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

Federal RegisterJul 22, 2015

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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:

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

ACTION:

Final rule.

SUMMARY:

The Department of Defense (“Department”) amends its regulation that implements the Military Lending Act, herein referred to as the “MLA.” Among other protections for Service members and their families, 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 amends its regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products. Among other amendments, the Department modifies the provisions relating to the optional mechanism a creditor could use when assessing whether a consumer is a “covered borrower,” modifies the disclosures that a creditor must provide to a covered borrower, and implements the enforcement provisions of the MLA.

DATES:

Effective Date:

October 1, 2015. Compliance required by October 3, 2016.

FOR FURTHER INFORMATION CONTACT:

Marcus Beauregard, 571-372-5357.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Regulatory Action

In September 2014, the Department published a proposal to amend its regulation implementing the MLA

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 (“Proposed Rule”),

rather than the limited credit products that had been defined as “consumer credit.”

After reviewing comments submitted on the Proposed Rule and in light of its experience administering the existing regulation for over seven years, the Department amends 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 disclosure requirements of the Truth in Lending Act (TILA), codified in Regulation Z, 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.

32 CFR part 232.

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents (Proposed Rule), 79 FR 58602 (Sept. 29, 2014). The Department extended the period for submitting comments on the Proposed Rule, to December 26, 2014. 79 FR 70137 (Nov. 25, 2014).

32 CFR 232.3(b) (2008).

The forms of “consumer credit” that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage or auto-secured purchase loan. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B).

See

12 CFR 1026.1(c)(1)(iii) (2015) (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).

The Department believes that this final rule is appropriate in order to address a wider range of credit products that currently fall outside the scope of the Department's existing regulation that, until now, had implemented the MLA (“existing rule”). In addition, the final rule streamlines the information that a creditor must provide to a covered borrower when consummating a transaction involving consumer credit and provides a more straightforward mechanism for a creditor to conclusively determine—via a safe harbor—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 elects to (but is not required to) unilaterally conduct a covered-borrower check by obtaining information from the Department's online database (“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 MLA Database is available at

https://www.dmdc.osd.mil/mla/welcome.xhtml

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. In developing this final rule the Department has consulted with the Board of Governors of the Federal Reserve System (“Board”), the Consumer Financial Protection Bureau (“Bureau”), the Department of the Treasury, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Trade Commission (“FTC”), the National Credit Union Administration (“NCUA”), and the Office of the Comptroller of the Currency (collectively, “Federal Agencies”). The Department will continue to consult with the Federal Agencies, as appropriate, as the Department continues to assess the measures implementing the protections of the MLA.

B. Summary of the Major Provisions of the Department's Final Rule; Modifications to the Department's Proposed Rule

The MLA, as implemented by the Department's 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, refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, “other MLA conditions”).

Key elements of the Department's rule, particularly relative to the Proposed Rule, include:

• Providing a temporary exemption for credit extended in a credit card account under an open-end (not home-secured) consumer credit plan. The exemption for a credit card account expires, at minimum, in October 2017, and the rule permits that exemption to be extended for up to one year;

• Providing a qualified exclusion from the requirements relating to the computation of the MAPR for a credit card account for a “bona fide” fee, but eliminating the proposed condition that the bona fide fee be “customary.” Under the final rule, an application fee, participation fee, transaction-based fee, or similar fee (other than a periodic rate) for a charge may be excluded from the MAPR to the extent that the fee is (i) a bona fide fee and (ii) reasonable for that type of fee; and

• Permitting a creditor, until October 3, 2016, to continue to use the method described in the existing rule for conducting a covered-borrower check, which involves the use of a covered borrower identification statement, as a safe harbor for compliance. After October 3, 2016, a creditor seeking a safe harbor for compliance with the rule may elect to use either of the new methods for conducting a covered-borrower check (and keep a record accordingly) set forth in § 232.5(b).

C. Timetable for Implementing the Department's Final Rule

1. Twelve-month Period for Compliance

Many comments on the Proposed Rule state that, if the Department were to adopt a final rule along the lines of the Proposed Rule, creditors would need a substantial period of time to modify their operations in order to comply with the rule. For example, in a joint letter, the American Bankers Association, the Association of Military Banks of America, the Consumer Bankers Association, the Independent Community Bankers of America, and the National Association of Federal Credit Unions (the “Associations”) state: “Given the breadth, complexity, and broad reach of the proposal, the necessary legal analysis operations, systems changes, staff training, [and] the draconian consequences for violations, . . . the Department should allow [creditors] at least 18 months to comply” with a final rule.

