit card account that charges bona fide fees, as discussed below, should the Department consider providing one or more exceptions from the charges that must be included in the MAPR for de minimis bona fide fees associated with an open-end credit line? If so, should that type of exception be limited to an open-end line of credit connected to a deposit account? If so, please specifically describe which fees on these accounts would be bona fide fees eligible for such an exception. What would be the appropriate cost limit of a de minimis fee? If the Department does provide for such an exception to open-end credit (other than for credit card accounts), what parameters should the Department use to limit the exception to prevent evasion of the protections under the MLA?
B. Proposed Conditional Exclusion for Credit Card Accounts
Even though the Department believes that the consumer credit regulated under the MLA generally should track the scope of credit regulated under Regulation Z, the Department recognizes that imposing the interest-rate limit of 10 U.S.C. 987(b) on credit card products likely would result in dramatic changes to the terms, conditions, and availability of those products to Service members and their families. The important protections
FOOTNOTE 103 See 72 FR at 50585 ("The intent of the statute is clearly to restrict or limit credit practices that have a negative impact on Service members without impeding the availability of credit that is benign or beneficial to Service members and their families."). END FOOTNOTE
The Department believes that most creditors impose bona fide fees expressly tied to specific products or services connected to using the credit card itself and segregable from the cost of funds borrowed, such as a foreign transaction fee that applies only when the cardholder tenders the card for a purchase made outside of
FOOTNOTE 104 In this regard, the Department notes that approximately 68 percent of American families have at least one credit card. See
The Department also believes that credit card products may warrant special consideration under the MLA because comparable protections for consumers who use these products separately apply under the Credit Card Accountability Responsibility and Disclosure Act of 2009 ("CARD Act"). For example, the CARD Act, as implemented by the Bureau's Regulation Z, limits penalty fees on credit cards, including late-payment and over-the-limit fees, to those fees that are "reasonable and proportional" to the omission or violation that triggered the fee. /105/ Regulation Z provides safe harbor fee ranges designed to facilitate compliance with these requirements of the CARD Act. The CARD Act also limits the total amount of fees that may be charged on an account in its first year: In general, a creditor may not impose fees for a credit card account during the first year that exceed 25 percent of the available line of credit in effect when the account is opened. /106/
FOOTNOTE 105 15 U.S.C. 1665d; 12 CFR 1026.52. END FOOTNOTE
FOOTNOTE 106 15 U.S.C. 1637(n)(1); 12 CFR 1026.52(a). END FOOTNOTE
In an effort to balance the interests of limiting credit practices that have an adverse impact on Service members without unduly impeding the availability of credit that is benign or beneficial to Service members and their families, the Department has considered proposing a complete exemption from the definition of "consumer credit" for credit extended to a covered borrower under a credit card account. However, the Department believes that certain creditors could take advantage of an opportunity to exploit a complete exemption for credit cards by transforming high-cost, open-end credit products (which otherwise would be covered as "consumer credit") into credit card products.
The Department similarly has considered whether exclusions from the MAPR for certain types of fees, such as an application fee or participation fee, should be proposed for credit card accounts in order to preserve current levels of access to those products for Service members and their dependents; however, the Department believes that unqualified exclusions from the MAPR for certain fees, or all non-periodic fees, likewise could be exploited by a creditor who would be allowed to preserve a high-cost, open-end credit product by offering a relatively lower periodic rate coupled with a high application fee, participation fee, or other fee (as described in the exclusion), subject to the restrictions under the CARD Act.
To avoid creating clear regulatory gaps in the framework for 10 U.S.C. 987, the Department believes that consumer credit under the MLA should include credit extended to a covered borrower under a credit card account under an open-end (not home-secured) consumer credit plan, except that this form of consumer credit may be subject to a qualified exclusion for bona fide application fees, participation fees, transaction-based fees, and similar fees connected to the use of the credit card. /107/ Proposed SEC 232.4(d) would allow a creditor to exclude from the MAPR a bona fide fee--other than a periodic rate--only to the extent that the charge by the creditor is (i) a bona fide fee and (ii) reasonable and customary for that type of fee. Proposed
FOOTNOTE 107 The Department maintains that 10 U.S.C. 987(i)(6) grants broad latitude to the Department to "define which types of consumer credit transactions shall be covered by the law, provided that they do not include the two listed exemptions." 72 FR at 50585. Furthermore, 10 U.S.C. 987(h) grants to the Department discretion to "prescribe regulations to carry out [the MLA]," and, in particular, to prescribe rules relating to "[t]he method for calculating the applicable annual percentage rate of interest" and the "types of fees" that are subject to the restrictions of the MLA. 10 U.S.C. 987(h)(2)(B) and (h)(2)(C). END FOOTNOTE
Proposed Standards for Exclusion for Bona Fide Fees
The Department believes that the proposed conditions for excluding a bona fide fee from the MAPR--namely, that the fee must be "reasonable" and "customary"--would fairly allow Service members and their families to continue to have access to credit card products and limit the opportunity for a creditor to exploit the exclusion for those products. Unlike a complete or targeted exemption for credit card products, the proposed conditional exclusion would not allow a creditor to transform high-cost, open-end credit products into credit card accounts by offering a relatively lower periodic rate coupled with a high application fee, participation fee, or other fee. Under the proposal, a creditor who imposes an unreasonable (in any respect) fee or a fee that is not, in every respect, customary (such as in the manner of the charge or the basis for the computation) in a credit card account for a Service member must include the total amount of the fees--including any fee(s) that otherwise may be eligible for the exclusion--in the MAPR. The "reasonable and customary" conditions for a bona fide fee, as proposed, are intended to be applied flexibly so that, in general, creditors may continue to offer a wide range of credit card products that carry reasonable costs expressly tied to specific products or services and which vary depending upon the Service member's own choices regarding the use of the card.
Proposed SUBSEC 232.4(d)(3)(i)-(v) would provide standards to guide determinations regarding whether a bona fide fee--other than a periodic rate--for a credit card account may be excluded from the calculation of the MAPR as "reasonable and customary."
Like-kind fees. Proposed
Safe harbor. Proposed
FOOTNOTE 108 The Department is aware of at least 16 creditors who hold loans above the proposed asset threshold. See The Nilson Report, Issue 1,025 (
In order for a creditor to use the fee(s) charged by a credit card issuer when computing an average, the credit card issuer must have had the qualifying amount of loans at any time during the 3-year period preceding the date when the creditor computes the average. If the amount of the creditor's own bona fide fee is less than or equal to the average of the amount charged by those 5 or more credit card issuers who each have the qualifying amount of outstanding credit card loans, then the creditor's bona fide fee would be reasonable for the purposes of the exclusion.
Proposed SEC 232.4(d)(3)(ii) would set a threshold of
The Department also proposes a rolling 3-year look-back period to facilitate a creditor's ability to establish that a credit card issuer meets the asset-size standard. This 3-year period should facilitate the process for calculating, and relying on, an average amount for one or more relevant fees because, for example, when a creditor uses information from the past year to establish that a credit card issuer meets the asset-size threshold, the creditor could rely on the fee information relating to that credit card issuer's credit card products for the next two years. At the same time, the proposed 3-year period could provide stability to the safe-harbor determination, particularly if credit card loan holdings of credit card issuers shift significantly in response to market conditions or otherwise. Furthermore, a 3-year period could provide adequate time for the Department to amend the proposed threshold or safe harbor, as may be necessary. /109/
FOOTNOTE 109 In this regard, 10 U.S.C. 987(h)(3) requires the Department, at a minimum, to consult with other Federal agencies "not less often than once every two years" with a view towards revising the regulation implementing the MLA. END FOOTNOTE
The Department believes that all creditors who offer credit card products to Service members and their dependents could readily calculate whether each type of fee associated with those products may fit within the safe harbor because data relating to the fees imposed by other credit card issuers, as well as the amount of credit card loans outstanding, is widely available. With regard to credit card fees, most credit card issuers, particularly all of the largest issuers, make complete contract terms on their current offerings freely available on their Web sites as part of solicitations and applications for their products. /110/ With regard to the amount of outstanding credit card loans held by a credit card issuer, issuers provide this information in both filings to the
FOOTNOTE 110 See, e.g., the solicitations available at https://creditcards.chase.com. END FOOTNOTE
FOOTNOTE 111 The
FOOTNOTE 112 Call Reports for institutions insured by the
For example, a creditor seeking to determine whether another credit card issuer could qualify as one of the 5 creditors for determining the average fee under proposed
The following example is provided for additional guidance on how a creditor could determine whether its own fees for a credit card account would fit within the safe harbor under proposed
FOOTNOTE 113 For the sake of simplicity, only two fees are considered in this example. Under proposed
Under proposed
Reasonable fee. Proposed
Customary. Proposed
Reasonableness for a participation fee. Consistent with the Department's proposal that the conditions of "reasonable and customary" be applied flexibly, proposed
QUESTION 7: If the Department continues to pursue an approach that defines "consumer credit" to be generally consistent with certain credit regulated under TILA, should the Department consider including an exemption specifically for a credit card account under an open-end (not home-secured) consumer credit plan? Would the consumer protection under TILA be sufficient to be consistent with the requirements of MLA? How would an exemption for consumer credit offered through a credit card account be articulated?
QUESTION 8: The Department solicits comment on potential operational issues with applying the regulation under the MLA to credit card products offered in retail sales locations, particularly at the point of sale. How should the Department address any such potential issues in a final rule that may cover some or all credit card products extended to covered borrowers?
QUESTION 9: Do the proposed standards appropriately describe whether a bona fide fee may be excluded from the calculation of the MAPR as "reasonable and customary?" If not, please specifically describe the language the Department should use to clarify when a bona fide fee is not required to be included in the MAPR.
QUESTION 10: Does the threshold of
C. Proposal To Revise Provisions Governing Assessment of a Covered Borrower
When adopting its initial regulation in 2007, the Department explained that the provisions governing the assessment of a "covered borrower" should balance protections for a covered borrower while also addressing a creditor's need to have "some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the MLA] as implemented by Part 232." /114/ The Department's existing regulation seeks to balance these interests by providing a "safe harbor" from the requirements of the regulation for a creditor who, with respect to a consumer credit transaction: first, provides a consumer a prescribed form, the "covered borrower identification statement," declaring whether he or she is a covered borrower, and the consumer signs the form indicating that he or she is not a covered borrower; and, second, has not determined, using certain optional verification procedures, that the consumer is a covered borrower. /115/ The Department is proposing to revise these provisions governing the assessment of a covered borrower for two reasons.
FOOTNOTE 114 72 FR at 50588. END FOOTNOTE
FOOTNOTE 115 32 CFR 232.5(a)(1)-(2). However, the Department also issued an important "caveat" to this provision, stating that a creditor may not fit within the safe harbor if the "creditor obtains documentation as part of the credit transaction reflecting that the applicant is a covered borrower" (notwithstanding the signed declaration). 72 FR at 50588. END FOOTNOTE
First, the Department has become 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 is concerned that a Service member seeking a credit product that is subject to the MLA falsely states--either on his or her own initiative or complicit with the creditor in the course of the application process--that he or she is not a covered borrower so that the institution offers the credit product unencumbered by the interest-rate limit and other restrictions of the MLA. While the Department intended the provision of the covered borrower identification statement to afford protections for Service members and their dependents, in actual transactions the dynamic between creditors and individual borrowers has led to widespread misuses of the statement, often resulting in extensions of credit that violate the MLA--plus, adverse effects on Service members or their dependents who make false statements. Furthermore, and benignly, some spouses of active duty Service members may not understand that they are "dependents" covered under the MLA and might unwittingly incorrectly complete the covered borrower identification statement. Accordingly, the Department believes that this section of the regulation should be revised to relieve a Service member or his or her dependent from making any statement regarding his or her status as a covered borrower /116/ in the course of a transaction involving consumer credit.
FOOTNOTE 116 In this regard, the Department notes that even under the elective verification method, an activated member of the
Second, the Department believes that the current framework of providing the covered borrower identification statement--which allows the consumer to state either that "I AM" or "I AM NOT" a covered borrower--could be unduly cumbersome for some creditors to administer. In particular, the Department is concerned that, in light of the proposal to cover a broader range of products as consumer credit under the MLA, a creditor should be afforded a more straightforward mechanism to have "some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the MLA] as implemented by Part 232." /117/ The Department believes that a covered-borrower check could be conducted unilaterally by a creditor by checking the Department's database, akin to the unilateral process a creditor currently uses to obtain a consumer report when assessing the creditworthiness of a consumer and to ascertain the consumer's identity. Accordingly, the Department proposes to revise this section of the regulation in order to provide a clearer mechanism for a creditor to obtain the protection of a safe harbor when assessing whether a consumer is a covered borrower.
