Limitations on Terms of Consumer Credit Extended to Service Members and Dependents

Federal RegisterSep 29, 2014

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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 232

[DOD-2013-OS-0133]

RIN 0790-AJ10

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents

AGENCY:

Under Secretary of Defense for Personnel and Readiness, Department of Defense.

ACTION:

Proposed rule.

SUMMARY:

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

DATES:

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

ADDRESSES:

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

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Mail:

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

Instructions:

All submissions received must include the agency name and docket number or RIN for this

Federal Register

document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at

http://www.regulations.gov

as they are received without change, including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT:

Marcus Beauregard, 571-372-5357.

SUPPLEMENTARY INFORMATION:

Retrospective Review

This rule is part of DoD's retrospective plan, completed in August 2011, under Executive Order 13563, “Improving Regulation and Regulatory Review.” DoD's full plan and updates can be accessed at:

http://www.regulations.gov/#!docketDetail;dct=FR+PR+N+O+SR;rpp=10;po=0;D=DOD-2011-OS-0036.

I. Executive Summary

A. Purpose of the Regulatory Action

The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of 10 U.S.C. 987 to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. More specifically, the Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA

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.

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).

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).

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

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

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

The MLA, as implemented by the Department's regulation as well as under this proposed regulation, provides two broad classes of requirements applicable to a creditor: first, the creditor may not impose a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower (“interest-rate limit”); second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information (

e.g.,

a statement of the MAPR), both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, by refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and by refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, “other MLA conditions”).

C. Costs and Benefits

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

Department has used to assess the proposal, these savings are estimated to exceed the compliance costs that would be borne by creditors.

Figure 1—Summary of Estimated Effects of Proposed Rule

[2013 dollars in millions]

First year

Annual,

ongoing

PV 10-year, 7% discount rate

PV 10-year, 3% discount rate

Sensitivity Analysis: Benefits to the Department

Low

$13

$96

$128

High

137

970

1,304

Primary Analysis: Costs to Creditors of Compliance

144

194

Primary Analysis: Transfer Payments

Low

101

717

958

High

120

856

1,139

II. Background

A. Overview of the Proposal

The Department proposes to amend its regulation

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,

and amended by sections 661-663 of the National Defense Authorization Act for Fiscal Year 2013 (“2013 Act”).

32 CFR part 232 (2013).

Public Law 109-364, 120 Stat. 2266.

Public Law 112-239, 126 Stat. 1785.

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,

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.”

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.

In addition, section 661 of the 2013 Act amended the MLA to require the Department to consult—“not less often than once every two years”—with the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (“Bureau”), the Department of the Treasury, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, “Federal Agencies”) with a view towards revising the regulation implementing the MLA.

Id. See

section 662(a) of the 2013 Act.

126 Stat. 1786.

See

section 662(b) of the 2013 Act.

126 Stat. 1786 (defining “dependent” to be a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2)).

In August 2007, the Department published its regulation to implement the MLA.

When initially determining the extent to which the protections of the MLA should apply, the Department “focus[ed] on three problematic credit products that the Department identified in its August 2006

Report to Congress on the Impact of Predatory Lending Practices on Members of the Armed Forces and Their Dependents

[(“2006 Report”)]

: Payday loans, vehicle title loans, and refund anticipation loans.”

The Department elected, at that time, to define the scope of “consumer credit” covered by the regulation as a narrow band of products within these three categories of credit; for example, the rule defines a “payday loan,” in relevant part, as “[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.”

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007).

Department of Defense,

Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents

(August 9, 2006), available at

http://www.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf.

72 FR at 50585.

32 CFR 232.3(b)(1)(i) (definition of “consumer credit”).

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,

(iii) for an amount of more than $2,000. Making any of these elementary adjustments to a credit product marketed as a “payday loan” is not illegal, however, the effect is clear: a Service-member borrower would obtain the credit without the protections afforded under the MLA. The Department's proposal aims to amend the regulation to curb this unfortunate consequence, of which there is ample evidence in the credit markets in which Service members are active participants.

See, e.g.,

section III.A.1 (describing information submitted by various persons in response to the Department's June 2013 advance notice of proposed rulemaking).

The Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA

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.

In general, under the Department's proposal, any charge that is a “finance charge” under Regulation Z,

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.

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).

See

12 CFR part 1026 (2013).

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.”

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.

72 FR at 50588.

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.

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 18157, 18165 (April 11, 2007) (in the context of disclosure requirements, explaining one of the policies for the Department's proposed regulation implementing the MLA).

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.

The junior enlisted ranks (E1-E4) comprise 44 percent of the military force.

Thirty five percent of E1s-E4s are married

and 20 percent of them have children or other legal dependents.

Considering only 11.7 percent of young people in the United States who are out of the military are married at a comparative age, Service members tend to take on relatively more household responsibilities than their civilian counterparts.

U.S. Dep't of Def., 2012 Demographics Profile of the Military Community, at 36. Available at

http://www.militaryonesource.mil/12038/MOS/Reports/2012_Demographics_Report.pdf.

Id.

at 17.

Id.

at 44.

Id.

at 128.

U.S. Census Bureau, U.S. Dep't of Commerce, Statistical Abstract of the United States 2012 table 57 (131st ed. 2011) (11.7 percent of individuals aged 18 through 24 who are not in the military are married).

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.

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.

About 26% selected the response “occasionally have some difficulty making ends meet.”

Defense Manpower Data Center (DMDC) QuickCompass of Financial Issues, 2013, Question 30: Have [you][your and/or your spouse][you and/or your significant other] used any of the following financial products or services to cover expenses in the past 12 months?”

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]?”

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

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]:”

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.

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.

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] . . .”

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?”

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

C. Financial Stability and Readiness

The Department makes a significant investment in recruiting, training and retaining highly qualified Service members. The Department expects these Service members to maintain personal readiness standards, including paying their debts and maintaining their ability to attend to the financial needs of their families.

Losing qualified Service members due to personal issues, such as financial instability, causes loss of mission capability and drives significant replacement costs. The Department estimates that each separation costs the Department $57,333.