Similarly, another comment states that “[the Department] should allow as long an implementation period as reasonable to provide adequate time for credit unions and others to implement necessary changes.”

Associations, Dec. 18, 2014, at 58.

Missouri Credit Union Assoc., Nov. 25, 2014, at 3.

Because the protections of the MLA will apply to a wider range of credit products—and thus the requirements of the final rule will apply to broader classes of creditors—the Department believes that a creditor should be afforded a reasonable period of time to adjust its operations and, if necessary, the terms and conditions of its loan product(s) offered to covered borrowers in order to comply with the final rule. Accordingly, under § 232.13(a), a creditor must comply with the requirements of the rule with respect to a consumer credit transaction or account for consumer credit consummated or established on or after October 3, 2016.

The Department has determined that the final rule shall be effective on October 1, 2015.

2. Creditor May Use Existing Safe Harbor for Covered-Borrower Determination Prior to Compliance Date

Consistent with the Department's determination that a creditor should be afforded a 12-month period to adjust its operations and loan product(s) to comply with the rule, a creditor also is permitted to use the existing safe harbor when assessing whether a consumer-applicant is a covered borrower. If a creditor uses the safe harbor set forth in § 232.5(a) of the Department's existing rule, the creditor would be subject to the existing interpretation regarding the treatment of a covered borrower which is designed to prevent the creditor from using the borrower's declaration to allow the borrower to waive his or her rights to the protections provided under the MLA.

See

72 FR 50588.

Upon the compliance date, the rule permits—and does not require—a creditor to use information obtained from the MLA Database or information contained in a consumer report obtained from a nationwide consumer reporting agency in order to conclusively determine whether a consumer-applicant is a covered borrower. A creditor who uses one (or both) of the methods set forth in, and complies with the recordkeeping requirements of, § 232.5(b) when conducting a covered-borrower check will be afforded the new safe harbor.

3. Two-Year Exemption for Credit Card Accounts

The Department concludes that consumer credit should not include credit extended in a credit card account under an open-end (not home-secured) consumer credit plan until October 3, 2017. Section 232.13(c)(2) allows the Secretary (or an official of the Department duly authorized by the Secretary) to extend, up to an additional year, the expiration of the exemption for a credit card account. Thus, until October 3, 2017 (or potentially a longer period of time), the requirements relating to the computation of the MAPR for a credit card account, as set forth in § 232.4, would not apply. When the exemption expires, the conditional exemption for any “bona fide” fee charged to a credit card account, as set forth in § 232.4(d) would apply.

D. Overview of Comments on the Proposed Rule

Several hundred comments from a wide range of persons—including thousands of individuals—have submitted comments on the Proposed Rule. Including comments on form letters and petitions, over 21,000 individuals express views on the Proposed Rule,

and the vast majority of individuals support the proposal to extend the protections of the MLA to a wider range of closed-end and open-end credit products.

In this regard, the comment from U.S. PIRG includes thousands of letters from consumers who support the Proposed Rule (U.S. PIRG, Dec. 23, 2014), and Public Citizen provides the names of 12,000 consumers supporting the Proposed Rule. Public Citizen, Dec. 24, 2014.

Nearly two hundred consumer or civil rights organizations have submitted comments, and most express support for the reforms in the Proposed Rule. In addition, some organizations representing consumers believe that the Department should adopt a regulation that extends the protections of the MLA to credit extended in overdraft services, as well as to rent-to-own products.

Forty U.S. Senators express support for the Department to adopt the proposed definition of “consumer credit,” particularly in order to close what they find to be “loopholes” in the existing rule that preclude Service members and their families from effectively receiving the protections of the MLA.

Likewise, the Attorneys General of 22 states (“Attorneys General”) support the Proposed Rule, and urge the Department to adopt more aggressive provisions to regulate some financial products under the MLA.

Several other state officials have submitted comments generally supporting the Proposed Rule,

and, in particular, applauding the proposed expansion of the definition of “consumer credit.”