FOOTNOTE 117 72 FR at 50588. END FOOTNOTE
The Department currently provides an online database, available at https://www.dmdc.osd.mil/appj/mla/index.jsp, that allows a creditor to determine whether a consumer is a covered borrower under the MLA (the MLA Database). Proposed
The Department anticipates that commercial information-services providers, such as consumer reporting agencies, may choose to supply information products to financial institutions that would include covered-borrower checks as part of those products used to process loan applications. As the Department may determine to be appropriate, the structure, as well as the terms and conditions for use, of the MLA Database could be developed to permit a commercial information-services provider to access the MLA Database for the purposes of obtaining and reselling a search record regarding a consumer. Contemplating that such developments could be made, if appropriate, nothing in proposed
QUESTION 11: If the Department makes appropriate adjustments to the MLA Database, should the Department modify the language of
If the vast majority of transactions are amenable to covered-borrower checks conducted solely through information obtained from the MLA Database, the actual status of the consumer as a covered borrower could be material to a consumer credit transaction or account if the creditor has actual knowledge of that consumer's status. Consistent with the policy underlying the caveat to the existing
If a creditor conducts a covered-borrower check in reliance on information obtained (including, potentially, indirectly) from the MLA Database, and determines at the outset that a consumer-applicant is not a covered borrower, proposed
The Department believes the consumer protections of the MLA will be most effectively provided if creditors extending consumer credit with an MAPR exceeding the 36 percent interest-rate limit check the MLA Database before extending that credit to consumers. In order to benefit from the safe-harbor provision under proposed
QUESTION 12: If the Department were to adopt a framework for a creditor to conduct a covered-borrower check as proposed in
QUESTION 13: Should the Department retain a safe harbor for use of the covered borrower identification statement? The Department solicits comment on whether the use of the statement would be unduly cumbersome if the Department expands coverage of the regulation to additional types of credit products?
QUESTION 14: Should the Department provide a fallback provision to protect a creditor from liability in the case that the creditor is temporarily or permanently unable to access the internet at the time of conducting a transaction or establishing an account for consumer credit? Should the Department provide protection from liability from the MLA in the case that a creditor can demonstrate that the MLA Database was not operational at the time the creditor attempted to search the database? If so, should the Department address how the creditor may establish that the MLA Database was not operational at the time the creditor attempted the search?
IV. Section-by-Section Description of the Proposed Regulation
Section 232.1 Authority, purpose, and coverage
The Department proposes minor revisions to this section, mainly for the sake of clarity and consistency with provisions of the regulation.
Section 232.2 Applicability
The Department proposes to amend this section in two respects.
First, in the new proposed subsection (a), the Department would add a provision stating: "Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit." This proposed provision is designed to clarify the Department's longstanding policy that the requirements under 10 U.S.C. 987, as implemented in the regulation, apply only to a consumer who is a covered borrower "at the time he or she becomes obligated on a consumer credit transaction covered by this part." /118/
FOOTNOTE 118 See 32 CFR 232.3(c) (defining a "covered borrower"). END FOOTNOTE
The Department believes that defining the scope of the regulation to apply only to a covered borrower when he or she enters into a transaction or establishes an account for consumer credit is consistent with the language and structure of 10 U.S.C. 987. /119/ In this regard, the Department believes that 10 U.S.C. 987 should not be interpreted so as to impose restrictions on an existing agreement between a creditor and a consumer involving a credit transaction primarily for personal, family, or household purposes that spring to life when the consumer becomes a covered borrower when he or she begins active duty service in the military. Interpreting 10 U.S.C. 987 as applying only to a covered borrower who holds that status when he or she agrees to obtain the consumer credit is fair to the creditor who, at the outset of the transaction, should be in a position to know the status of its counterparty to the agreement. Moreover, the Department's longstanding policy regarding this aspect of the scope of 10 U.S.C. 987 is consistent with the provision set forth in
FOOTNOTE 119 See, e.g., 10 U.S.C. 987(a) (imposing conditions on "[a] creditor who extends consumer credit"); 10 U.S.C. 987(c) (requiring certain information to be provided to a covered borrower "before the issuance of credit"); 10 U.S.C. 987(e) (declaring that "[i]t shall be unlawful for any creditor to extend consumer credit to a [covered borrower]" that involves certain restrictions or conduct) (emphases added). END FOOTNOTE
FOOTNOTE 120 10 U.S.C. 987(f)(3) ("Any credit agreement, promissory note, or other contract prohibited under this section is void from the inception of such contract."). END FOOTNOTE
Second, the Department proposes to add a new subsection (b) stating: "The examples in this part are not exclusive. To the extent that an example in this part implicates a term or provision of Regulation Z (12 CFR part 1026), issued by the
Section 232.3 Definitions
(a) Affiliate. The Department proposes a definition of "affiliate" to accompany the definition of "creditor." This new proposed definition is designed to prevent evasion of the rule, specifically with respect to an entity that would not, when considered alone, qualify as a creditor, but, when considered together with its affiliates, would be engaged in extending credit, as described in
(b) Billing cycle. The Department proposes to define the term consistent with the meaning of this term in Regulation Z.
(c) Bureau. The Department proposes to define the term for the
(d) Closed-end credit. The Department proposes to define the term consistent with the meaning of this term in Regulation Z.
(e) Consumer. The Department proposes to define this term as a natural person.
(f) Consumer credit. As discussed above, the Department proposes to define "consumer credit" consistent with the relevant provisions of the Bureau's Regulation Z. Proposed
Certain credit products may, or may not, be covered under the Department's proposed definition of "consumer credit," depending, for example, on whether the particular credit product is subject to a "finance charge," which the Department likewise proposes to define consistent with the meaning of that term in Regulation Z. Most, if not all, "deposit advance" products would (when offered to a covered borrower) be covered as consumer credit because this type of product typically involves credit extended by a creditor primarily for personal, family, or household purposes for which the borrower pays any fee or charge that is, or is expected to be, repaid from funds available in the borrower's asset account held by that creditor. Likewise, consistent with Regulation Z, /121/ an overdraft line of credit with a finance charge would (when offered to a covered borrower) be covered as consumer credit to the extent that product consists of credit extended by a creditor primarily for personal, family, or household purposes to pay an item that overdraws an asset account and for which the borrower pays any fee or charge, but only if (A) the extension of credit for such an item and (B) the imposition of the fee or charge were previously agreed upon in writing. On the other hand, an overdraft service typically would not be covered as consumer credit because Regulation Z excludes from "finance charge" any charge imposed by a creditor for credit extended to pay an item that overdraws an asset account and for which the borrower pays any fee or charge, unless the payment of such an item and the imposition of the fee or charge were previously agreed upon in writing. /122/
FOOTNOTE 121 See 12 CFR 1026.4(c)(3) (imposing certain conditions on a charge for overdraft services that, if not satisfied, would make that charge a "finance charge"). END FOOTNOTE
FOOTNOTE 122 See 12 CFR 1026.4(c)(3). END FOOTNOTE
Consistent with the Department's existing regulation, proposed
FOOTNOTE 123 See 12 CFR 1026.29, regarding state application for Bureau exemption of a class of transactions within the state. END FOOTNOTE
In this regard, this section of the proposed rule would remove the provision in the Department's existing regulation that provides an exclusion for "credit secured by a qualified retirement account as defined in the Internal Revenue Code." /124/ The Department believes that the intent of this exclusion is sufficiently captured by the exception for any credit transaction that is an exempt transaction for the purposes of Regulation Z, as described in proposed
FOOTNOTE 124 32 CFR 232.3(b)(2)(iv). In addition, the Department now believes that this provision represents a drafting error because, upon closer review, the Department could not locate a reference in the Internal Revenue Code to a "qualified retirement account," as described in this provision. END FOOTNOTE
(g) Covered borrower. The Department proposes to revise the definition of "covered borrower" to provide greater clarity and more closely reflect the language of the MLA. Consistent with the plain language of 10 U.S.C. 987(i)(1), the proposed rule would refer to the "armed forces." This proposed provision also would clarify that the protections provided to members of the armed forces on active duty apply to Service members called or ordered to active duty under titles 10 or 14 of the United States Code, or Service members on active Guard and Reserve duty under title 32. Additionally, the Department proposes to revise the definition of "dependent" to reflect the plain language of the statute, as amended by
QUESTION 15: Does the revised definition of covered borrower appropriately cover active duty Service members and their dependents?
(h) Credit. The proposed definition of "credit" is not changed from the Department's existing regulation. /125/
FOOTNOTE 125 32 CFR 232.3(d). END FOOTNOTE
(i) Creditor. The Department proposes to define "creditor" to more closely track the language in the definition of the term in 10 U.S.C. 987(i)(5). In addition, in paragraph (i)(3), the Department proposes to interpret the statutory provision of "engaged in the business of extending consumer credit" /126/ consistent with the corresponding provision of the Department's existing regulation, which refers to the definition of "creditor" in Regulation Z. /127/
FOOTNOTE 126 10 U.S.C. 987(i)(5)(A)(i). END FOOTNOTE
FOOTNOTE 127 32 CFR 232.3(e) (" Creditor means a person who . . . and who otherwise meets the definition of `creditor' for purposes of Regulation Z."). END FOOTNOTE
(j) Department. The Department proposes to define the term for the
(k) Dwelling. The proposed definition of "dwelling" is not changed from the Department's existing regulation. /128/
FOOTNOTE 128 32 CFR 232.3(f). END FOOTNOTE
(l) Electronic fund transfer. The Department proposes to amend the definition of "electronic fund transfer" to have the same meaning as in the regulation issued by the Bureau to implement the Electronic Fund Transfer Act ("EFTA"), as amended from time to time (12 CFR part 1005). /129/ In the context of this provision--which relates only to an exception that would be contained in proposed
FOOTNOTE 129 Currently the term "electronic fund transfer" is defined in section 1005.3(b) of the Bureau's Regulation E. 12 CFR 1005.3(f). END FOOTNOTE
(m) Finance charge. The Department proposes to define the term consistent with the meaning of this term in Regulation Z.
(n) Military annual percentage rate (MAPR). The Department proposes to define the term as the cost of credit expressed as an annual rate, and requires the MAPR to be calculated in accordance with proposed
(o) Open-end credit. The Department proposes to define the term consistent with the meaning of this term in Regulation Z.
(p) Person. The Department proposes to define the term consistent with the definition of "person" in the Department's existing regulation. /130/
FOOTNOTE 130 32 CFR 232.3(e) (defining "person" for the purposes of
(q) Regulation
FOOTNOTE 131 32 CFR 232.3(i). END FOOTNOTE
Section 232.4 Terms of Consumer Credit Extended to Covered Borrowers
Proposed SEC 232.4(a) is intended to track the restrictions under 10 U.S.C. 987(a). Relative to the language of this provision in the Department's existing rule, which describes a "creditor" and an "assignee," the Department is proposing to modify this provision to track the language of the statute and proposed
Proposed SEC 232.4(a)(2) would track the restriction under 10 U.S.C. 987(a)(2), which provides that a creditor who extends consumer credit to a covered borrower shall not require the borrower to "pay interest with respect to the extension of such credit, except as . . . authorized by applicable State or Federal law." The Department understands that this condition on an extension of consumer credit possibly could be interpreted to restrict a financial institution, such as a national bank, based in one state from charging interest to covered borrowers residing in another state, which imposes a limit on the interest rate that may be charged, "except as . . . authorized by [that other] State." The Department believes nothing in 10 U.S.C. 987 or this regulation should be construed so as to affect the Federal law governing the interest rate a financial institution may charge. /132/
FOOTNOTE 132 In the case of a national bank, for example, See 12 U.S.C. 85; 12 CFR 74001. END FOOTNOTE
Proposed SEC 232.4(b) is intended to track the interest-rate limit of 10 U.S.C. 987(b).