Losing an experienced mid-grade noncommissioned officer (NCO), who may be in a leadership position or key technical position, may be considerably more expensive in terms of replacement costs and in terms of the degradation of mission effectiveness resulting from a loss of personal reliability for deployment and availability for duty. A study of the potential impact of the use of payday loans on enlisted members in the Air Force found “significant average declines in overall job performance and retention, and significant increases in severely poor readiness,” as a result of using payday loans.

Additionally, financial concerns detract from mission focus and often times require attention from commanding officers and senior NCOs to resolve outstanding debts and other credit issues.

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].”).

U.S. Gov't Accountability Office, GAO-11-170,

Military Personnel: Personnel and Cost Data Associated with Implementing DOD's Homosexual Conduct Policy

(January 20, 2011) (estimating that each separation costs the Department $52,800 in 2009 dollars). The cost of $57,272 is calculated in 2013 dollars (through November 2013), using the U.S. Dep't of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI-U), available at

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.

Scott Carrell and Jonathan Zinman, “In Harm's Way? Payday Lending and Military Personnel Performance,” August 2008, Abstract.

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.

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.

The Department has established the Financial Readiness Program to assist Service members in dealing with financial concerns, by providing messaging, education, and assistance. Throughout each year, the Department provides key messages on personal finance to the military community as part of a strategic communications plan that includes press releases, news articles, interviews, Web sites and social media. The Department has the assistance of nonprofit organizations in delivering messages and programs to promote savings and sound money management. The Department annually promotes the “Military Saves Campaign,” which occurs at the end of February each year as part of “America Saves,” sponsored by the Consumer Federation of America. The campaign asks Service members and their families to pledge towards their own savings goals, and the campaigns are supported by banks and credit unions on military installations. Initiated in 2007, the campaign has signed up 31,527 savers through 2013.

Additionally, the Financial Institutions National Regulatory Authority (FINRA) Foundation sponsors the “Save and Invest Program” that has provided forums at military installations (33,000 participants), fellowships for 1,200 military spouses to earn a financial counselor credential and give back to the community through 355,000 practicum hours, assistance to wounded warriors (17,000 guides distributed), 800,000 booklets on managing money during military moves and deployments, and access to no cost on-line tools to assist 150,000 military families with managing credit.

DMDC Survey, question 20: 39% of E1-E4s have a high school diploma, 22% have less than one year of college, 24% have one or more years of college, but no degree.

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.

Military Saves 2013 Report, page 2,

http://www.militarysaves.org/in-the-newsroom/military-saves-week-reports.

“

Military Financial Readiness Program—Accomplishments To Date,” SaveandInvest.org, About the Program, http://www.saveandinvest.org/MilitaryCenter/About/P124822.

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.

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.

In addition, the National Guard and Reserve Commands conducted 8,912 sessions, hosted at unit events lasting one-to-three days, attended by 13,480 participants.

DoD Instruction 1342.22, Family Readiness Program, July 3, 2012, page 12,

http://www.dtic.mil/whs/directives/corres/pdf/134222p.pdf.

“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.]

Military OneSource internal report for Fiscal Year 2012.

Department policy also requires the Military Services to provide one-on-one counseling to help a Service member determine appropriate short and long term actions to alleviate debt and achieve financial goals. The Military Services employ at least one certified financial counselor (civil service or contractor) at each military installation and have developed Military Service-specific programs to extend counseling into the military units through designated approved financial educators. For example, the Department of the Navy directs Navy and Marine Corps units to designate and train a Command Financial Specialist (E6 or above) who delivers financial education, conducts basic counseling and makes referrals to certified counselors. The Military Services reported 1,828,299 brief counseling contacts and 161,992 extended counseling contacts for Fiscal Year 2012.

To supplement the counseling services provided by the Military Services, the Department employs contract counselors through Military One Source to conduct over-the-phone counseling (available 24/7) and 12 in-person sessions for each military client (in a 12 month period). These counselors provided 32,000 in-person sessions for 35,000 Service members and spouses in Fiscal Year 2012.

Military OneSource internal report for Fiscal Year 2012.

To provide monetary support to Service members and their families with financial hardships, the Military Services have partnered with nonprofit charitable organizations chartered to provide relief services to Service members and their families. The four relief societies for the Military Services (Army Emergency Relief, Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard Mutual Assistance) (collectively, the “Relief Societies”) provide no-interest loans, grants, and scholarships, and fund other support programs for active-duty military communities. Each of these Relief Societies traditionally has provided no-interest loans and grants for shortfalls in household expenses (

e.g.,

rent, mortgage, or utilities) and for unforeseen emergencies (

e.g.,

auto repair, funeral, or family emergency). Since 2007, each of the Relief Societies also has offered small-dollar loans, which can be drawn without counseling.

In total for 2012, the Relief Societies provided $142.2 million in no-interest loans and grants to 159,745 clients.

See

Army Emergency Relief, Soldiers Helping Soldiers: Army Emergency Relief 2012 Annual Report, at 13 (2013) (in 2012, Army Emergency Relief provided $19.1 million in “Commander Referral Loans”); Air Force Aid Soc'y, Air Force Aid Society 2012 Annual Report, at 6 (2013) (in 2012, the Air Force Aid Society provided half of its $10.1 million in emergency assistance “Falcon Loans”); Coast Guard Mut. Assistance, 2012 Annual Report, at 2 (2013) (in 2012, Coast Guard Mutual Assistance provided $212,000 in quick loans).

See

Army Emergency Relief, Soldiers Helping Soldiers: Army Emergency Relief 2012 Annual Report, at 13 (2013); Navy-Marine Corps Relief Society, 2012 Annual Report, at 11 (2013); Air Force Aid Soc'y, Air Force Aid Society 2012 Annual Report, at 6 (2013); Coast Guard Mut. Assistance, 2012 Annual Report, at 2 (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 April 2014 (“April 2014 Report”).