Sen. Jack Reed, et al., Nov. 25, 2014.

Attorneys General, Dec. 22, 2014.

See, e.g.,

Hon. Kate Marshall, State Treasurer, State of Nevada, Dec. 23, 2014.

Hon. Benjamin M. Lawsky, Superintendent, N.Y. Dep't of Financial Services, Dec. 24, 2014.

Over 350 groups, trade associations, and businesses have submitted comments, and many of these businesses and their representatives express concerns with—as well as outright opposition to—the Proposed Rule.

Most financial institutions, through approximately 50 comments, urge the Department to adopt in the final rule an exemption for certain types of creditors or, more narrowly, one or more exemptions for certain types of credit products. In particular, insured depository institutions and insured credit unions believe that, if the Department extends the scope of “consumer credit,” then the Department also should craft that definition so that an extension of credit from an insured depository institution or insured credit

union should be exempt from the requirements of the MLA. In addition, banks and credit unions, as well as others, raise concerns that Service members and their families should continue to have access to voluntary credit insurance products, unrestricted from the interest-rate limit of the MLA. Financial institutions request that the Department, at a minimum, delay the date(s) on which a creditor must comply with the final rule, seeking time periods ranging from 90 days to three years after the effective date of the rule.

See, e.g.,

Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 21 (urging the Department to delay the date for compliance with the final rule for at least 90 days); GECU-Greater El Paso's Credit Union, Dec. 12, 2014, at 1 (recommending that, for credit unions, the compliance date should be delayed for a minimum of three years).

Apart from banks and credit unions, several finance companies and their representatives express the view that the Proposed Rule, if adopted, would reduce access to a wide range of installment loans, which these commenters contend are valuable resources for Service members and their families. Some of these comments state that 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”) currently have limited scope of service and resources, insufficient to handle the range and volume of loans needed by Service members and their families; extending the Department's rule to cover a wider range of installment loans, these comments contend, would restrict access to these products for covered borrowers.

Installment lenders, including payday loan companies, also raise concerns about the potential burdens of using the MLA Database to conduct covered-borrower checks. Nonetheless, the Community Financial Services Association of America, which represents certain payday loan companies operating in more than 30 states, stated that it “believes that extending MLA protections to a broader range of consumer credit products will provide more consistent consumer protections.”

See, e.g.,

Nat'l Installment Lenders Assoc., Dec. 9, 2014.

Community Financial Services Assoc. of America, Dec. 24, 2014, at 2.

Pawnbrokers and their representatives explain that traditional pawn transactions are different in kind from other types of credit transactions, principally because a pawn transaction typically is a non-recourse loan,

and should be exempt from the scope of “consumer credit” regulated under the MLA.

See, e.g.,

Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 3.

See, e.g.,

American-Gold Mine, Inc., Nov. 25, 2014.

E. Costs and Benefits

In its proposal, the Department posed a series of questions in order to facilitate comments and, in particular, encourage interested persons to provide detailed information about the potential effects if the Department were to adopt the Proposed Rule. Some commenters offer certain data regarding the potential costs and benefits that might emerge if the Proposed Rule were to be implemented; in assessing the potential effects of the final rule, the Department has incorporated that data, as appropriate.

The Department has quantified three effects of the regulation. With respect to costs, the Department anticipates that, absent any relief under § 232.13(c), its regulation might impose costs of approximately $106 million during the first year, as creditors adapt their systems to comply with the requirements of the MLA and the Department's regulation. When the relief afforded to creditors for the general exemption for credit card accounts is included, then the anticipated approximate costs would be significantly lower during the first year. After the first year and on an ongoing basis, in a sensitivity analysis, the annual benefits to the Department may be between approximately $14 to $133 million. The Department estimates the potential savings that could result if the rule reduces the involuntary separations of Service members where financial distress is a contributing factor 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. The Department also has developed a transfer payment analysis that estimates between $100 and $119 in transfer payments per year from creditors to service members and their dependents. In addition to these quantified effects, the Department examined some effects qualitatively including those effects listed in figure 2 within section V.A.