Proposed SEC 232.4(c) provides the framework for calculating the MAPR by: First, in
Proposed SEC 232.4(c)(1)(i)-(ii) is intended to reflect the charges that must be included as "interest" under 10 U.S.C. 987(i)(3). Relative to the corresponding provisions of the Department's existing rule, /133/ the language of these proposed provisions would be amended to reflect the broader scope of consumer credit subject to the regulation, such as by referring to "the credit transaction for closed-end credit or upon account opening for open-end credit " (emphasis added). The proposed exception for a bona fide fee (other than a periodic rate) charged to a credit card account would not apply to the charges set forth in proposed
FOOTNOTE 133 32 CFR 232.3(h)(1)(ii)-(iii). END FOOTNOTE
At this time, the Department proposes to maintain (in proposed
FOOTNOTE 134 32 CFR 232.3(h)(1)(iii). END FOOTNOTE
FOOTNOTE 135 10 U.S.C. 987(i)(3) (defining " `interest'" generally as including "all cost elements associated with the extension of credit"). END FOOTNOTE
FOOTNOTE 136 Amending the scope of
QUESTION 16: Should the Department consider eliminating the timing condition of
Proposed SEC 232.4(c)(1)(iii) is intended to describe the charges that must be included in the MAPR in light of the definition of consumer credit, which would chiefly consist of "[f]inance charges," consistent with Regulation Z. In general, a charge that is excluded as a "finance charge" under Regulation Z also would be excluded from the charges that must be included when calculating the MAPR. As a result, whereas the Department's existing regulation provides exclusions from the MAPR for late payment fees /137/ and taxes required to be paid, /138/ proposed
FOOTNOTE 137 32 CFR 232.3(h)(2)(i) (excluding from the MAPR "[f]ees or charges imposed for actual unanticipated late payment, default, delinquency, or similar occurrence"). END FOOTNOTE
FOOTNOTE 138 32 CFR 232.3(h)(2)(ii) (excluding from the MAPR "[t]axes or fees prescribed by law that actually are or will be paid to public officials for determining the existence of, or for perfecting, releasing, or satisfying a security interest"). END FOOTNOTE
FOOTNOTE 139 See 12 CFR 1026.4(c). END FOOTNOTE
However, the Department recognizes that, under Regulation Z, a wide range of charges that a creditor may impose in connection with a credit product are excluded as "finance charges," particularly an application fee and a participation fee. /140/ If these exclusions from the definition of finance charge were to be maintained in the context of consumer credit covered under the MLA, a creditor would have a strong incentive to evade the interest-rate limit of 10 U.S.C. 987(b) by shifting the costs of a credit product by lowering the interest rate and imposing (or increasing) one or more of these excluded fees. To guard against this obvious result, the Department proposes to specifically include any application fee and any participation fee as charges that generally must be included in the MAPR. /141/ The exception for a bona fide fee (other than a periodic rate) charged to a credit card account would apply to the charges set forth in proposed
FOOTNOTE 140 See 12 CFR 1026.4(c)(1) and (c)(4). END FOOTNOTE
FOOTNOTE 141 See also 72 FR at 50587 (explaining the need to define the MAPR so that covered credit products "cannot evade the 36 percent [interest-rate] limit by including low interest rates with high fees associated with origination, membership, administration, or other cost that may not be captured in the TILA definition of APR"). END FOOTNOTE
Proposed SEC 232.4(c)(1)(iv) is intended to clarify that, even if a charge set forth in paragraphs (c)(1)(i)-(iii) of this section would be excluded from the finance charge under Regulation Z, that charge nevertheless must be included in the calculation of the MAPR.
QUESTION 17: Would this approach to include any application fee or participation fee in the calculation of the MAPR be reasonable to implement the statutory provision of "interest," which covers "any other charge or premium with respect to the extension of consumer credit?" /142/
FOOTNOTE 142 10 U.S.C. 987(i)(3). END FOOTNOTE
1. Computing the MAPR
The proposed rule contains two provisions for computing the MAPR, /143/ both of which track the methods already established in Regulation Z.
FOOTNOTE 143 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(B) (authorizing the Department to establish "[t]he method for calculating the applicable annual percentage rate of interest on such obligations, in accordance with the limit established under [the MLA]"). END FOOTNOTE
First, for closed-end credit, the proposed rule would require a creditor to follow "the rules for calculating and disclosing the `Annual Percentage Rate (APR)' for credit transactions under Regulation Z," based on the charges required for the MAPR, as set forth in proposed
For example, the MAPR for single advance, single payment transactions, such as some types of deposit advance loans, must be computed in accordance with the rules in Regulation Z, such as by following the instructions described in paragraph (c)(5) of appendix J. Based on the formula provided in paragraph (c)(5) of appendix J, in the case of a single advance, single payment transaction loan extended to a covered borrower for a period of 45 days, and for which the advance is
Second, for open-end credit, a creditor generally would be required to calculate the MAPR using the methods prescribed in
FOOTNOTE 144 A creditor subject to
For example, suppose a creditor offers a line of credit to a covered borrower primarily for personal, family, or household purposes (commonly referred to as a "personal line of credit"), and permits the borrower to repay on a monthly basis. Upon establishing the personal line of credit, the covered borrower borrows
In the case of open-end credit extended through a credit card account, a creditor likewise would be required to calculate the MAPR using the methods prescribed in
Under certain circumstances, a creditor might not know at the outset of a billing cycle whether the borrower's use of an open-end line of credit will lead to a finance charge that--through a combination of rates and fees--exceeds the interest-rate limit of the MLA. However, at the end of a billing cycle the creditor would be able to calculate the total charges included in the MAPR and waive an amount necessary to comply with the 36-percent limit of
QUESTION 18: Are there operational issues with the use of the effective APR methodology for open-end credit products that the Department should consider? If so, are there alternative methods for calculating the MAPR for these products that would be consistent with 10 U.S.C. 987 and that would address the operational issues?
Proposed SEC 232.4(c)(2)(ii)(B) generally would prohibit a creditor from imposing a charge in an open-end credit plan for any billing cycle during which there is no balance. However, this provision would include an exception for a participation fee (which otherwise would be required to be included under proposed
2. Conditional Exclusion From the MAPR for Bona Fide Fees Charged to a Credit Card Account
The Department believes that credit card products may warrant special consideration under the MLA. As discussed above, proposed
However, as set forth in proposed
Section 232.5 Identification of Covered Borrowers
As discussed above and except as provided in
Proposed SEC 232.5(c)(1) would provide that a creditor who has actual knowledge that a consumer is a covered borrower must "treat the consumer as a covered borrower notwithstanding any determination by that creditor based on information obtained from the [MLA Database]." The Department intends for this exception to the safe harbor in proposed
Proposed SEC 232.5(c)(2) would state that "actual knowledge" of the status of a consumer as a covered borrower may be established "only on the basis of a record (including any electronic record) collected by the creditor prior to entering into a transaction or establishing an account for consumer credit and maintained in any system used by the creditor that relates to the consumer credit involving that consumer." This proposed paragraph (c)(2) is intended to provide an evidentiary standard to establish whether a creditor might have "actual knowledge" with respect to a consumer's status relating to a consumer credit transaction or account. Depending on the circumstances, actual knowledge may be established based on the presence of one or more records maintained in the relevant system the creditor uses for the consumer credit transaction or account; under proposed
QUESTION 19: What alternatives should the Department consider for the evidentiary standard articulated in proposed
Section 232.6 Mandatory Loan Disclosures
The Department proposes to amend
Proposed SEC 232.6(a) would require a creditor to provide four categories of information to a covered borrower at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit. namely:
* A statement of the MAPR applicable to the extension of consumer credit;
* Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure;
* A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or account-opening disclosure (in the case of open-end credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement; and
* A statement [describing the protections afforded to Service members and their dependents under the MLA]."
1. Clear and Conspicuous Requirement
The Department's existing regulation requires each of these categories of information to be provided "clearly and conspicuously" to a covered borrower. /145/ There might be some benefits to covered borrowers by requiring certain information to be provided in a manner that, relative to other terms and conditions relating to the extension of or account for consumer credit, makes that information clear and conspicuous. /146/ However, nothing in 10 U.S.C. 987(c) requires information to be provided "clearly and conspicuously." In addition, Regulation Z independently generally requires disclosures regarding the costs of credit to be provided "clearly and conspicuously," /147/ and requires a creditor to present some types of information in those disclosures in certain formats. /148/ The Department believes that--particularly in light of the proposal to extend the protections of the MLA to a broader range of transactions of and accounts for consumer credit--a creditor should be relieved from the obligation to present the categories of information required under 10 U.S.C. 987(c)(1)(A) and 987(c)(1)(C) in a manner that is clear and conspicuous. However, the Department continues to intend that the information which would be required to be provided to a covered borrower must be provided consistent with the format and other requirements of Regulation Z. /149/
FOOTNOTE 145 32 CFR 232.6(a). END FOOTNOTE
FOOTNOTE 146 When adopting its rule in 2007, the Department addressed the disclosure requirements of Regulation Z, see, e.g., 72 FR at 50588, but did not address the purposes of imposing a clear-and-conspicuous requirement under 10 U.S.C. 987(c). END FOOTNOTE FOOTNOTE 147 12 CFR 1026.5(a)(1)(i) and 1026.17(a)(1). END FOOTNOTE
FOOTNOTE 148 See, e.g., 12 CFR 1026(a)(3)(iii) (requiring "[c]ertain account-opening disclosures [to] be provided in a tabular format"); see also, e.g., 12 CFR 1026.17(a)(1) (prescribing the format of the TILA disclosures for closed-end credit transactions to be "grouped together, [and] segregated from everything else"). END FOOTNOTE
FOOTNOTE 149 See 72 FR at 50588. Accordingly, the information required under the MLA should not be interspersed with the TILA disclosures. END FOOTNOTE
QUESTION 20: If the Department were to adopt a regulation as proposed, to what extent, and in what manner, would the elimination of the clear-and-conspicuous requirement affect the presentation of the categories of information required under 10 U.S.C. 987(c)(1)(A) and 987(c)(1)(C)?
2. Statement of the MAPR
Proposed SEC 232.6(a)(1) would require a creditor to provide a "statement" of the MAPR, instead of "[t]he MAPR applicable to the extension of consumer credit, and the total dollar amount of all charges included in the MAPR," as required under
FOOTNOTE 150 72 FR at 50589. END FOOTNOTE
Section 987(c)(1)(A) of the MLA does not, by its terms, require the disclosure of a particular annual percentage rate or the "amount of all charges" applicable to the extension of consumer credit. Rather, 10 U.S.C. 987(c)(1)(A) requires a " statement of the annual percent rate of interest applicable to the extension of credit" (emphasis added), and 10 U.S.C. 987(c)(2) independently requires "[s]uch disclosures [to] be presented in accordance with terms prescribed by the regulations . . . to implement the [TILA]." /151/ Taken singly and in conjunction with each other, these provisions of
FOOTNOTE 151 10 U.S.C. 987(c)(2). As enacted, the MLA refers in this section to regulations "issued by the
In addition, section 987(i)(4) of the MLA provides that the term " `annual percentage rate' has the same meaning as in section 107 of [TILA], as implemented by regulations of the [Bureau]." That term also includes "all fees and charges," including certain charges that may be exempt from the term "finance charge" under Regulation Z. /152/ The Department believes that, in light of section 987(i)(4) ("`annual percentage rate' has the same meaning as in section 107 of [TILA], as implemented by the [Bureau]"), section 987(c)(1)(A) of the MLA ("A statement of the annual percentage rate of interest") should not be interpreted to require a creditor to calculate and disclose to a covered borrower a definitive figure for the "annual percentage rate" of interest applicable to the consumer credit that could include additional charges that must be counted as "interest," and thereby would be materially different from the figure the creditor is required (under section 987(c)(1)(B) of the MLA) to compute and disclose under TILA. Instead, the Department believes that the appropriate approach to interpret the tension between sections 987(i)(4), 987(c)(1)(A), and 987(c)(1)(B) is to subject a creditor to one set of requirements for calculating and disclosing the costs of the extension of credit, namely, the requirements under TILA. One clear and beneficial consequence of interpreting these ambiguous provisions of the MLA under this approach is that a creditor would not be required to provide to a covered borrower two different numerical disclosures, which inevitably would lead to confusion. /153/
FOOTNOTE 152 See 12 U.S.C. 1026(c). END FOOTNOTE
FOOTNOTE 153 In this regard, the Department also recognizes that many creditors likely would adopt disclosures and contract documents that would be designed to be provided to both consumers who are not entitled to the protections under the MLA and to covered borrowers. The Department's proposed interpretation of sections 987(i)(4), 987(c)(1)(A), and 987(c)(1)(B) of the MLA, which would require a creditor to provide the cost disclosures only required by TILA, would reduce the general confusion to non -covered borrowers assessing the costs of credit products that are not covered by the MLA. END FOOTNOTE
In light of the scope of the proposed definition of consumer credit, which would encompass open-end credit products, the Department proposes to exercise its discretion under the MLA /154/ to interpret 10 U.S.C. 987(c)(1)(A) more straightforwardly to require, in
<p> FOOTNOTE 154 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(A) (authorizing the Department to prescribe regulations establishing "[d]isclosures required of any creditor that extends consumer credit to a [covered borrower]"). END FOOTNOTE
Proposed SEC 232.6(c)(2) provides that a creditor may include a statement of the MAPR in its agreement with the covered borrower for the transaction of or account established for consumer credit. Consistent with the Department's interpretation of its existing regulation, /155/ proposed
FOOTNOTE 155 72 at 50589. END FOOTNOTE
QUESTION 21: If the Department were to adopt a regulation as proposed, to what extent, and in what manner, would the requirement to provide a description of "the charges the creditor may impose, in accordance with this part and subject to the terms and conditions of the agreement relating to the consumer credit to calculate the MAPR," instead of a definitive figure for the "annual percentage rate" of interest applicable to the consumer credit, affect the offering or provision of that credit to a covered borrower?