The April 2014 Report presents data submitted by many sources, including anecdotal information, that assisted in responding to the request of the House Report. The Department recognizes that information submitted for the April 2014 Report was provided by numerous sources, including some surveys conducted by the Department, and the information does not yield definitive results; rather, as the April 2014 Report states, the data “tend to indicate” some findings

and, for many issues, raise important questions that might involve further examination. The April 2014 Report states—specifically in light only of the research and consultation in preparing that Report—that “the definitions of [consumer credit] in the implementing regulation for the MLA do need to be updated and expanded to ensure that the MLA continues to provide protections to Service members and their families.”

While observing that certain conditions “appear” to warrant revising the definition of “consumer credit,”

the Department has drawn no conclusions regarding the scope or terms of its regulation implementing the MLA. Rather, the April 2014 Report expressly states that “the Department is working on [a more] comprehensive approach in its redrafting of the implementing regulation for the MLA.”

The Department is committed to an open and transparent process as its work continues on any potential amendment to its regulation, and, as stated above, invites comment on all aspects of this proposal, particularly data regarding the nature, scope, and prevalence of credit products offered or extended to Service members and their families.

Dep't of Defense,

Report: Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents,

April 2014.

See, e.g.,

April 2014 Report, at 2.

Id.

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.

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.”

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 .. . . ”

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.”

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.”).

72 FR at 50584.

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).

72 FR at 50585.

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.

As described above in section II.E., information was submitted for the April 2014 Report issued in response to the House Report. In this regard, the April 2014 Report describes various sources of information, including results from a DMDC QuickCompass survey

and a questionnaire the Department distributed to financial counselors and legal assistance attorneys, which mostly requested narrative responses.

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.”).

See, e.g.,

April 2014 Report, at 2.

April 2014 Report, app. A.

More importantly, and directly to support the Department's rulemaking process, in June 2013 the Department published an advance notice of proposed rulemaking (“ANPR”) soliciting comment on several issues relating to its existing regulation.

In particular, the Department asked whether there is a need to revise the regulation, “with special attention to the scope of the definition of `consumer credit.' ”

78 FR 36134 (June 17, 2013).

Id.

1. The Department's June 2013 ANPR

The Department received 37 comments in response to the ANPR. Most of the comments were submitted by state agencies, including state attorneys general,

and consumer protection groups. Several participants in the credit industry submitted comments,

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.

California Attorney General, et al., DOD-2013-OS-0133-0002. References herein to the comments note the name of the commenter and the docket number of the submission, available at

http://www.regulations.gov.

See, e.g.,

American Bankers Assoc. et al., DOD-2013-OS-0133-0022.

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 $2,000.

This commenter states, more specifically, that “[i]n Texas, high cost multiple-payment loans with rates often exceeding [600 percent] APR are increasingly offered by payday lenders.”

In support of its claims regarding the effects of the loopholes in the Department's current rule, this commenter describes its “[s]tore visits” in Killeen, Texas, in July 2013, where the commenter found companies that had changed their loan products to offer “high-cost multiple-payment products to [Service] members,”

and cited as an example particular loan products

offered by a national payday lender with two locations in Killeen.

Texas Appleseed, DOD-2013-OS-0133-0016, at 1-2;

see also

State of Colorado, DOD-2013-OS-0133-0034, at 1 (explaining how lenders can circumvent the Military Lending Act by “offering 92 day loans, loans for $2001, or by structuring the loans as open-end credit”);

but see

Credit Union National Association and Defense Credit Union Council, DOD-2013-OS-0133-0032, at 2 (arguing that the current rule has been an “effective tool” and that the 91-day limit for payday loans should not be changed).

Texas Appleseed, DOD-2013-OS-0133-0016, at 2.

Id.

at 3.

Id.

at 3-4.

Another commenter states that under the Department's current rule, “lenders have easily circumvented the purpose and protections intended by the MLA.”

For example, the commenter describes the “structure of [the] payday loan law”

in Colorado, which requires “a minimum loan term of six months.”

Because of the extended duration of the loan, “the MLA rate cap of 36 percent does not apply,”

allowing lenders “to make loans to service members with an approximate 200 percent annual percentage rate.”

The commenter urges the Department to revise the rule so that it does not “contain limits that lenders may use to avoid regulation.”

Specifically, the commenter recommends that the Department incorporate the definition of consumer credit under TILA, “so that regardless of the consumer credit transaction amount, structure, or duration, it is subject to MLA's 36 percent cap on interest rates.”

State of Colorado, DOD-2013-OS-0133-0034, at 1;

see also

California Attorney General, et al., DOD-2013-OS-0133-0002, at 2 (“[T]he narrow categories and definitions create large loopholes that permit lenders to fashion abusive or predatory transactions that avoid the MLA's protections.”);

but see

Missouri Credit Union Association, DOD-2013-OS-0133-0801, at 1 (arguing that the rule's objective has been accomplished “primarily by limiting the impact of the rule to those creditors that offer certain loans which are closed-end credit”).

State of Colorado, DOD-2013-OS-0133-0034, at 1.

Id.

at 2.

Id.

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.”

The commenter, more specifically, states that lenders can evade protections under the current rule “by requiring that payday loans be a minimum of $2,001, or have a minimum period of 92 days” or by offering “[a]ny open-ended or revolving payday loan; [a]ny auto title loan for more than 181 days; [a]ny bank loan that is secured by funds on deposit, such as overdraft loans; and [a]ny retail sales credit loan or other similar rent-to-own transaction.”

“[T]o protect military borrowers from predatory lenders who purposefully structure loan transactions so as to avoid the strictures of the MLA,” the commenter urges the Department to make the MLA protections “apply uniformly to the full range of consumer credit loans that present dangers similar to those already covered, including rent-to-own transactions and overdraft loans.”

California Attorney General, et al., DOD-2013-OS-0133-0002, at 2;

see also

Texas Appleseed, DOD-2013-OS-0133-0016, at 1 (stating that the current rule has “significant gaps and loopholes”);

but see

American Bankers Assoc., et al., DOD-2013-0133-0022, at 4 (“The rule adopted in 2007 was structured carefully and struck the proper balance between protecting servicemembers and their families while still ensuring they had access to beneficial products and services.”).

Members of the U.S. Senate, DOD-2013-OS-0133-0036, at 1.

Id.

at 1-2.

Id.

at 2.

Id.

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.”

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.

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.”