Figure 1—Summary of Estimated Effects of Final Rule

[2015 dollars in millions]

First Year,

set-up costs

(Oct. 1, 2015-Sept. 30, 2016)

Annual,

ongoing

(October 1, 2016 and thereafter)

PV 10-year, 7% discount rate

PV 10-year, 3% discount rate

Sensitivity Analysis: Benefits to the Department

Low

$14

$96

$129

High

$133

$940

$1,263

Primary Analysis: Costs to Creditors of Compliance

($106)

($30)

($185)

($259)

Sensitivity Analysis: Transfer Payments

Low

n/a

$100

$616

$856

High

n/a

$119

$740

$1,022

II. Background

A. Overview of the Final Rule

The Department is amending 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 (“2006 Act”),

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

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 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.

At that time, the Department elected to define the scope of “consumer credit” as a narrow band of products within three categories of credit; for example, the existing rule had defined 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).

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

In September 2014, the Department published a proposal to amend the existing rule 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. In describing the Proposed Rule, the Department explained, in relevant part, that “the narrowly defined parameters of the credit products regulated as `consumer credit' under [the then-existing rule] do not effectively provide the protections intended to be afforded to Service members and their families under the MLA.”

79 FR 58610.

Many persons and entities believe that the Department should not amend its regulation as proposed because the expansion of the definition of “consumer credit” and the attendant requirements under the MLA would impair the ability of many types of creditors, particularly insured depository institutions and insured credit unions, to provide short-term credit to Service members and their families. However, some commenters argue that the Department should amend its regulation to apply to a broader range of credit products, including open-end credit, provided that the regulation also includes an exemption for insured depository institutions and insured credit unions.

Still other commenters urge the Department to amend its regulation to apply to a broader range of credit products, including open-end credit, without any exemptions or conditions.

See, e.g.,

Associations, Dec. 18, 2014, at 8.

See, e.g.,

Attorneys General, Dec. 22, 2014, at 3 (urging the Department to adopt “a more inclusive calculation of the MAPR,” without the conditional exclusion for “bona fide” fees charged for a credit card account).

In the process of adopting this final rule, the Department has reviewed the comments on the Proposed Rule and consulted with the Federal Agencies on a wide range of issues implicated by the Proposed Rule. In light of its assessment of the comments, its experience observing the effects of its existing regulation, and the scope and purposes of the provisions of 10 U.S.C. 987, the Department has determined that a wider range of credit products offered or extended to covered borrowers should be subject to the protections of the MLA. As proposed, the Department is amending 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 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, 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.

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).

12 CFR part 1026 (2013).

The Department has considered whether unqualified exclusions from the MAPR for certain types of fees, such as an application fee or participation fee, should be adopted 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, 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 an application fee, participation fee, or other fee (as described in the exclusion), subject to the restrictions under the amendments to TILA enacted in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”).

However, the Department also adopts the provisions in the Proposed Rule, with certain modifications, that provide a broad exclusion to allow a creditor who offers consumer credit through a credit card account to exclude from the MAPR any “bona fide” fee (other than a periodic rate). Under the final rule, that creditor would need to confirm that its fees are bona fide and reasonable, and if so, the Department believes that the creditor should be able to continue to offer the same credit card product(s) to covered borrowers by making certain adjustments to the terms and conditions for the product(s) by, for example, including the “statement of the MAPR” (which would be permitted simply to be added to its credit card agreement(s), and which is not required to be provided in any advertisement),

and modifying any provision (if any) that requires a covered borrower to “submit to arbitration.”

See

§ 232.6.

See

§ 232.8(c).

The Department has considered whether to provide a complete exemption from the definition of consumer credit for certain types of loans, such as a “payday alternative loan” (“PAL”) offered by a federal credit union and regulated under the NCUA's regulation

or similar credit product; likewise, the Department has considered whether to provide an exclusion from the requirements for computing the MAPR for an application fee or participation fee imposed on certain types of credit transactions or credit accounts. The Department has determined that an application fee or participation fee is an element generally required to be included when computing the MAPR (subject to a limited exception for a qualifying closed-end loan and the conditional exclusion for a bona fide fee charged to a credit card account).

12 CFR 701.21(c)(7)(iii) (2015).

As discussed in section III.D., the Department declines to provide a complete exemption for a PAL and,

instead, has determined that an application fee may be excluded from the computation of the MAPR for a short-term, small amount loan, subject to certain conditions.