3. One-Time Delivery of Information; Methods of Delivery; Refinancing a Covered Loan
Proposed SEC 232.6(b) would establish rules relating to transactions involving a creditor and assignee or multiple creditors. More specifically, proposed
Proposed SEC 232.6(d) would establish rules relating to the methods of delivery, which are substantively similar to the rules under the existing regulation. Under proposed
FOOTNOTE 156 See 10 U.S.C. 987(c)(1) (requiring information to be provided "orally"). END FOOTNOTE
Proposed SEC 232.6(e) would keep intact the current provision, currently found in
4. Proposal To Eliminate Disclosure Under SEC 232.6(a)(4)
Under the Department's existing regulation (as well as this proposed regulation),
FOOTNOTE 157 When proposing its initial regulation in
FOOTNOTE 158 10 U.S.C. 987(h)(2)(A). END FOOTNOTE
QUESTION 22: Please specifically describe the benefits currently provided to a covered borrower by requiring a creditor to provide a specific statement describing the protections afforded to Service members and their dependents under the MLA, as set forth in
QUESTION 23: The Department solicits comment on whether the proposal adequately addresses compliance challenges involving the provision of oral disclosures required by the MLA. The Department invites comment on alternatives that would balance the informational needs of covered borrowers with the compliance burden of creditors.
Section 232.7 Preemption
Proposed SEC 232.7 would revise the corresponding section of the Department's existing regulation to reflect amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a)(1) of the 2013 Act. In particular,
Section 232.8 Limitations
When the Department adopted its initial regulation in 2007,
FOOTNOTE 159 32 CFR 232.8(a)(1). END FOOTNOTE
FOOTNOTE 160 72 FR at 50589. END FOOTNOTE
Proposed SEC 232.8(a) would track the language of the refinancing prohibition of 10 U.S.C. 987(e)(1), /161/ but would limit the application of that prohibition to a relatively narrow group of creditors. More specifically, the Department would exercise its discretion to define a creditor for the purposes of 10 U.S.C. 987 /162/ by defining--only for the purposes of
FOOTNOTE 161 In addition, the Department proposes to substantially preserve the provision which currently states: "This part shall not apply to a transaction permitted by this paragraph when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this part because the consumer was not a covered borrower at the time of the original transaction." END FOOTNOTE
FOOTNOTE 162 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(i)(5)(A)(ii) (authorizing the Department to establish "additional criteria [for the definition of creditor] as are specified for such purpose in regulations prescribed under [the MLA]"). END FOOTNOTE
FOOTNOTE 163 See 2006 Report, at 14. See also
Proposed SEC 232.8(e) generally would track the language of
Proposed SEC 232.8(f) would track the language of the prohibition of 10 U.S.C. 987(e)(6), but would provide an exemption for a unique class of creditors. More specifically, the Department would exercise its discretion to define a creditor for the purposes of 10 U.S.C. 987 /164/ by excluding--only for the purposes of
FOOTNOTE 164 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(i)(5)(A)(ii) (authorizing the Department to establish "additional criteria [for the definition of creditor] as are specified for such purpose in regulations prescribed under [the MLA]"). END FOOTNOTE
FOOTNOTE 165 37 U.S.C. 1007(h). END FOOTNOTE
In the Department's experience, the specified Relief Societies provide essential emergency financial assistance to Service members. The specified Relief Societies make low- and no-cost loans, as well as grants, to Service members repayable through an allotment of military pay. /166/ Recognizing the unique and important role of the specified Relief Societies, and the long history of the specified Relief Societies in supporting the welfare of Service members and their families, the Department encourages Service members facing financial need to utilize the services provided by the specified Relief Societies.
FOOTNOTE 166 See Army Emergency Relief: http://www.aerhq.org/dnn563/Portals/0/AERAnnualReport2012.pdf, "[i]n 2012, AER provided more than
In light of the specialized operations of each of the specified Relief Societies, which currently depend crucially on the use of an allotment from a Service-member borrower's pay, and consistent with the Department's regulations on deductions from pay under 37 U.S.C. 1007, the Department proposes to exclude the Relief Societies specified in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4) from the definition of "creditor" only for the purposes of the prohibition in
In all other respects, proposed
QUESTION 24: What would be the likely costs or benefits of revising the refinancing prohibition in 10 U.S.C. 987(e)(1) to apply only to a specific type of creditor who is "engaged in the business of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the relevant law)," and to not include a creditor that is "chartered or licensed under Federal or State law as a bank, savings association, or credit union?"
QUESTION 25: What would be the likely costs or benefits of amending the prohibition in 10 U.S.C. 987(e)(5) to apply to creditors other than a creditor who is "chartered or licensed under Federal or State law as a bank, savings association, or credit union?"
QUESTION 26: Should the Department consider a broader exemption from the term "creditor" for the military welfare societies and the service Relief Societies specified in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4)?
Section 232.9 Penalties and Remedies
Proposed SEC 232.9(a)-(d) would preserve the language of those provisions of the existing regulation. The Department proposes to add a new
Section 232.10 Administrative Enforcement
The Department proposes to add a new
Section 232.11 Servicemembers Civil Relief Act Provisions Unaffected
As a consequence of adding a new section for the administrative-enforcement provisions, the existing
Section 232.12 Effective Dates
The Department proposes to amend the section relating to the effective dates of the regulation, now
Proposed SEC 232.12(a) would amend the language of
Proposed SEC 232.12(b) generally would apply the requirements of the Department's forthcoming final rule only to new transactions or accounts involving consumer credit that are consummated or established after the effective date of the final rule. The Department believes that this provision would be equitable, particularly to avoid the potential injustice and operational difficulties that could arise if new requirements under the amended regulation were to apply to pre-existing transactions or accounts involving consumer credit to covered borrowers. However, proposed
Proposed SEC 232.12(c) would provide that "the amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a) of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 112-239, 126 Stat. 1785), as reflected in
FOOTNOTE 167 10 U.S.C. 987 note. END FOOTNOTE
Proposed SEC 232.12(d) would provide that civil-liability provisions adopted in
V. Regulatory Analyses
A. Analysis Under Executive Orders 12866 and 13563
In accordance with the requirements of Executive Orders 12866 /168/ and 13563 /169/ ("EO 12866" and "EO 13563"), the Department has assessed the expected costs associated with the proposal to amend its regulation to extend the protections of 10 U.S.C. 987 to a broader range of closed-end and open-end credit products offered or extended to covered borrowers. In addition, the Department has provided a sensitivity analysis that examines potential benefits.
FOOTNOTE 168 Regulatory Planning and Review, 58 FR 51735 (
FOOTNOTE 169 Improving Regulation and Regulatory Review, 76 FR 3821 (
1. Executive Summary
EO 12866 and EO 13563 direct executive agencies, including the Department, to assess the anticipated present and future benefits and costs of available regulatory alternatives--including both quantitative measures and qualitative measures--using the best available techniques. A determination has been made that this proposed regulation is a significant regulatory action, as defined in EO 12866 and as supplemented by EO 13563, in that this regulation, if adopted as proposed, might have an annual effect on the economy of
The Department anticipates that its regulation, if adopted as proposed, might impose costs of approximately
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 an 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").
The interest-rate limit results in a transfer payment because the amount of interest revenue to be foregone by a creditor--that is, the amount of interest revenue that a creditor otherwise could receive by imposing an MAPR of greater than 36 percent--necessarily corresponds to the amount saved by the covered borrower.
The Department recognizes that the other MLA conditions of the proposed regulation could lead to various types of compliance costs for creditors, and the estimated cumulative amount of those quantified costs on an ongoing, annual basis is approximately
The scenario analysis that examines the potential benefit of the Department's proposal are the savings attributable to lower recruiting and training expenses associated with the reduction in involuntary separation of Service members due to financial distress. Each separation of a Service member is estimated to cost the Department
Figure 1 (which also appears in the Executive Summary, in section I.C.) provides a summary of the anticipated benefits and (costs) of the Department's proposed regulation, /170/ and the estimates are provided for the first year, on an annual (ongoing basis), and for a ten-year period, applying discount rates of both 7 percent and 3 percent, consistent with guidance issued by OMB. /171/ Nevertheless, the Department has assessed the amounts of value that potentially may be involved in the transfer payments due to the interest-rate limit, and those amounts are summarized in Figure 2.
FOOTNOTE 170 For the sake of brevity and clarity, the estimated savings to creditors, as discussed below, are not included in the computations represented in Figure 1. END FOOTNOTE
FOOTNOTE 171 See OMB Circular A-4 (Regulatory Planning and Review), at 31-34 (recommending, for regulatory analysis, providing estimates of net benefits using discount rates of both 3 percent and 7 percent), available at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf. END FOOTNOTE GOES
Figure 1--Summary of Estimated Effects of Proposed Rule [2013 dollars in millions] First Annual, PV PV year ongoing 10-year, 10-year, 7% 3% discount discount rate rate Sensitivity Analysis: Benefits to the Low$0 $13 $96 $128 Department High 0 137 970 1,304 Primary Analysis: Costs to Creditors of 96 20 144 194 Compliance Primary Analysis: Transfer Payments Low NA 101 717 958 High NA 120 856 1,139
GOES
Figure 2--Estimated Value of Transfer Payments Under the Proposed Rule [2013 dollars in millions] Annual, 10-year, 10-year, ongoing 7% 3% discount discount rate rate Transfer Payments: Low$101 $716 $957 High 120 856 1,139
2. Need for the Regulation and Consideration of Alternatives
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, as discussed above, the Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA /172/ 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. /173/
FOOTNOTE 172 The forms of "consumer credit" that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). END FOOTNOTE
FOOTNOTE 173 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). END FOOTNOTE
In developing this proposal, the Department has consulted with the Federal Agencies (pursuant to 10 U.S.C. 987(h)(3)), and in the course of that process has considered a range of alternatives to the provisions contained in this proposal. For example, as discussed above in section III.B., in developing the provisions for the conditional exclusion for credit card accounts, the Department has considered proposing a complete exemption from the definition of "consumer credit" for credit extended to a covered borrower under a credit card account. The Department similarly has considered whether exclusions from the MAPR for certain types of fees, such as an application fee or participation fee, should be proposed for credit card accounts in order to preserve current levels of access to those products for Service members and their dependents. The Department also has considered alternative mechanisms and thresholds for the provision in proposed
Similarly, in developing the provisions relating to a creditor's assessment of a covered borrower, the Department has considered alternatives to the creditor's use of the MLA Database in order to obtain the benefit of a safe harbor under proposed
FOOTNOTE 174 See section III.C., question 13. END FOOTNOTE
FOOTNOTE 175 See section III.C., question 11. END FOOTNOTE
In light of the data and other information available to the Department at this time, the Department has considered alternative approaches to the provisions of the proposal and, as appropriate, explicitly solicits comments on the alternatives the Department should consider. /176/
FOOTNOTE 176 See, e.g., section III.B., question 10. END FOOTNOTE
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 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 conclusively assess whether a consumer-applicant is a covered borrower. In this regard, as discussed above in section III.C., 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.
3. Estimate of Anticipated Costs Associated With Other MLA Conditions
The other MLA conditions that would apply to creditors who offer consumer credit products that would be subject to the proposed regulation might present several types of compliance costs to those creditors. For example, if a creditor extends consumer credit to a covered borrower only in the form of a credit card product (and who thus currently is not subject to the MLA), the creditor might encounter various costs associated with complying with requirements for: adjustment of computer systems and software to provide for calculation of the MAPR (pursuant to
The Department believes that some of the compliance costs due to the other MLA conditions are not material to the quantifiable aspects of this regulatory impact assessment because some costs are minimal (relative to the creditor's other compliance costs or the creditor's overall costs of operations when providing consumer credit) or not amenable to measurement. /177/ Accordingly, for the purposes of this regulatory impact assessment, the Department has focused its quantitative assessment of costs on two areas that, based on the Department's experience, are reasonably likely to impose costs: First, the disclosures required by the MLA to be provided by a creditor to a covered borrower (under proposed
FOOTNOTE 177 For example, the Department believes that the costs associated with the prohibition against requiring a covered borrower to waive his or her rights under any otherwise applicable provision of law (as provided in proposed
The Department recognizes that this assessment does not capture all possible compliance costs associated with the proposed regulation. Indeed, the Department anticipates that a creditor who chooses to extend credit with a cost that may exceed the interest-rate limit or implicate the limitations in proposed
FOOTNOTE 178 In considering the costs associated with updating computer programs, the Department relies on analysis from the
As the Department assesses whether to amend its regulation, as proposed, the Department will further consider the potential benefits and costs of extending the protections of the MLA to a broader range of closed-end and open-end credit products. There are several areas where additional information could assist the Department in better estimating the potential benefits, costs, and effects of amending its regulation. The Department requests interested parties to provide specific data relating to the benefits and costs of amending the regulation, as proposed, including costs to implement measures to adjust computer systems and to train personnel. The Department seeks comments on whether all anticipated costs have been adequately captured in the analysis. Please provide information on the type of costs and the magnitude of costs by providing relevant data and studies.