American Bankers Assoc. et al., DOD-2013-OS-0133-0022, at 1;

see also

Missouri Credit Union Association, DOD-2013-OS-0133-0026, at 1 (“[T]he rule's objective has been accomplished primarily by limiting the impact of the rule to those creditors that offer certain loans which are closed-end credit in the form of payday loans, vehicle title loans, and tax refund anticipation loans.”);

but see

State of Colorado, DOD-2013-OS-0133-0034, at 1 (arguing that “lenders have easily circumvented the purpose and protections intended by MLA”).

American Bankers Assoc. et al., DOD-2013-OS-0133-0022, at 1, at 4-5.

Id.

at 11.

One commenter expressed concern that the current rule “includes limitations which reduce the [MLA's] effectiveness.”

This commenter states that “[a]pproximately one out of every ten veterans reported having more than $40,000 in unsecured debt. For many veterans, some of this debt is acquired while on active duty, often from high-cost lenders that frequently target military bases.”

The commenter states that in at least eleven states, the current rule “does not apply to all forms of payday lending permitted under state law, and in at least thirteen the rule does not apply to all forms of vehicle title lending.”

The commenter requests that the Department align consumer credit under the rule with the definition of consumer credit under TILA. The commenter states that “[t]his inclusive definition will ensure that all service members are covered by the consumer protections envisioned by Congress in 2007 and protect veterans from the long-term effects of predatory lending as they return to civilian life.”

Idaho Division of Veterans Services, DOD-2013-OS-0133-0038, at 2;

see also

State of Colorado, DOD-2013-OS-0133-0034, at 2 (“[T]he definition of consumer credit should be as broad as possible and should not contain limits that lenders may use to avoid regulation.”);

but see

American Bankers Assoc. et al., DOD-2013-OS-0133-0022, at 3 (noting that Service members also benefit from many other consumer protections that are not occupation-specific).

Id.

at 1 (citing Eric Elbogen, Sally Johnson, Ryan Wagner, Virginia Newton, and Jean Beckham, “Financial Well-Being and Postdeployment Adjustment Among Iraq and Afghanistan War Veterans,”

Military Medicine

177 (June 2012).

Idaho Division of Veterans Services, DOD-2013-OS-0133-0038, at 2.

Id.

One commenter states that the Department should “not lose sight of [a] payday lender's demonstrated capacity for creative evasion.”

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.”

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 Virginia while all the parties and transactions at issue are typically located in North Carolina. Finally, the commenter states that the Department should amend the rule to cover all payday, rent-to-own, installment, and vehicle title loans without respect to the duration of the loan.

Michael S. Archer, DOD-2013-OS-0133-0007, at 3;

see also

State of Colorado, DOD-2013-OS-0133-0034, at 1 (stating that lenders are easily able to circumvent the current rule's “purpose and protections”).

Michael S. Archer, DOD-2013-OS-0133-0007, at 4. With regard to rent-to-own transactions, the commenter states that the Department should specifically prohibit sellers from tracking consumers' activity on computers and other electronics. The commenter states that the Department should prohibit contact with commanding officers and other third parties in the debt collection context unless the service member has given written consent after default.

But see

Rent-A-Center, DOD-2013-OS-0133-0010 (arguing that rent-to-own transactions should not be defined as consumer credit due to the nature of those transactions and legislative and regulatory history).

One commenter states that the Department correctly “left [rent-to-own] out” of the current rule.

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.”

To support this point, the commenter describes a typical rent-to-own transaction where the consumer “[does] not assume any debt”

and instead enters into “weekly, bi-weekly, semi-monthly, or monthly rental agreements for consumer durables.”

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.”

Association of Progressive Rental Organizations, DOD-2013-OS-0133-0012, at 1;

see also

Aaron's, Inc., DOD-2013-OS-0133-0028, at 2 (“[A]ny attempt to include the [rent-to-own] transaction] under [the] definition of consumer credit would not be consistent with federal and state laws.”);

but see

Shriver Center, DOD-2013-OS-0133-0009, at 2 (“[R]ent-to-own transactions are consumer credit sales and should be protected as consumer credit under the MLA.”).

Association of Progressive Rental Organizations, DOD-2013-OS-0133-0012, at 2.

see also

Michigan Credit Union League & Affiliates, DOD-2013-OS-0133-0021, at 1 (“Because of credit unions' unique structure and the products and services offered to assist Service members, the MCUL does not believe revisions to the rules as they relate to credit unions are necessary or desirable at this time.”).

Ohio Credit Union League, DOD-2013-OS-0133-0027, at 2;

but see

Woodstock Institute, DOD-2013-OS-0133-0025, at 2 (“In order to beset protect all service members, the Department of Defense should eliminate its narrow product definitions and apply the 36 percent Military APR limit, and additional protections, to all consumer credit products covered by the Truth in Lending Act.”).

Ohio Credit Union League, DOD-2013-OS-0133-0027, at 2.

One commenter requesting that the current rule should not be changed states that of over 40,000 complaints in the Better Business Bureau's complaint database in 2011, only 37 were filed against online military installment lenders.

The commenter states that installment lending should not be covered by the regulation because it “provides access to affordable, repayable consumer credit” and is “the safest form of small-dollar lending” because it is self-amortizing and thereby protects borrowers from becoming trapped in a cycle of debt.

American Financial Service Association, DOD-2013-OS-0133-0020 at 2 (citing Jean Ann Fox,

The Military Lending Act Five Years Later: Impact On Servicemembers, the High-Cost Small Dollar Loan Market, and the Campaign against Predatory Lending,

Consumer Federation of America, (May 29, 2012)).

Id.

at 2;

see also

National Installment Lenders Association, DOD-2013-OS-0133-0014, at 1 (arguing that the Department of Defense should instruct Base commanders to “place off limits to service members any business they find objectionable or predatory” instead of amending the rule to cover installment lending);

but see

Shriver Center, DOD-2013-OS-0133-0009, at 2 (arguing that installment loans can “have many of the same harmful features the MLA prohibits such as high interest rates, automatic access to a bank account, payment by military allotment, and repeated refinances with no benefit to the consumer”).