The Department adopts in the final rule provisions designed to provide a creditor with a more straightforward mechanism to assist in assessing the status of a consumer as a covered borrower so 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 continues to believe that a covered-borrower check could be conducted unilaterally by a creditor who uses information obtained from the MLA Database 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 amends the existing rule to allow a creditor to use information obtained from the MLA Database or information contained in a consumer report from a nationwide consumer reporting agency to assess the status of a consumer-applicant for consumer credit and thereby providing 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 50588.

B. Financial Stability and Readiness

As the Department stated when issuing the Proposed Rule, 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 $58,250.

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 access to payday loans on enlisted members in the Air Force found “[a]irmen job performance and retention declines with payday loan access, and severely poor readiness increases.”

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

U.S. Dep't of Defense, 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 Uniform Code of Military Justice (10 U.S.C. 939)].”).

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 $58,250 is calculated in 2015 dollars (through December 2014), using the DOL, 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 2014, Abstract, available at

http://www.econ.ucdavis.edu/faculty/scarrell/payday.pdf

C. 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.

Defense Manpower Data Center (DMDC) QuickCompass of Financial Issues, (2013), 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.

See

Lewis Mandell,

The Financial Literacy of Young American Adults,

(2008), at 8, available at

www.jumpstart.org/assets/files/2008SurveyBook.pdf

(reporting that 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).

Consumer Federation of America, Military Saves Week 2013 Report, at 2, available at

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

“

Military Financial Readiness Program—Accomplishments To Date,”

SaveandInvest.org, About the Program, available at

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.

See

DoD Instruction 1342.22, Family Readiness Program, July 3, 2012, at 12, available at

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

Fiscal Year 2012 Annual Report on Family Readiness Programs (internal Department 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 hours a day and 7 days each week) 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 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).

D. 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. 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.

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 particular, the military services have partnered with nonprofit charitable organizations chartered to provide relief services to Service members and their families so that Service members and their families can obtain monetary support for their financial hardships. The Relief Societies provide 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), as well as scholarships; the Relief Societies also fund other support programs for active-duty military communities. 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.

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 Federal Agencies. Consistent with this provision of the MLA and with Executive Order 13563 (“EO 13563”),

the Department intends to conduct periodic reviews of this rule and may, as appropriate, modify certain provisions of the rule after notice and comment. The Department is mindful that the changes to credit made pursuant to this rule warrant continued evaluation of access to and the impact on credit extended to service members and their families, and that there may be relevant distinctions between military and civilian populations. During the periodic review and the required consultations, the Department will review its need to collect data as well as information provided by the Federal Agencies. The Department intends to synthesize and review available data on new and historical information to evaluate the effectiveness of this rule, including incorporation of fees in calculating MAPR, affected open-ended credit products, and availability of credit to covered borrowers with an eye toward striking an appropriate ongoing balance between covered borrower protection and industry compliance burden. These results of this data gathering will form the basis for ongoing reviews of the rule and assessments of various aspects of the rule. Any modifications, including those based on the results of studies currently ongoing and underway, would be subject to further analysis. This rule, as well as any proposed revisions to this rule, are part of the Department's retrospective review plan under EO 13563 completed in August 2011. The Department's full plan and retrospective review reports is available at:

http://www.regulations.gov/#!docketDetail;D=DOD-2011-OS-0036

Improving Regulation and Regulatory Review, 76 FR 3821 (Jan. 21, 2011).

III. Key Aspects of the Final Rule

A. Scope of “Consumer Credit”

1. In General

As proposed, the Department has determined to revise the scope of the definition of “consumer credit” to be generally consistent with the credit

products that for decades have been subject to the requirements of the Bureau's Regulation Z. Accordingly, the Department has revised § 232.3(e) so that, in general, consumer credit is defined consistently with certain credit that long has been subject to 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.

See

The Department believes that the narrow parameters of the credit products defined as “consumer credit” under the existing rule do not effectively provide the protections intended to be afforded to Service members and their families under the MLA. As forty U.S. Senators observe, extending the scope of “consumer credit” to track the credit regulated under Regulation Z closes “existing MLA loopholes” and “[t]his comprehensive approach is essential to preventing future evasions” of the requirements of the MLA.

Subject to certain exceptions, under the final rule when extending consumer credit to a covered borrower, a creditor should be permitted to 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”

and the methods for calculating the annual percentage rate of interest for consumer credit.