Disclosures. Under the Department's existing regulation ("status quo alternative"), a creditor who extends to a covered borrower one or more of the three consumer credit products covered by the regulation must "clearly and conspicuously" disclose: (i) A numerical value for the MAPR applicable to the extension of credit, including the total dollar amount of all charges included in the MAPR; (ii) any disclosures required by Regulation Z; (iii) a clear description of the payment obligation (which may be satisfied by a payment schedule provided pursuant to Regulation Z); and (iv) a Statement of Federal Protections. A creditor must provide the information orally and in writing prior to consummation of the credit transactions. For mail and internet transactions, the creditor may provide, with the written disclosures, a toll-free telephone number that the borrower may use to obtain the oral disclosures.
Section 232.6 of the proposed rule would amend the provisions relating to the information required by the MLA to simplify the information that a creditor must provide to a covered borrower when extending consumer credit. The proposal would relieve a creditor of the obligation to disclose "clearly and conspicuously" the information required by the MLA. Additionally, the Department would eliminate the requirement that a creditor disclose a numerical value for the MAPR or "the total dollar amount of all charges," and instead would require a creditor to provide a description of the charges that the creditor may impose. Thus, in general, the proposal would permit a creditor to streamline compliance with the disclosure requirements under 10 U.S.C. 987(c) by providing to a covered borrower the same information the creditor must provide to a consumer under Regulation Z, plus a statement of the MAPR. In order to facilitate compliance, the proposed regulation provides a model statement that a creditor could use. Consistent with the Department's interpretation of its existing regulation, the proposal expressly provides that the statement of the MAPR would not be required in any advertisement relating to consumer credit.
The Department estimates that there are approximately 191 million transactions each year in which creditors would provide the required information, /179/ generally included as part of their standard credit agreements. The Department assumes that all creditors, other than creditors who offer only residential mortgage loans or loans expressly to finance the purchase of personal property (neither of which loans is consumer credit), will provide these disclosures, and believes that, based on these assumptions, approximately 40,000 creditors would be subject to the proposed regulation. /180/ The Department seeks comments on whether the estimate of 40,000 creditors is reasonable. Please provide data and studies that support the comment.
FOOTNOTE 179 To estimate the number of consumer credit transactions each year, the Department relies on data from the Federal Reserve Bank of
FOOTNOTE 180 The Department bases this estimate on relevant numbers of establishments published by the
(a) Statement of the MAPR
For creditors who currently provide disclosures to covered borrowers (under the status quo alternative), the proposed rule is expected to reduce some of their compliance costs by eliminating the requirement to disclose a numerical value for the MAPR. The Department estimates that eliminating the requirement under the status quo to disclose a numerical value for the MAPR would reduce the compliance costs for creditors who currently offer forms of consumer credit by
The proposal to require the provision of a statement of the MAPR, which may be satisfied through the use of a model statement, is anticipated to cost all creditors approximately
FOOTNOTE 181 The Department estimates that set-up for the statement of the MAPR will take 20 hours, and that staff time for the set-up of the proposed disclosure will be 50 percent data entry and information processing workers, 40 percent supervisors of office and administrative support workers, and 10 percent legal counsel. U.S. Dep't of Labor,
FOOTNOTE 182 In this regard, the Department has estimated the potential costs only for in-person transactions. These figures do not relate to applications involving the use of the creditor-supplied telephone number for the oral delivery of the required information. END FOOTNOTE
FOOTNOTE 183 The Department reaches this estimate by computing the cost of the additional transaction time, calculated by multiplying the number of transactions (4 million) by the mean hourly wage for financial tellers (
The Department further assumes that creditors will update standard account disclosures for all consumer credit accounts and that the printing and paper costs are
FOOTNOTE 184 The Department relies on estimates of paper and printing costs recently published by the
FOOTNOTE 185 The Department reaches this estimate by computing the cost of the additional printing and paper for the disclosure, calculated by multiplying the number of transactions (191 million) by the cost per page (
Taking the additional transaction time for oral disclosure and the additional printing and paper expenses for written disclosure together, the Department estimates that the total costs to all creditors of providing the statement of the MAPR would be
Additionally, creditors may experience some increase in call volume and costs associated with providing oral disclosures if borrowers engage in consumer credit transactions by mail, internet, or at the point of sale in association with the sale of a nonfinancial product or service. The Department seeks comment, as well as data (as may be appropriate), on its supposition regarding the costs associated with these sales channels. Due to the lack of readily available data, the Department has not quantified the potential costs of any increase in this call volume; however, the Department has sought to streamline and minimize the compliance burden associated with all disclosures, including the requirement to orally provide the required information. Proposed
(b) Statement of Federal Protections
Under the proposal, like the status quo alternative, a creditor still must provide to a covered borrower the Statement of Federal Protections. However, because the proposal would apply the protections of 10 U.S.C. 987 to a broader scope of credit transactions, an additional 20,000 creditors would provide the Statement of Federal Protections, as required by proposed
FOOTNOTE 186 The Department estimates that set-up for the Statement will take 20 hours and that staff time for the set-up of proposed disclosures will be 50 percent data entry and information processing workers, 40 percent supervisors of office and administrative support workers, and 10 percent legal counsel. U.S. Dep't of Labor,
On an ongoing basis, the Department estimates that providing the Statement of Federal Protections would add approximately 50 seconds to each transaction when the disclosure is provided orally and require one-quarter of a printed page when included in standard account disclosures. To estimate the cost of orally providing the Statement of Federal Protections, the Department assumes that this statement is provided by a creditor's teller or sales person, provided only to covered borrowers, and that there are approximately 2 million covered borrowers, each opening two credit accounts per year. The Department estimates that the cost to creditors of providing the Statement of Federal Protections orally will be approximately
FOOTNOTE 187 The Department reaches this estimate by computing the cost of the additional transaction time, calculated by multiplying the number of transactions (4 million) by the mean hourly wage for financial tellers (
The Department further assumes that creditors will update standard account disclosures for all credit accounts and that the printing and paper costs are
FOOTNOTE 188 U.S. Dep't of Labor,
FOOTNOTE 189 The Department reaches this estimate by computing the cost of the additional printing and paper for the disclosure, calculated by multiplying the number of transactions (191 million) by the cost per page (
Taking the additional transaction time for oral disclosure and the additional printing and paper expenses for written disclosure together, the Department estimates that the total costs to all creditors of providing the Statement of Federal Protections would be
Additionally, as with the statement of the MAPR, the Department realizes that creditors might experience some increase in call volume and costs associated with providing oral disclosures if borrowers engage in consumer credit transactions by mail, internet, or at the point of sale in association with the sale of a nonfinancial product or service. The Department has not quantified the potential costs of any increase in this call volume; however, the Department has sought to streamline and minimize the compliance burden associated with all disclosures, including the MLA's oral disclosure requirement. Proposed
Figure 3a provides a summary of the anticipated benefits and (costs) associated with the disclosures under the Department's proposed regulation. GOES
Figure 3a--Estimated Benefits and Costs of Disclosures Under the Proposed Rule [2013 dollars in millions] First Annual, PV PV year ongoing 10-year, 10-year, 7% 3% discount discount rate rate Benefits of eliminating requirement$0.00 $0.07 $0.58 $0.69 to disclose numerical MAPR Set up costs of Proposed Statement of 19 n/a n/a n/a the MAPR Ongoing costs of Proposed Statement 0.00 3 22 29 of the MAPR (oral and printed) Set up costs of Statement of Federal 10 n/a n/a n/a Protections (additional creditors) Ongoing costs of Statement of Federal 0.00 3 22 29 Protections (oral and printed) Total Net Costs 29 6 43 58
Department seeks comment on the assumptions invoked in this section. Please provide comment on the reasonableness of these assumptions and likelihood of the associated costs. Please provide data and studies that support the comment.
Identification of Covered Borrowers. Under the status quo, the Department believes that a creditor who offers a covered payday loan, vehicle title loan, or refund anticipation loan typically assesses the status of a consumer-applicant by providing a self-certification form which is completed by the applicant, as provided in
The Department proposes to modify the process for conducting a covered-borrower check so that a creditor may unilaterally assess the status of a consumer-applicant, rather than relying on the applicant to complete a self-declaration form. Proposed
The Department assumes that all creditors, other than creditors who offer only residential mortgage loans or loans expressly to finance the purchase of personal property (neither of which loans is consumer credit), will establish processes for querying the MLA Database and retaining records of covered-borrower checks. As described above, the Department believes that, based on these assumptions, approximately 40,000 creditors would be subject to the proposed regulation. The Department believes that setting up the process to use the MLA Database and retain records of queries will take each creditor 70 hours of labor time. Based on these assumptions, the Department estimates that the total costs relating to setting up the processes to use the MLA Database and take advantage of the safe harbor in proposed
FOOTNOTE 190 The Department estimates that staff time to set up access to the MLA Database and the processes to record and retain information will be 50 percent data entry and information processing workers, 40 percent supervisors of office and administrative support workers, and 10 percent legal counsel. U.S. Dep't of Labor,
The Department has observed that, in general, creditors who currently offer consumer credit products, as defined by the Department's existing regulation, require all consumer-applicants to complete the self-declaration form. For the purposes of this analysis, the Department assumes that a creditor requests the consumer-applicant to complete the self-declaration form only once. For a creditor who currently offers a form of consumer credit, as defined by the Department's existing rule, replacing the self-declaration form with a process to use the MLA Database is estimated to result in a savings from transaction time, printing and paper costs, as well as a reduction in legal risks. Further, the Department assumes that creditors choosing to avail themselves of the MLA Database and the safe harbor in proposed
According to the
FOOTNOTE 191
FOOTNOTE 192
The Department expects that proposed
The Department estimates that of the estimated 191 million covered credit applications each year, /193/ there will be approximately 70 million applications when creditors choose to query the MLA Database as a single-record check. For each of these single-record checks, the inquiry and record retention is expected to add approximately 60 seconds to each new consumer credit transaction. The Department estimates that the total cost to creditors for using the database and retaining records relating to consumer-applicants would be approximately
FOOTNOTE 193 The Department estimates 191 million relying on data from the Federal Reserve Bank of
FOOTNOTE 194 The Department calculates the estimated cost by multiplying the expected number of transactions involving a covered borrower check (70 million) by the mean hourly wage for financial tellers (
Because modern credit applications, whether conducted online or in person, involve highly automated systems for underwriting, the Department expects that many creditors who issue credit cards and other creditors will choose to develop systems that make the marginal increase in time for querying the MLA Database negligible. The Department has not sought to estimate the potential costs associated with computer programming or including a covered-borrower check in automated underwriting. /195/
FOOTNOTE 195 In considering the costs associated with updating computer programs, the Department relies on analysis from GAO examining the costs of implementing changes to minimum payment disclosures for credit card accounts. There, GAO found that credit card issuers were unable to provide precise estimates of, among others, the cost of computer programming to provide the revised disclosures. GAO found that estimates of the computer programming cost varied widely, from
Figure 3b provides a summary of the anticipated benefits and (costs) associated with the covered-borrower checks under the Department's proposed regulation. GOES
Figure 3b--Estimated Benefits and Costs of Covered-Borrower Checks Under the Proposed Rule [2013 dollars in millions] First Annual PV PV year 10-year, 10-year, 7% 3% discount discount rate rate Benefits of Eliminating Printing and$0.00 $0.22 $2 $2 Paper Costs for Self-Certification Set-up Costs to Use MLA Database 67 n/a n/a n/a Covered-Borrower Checks 0.00 14 103 138 Total 67 14 101 136
Department seeks comment on the assumptions invoked in this section. Please provide comment on the reasonableness of these assumptions and the likelihood of the associated costs. Please provide data and studies that support the comment.
Prohibition on Requiring Arbitration. The MLA prohibits a creditor from "requir[ing] a covered borrower to submit to arbitration or impos[ing] onerous legal notice provisions in the case of a dispute" relating to an extension of consumer credit, /196/ and this restriction is reflected in proposed
FOOTNOTE 196 10 U.S.C. 987(e)(3). END FOOTNOTE
The Department seeks comment on the potential costs to creditors, across a variety of contracts implicated by the prohibition in proposed
4. Sensitivity Analysis on Potential Benefits
Each year, thousands of well-trained Service members are compelled to leave military service because they experience financial distress that leads to the revocation of their security clearances. The Department has direct experience with this process of involuntary separation, which generally involves a Service member becoming over-extended in debt--which occurs due to a wide range of factors--defaulting on one or more credit agreements (either by making late payments or by failing to make payments), and experiencing a deterioration in the credit score or credit history prepared by a consumer reporting agency for that individual. The individual's deteriorating creditworthiness presents an exposure to the Department that the individual poses a security risk, which ultimately warrants separation.