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 § 232.3(e), so that, in general, consumer credit would be defined consistently with certain credit that long 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.

100

See

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 §§ 232.3(

) 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).

101

See

10 U.S.C. 987(i)(3) (broadly defining “interest”).

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”).

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 Congress intends to provide to Service members and their families under the MLA should be made relevant to a broader range of credit products without unduly impeding the availability of credit that is benign or beneficial to Service members and their families.

103

Unlike the vast majority of credit products that are amenable to straightforward pricing mechanisms relating to the cost of the funds borrowed (such as solely on the basis of a fixed or variable interest rate applied for a term or on a periodic basis), credit provided through a credit card account can be provided subject to pricing mechanisms that, in part, account for the value of products or services delivered through the cardholder's use of the card itself. In this regard, many creditors offer credit card products that, from a consumer's perspective, generally are subject to periodic interest-rate charges (

i.e.,

the cost of the funds borrowed), plus participation fees and transaction-based fees that may vary, depending on the consumer's use of the card.

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.”).

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 the United States. Even though some of these fees might appear to be relatively high under certain circumstances, the Department believes that credit card products represent a form of consumer credit that, in general, is beneficial to Service members,

104

especially insofar as the costs of bona fide fees expressly tied to specific products or services may be imposed only upon the Service member's own choices regarding the use of the card. If the interest-rate limit of 10 U.S.C. 987(b) were to be flatly imposed on credit card products, then creditors likely would be required to significantly re-structure their current products, services, and pricing mechanisms when providing credit cards to Service members and their families—without a corresponding benefit to the Service members and their families. Flatly applying the interest-rate limit of 10 U.S.C. 987(b) to credit card products could result in unusually adverse consequences to both creditors and Service members, especially insofar as some creditors might elect to stop offering these products altogether or suspend certain functions of the card (

i.e.,

use of a card to make purchases in a foreign country) to Service members.

104

In this regard, the Department notes that approximately 68 percent of American families have at least one credit card.

See

Federal Reserve Board's Survey of Consumer Finances (2010), available at

http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf

p. 67.

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

105

15 U.S.C. 1665d; 12 CFR 1026.52.

106

15 U.S.C. 1637(n)(1); 12 CFR 1026.52(a).

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 § 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 § 232.4(d)(2) would clarify that certain charges—namely, “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”—may not be excluded as bona fide fees because these charges are expressly included in the definition of “interest” in 10 U.S.C. 987(i)(3).

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).

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 §§ 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 § 232.4(d)(3)(i) would provide that the bona fide fee must be compared to “fees typically imposed by other creditors for the same or a substantially similar

product or service.” The Department believes that this elementary like-kind standard would be appropriate because a creditor should not be required to assess a fee for, say, a balance-transfer service based on the fees that other creditors charge for cash-advance services.

Safe harbor.

Proposed § 232.4(d)(3)(ii) is designed to provide a firm, yet flexibly adaptable standard for a “reasonable” amount of a bona fide fee. Under this provision, a creditor may compare the amount of the bona fide fee to “an average amount for a substantially similar fee charged by 5 or more creditors each with at least $3 billion in outstanding loans on U.S. credit card accounts at any time during the 3-year period preceding the time such average is computed.” The Department believes that the standard for a “reasonable” amount of a bona fide fee should be sufficiently flexible to allow for changing conditions in the marketplace for products and services provided through credit card accounts, and thus proposes language in the provision (“an average” of an amount charged by “5 or more creditors”) that would allow a creditor to select any group of 5 or more credit card issuers who each have the qualifying amount of outstanding credit card loans in order to make a determination. The Department believes that using a pool of 5 or more of these qualifying creditors is reasonable because these creditors, taken together, would represent a significant portion of the market for credit card products.

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 (Sept. 2013) at 10 (listing 14 MasterCard and Visa issuers with above $3 billion in outstanding loans mid-year 2013); Discover Bank, Consolidated Reports on Condition and Income for A Bank with Domestic Offices Only—FFEIC 041 (July 30, 2013) at 17 (indicating that Discover held more than $49 billion in such loans); and American Express Company, Consolidated Statements of Income (July 17, 2013) at 13 (indicating that American Express held $54.6 billion in cardmember loans. These 16 creditors (who are not the only creditors above the $3 billion threshold) hold over $582 billion in credit card loans or greater than 87 percent of the market in 2013.

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 § 232.4(d)(3)(ii) would set a threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts held by a credit card issuer in order for that issuer's fees to be eligible for inclusion in an average calculated for the purposes of compliance with the “reasonable” condition of § 232.4(d)(1). The Department proposes the use of a minimum of 5 credit card issuers, each of whom meet the threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts, in order to facilitate a creditor's ability to compute an average under the safe-harbor provision in light of a very manageable, yet fairly representative, sample of fees in the marketplace for credit card products. The Department believes a threshold of $3 billion of outstanding credit card loans is reasonable because that threshold would include a significant number of credit card issuers, whose credit card products make up the majority of the products in the current credit card market. Moreover, the credit card issuers who hold more than $3 billion in outstanding credit card loans on U.S. credit card accounts offer credit card products that are typical in that marketplace. The Department is aware that many credit card issuers who hold less than $3 billion in outstanding credit card loans on U.S. credit card accounts may offer credit card products with lower or similar fees (relative to issuers who hold more than $3 billion in outstanding credit card loans); these issuers would benefit in a straightforward manner from the proposed method of computing an average for the purposes of the safe-harbor proposed in § 232.4(d)(3)(ii). The Department believes that establishing this threshold would prevent a niche issuer charging unreasonable credit card fees from benefiting from the safe harbor, in a manner that evades the intent of the rule, by comparing its fees only to the fees of other niche issuers, rather than a more representative sample of the marketplace.

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.

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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.

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.

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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 Securities and Exchange Commission (SEC filings) and Consolidated Reports of Condition and Income (Call Reports). Both SEC filings

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and Call Reports

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are available online without charge. In addition, the Department recognizes that data collected from these and other information sources is compiled in commercially available databases regularly used by financial institutions to track the marketplace for credit card products and services, and the Department believes that creditors should be permitted to reasonably rely upon those industry-specific databases when computing an average fee under proposed § 232.4(d)(3)(ii).