In general, in §§ 232.3(n) and 232.4(c), 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.

Sen. Jack Reed, et al., Nov. 25, 2014.

See

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

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”).

Commenters urge the Department to modify certain aspects of the Proposed Rule in light of certain provisions relating to the scope of consumer credit and the charges included in the MAPR that do not track the terms and conditions of Regulation Z. As discussed in section IV., the Department declines to adopt provisions that would allow any fee for a voluntarily agreed to credit insurance product, debt cancellation contract, or debt suspension agreement to be excluded from the MAPR.

2. Need to Address Risks Posed by High-Cost Consumer Credit

Many persons and entities urge the Department not to revise the scope of “consumer credit” as described in the Proposed Rule. For example, one commenter that generally “applaud[s] the proposal and support[s] the expansion of the definitions of the credit products that fall under the [Proposed Rule]” nonetheless cautions that “the proposed changes [to the regulation] would mean that the cost of providing small dollar loans will be more than can be recovered in fees and interest.”

The Associations likewise appear to argue that the Department should not adopt the definition of consumer credit set forth in the Proposed Rule: “we recommend a more focused approach and urge the Department to address particular problems of the current regulation by modifying coverage in a targeted fashion, consistent with its previous approach.”

However, the Associations also specifically recommend that the Department “

broaden coverage of the regulation by eliminating the current parameters in the definition of covered consumer credit related to loan terms and amount, expand coverage to open-end credit, and exempt insured depository institutions

.”

Nat'l Military Family Assoc., Dec. 18, 2014, at 1. However, the National Military Family Association declines to explain how the changes to the regulation could be a source for increasing the costs of providing small-dollar loans and does not provide data to support its assertion that “the proposed changes to the [regulation], if implemented as drafted, could eliminate an important category of products proven to be beneficial to [Service] members and their families.”

Id.

Associations, Dec. 18, 2014, at 8. In this regard, the Associations argue that the MLA is intended “to target

specific

loans considered under the legislation to be “predatory:” Payday loans, vehicle title loans, rent-to-own programs, refund anticipation loans, and military installment loans.”

Id.

at 2 (emphasis in original).

But see

Associations at 11 (explaining that Congress rejected an “original payday lending amendment” offered in the Senate, which was “narrower than the legislation ultimately [enacted]”).

Associations, Dec. 18, 2014, at 8 (emphasis in original).

Other persons and entities similarly urge the Department not to adopt the approach of the Proposed Rule because, they contend, 10 U.S.C. 987 is intended solely to address so-called “predatory” loan products. For example, a comment on behalf of certain credit card issuers asserts that the “regulatory framework [under the MLA] . . . was developed by the [Department] for application only to specific types of closed-end products,” and the comment contends that, in adopting the rule in 2007, the Department had established or endorsed certain “criteria for evaluating whether credit products pose risks to [Service] members.”

These credit card issuers argue that the Department should not abandon a product-based approach to a regulation that implements the protections of the MLA,

and further argue that certain aspects of the Proposed Rule “clearly demonstrate the significant problems that would arise by abandoning a more targeted and tailored approach to coverage under the MLA.”

L. Chanin, Dec. 23, 2014, at 7.

Id.

L. Chanin, Dec. 23, 2014, at 7-8. Nevertheless, these credit card issuers do not provide any proposal to improve the “product-based approach.” In this regard, the Department specifically sought comment on ways to “refin[e] the Department's current rule for payday loans, vehicle title loans, and refund anticipation loans—and the associated benefits and costs.” 79 FR 58604. These credit card issuers decline to take up the Department's invitation; their silence regarding one or more ways to establish a “more targeted and tailored approach to coverage under the MLA” evinces support solely for the very narrowly defined scope of consumer credit adopted in 2007.

Compare

New York Credit Union Assoc., Dec. 26, 2014, at 3 (arguing that the Department should amend 32 CFR 232.3(b)(1) by adding a new subparagraph (iv) that would clarify that consumer credit includes “ `similarly structured loans' in which a lender has engaged in a pattern of offering loans in which a paycheck, vehicle's title, or an anticipated tax refund is used as collateral for the [underlying] loan”).