As discussed in sections II.C and II.D, the Department makes a significant investment in recruiting, training, and progressing each qualified Service member. Losing a qualified soldier, sailor, airman, or Marine can cause a loss of mission capability, and there are substantial costs associated with replacing that Service member. Even though, for the purposes of this regulatory impact assessment under EO 12866 and EO 13563, the most direct effect of the interest-rate limit is a transfer payment, a secondary--yet no less direct--effect is the reduction in the overall amount of debt owed to creditors by covered borrowers. The Department believes if the interest-rate limit were to apply to a broader range of credit products, the overall amount of debt owed to creditors would be reduced; as a result, regardless of the original occasions for incurring debts, Service members reasonably may be expected to have a lower incidence of financial distress, and a correspondingly lower incidence of involuntary separation. Thus, the Department believes that the savings of the Department's costs associated with replacing Service members who are involuntarily separated constitute benefits for the purposes of this regulatory impact assessment--entirely independently of the transfer payment flowing from the interest-rate limit--and are amenable to being quantified. More generally, the anticipated improvements in military readiness and Service-member retention lie at the core of 10 U.S.C. 987.
Military Readiness and Service Member Retention. The most substantial--as well as meaningfully quantifiable--benefit of the Department's proposed regulation, if adopted, would be the reduction in involuntary separations among Service members due to financial distress. The Department also anticipates that the proposed regulation would entail non-quantifiable benefits, reducing stress for Service members or their families, which currently affects approximately two-thirds of military families who report experiencing stress related to their financial condition. /197/
FOOTNOTE 197 Blue Star Families, The 2013
The Department estimates that each separation costs the Department
FOOTNOTE 198 U.S. Gov't Accountability Office, GAO-11-170, Military Personnel: Personnel and Cost Data Associated with Implementing DOD's Homosexual Conduct Policy (
(a) Estimate One
For the years 2003 through 2011, there was an average of 55,036 involuntary separations per year. Of those involuntary separations that were due to legal or standard-of-conduct issues--an average of 19,893 per year--the Department estimates that approximately half are attributable to a loss of security clearance, and, of these, 80 percent are due to financial distress. /199/ Based on this data and these assumptions, the Department estimates that, going forward, there would be approximately 7,957 separations each year due to financial distress.
FOOTNOTE 199 U.S. Dep't of Defense, Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 39 (
(b) Estimate Two
In 2005, there were 1,999 revocations of security clearances in the
FOOTNOTE 200 Amy Klamper, "Breakthrough,"
FOOTNOTE 201 U.S. Dep't of Defense, Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 9 (
FOOTNOTE 202 Service members also could be separated in a number of other ways; for example, this number does not attempt to account for separations where a Service member is court-marshaled for failure to pay debts. END FOOTNOTE
FOOTNOTE 203 Thus, in estimate two, the Department computes the total number of separations per year as follows: the approximate total number of revocations per year [(1,999)/(0.0850)] multiplied by 0.80, yields the revocations due to financial distress of 18,814; and 25 percent of that figure is 4,703. END FOOTNOTE
The Department estimates that the 10-year cost of involuntary separations due to financial distress is between
The Department acknowledges that the proposed regulation, if adopted as proposed, would not entirely eliminate financial distress among Service members. However, the Department expects that extending the protections of 10 U.S.C. 987 to a broader range of credit products would significantly reduce the incidence of derogatory items in the credit files of Service members (maintained by consumer reporting agencies), and thereby improve the Service members' respective capacities to manage and pay debts.
The Department estimates that the proposal, if adopted, would reduce the separations associated with financial distress. To assess the anticipated savings reasonably attributable to a reduction in involuntary separations, the Department has used three estimates of the possible reduction in involuntary separations: 5 percent, /204/ 17.5 percent, /205/ and 30 percent. /206/ The Department believes that estimating between 5 percent and 30 percent reduction in the total number of these separations is reasonable in light of the conservative assumptions relating to the separations due to financial distress. The Department seeks comment on the reasonableness of these estimates. Please provide data and studies that support the comment.
FOOTNOTE 204 See, generally,
FOOTNOTE 205 See, generally,
FOOTNOTE 206 See, generally,
The Department estimates that the proposed regulation, if adopted, would result in savings from involuntary separations due to financial distress of between
Figure 4--Scenario Analysis of Costs Savings From Reductions in Separations [2013 dollars in millions] Annual 10-year, 10-year, 7% 3% discount discount rate rate Estimate One: 7,957 separations per year Separations Reduced by 30%$137 $970 $1,304 Separations Reduced by 17.5% 80 567 763 Separations Reduced by 5% 23 162 217 Estimate Two: 4,703 separations per year Separations Reduced by 30% 81 574 771 Separations Reduced by 17.5% 47 335 451 Separations Reduced by 5% 13 96 128
In addition to reducing the quantifiable costs associated with separations due to financial distress, the Department believes that the proposed regulation, if adopted, would reduce non-quantifiable costs associated with financial strains on Service members. High-cost debt can detract from mission focus, reduce productivity, and require the attention of supervisors and commanders. Additionally, if the Department's proposed regulation is adopted, the protections afforded to covered borrowers under the MLA might, over time, improve the Department's capabilities to retain Service members. In this regard, one study found that access to extremely high-cost debt decreases military readiness by increasing the presence of unfavorable credit information in the files of consumer reporting agencies, and by producing a significant decline in job performance, reducing the overall eligibility of Service members for reenlistment. /207/
FOOTNOTE 207 Scott Carrell &
5. Estimate of Amount of Transfer Payments
The Department believes that the interest-rate limit and the corresponding provisions governing computation of the MAPR could entail some costs, particularly for creditors who might need to adjust their systems to compute the MAPR in accordance with the standards of the proposed regulation. The Department anticipates that the great majority of creditors should be able to compute the MAPR for their credit products without significantly redesigning their computing or accounting systems. However, there might be a relatively small number of creditors who offer credit insurance products or credit-related ancillary products with loans who might encounter costs to adjust their computing or accounting systems to comply with the new standards, if adopted as proposed. For example, credit card issuers whose fees fit within the bona fide fee safe harbor would not be required to calculate an effective APR cost element of the MAPR, provided that the periodic rate falls below 36 percent APR. The Department anticipates that only a small number of creditors would offer credit products requiring calculation of an effective APR cost element of the MAPR. For this limited class of creditors, the Department recognizes that adjustments to computing or accounting systems could entail some costs, however, there are no reliable data on how many creditors would pursue such product offerings nor data that would allow the Department to develop a quantifiable estimate of the potential costs associated with compliance with the interest-rate limit and the provisions governing computation of the MAPR. Thus, for the purposes of this analysis under EO 12866 and EO 13563, the Department has assessed the potential effects of the interest-rate limit only in terms of the amount of the transfer payments relating to certain consumer credit products.
Even though the interest-rate limit of 10 U.S.C. 987(b) results in transfer payments from various creditors to covered borrowers, and thus does not affect the benefits-cost analysis under EO 12866 and EO 13563, the Department has estimated the amounts involved in these payments. For the purposes of assessing the amounts involved in the transfer payments, the Department has considered estimates of the current cost of credit and usage rates for four types of consumer credit, namely: (i) Credit card products, (ii) payday loans, (iii) auto title loans, and (iv) installment loans.
In the credit card market, the Department believes that most creditors should be able to comply with the limitation on the MAPR by continuing to offer credit card products with minimal or no alternations to their current pricing practices. In this regard, few, if any, creditors who offer credit card products charge periodic rates that exceed the interest-rate limit of 10 U.S.C. 987(b) and proposed
The Department estimates the amount of the transfer payments by taking the difference of the cost of credit for a typical credit card with a credit insurance or debt cancellation product and 36 percent MAPR, less the payout rate on a credit insurance or debt protection product. To calculate the range of possible transfer payments associated with credit card products, the Department estimates an amount per account, and then makes a high- and low-end estimate of the number of Service members with credit cards who also carry a credit insurance or debt cancellation product that would cause the MAPR to exceed the 36-percent threshold. In this regard, the Department's estimate is conservative because the data relate only to consumer credit obtained by Service members, and not to other categories of individuals who could be covered borrowers.
The Department is aware that there are other credit-related ancillary products that may be sold in connection with, and either at or before, the account opening. The Department has not estimated the amount of the transfer payments that might be associated with those credit-related ancillary products.
To estimate the amount of the transfer payment for each credit card account, the Department assumes that 78 percent of Service members have a credit card, /208/ revolving an average balance of
FOOTNOTE 208 Blue Star Families, The 2013
FOOTNOTE 209
FOOTNOTE 210 U.S. Gov't Accountability Office, GAO-11-311, Credit Cards: Consumer Costs for Debt Protection Can be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight 9, 21 (
FOOTNOTE 211 This calculation assumes a beginning balance of
Second, from an examination of credit card offers, the Department estimates that between 44 and 100 percent of the 78 percent of Service members who have a credit card account have a card with an APR sufficiently high that if the creditor also sells a credit insurance or debt cancellation product, the cost of credit could exceed the limit in 10 U.S.C. 987(b). The Department assumes that 7 percent of these accounts actually use credit insurance or debt cancellation; therefore the estimates are based on the assumption that between 3 percent and 7 percent of the 78 percent of Service members holding credit cards have a credit insurance or debt cancellation product. /212/
FOOTNOTE 212 U.S. Gov't Accountability Office, GAO-11-311, Credit Cards: Consumer Costs for Debt Protection Can be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight 7 (
At the high-end, assuming that 78 percent of Service members have a credit card that, given typical costs, might exceed the interest-rate limit if the borrower purchases credit insurance or debt cancellation and pays a penalty APR, and that 7 percent of these borrowers actually do purchase such a product, the amount that would be transferred is estimated to be
FOOTNOTE 213 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a credit card account (78 percent), the percentage of accounts with costs that might exceed the interest rate limit if the borrower purchases add-on products (100 percent), the percentage of accounts where the borrower actually purchases add-on products (7 percent), and the amount transferred per card (
At the low-end, assuming that 44 percent of Service members have a credit card that, given typical fees, might exceed the interest-rate limit if the borrower purchases credit insurance or debt cancellation and pays a penalty APR, and that 7 percent of these borrowers actually do purchase such a product, the amount that would be transferred is estimated to be
FOOTNOTE 214 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a credit card account (78 percent), the percentage of accounts with costs that might exceed the interest rate limit if the borrower purchases add-on products (44 percent), the percentage of accounts where the borrower actually purchases add-on products (7 percent), and the amount transferred per card (
For non-credit card credit products that would be subject to the proposed regulation, the Department estimates the amount that would be transferred due to the interest-rate limit by considering three segments of that market for consumer credit: Payday loans, auto title loans, and non-purchase money installment loans. The Department assumes that approximately 12 percent of Service members use non-credit card credit products that would be covered under the Department's regulation, if adopted as proposed. /215/ The prices associated with these credit products vary widely; for any given creditor, the amount that would be transferred as a result of compliance with the interest-rate limit depends on how much that creditor charges for credit extended under the status quo.
FOOTNOTE 215
In order to estimate the amount that would be transferred, the Department assumes that between 7 percent and 4.9 percent of Service members use payday loans with a median APR of 391 percent and a median ten transactions per year, each borrowed for 14 days, /216/ 0.3 percent of Service members use auto title loans with a median APR of 300 percent, /217/ and 7 percent of Service members use installment loans with a median APR of 80 percent. /218/
FOOTNOTE 216
FOOTNOTE 217
FOOTNOTE 218 See
Given typical prices of payday loans and borrowing patterns, the Department estimates that the value that would be transferred is
FOOTNOTE 219 The Department assumes that the average loan amount is
FOOTNOTE 220 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a payday loan (4.9 percent), and the amount transferred per account (
FOOTNOTE 221 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a payday loan (7 percent), and the amount transferred per account (
Approximately 7 percent of volume in payday loans is done by online lenders based offshore. /222/ The Department estimates that the transfer payments relating to these offshore creditors would be between
FOOTNOTE 222
Assuming that 0.3 percent of Service members use auto title loans each year and that the average auto title loan carries an APR of 300 percent, the Department estimates that the interest-rate limit would lead to transfer payments relating to the auto title lending industry of
FOOTNOTE 223 The Department assumes that the average principal borrowed is
Assuming that 7 percent of Service members use high-cost installment loans each year and that the average installment loan carries an APR of 80 percent, the Department estimates that the interest-rate limit would result in transfer payments relating to the domestic installment lending industry of
FOOTNOTE 224 The Department assumes that a typical loan is
Approximately 7 percent of volume in the high-cost installment lending market is done by online lenders based offshore. /225/ The Department estimates the proposed regulation would result in transfer payments relating to these offshore creditors of approximately
FOOTNOTE 225
Overall, the Department estimates that the total amount of transfer payments relating to these four categories of consumer credit products would be between
Figure 5--Amount of Transfer Payments Relating to the Interest-Rate Limit [2013 dollars in millions] Annual PV PV 10-year, 10-year, 7% 3% discount discount rate rate Payday: (1) At 4.9% usage$37 $260 $350 (2) At 7% usage 52 370 497 Auto title 0.87 6 8 Installment 60 426 572 Credit Cards: (1) At 3% of cards 3 24 27 (2) At 7% of cards 7 54 61 TOTAL Low (4.9% payday, 3% cards) 101 716 958 High (7% payday, 7% cards) 120 856 1,139
Apart from the MLA, for active duty Service members who are materially affected by virtue of his or her military service, the Servicemembers Civil Relief Act (SCRA) limits the permissible rate of interest on outstanding pre-service balances at 6 percent APR. /226/ To avail himself or herself of the protections of the SCRA, a Service member must make a written request to the creditor. Because data is unavailable on the extent to which creditors are reducing pre-service obligations for Service members, the Department is unable to adjust the estimated amount of the transfer payments relating to the interest-rate limit of the proposed regulation to account for the potential effects of the SCRA.