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See, e.g.,

the solicitations available at

https://creditcards.chase.com.

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The SEC makes public filings available through its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Information on this system is available at

http://www.sec.gov/edgar/aboutedgar.htm.

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Call Reports for institutions insured by the Federal Deposit Insurance Corporation can be found on the Federal Financial Institutions Examination Council's Web site, available at

https://cdr.ffiec.gov/public/.

Call Reports for credit unions are available online through the National Credit Union Administration's Web site, available at

http://researchcu.ncua.gov/Views/FindCreditUnions.aspx.

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 § 232.4(d)(3)(ii) could download a recent Call Report for an issuer and review Schedule RC-C Part I line 6(a) that provides credit card “[l]oans to individuals for household, family, and other personal expenditures” held by the institution. If that credit card issuer indicated that it held more than $3 billion in outstanding credit card loans, then the creditor could include any fee charged by that credit card issuer in the creditor's safe-harbor calculation under proposed § 232.4(d)(3)(ii). The creditor could find the amounts of the relevant fees for that credit card issuer disclosed on the issuer's current offerings, as available through a variety of sources, such as the issuer's Web site.

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 § 232.4(d)(3)(ii). Creditor Bank regularly offers a credit card product called the “Creditor Bank Card.” The Creditor Bank Card carries an annual fee of $25, a cash advance fee of 3 percent of a transaction or $5, whichever is greater, and no other fees.

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Creditor Bank is aware of 5 large credit card issuers: Bank A, Bank B, Bank C, Bank D, and Bank E. Creditor Bank consults the SEC filings for each of these 5 banks and finds that all 5 held U.S. credit card loans in excess of $3 billion at some time in the preceding year. Next, Creditor Bank reviews the fees charged on various credit card products issued by those 5 banks. Bank A charges an annual fee of $100 on one credit card product and a $0 annual fee on another credit card product. Bank A charges a cash advance fee of 4 percent of a transaction or $10, whichever is greater, on both of its card products. Bank B charges a $50 annual fee on one credit card product and a $0 annual fee on another credit card product. Bank B charges a cash advance fee of 2 percent of the transaction or $5, whichever is greater, on both its credit card products. Bank C, Bank D, and Bank E each offers one credit card product that carries a $50 annual fee, and a cash advance fee of 3 percent of the transaction or $5, whichever is greater.

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For the sake of simplicity, only two fees are considered in this example. Under proposed § 232.4(d)(1), each bona fide fee must be “reasonable and customary,” and accordingly, a creditor seeking to determine whether all of its bona fide fees fit within the safe harbor under proposed § 232.4(d)(3)(ii) must conduct a separate analysis for each fee. Similarly, the example uses bank cards only for the sake of simplicity. The proposed regulation does not distinguish among types of credit cards (

e.g.,

private label, bank, or retail store cards) or types of creditors.

Under proposed § 232.4(d)(3)(ii), Creditor Bank may choose to calculate an average using the highest annual fees charged by each of these other 5 banks. In this case, Creditor Bank could calculate an average fee for the annual participation fee of $60 (the sum of $100 for Bank A, plus $50 for each of Bank B, Bank C, Bank D, and Bank E; divided by 5). Because the Creditor Bank Card's $25 annual fee falls below the $60 average of fees charged by 5 other banks, Creditor Bank would meet the safe harbor for that fee. Creditor Bank could then undertake the same analysis for cash advance fees, and would be required to consider whether its fee is “reasonable” under the safe harbor with respect to both the percentage charged and the minimum fee. In this case, Creditor Bank could calculate an average cash advance percentage fee of 3 percent and an average cash advance minimum fee of $6. Because the Creditor Bank Card's percentage fee and minimum fee fall below these averages, Creditor Bank may exclude these bona fide fees from the MAPR under proposed § 232.4(d)(3)(ii). We seek comment on the feasibility of performing this calculation and the associated costs.

Reasonable fee.

Proposed § 232.4(d)(3)(iii) is designed to clarify that a bona fide fee still may be “reasonable” for the purposes of the exclusion even if that fee is higher than an average amount as calculated under proposed § 232.4(d)(3)(ii). In particular, the Department recognizes that, due to several factors in the marketplace for credit cards, the prices of certain fees could drop from current levels, including to zero, and yet the Department believes that a creditor who charges a reasonable fee still should be permitted to avail itself of the exclusion in paragraph (d)(1) of this section. Accordingly, the Department proposes a provision that expressly states that “[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.”

Customary.

Proposed § 232.4(d)(3)(iv) would provide a standard to assess whether a bona fide fee is “customary” for the purposes of the exclusion. The touchstone for assessing whether a creditor's bona fide fee is “customary” is whether “other creditors typically compute, or customarily have computed,” that fee in the manner by which that creditor does so. Nevertheless, the condition that a bona fide fee be “customary” for that type of fee should not be interpreted so as to require creditors to move in lockstep in order to satisfy this condition. The Department intends the standard for a “customary” condition to be applied with sufficient flexibility that a creditor who imposes a bona fide fee in a given manner, such as a fixed amount per transaction, may continue to do so, “even if substantially all other creditors compute that fee on a percentage basis.”

Reasonableness for a participation fee.

Consistent with the Department's proposal that the conditions of “reasonable and customary” be applied flexibly, proposed § 232.4(d)(3)(v) would provide a standard in the particular case of a participation fee. The Department recognizes that creditors who issue credit cards provide a range of benefits and services to Service members and their dependents who are cardholders, and some cards may charge a participation fee in lieu of (or in light of lower) transaction-based fees. For example, a creditor may offer a credit card that carries a relatively higher participation fee, yet does not charge a foreign transaction fee. Accordingly, proposed § 232.4(d)(3)(v) would provide a standard stating that “[a]n amount of a bona fide fee for participation in a credit card account may be reasonable and customary . . . 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.”