Even though the Department's initial proposal, issued in April 2007,

referred to various studies and reports (including reports and other initiatives by the Department) that describe “predatory” lending “practices,” the Department broadly described its overarching aim, namely, to promote readiness by taking steps to reduce the risk that a Service member or his or her family could get caught in a “debt trap.”

In the context of describing its own report to Congress in 2006, for example, the Department observed that “some forms of credit” could pose risks for Service members and their families: “The 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 rollover the loan instead of repaying it can create a cycle of debt for financially overburdened Service

members and their families.”

When implementing the regulation in 2007, the Department acted in light of the short timetable for the effective date of 10 U.S.C. 987

and the instruction to act swiftly, as evidenced in authority to prescribe interim regulations without regard to the notice-and-comment requirements of the Administrative Procedure Act.

Still, the Department elected to act judiciously by initially regulating only certain credit products that, at that time, the Department believed posed the most severe risks to Service members and their families.

Moreover, in proposing and adopting the regulation in 2007, the Department eschewed any reliance on certain criteria as a predicate to define the scope of consumer credit.

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 18157 (Apr. 11, 2007).

72 FR 18159.

Id.

The 2006 Act, enacted on October 17, 2006, was scheduled to take effect in less than one year, and under 10 U.S.C. 987(c)(3) the Department was authorized to establish an earlier effective date. 10 U.S.C. 987 note.

10 U.S.C. 987(d).

72 FR 50584 (observing the need to act “judiciously” when initially defining the scope of “creditor” and “consumer credit”).

See also

72 FR 18162 (“the statute allows the Department to focus [the limitation imposed under the MLA] on areas that create the most concern”) and 72 FR 50585 (“the final rule focuses on three problematic credit products that the Department identified in its August 2006 [report to Congress]”).

In this regard, comments urging the Department to “continue” to define the scope of the regulation to address only credit products with “predatory characteristics” miss the mark.

See, e.g.,

L. Chanin, Dec. 23, 2014, at 2; Assoc. of Military Banks of America, Dec. 18, 2014, at 2; Independent Bank, Dec. 24, 2014, at 1.

In explaining the bases and rationale for redefining consumer credit in the Proposed Rule, the Department observed that “certain payday loans, vehicle title loans, and refund anticipation loans present the

most severe

risks to Service members and their families”

—not the only risks. Some comments

have seized on the Department's characterization of the risks posed by those three narrowly defined products in the context of that aspect of the Proposed Rule to conclude that the status quo must be maintained because either: (i) The Department's countervailing consideration—to guard against unintended adverse consequences

—is a relatively more important objective; or (ii) expanding the scope of consumer credit to track the scope of credit that is subject to Regulation Z would eliminate access to credit products that are benign or beneficial to Service members and their families.

The Department finds that the conclusion many comments support—avoid expanding the scope of consumer credit—is based on false absolutes, say, between preserving access to “much needed, good, small-dollar credit”

and affording the protections of the MLA to Service members and their families when they choose to obtain a wider range of loan products. As the Department explained when issuing the Proposed Rule, “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 risks] to Service members and their families. . . .”

The Department believes, and comments amply support the view,

that the scope of consumer credit reasonably could apply to credit products that are subject to the requirements of Regulation Z in order to reduce the risks to covered borrowers posed by high-cost loans, and still preserve access to a wide range of products, including “much needed, good, small-dollar credit options,”

for those borrowers.

79 FR 58607 (emphasis added). Likewise, the Department finds no occasion to concur with the view expressed by many comments asserting that the (primary or sole) purpose of the MLA is to “curb predatory lending practices.”

See

Attorneys General, Dec. 22, 2014, at 2.

See, e.g.,

American Financial Services Assoc. (“AFSA”), Dec. 22, 2014, at 8-9 (In particular, AFSA states:

“[T]he Department recognizes that there is a need for small-dollar credit, while at the same time being concerned that the current regulation implementing the MLA does not protect covered borrowers from high-cost credit products.

“AFSA agrees with the Department that Service members and their families should have access to safe and responsible credit. We understand the Department's concern that high-cost loans can pose risks to Service members and their families.

“The Department's proposed approach, though, does not meet these two goals. It seems that the Department is willing to prevent covered borrowers from accessing much needed, good, small-dollar credit options by rewriting the rules with a broad brush stroke that assumes that all products are undesirable.”).