FOOTNOTE 226 50 App. USC 527(a). END FOOTNOTE
Furthermore, the Department does not expect that the interest rate limitation will have undesirable side-effects for Service members. The Department observes that numerous creditors currently supply credit to Service members in a manner that already should comply with the interest-rate limit. In the Department's experience, covered borrowers enjoy access to low- and no-cost credit. For example, 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 provide no-interest loans and grants for shortfalls in household expenses and unforeseen emergencies.
B. Unfunded Mandates Reform Act (Sec. 202, Pub. L. 104-4)
The Department certifies that this proposed regulation does not contain a Federal mandate that may result in the expenditure by State, local, and tribal governments, in aggregate, or by the private sector of
FOOTNOTE 227 See analysis in section IV.A. for calculations. The Department expects expenditure by the private sector of approximately
C. Regulatory Flexibility Act
The Department certifies that this proposed regulation is not subject to the Regulatory Flexibility Act ("RFA") /228/ because the regulation, if adopted as proposed, would not have a significant economic impact on a substantial number of small entities.
FOOTNOTE 228 5 U.S.C. 601. END FOOTNOTE
The North American Industrial Classification (NAIC) codes for the affected businesses are the following:
(a) 522110--Commercial Banking
(b) 522130--Credit Unions
(c) 522210--Credit Card Issuing
(d) 522291--Consumer Lending
Pursuant to the
Approximately 81 percent of firms in NAIC code 522110 and 94 percent of firms in NAIC code 522130 are small business entities. Overwhelmingly, credit card products are issued by insured depository institutions and, therefore, small business entities issuing credit cards (included within NAIC code 522210) are covered by the previously described codes.
While a substantial portion of firms in each affected market are "small business entities," Service members and their dependents make up only a small portion of the consumers for those businesses. Because only approximately 2.5 percent of households in
D. Paperwork Reduction Act
Proposed SUBSEC 232.5 and 232.6 contain information-collection requirements. The Department has submitted the following proposal to OMB under the provisions of the Paperwork Reduction Act. /229/ Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the Department, including whether the information will have practical utility; (b) the accuracy of the estimate of the burden of the proposed information collection; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the information collection on respondents.
FOOTNOTE 229 44 U.S.C. 3502, 3506-07. END FOOTNOTE
Title: Database Inquiry and Mandatory Loan Disclosures as Part of Limitations on Terms of Consumer Credit Extended to Service Members and Their Dependents.
Type of Request: Reinstatement with change.
Number of Respondents: 40,000.
Responses per Respondent: Varies by type of respondent.
Annual Responses: 191 million.
Average Burden per Response: Varies by type of response. On an ongoing basis, respondents likely will spend 1 minute (0.02 hours) for single-record borrower inquiry (70 million); 1.67 minutes (0.03 hours) for orally providing the required information to covered borrowers (4 million responses); and 0 minutes for printed disclosures included in all consumer credit contracts (191 million). In the first year, there is expected to be a one-time burden of 110 labor hours to set up the mandatory oral and printed disclosures, as well as a process for conducting covered-borrower checks and retaining records.
Annual Burden Hours: 4,000,000 set-up burden hours in the first year; 1,266,747 ongoing burden hours each year.
Needs and Uses: With respect to any extension of consumer credit to a covered borrower, a creditor would be required to provide to the borrower (a) a statement of the MAPR and (b) a Statement of Federal Protections. In approximately 4 million transactions, the required information would be provided orally as well as in a printed document; in approximately 191 million transactions, the required information would be included in standard account agreements. Additionally, a creditor may, at its discretion, identify the status of a consumer-applicant by querying the MLA Database and, in the event that the inquiry indicates that consumer-applicant is not a covered borrower, take advantage of a safe harbor from liability under 10 U.S.C. 987 by retaining a record of the information obtained from the database.
Affected Public: Creditors making loans that are subject to a finance charge or payable by a written agreement in more than four installments, except for loans that are mortgage loans and purchase-money financing for vehicles or other personal property.
Frequency: One set of disclosures for each transaction involving consumer credit; one database inquiry for each transaction involving consumer credit.
Respondents' Obligation: Mandatory loan disclosures; optional database inquiry and subsequent record retention.
OMB Desk Officer
Written comments and recommendations on the proposed information collection should be sent to Ms.
You may also submit comments, identified by docket number and title, by the following method:
* Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Instructions: All submissions received must include the agency name, docket number and title for this
To request more information on this proposed information collection or to obtain a copy of the proposal and associated collection instruments, please write to
E. Executive Order 13132 Federalism
Executive Order 13132 ("EO 13132") requires Executive departments and agencies, including the Department, to identify regulatory actions that have significant federalism implications. A regulation has federalism implications if it has substantial direct effects on the States, on the relationship or distribution of power between the Federal Government and the States, or on the distribution of power and responsibilities among various levels of government.
The provisions of this part, as required by 10 U.S.C. 987, override state statutes inconsistent with this part to the extent that these provisions provide different protections for covered borrowers than those provided to residents of that State. As discussed in the section-by-section description of the proposed regulation, in section III, the proposal would revise the corresponding section of the Department's existing regulation to reflect amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a)(1) of the 2013 Act. This amendment clarifies the scope of state laws subject to preemption by 10 U.S.C. 987.
The proposed regulation, if adopted as proposed, would not affect in any manner the powers and authorities that any State may have or affect the distribution of power and responsibilities between Federal and State levels of government. Therefore, the Department has determined that the proposed regulation has no federalism implications that warrant the preparation of a Federalism Assessment in accordance with EO 13132.
List of Subjects in 32 CFR Part 232
Loan programs, Reporting and recordkeeping requirements, Service members.
For the reasons set forth in the preamble, chapter I of title 32, Code of Federal Regulations is proposed to be amended by revising part 232 to read as follows:
PART 232--LIMITATIONS ON TERMS OF CONSUMER CREDIT EXTENDED TO SERVICE MEMBERS AND DEPENDENTS
Sec.
232.1 Authority, purpose, and coverage.
232.2 Applicability; examples.
232.3 Definitions.
232.4 Terms of consumer credit extended to covered borrowers.
232.5 Identification of covered borrower.
232.6 Mandatory loan disclosures.
232.7 Preemption.
232.8 Limitations.
232.9 Penalties and remedies.
232.10 Administrative enforcement.
232.11 Servicemembers Civil Relief Act provisions unaffected.
232.12 Effective dates.
Authority: 10 U.S.C. 987.
(a) Authority. This part is issued by the
(b) Purpose. The purpose of this part is to impose limitations on the cost and terms of certain extensions of credit to Service members and their dependents, and to provide additional protections relating to such transactions in accordance with 10 U.S.C. 987.
(c) Coverage. This part defines the types of transactions involving "consumer credit," a "creditor," and a "covered borrower" that are subject to the regulation, consistent with the provisions of 10 U.S.C. 987. In addition, this part:
(1) Provides the maximum allowable amount of all charges, and the types of charges, that may be associated with a covered extension of consumer credit;
(2) Requires a creditor to provide to a covered borrower a statement of the Military Annual Percentage Rate, or MAPR, before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit. The statement required by this part differs from and is in addition to the disclosures that must be provided to consumers under the Truth in Lending Act;
(3) Provides for the method a creditor must use in calculating the MAPR; and
(4) Contains such other criteria and limitations as the Secretary of Defense has determined appropriate, consistent with the provisions of 10 U.S.C. 987.
(a) Applicability. This part applies to consumer credit extended by a creditor to a covered borrower, as those terms are defined in this part. Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit.
(b) Examples. The examples in this part are not exclusive. To the extent that an example in this part implicates a term or provision of Regulation Z (12 CFR part 1026), issued by the
(a) Affiliate means any person that controls, is controlled by, or is under common control with another person.
(b) Billing cycle has the same meaning as "billing cycle" in Regulation Z.
(c) Bureau means the
(d) Closed-end credit means consumer credit (but for the conditions applicable to consumer credit under this part) other than consumer credit that is "open-end credit" as that term is defined in Regulation Z.
(e) Consumer means a natural person.
(f)(1) Consumer credit means 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) Exceptions. Notwithstanding paragraph (f)(1) of this section, consumer credit does not mean:
(i) A residential mortgage, which is any credit transaction secured by an interest in the covered borrower's dwelling, including a transaction to finance the purchase or initial construction of a dwelling, any refinance transaction, home equity loan or line of credit, or reverse mortgage;
(ii) Any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased;
(iii) Any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased; and
(iv) 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.
(g) Covered borrower means a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member (as defined in this paragraph) or a dependent (as defined in this paragraph) of a covered member.
(1) The term "covered member" means a member of the armed forces who is serving on--
(i) Active duty pursuant to title 10, title 14, or title 32, United States Code, under a call or order that does not specify a period of 30 days or fewer, or
(ii) Active Guard and Reserve duty, as that term is defined in 10 U.S.C. 101(d)(6).
(2) The term "dependent" with respect to a covered member means a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2).
(h) Credit means the right granted to a consumer by a creditor to defer payment of debt or to incur debt and defer its payment.
(i) Creditor, except as provided in
(1) Engaged in the business of extending consumer credit; or
(2) An assignee of a person described in paragraph (i)(1) of this section with respect to any consumer credit extended.
(3) For the purposes of this definition, a creditor is engaged in the business of extending consumer credit if the creditor considered by itself and together with its affiliates meets the transaction standard for a "creditor" under Regulation Z with respect to extensions of consumer credit to covered borrowers.
(j) Department means the
(k) Dwelling means a residential structure that contains one to four units, whether or not the structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and manufactured home.
( l) Electronic fund transfer has the same meaning as in the regulation issued by the Bureau to implement the Electronic Fund Transfer Act, as amended from time to time (12 CFR part 1005).
(m) Finance charge has the same meaning as "finance charge" in Regulation Z.
(n) Military annual percentage rate (MAPR). The MAPR is the cost of the consumer credit expressed as an annual rate, and shall be calculated in accordance with
(o) Open-end credit means consumer credit that (but for the conditions applicable to consumer credit under this part) is "open-end credit" under Regulation Z.
(p) Person means a natural person or organization, including any corporation, partnership, proprietorship, association, cooperative, estate, trust, or government unit.
(q) Regulation Z means any rules, or interpretations thereof, issued by the Bureau to implement the Truth in Lending Act, as amended from time to time, including any interpretation or approval issued by an official or employee duly authorized by the Bureau to issue such interpretations or approvals. However, for any provision of this part requiring a creditor to comply with Regulation Z, a creditor who is subject to Regulation Z (12 CFR part 226) issued by the
(a) General conditions. A creditor who extends consumer credit to a covered borrower may not require the covered borrower to pay an MAPR for the credit with respect to such extension of credit, except as:
(1) Agreed to under the terms of the credit agreement or promissory note;
(2) Authorized by applicable State or Federal law; and
(3) Not specifically prohibited by this part.
(b) Limit on cost of consumer credit. A creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit.
(c) Calculation of the MAPR.
(1) Charges included in the MAPR. The charges for the MAPR shall include, as applicable to the extension of consumer credit:
(i) Credit insurance premiums, including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements;
(ii) Fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction for closed-end credit or upon account opening for open-end credit; and
(iii) Except for a bona fide fee (other than a periodic rate) which may be excluded under paragraph (d) of this section:
(A) Finance charges associated with the consumer credit;
(B) Any application fee charged to a covered borrower who applies for consumer credit; and
(C) Any fee imposed for participation in any plan or arrangement for consumer credit, subject to paragraph (c)(2)(ii)(B) of this section.