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 $3 billion in outstanding credit card loans on U.S. credit card accounts appropriately allow an assessment of whether a bona fide fee is “reasonable,” in light of the fees charged by credit card issuers whose credit card products are typical in the marketplace? If not, what measure(s) should be used to facilitate a creditor's own assessment of its bona fide fees, for the purposes of complying with conditions proposed in § 232.4(d)(1), while also preventing other creditors who offer credit card products that carry unreasonable fees from benefitting from the safe harbor? Is a pool of 5 or more creditors reasonably large for computing an average fee for the purposes of § 232.4(d)(1)? Does a period of 3 years provide sufficient stability for measuring whether a credit card issuer meets the asset-size standard? If not, what period should be used?

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.”

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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.

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The Department is proposing to revise these provisions governing the assessment of a covered borrower for two reasons.

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72 FR at 50588.

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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.

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

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in the course of a transaction involving consumer credit.

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In this regard, the Department notes that even under the elective verification method, an activated member of the National Guard or Reserves is required to provide a copy of the military orders calling the covered member to military service, upon request of the creditor. 32 CFR 232.5(b).

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.”

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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.

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72 FR at 50588.

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 § 232.5 would provide a conclusive mechanism for a creditor to unilaterally assess the status of a consumer who applies for consumer credit if: first, the creditor checks the MLA Database to determine that consumer-applicant's status when the creditor enters into a transaction or establishes an account for consumer credit; second, the consumer-applicant does (or does not) appear in the MLA Database; and, third, the creditor retains a record of the information obtained from the MLA Database.

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 § 232.5 would prohibit or otherwise restrict a creditor from using a commercially provided information product to conduct a covered-borrower check, so long as the MLA Database is the underlying source of the data relied on by that creditor.

QUESTION 11:

If the Department makes appropriate adjustments to the MLA Database, should the Department modify the language of § 232.5 to clarify that a creditor may take advantage of the

safe harbor by conducting a covered-borrower check using a commercially provided information product whose underlying data is derived from the MLA Database? If so, please specifically describe the language the Department should use to clarify this aspect of § 232.5.

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 § 232.5(a), the Department believes that a creditor who has actual knowledge that a consumer is a covered borrower should not be entitled to the safe harbor when entering into a transaction or establishing an account for consumer credit for that borrower. For example, if as part of the creditor's application or underwriting process, the creditor collects from a covered borrower a copy of the borrower's current military identification card or other record of the borrower's status, the creditor would obtain actual knowledge of that borrower's status, regardless of whether the creditor checks the MLA Database. Proposed § 232.5(c) reflects this policy and provides that the creditor 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 § 232.5(b) to apply so that a creditor may not take advantage of an obvious error in the MLA Database when the creditor knows otherwise, and the Department expects these circumstances to be rare.

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 § 232.5(b)(2) generally would provide a safe harbor from liability under the MLA in the event that the consumer, in fact, is a covered borrower. This situation could occur, for example, in the case that a consumer married to an active duty service member (and, therefore who is a covered borrower himself or herself) has not registered for any military benefits in the Defense Enrollment Eligibility Reporting System which provides the underlying data for the MLA Database. The Department believes a creditor who checks a consumer against the MLA Database has undertaken the best efforts under the circumstances to comply with the MLA and should receive, therefore, protection from liability if the database had contained incorrect information about that consumer. Moreover, a creditor who satisfies the conditions for the safe harbor provided under proposed § 232.5(b)(2) would be free from liability under the MLA at the outset of establishing an account for credit—and throughout the lifespan of that particular account—relating to that consumer.

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 § 232.5(b), a creditor must check the MLA Database whenever a consumer applies for a new consumer credit product or establishes a new account for consumer credit, including a new line of consumer credit that might be associated with a pre-existing transactional account held by the borrower. For example, if a consumer initially opens a checking account with a bank, and then, later, applies for an overdraft line of credit associated with that checking account and which carries a cost in excess of the interest-rate limit, in order to receive the benefit of the safe harbor for purposes of that new line of consumer credit, the bank must check the MLA Database when the consumer applies for the overdraft line of credit, even if the bank previously had checked the MLA Database at the time he or she established the checking account and did not find the consumer in the database.

QUESTION 12:

If the Department were to adopt a framework for a creditor to conduct a covered-borrower check as proposed in § 232.5, should the Department also adopt an exception from the safe harbor that addresses the situation when the creditor has actual knowledge that a consumer is a covered borrower? What are the likely costs associated with conducting covered-borrower checks as proposed in § 232.5? What alternatives should the Department consider for creditors to conduct covered-borrower checks? Should the Department consider alternative safe harbor provisions for certain types of creditors or certain types of consumer credit, such as credit extended at retail sales locations? Please provide specific language for provisions that would implement these alternatives.

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.”

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See

32 CFR 232.3(c) (defining a “covered borrower”).

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.

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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 § 987(f)(3),

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which makes any credit contract that is prohibited under 10 U.S.C. 987 “void from the inception of such contract.” Section § 987(f)(3) would operate unjustly if a consumer, upon obtaining the status of a covered borrower, could sue the creditor to void an existing credit contract on the grounds that the contract—which may have been entirely lawful when originally entered into with the consumer—violates one or more provisions of 10 U.S.C. 987. One practical consequence of the Department's longstanding policy is that a creditor is not required to constantly monitor the status of each consumer who has obtained credit or holds an account for credit to assess whether the consumer is a “covered borrower;” rather, the creditor may conduct that assessment, as the creditor may so elect, only at the outset of the transaction or when establishing the account for consumer credit. The Department proposes to adopt corresponding revisions to the language of certain other provisions of the regulation, notably §§ 232.3(f) and 232.5(b)(2), for the sake of clarity and consistency with this policy.

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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).

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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.”).

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 Consumer Financial Protection Bureau to implement the Truth in Lending Act, Regulation Z shall control the meaning of that term or provision.”

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 § 232.3(i)(3) of the proposed rule.

(b) Billing cycle.

The Department proposes to define the term consistent with the meaning of this term in Regulation Z.

The Department proposes to define the term for the Consumer Financial Protection Bureau.

(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 § 232.3(f)(2) would provide exceptions to “consumer credit” that, in general, track the exceptions in 10 U.S.C. 987(i)(6).

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,

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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.

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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”).

122

See

12 CFR 1026.4(c)(3).

Consistent with the Department's existing regulation, proposed § 232.3(f)(2)(iv) would exclude from the scope of “consumer credit” any credit transaction that is an exempt transaction for the purposes of Regulation Z (other than a transaction exempt under 12 CFR 1026.29)

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or otherwise is not subject to disclosure requirements under Regulation Z. The Department believes, at this time, that the exclusions in proposed § 232.3(f)(2)(iv) are appropriate limitations to the consumer credit that is subject to 10 U.S.C. 987 because these types of exempted credit do not pose risks to Service members and their dependents, and a creditor who already complies with Regulation Z should not be required to independently assess whether certain types of credit exempt under that rule could be subject to the requirements of the MLA.

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See

12 CFR 1026.29, regarding state application for Bureau exemption of a class of transactions within the state.

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.”

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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 § 232.4(c)(1)(iv). Under § 1026.3(g) of Regulation Z, credit extended to a participant in certain retirement plans is

not subject to the requirements of Regulation Z.

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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.

(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 § 663 of the 2013 Act. The Department believes that the proposed definition of “dependent,” consistent with the term used to establish eligibility for military medical care, would appropriately carry out the intent to simplify the process for determining which family members are covered under 10 U.S.C. 987.

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.

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32 CFR 232.3(d).

(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”

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consistent with the corresponding provision of the Department's existing regulation, which refers to the definition of “creditor” in Regulation Z.

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10 U.S.C. 987(i)(5)(A)(i).

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32 CFR 232.3(e) (“

Creditor

means a person who . . . and who otherwise meets the definition of `creditor' for purposes of Regulation Z.”).

(j) Department.

The Department proposes to define the term for the Department of Defense.

(k) Dwelling.

The proposed definition of “dwelling” is not changed from the Department's existing regulation.

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32 CFR 232.3(f).

(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).

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In the context of this provision—which relates only to an exception that would be contained in proposed § 232.8(e)—the Department believes that there is no need to account for the authority of the Board of Governors of the Federal Reserve System under EFTA.

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Currently the term “electronic fund transfer” is defined in section 1005.3(b) of the Bureau's Regulation E. 12 CFR 1005.3(f).

(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 § 232.4(c).

(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.

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32 CFR 232.3(e) (defining “person” for the purposes of § 232.3 as including a “natural person, organization, corporation, partnership, proprietorship, association, cooperation, estate, [and] trust.”

(q) Regulation Z.

The Department proposes to define the term consistent with the definition of “Regulation Z” in the Department's existing regulation,

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except that, first, the Department would delete the phrase “or contract” and, second, the Department would include a provision relating to the authority of the Board of Governors of the Federal Reserve System under TILA.

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32 CFR 232.3(i).

Section 232.4 Terms of Consumer Credit Extended to Covered Borrowers

Proposed § 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 § 232.3(i)(2), which includes an “assignee” within the definition of creditor.

Proposed § 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.

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In the case of a national bank, for example,

see

12 U.S.C. 85; 12 CFR 74001.

Proposed § 232.4(b) is intended to track the interest-rate limit of 10 U.S.C. 987(b).

Proposed § 232.4(c) provides the framework for calculating the MAPR by: First, in § 232.4(c)(1), describing each of the charges that must be included in the MAPR; and second, in § 232.4(c)(2), prescribing the rules for computing the MAPR based on those charges.

Proposed § 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,

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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 § 232.4(c)(1)(i)-(ii).

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32 CFR 232.3(h)(1)(ii)-(iii).

At this time, the Department proposes to maintain (in proposed § 232.4(c)(1)(ii)) the language of § 232.3(h)(1)(iii), which requires a creditor to include in the MAPR “fees for credit-related ancillary products sold in connection with and either at or before consummation of the [consumer credit].” When adopted in 2007, including in the MAPR only the “credit-related ancillary products” sold “either at or before consummation of the credit transaction”

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was designed to be consistent with the scope of consumer credit, which covers only a narrow band of closed-end credit products. However, nothing in the MLA necessarily limits the inclusion in the MAPR of these charges only to those that are sold at the outset of the credit transaction. Particularly insofar as consumer credit would cover open-end credit products, as proposed, the MLA reasonably could

be interpreted to require a creditor to include in the MAPR the fee for any ancillary product “sold with any extension of credit to a [covered borrower]” so long as that ancillary product was “associated with the extension of credit”

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—which could arise at any time in an ongoing, open-end account for consumer credit. The Department has considered whether to amend the language of proposed § 232.4(c)(1)(ii) to require the inclusion in the MAPR of any fees for credit-related ancillary products, with respect to open-end credit, sold either upon account opening or at any time during the existence of the account, so long as the consumer was a covered borrower at the time the account was established.

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32 CFR 232.3(h)(1)(iii).

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10 U.S.C. 987(i)(3) (defining “ `interest'” generally as including “all cost elements associated with the extension of credit”).

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Amending the scope of § 232.4(c)(1)(ii) by eliminating the timing condition would be consistent with the scope of § 232.4(c)(1)(i) (which tracks § 232.3(h)(1)(ii) of the existing regulation), which does not impose a condition based on the timing of a sale or charge for a credit insurance premium.

QUESTION 16:

Should the Department consider eliminating the timing condition of § 232.4(c)(1)(ii) to require the inclusion in the MAPR of any fees for credit-related ancillary products sold either upon account opening or at any time during the existence of an account for open-end consumer credit? If so, please specifically describe the scope of an amended § 232.4(c)(1)(ii). For example, how should the Department define a “credit-related ancillary product?” How should the Department define the seller whose charge for a credit-related ancillary product would be subject to inclusion in the MAPR (

i.e.,

“sold by the creditor” or “sold by the creditor or any affiliate of the creditor”)?

Proposed § 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

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and taxes required to be paid,

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proposed § 232.4(c) omits these provisions because these charges (as well as other charges) are not finance charges under Regulation Z.

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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”).

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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”).

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See

12 CFR 1026.4(c).

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.

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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.

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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 § 232.4(c)(1)(iii).

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See

12 CFR 1026.4(c)(1) and (c)(4).

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