(iv) Certain exclusions of Regulation Z inapplicable. Any charge set forth in paragraphs (c)(1)(i)-(iii) of this section shall be included in the calculation of the MAPR even if that charge would be excluded from the finance charge under Regulation Z.
(2) Computing the MAPR --(i) Closed-end credit. For closed-end credit, the MAPR shall be calculated following the rules for calculating and disclosing the "Annual Percentage Rate (APR)" for credit transactions under Regulation Z based on the charges set forth in paragraph (c)(1) of this section.
(ii) Open-end credit --(A) In general. Except as provided in paragraph (c)(2)(ii)(B) of this section, for open-end credit, the MAPR shall be calculated following the rules for calculating the effective annual percentage rate for a billing cycle as set forth in
(B) No balance during a billing cycle. For open-end credit, if the MAPR cannot be calculated in a billing cycle because there is no balance in the billing cycle, a creditor may not impose any fee or charge during that billing cycle, except that the creditor may impose a fee for participation in any plan or arrangement for that open-end credit so long as the participation fee does not exceed
(d)
(2) Ineligible items. The exclusion for bona fide fees in paragraph (d)(1) of this section does not apply to any credit insurance premium, including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements, or to any fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction or upon account opening.
(3) Standards relating to bona fide fees --(i) Like-kind fees. To assess whether a bona fide fee is reasonable and customary under paragraph (d)(1) of this section, the fee must be compared to fees typically imposed by other creditors for the same or a substantially similar product or service. For example, when assessing a bona fide cash advance fee, that fee must be compared to fees charged by other creditors for transactions in which consumers receive extensions of credit in the form of cash or its equivalent.
(ii) Safe harbor. A bona fide fee is reasonable under paragraph (d)(1) of this section if the amount of the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 or more creditors each with at least
(iii) Reasonable fee. A bona fide fee that is higher than an average amount, as calculated under paragraph (d)(3)(ii) of this section, also may be reasonable under paragraph (d)(1) of this section depending on other factors relating to the credit card account. A bona fide fee charged by a creditor is not unreasonable solely because other creditors do not charge a fee for the same or a substantially similar product or service.
(iv) Customary. A bona fide fee computed as a percentage of the amount of a transaction is customary under paragraph (d)(1) of this section so long as other creditors typically compute, or customarily have computed, that fee for the same or a substantially similar product or service on a percentage basis. Nothing in this paragraph (d)(3)(iv) shall prohibit a bona fide fee that is a fixed amount from being customary for the purpose of meeting the condition set forth in paragraph (d)(1) of this section, even if substantially all other creditors currently compute that fee on a percentage basis. Nothing in this paragraph (d)(3)(iv) shall prohibit a bona fide fee that is charged on a percentage basis from being customary for the purpose of meeting the condition set forth in paragraph (d)(1) of this section, even if substantially all other creditors currently charge a fixed amount.
(v) Indicia of reasonableness for a participation fee. An amount of a bona fide fee for participation in a credit card account may be reasonable and customary under paragraph (d)(1) of this section if that amount reasonably and customarily corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account. For example, even if other creditors typically charge
(4) If a creditor imposes any fee (other than a periodic rate) that is not a bona fide fee and imposes a finance charge to a covered borrower, the total amount of those fees, including any bona fide fees, and other finance charges shall be included in the MAPR pursuant to paragraph (c) of this section.
(5) Rule of construction. Nothing in paragraph (d)(1) of this section authorizes the imposition of fees or charges otherwise prohibited by this part or by other applicable State or Federal law.
(a) In general. A creditor may conclusively determine whether credit is offered or extended to a covered borrower, and thus may be subject to 10 U.S.C. 987 and the requirements of this part, by assessing the status of a consumer in accordance with this section. A creditor also is permitted to assess whether a consumer is a covered borrower by using other methods, as the creditor may elect.
(b) Safe harbor --(1) Department database. To determine whether a consumer is a covered borrower, a creditor may verify the status of a consumer by accessing the information relating to that consumer, if any, in the database maintained by the Department, available at http://www.dmdc.osd.mil/mla/owa/home. A search of the Department's database requires the entry of the consumer's last name, date of birth, and
(2) Determination and recordkeeping. Except as provided in paragraph (c) of this section, when a creditor enters into a transaction or establishes an account for consumer credit, a determination by a creditor regarding the status of a consumer based on information obtained from the Department's database shall be deemed to be conclusive with respect to that transaction or account involving consumer credit between the creditor and that consumer, so long as that creditor maintains a record of the information so obtained.
(c) Actual knowledge. (1) If at the time a creditor enters into a transaction or establishes an account for consumer credit the creditor has actual knowledge that a consumer is a covered borrower, the creditor shall treat the consumer as a covered borrower notwithstanding any determination by that creditor based on information obtained from the Department's database. Actual knowledge that a consumer is a covered borrower obtained after a creditor has entered into a transaction or established an account for consumer credit shall not affect that transaction or account if the prior determination by that creditor was based solely on information obtained from the Department's database.
(2) For the purposes of this section, actual knowledge of the status of a consumer as a covered borrower may be established only on the basis of a record (including any electronic record) collected by the creditor prior to entering into a transaction or establishing an account for consumer credit and maintained in any system used by the creditor that relates to the consumer credit involving that consumer.
(a) Required information. With respect to any extension of consumer credit (including any consumer credit originated or extended through the internet) to a covered borrower, a creditor shall provide to the covered borrower the following information before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit:
(1) A statement of the MAPR applicable to the extension of consumer credit;
(2) Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure;
(3) A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or account-opening disclosure (in the case of open-end credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement; and
(4) A statement that "Federal law provides important protections to regular or reserve members of the
(b) One-time delivery; multiple creditors. (1) The information described in paragraphs (a)(1), (a)(3), and (a)(4) of this section are not required to be provided to a covered borrower more than once for the transaction or the account established for consumer credit with respect to that borrower.
(2) Multiple creditors. If a transaction involves more than one creditor, the creditors shall agree among themselves which creditor must provide the information described in paragraphs (a)(1), (a)(3), and (a)(4) of this section.
(c) Statement of the MAPR --(1) In general. A creditor may satisfy the requirement of paragraph (a)(1) of this section by describing the charges the creditor may impose, in accordance with this part and subject to the terms and conditions of the agreement relating to the consumer credit to calculate the MAPR. Paragraph (a)(1) of this section shall not be construed as requiring a creditor to describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MAPR that apply to the extension of consumer credit.
(2) Method of providing a statement regarding the MAPR. A creditor may include a statement of the MAPR applicable to the consumer credit in the agreement with the covered borrower involving the consumer credit transaction. Paragraph (a)(1) of this section shall not be construed as requiring a creditor to include a statement of the MAPR applicable to an extension of consumer credit in any advertisement relating to the credit.
(3) Model statement. A statement substantially similar to the following statement may be used for the purpose of paragraph (a)(1) of this section: "Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: the costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for a credit card account); and any participation fee charged (other than certain participation fees for a credit card account)."
(d) Methods of delivery --(1) Written disclosures. The creditor shall provide the information required by paragraphs (a)(1), (a)(3), and (a)(4) of this section in writing in a form the covered borrower can keep.
(2) Oral disclosures. The creditor also shall orally provide the information required by paragraphs (a)(1), (a)(3), and (a)(4) of this section. In mail transactions, internet transactions, and transactions conducted at the point-of-sale in connection with the sale of a nonfinancial product or service, the creditor satisfies this requirement if it provides a toll-free telephone number on or with the written disclosures that a covered borrower may use to obtain oral disclosures and the creditor provides oral disclosures when the covered borrower contacts the creditor for this purpose.
(e) When disclosures are required for refinancing or renewal of covered loan. The refinancing or renewal of consumer credit requires new disclosures under this section only when the transaction for that credit would be considered a new transaction that requires disclosures under Regulation Z.
(a) Inconsistent laws. 10 U.S.C. 987 as implemented by this part preempts any State or Federal law, rule or regulation, including any State usury law, to the extent such law, rule or regulation is inconsistent with this part, except that any such law, rule or regulation is not preempted by this part to the extent that it provides protection to a covered borrower greater than those protections provided by 10 U.S.C. 987 and this part.
(b) Different treatment under State law of covered borrowers is prohibited. A State may not:
(1) Authorize creditors to charge covered borrowers rates of interest for any consumer credit or loans that are higher than the legal limit for residents of the State, or
(2) Permit the violation or waiver of any State consumer lending protection covering consumer credit that is for the benefit of residents of the State on the basis of the covered borrower's nonresident or military status, regardless of the covered borrower's domicile or permanent home of record, provided that the protection would otherwise apply to the covered borrower.
Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which:
(a) The creditor rolls over, renews, repays, refinances, or consolidates any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower. This paragraph shall not apply to a transaction when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this paragraph because the consumer was not a covered borrower at the time of the original transaction. For the purposes of this paragraph only, the term "creditor" means a person engaged in the business of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the relevant law), provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union.
(b) The covered borrower is required to waive the covered borrower's right to legal recourse under any otherwise applicable provision of State or Federal law, including any provision of the Servicemembers Civil Relief Act (50 U.S.C. App.
(c) The creditor requires the covered borrower to submit to arbitration or imposes other onerous legal notice provisions in the case of a dispute.
(d) The creditor demands unreasonable notice from the covered borrower as a condition for legal action.
(e) The creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with
(1) Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law;
(2) Require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or
(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.
(f) The creditor requires as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay the obligation. For the purposes of this paragraph only, the term "creditor" shall not include a "military welfare society," as defined in 10 U.S.C. 1033(b)(2), or a "service relief society," as defined in 37 U.S.C. 1007(h)(4).
(g) The covered borrower is prohibited from prepaying the consumer credit or is charged a penalty fee for prepaying all or part of the consumer credit.
(a) Misdemeanor. A creditor who knowingly violates 10 U.S.C. 987 as implemented by this part shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both.
(b) Preservation of other remedies. The remedies and rights provided under 10 U.S.C. 987 as implemented by this part are in addition to and do not preclude any remedy otherwise available under State or Federal law or regulation to the person claiming relief under the statute, including any award for consequential damages and punitive damages.
(c) Contract void. Any credit agreement, promissory note, or other contract with a covered borrower that fails to comply with 10 U.S.C. 987 as implemented by this part or which contains one or more provisions prohibited under 10 U.S.C. 987 as implemented by this part is void from the inception of the contract.
(d) Arbitration. Notwithstanding 9 U.S.C. 2, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit to a covered borrower pursuant to this part shall be enforceable against any covered borrower, or any person who was a covered borrower when the agreement was made.
(e) Civil liability --(1) In general. A person who violates 10 U.S.C. 987 as implemented by this part with respect to any person is civilly liable to such person for:
(i) Any actual damage sustained as a result, but not less than
(ii) Appropriate punitive damages;
(iii) Appropriate equitable or declaratory relief; and
(iv) Any other relief provided by law.
(2) Costs of the action. In any successful action to enforce the civil liability described in paragraph (e)(1) of this section, the person who violated 10 U.S.C. 987 as implemented by this part is also liable for the costs of the action, together with reasonable attorney fees as determined by the court.
(3) Effect of finding of bad faith and harassment. In any successful action by a defendant under this section, if the court finds the action was brought in bad faith and for the purpose of harassment, the plaintiff is liable for the attorney fees of the defendant as determined by the court to be reasonable in relation to the work expended and costs incurred.
(4) Defenses. A person may not be held liable for civil liability under paragraph (e) of this section if the person shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person's obligations under 10 U.S.C. 987 as implemented by this part is not a bona fide error.
(5) Jurisdiction, venue, and statute of limitations. An action for civil liability under paragraph (e) of this section may be brought in any appropriate United States district court, without regard to the amount in controversy, or in any other court of competent jurisdiction, not later than the earlier of:
(i) Two years after the date of discovery by the plaintiff of the violation that is the basis for such liability; or
(ii) Five years after the date on which the violation that is the basis for such liability occurs.
The provisions of this part, other than
Nothing in this part may be construed to limit or otherwise affect the applicability of section 207 and any other provisions of the Servicemembers Civil Relief Act (50 U.S.C. App. 527).
(a) Prior extensions of consumer credit. Consumer credit that is extended to a covered borrower and consummated any time between
(b) New extensions of consumer credit. Except as provided in paragraphs (c) and (d) of this section, the requirements of this part, as amended by the Department and effective as of [EFFECTIVE DATE OF FINAL REGULATION], shall apply only to a consumer credit transaction or account for consumer credit consummated or established on or after [EFFECTIVE DATE OF FINAL REGULATION].
(c) Provisions of 10 U.S.C. 987(d)(2). The amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a) of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 112-239, 126 Stat. 1785), as reflected in
(d) Civil liability remedies. The provisions set forth in
Dated:
Alternate OSD Federal Register Liaison Officer,
[FR Doc. 2014-22900 Filed 9-26-14;
BILLING CODE 5001-06-P
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