Avoidance of unintended adverse consequences is one of the Department's longstanding objectives, and the one of the principal bases for the Department's election to incrementally implement the protections of the MLA.

See

72 FR 50584-50585 (explaining that a “narrow definition” of consumer credit in the existing regulation “will prevent unintended consequences”).

See

79 FR 58610 (explaining the Department's view that the MLA should be interpreted to provide “important protections to Service members and their families . . . without unduly impeding the availability of credit that is benign or beneficial to [them]”).

AFSA, Dec. 22, 2014, at 9.

79 FR 58607.

See, e.g.,

Navy Federal Credit Union, Dec. 15, 2014, at 1-2 (stating that “Navy Federal supports the Department's proposal to expand the scope of the rule to include additional credit products” and not raising any objection to the cost elements, other than “

voluntary

debt cancellation fees,” that must be included in the MAPR) (emphasis in original); Consumer Finance team at the Pew Charitable Trusts (“Pew”), Dec. 23, 2014, at 1-3 (stating that “comprehensive definitions that include all small-dollar loans will give lenders clear guidance to foster innovation,” and that “[t]horough assessment of income and expenses is the best way to ensure that loans are affordable for borrowers”); Consumer Federation of America

et al.,

Aug. 1, 2013, at 12-14 (describing dozens of financial institutions that offer to consumers credit products that would satisfy the interest-rate limit imposed by the MLA).

AFSA, Dec. 22, 2014, at 9.

Moreover, the Department continues to believe that the extremely narrow definition of “consumer credit” in the existing rule permits a creditor to structure its 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 covered borrower 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 covered borrower would obtain the credit without the protections afforded under the MLA. Many persons and entities commenting on the Proposed Rule share the view that “consumer credit” in the existing rule is unduly narrow and permits a creditor to avoid the obligations of the MLA.

See, e.g.,

Texas Appleseed, Dec. 2, 2014 (describing products offered by various lenders and observing that “the [Proposed Rule] will help close the loopholes Texas' payday and auto title businesses have been able to exploit”);

See also

10 U.S.C. 987(i)(5) (in relation to the term “creditor,” permitting the Department to prescribe “such additional criteria as are specified for such purpose in regulations prescribed under [10 U.S.C. 987]” and 987(i)(6) (providing that “[t]he term `consumer credit' has the meaning provided for such term in regulations prescribed [by the Department],” subject to the exceptions for a residential loan or a loan procured in the course of purchasing a car or personal property).

10 U.S.C. 987(h)(2)(B).

10 U.S.C. 987(h)(2)(C). The grant of authority under this subparagraph also relates to the disclosures that a creditor must provide to a covered borrower, which is addressed in subsection 2 of the relevant part of section IV (Section 232.6 Mandatory loan disclosures).

For example, 10 U.S.C. 987(i)(4) first provides that the term “annual percentage rate” has the same meaning as implemented in Regulation Z, but, second, provides that the term “includes all fees and charges,” including specified charges, even though Regulation Z for years has excluded from the disclosures of APR many types of fees and charges, particularly some of the fees specified in 987(i)(4).

In addition, as discussed in section II.A., the Department is directed to periodically consult with the Federal Agencies.

C. Consideration of Exemptions for Certain Classes of Creditors

In light of the scope of the Proposed Rule, the Department asked whether consideration should be given for a limited or complete exemption for an insured depository institution or insured credit union.

Many comments argue in favor of providing a complete exemption for a supervised financial institution.

Indeed, the Associations appear to tie their support for broadening the scope of the definition of consumer credit with an exemption for insured depository institutions.

One association representing credit unions cautions against the “unintended consequences [of the Proposed Rule] for credit unions,” which that association contends “could jeopardize extension of some consumer credit to [Service] members and their families.”

This association urges the Department to provide a blanket exemption for “credit unions and other depository institutions.”

Likewise, other associations representing credit unions argue that credit unions should be exempt from the regulation because (i) “credit unions are not predatory lenders,” (ii) “already have very high compliance burdens” under other laws and regulations (implemented and enforceable by other agencies), and (iii) of “the highly regulated and relatively limited nature of their operations.”

79 FR 58610 (QUESTION 4).

See, e.g.,

Iowa Credit Union League, Nov. 28, 2014, at 1; L. Chanin, Dec. 23, 2014, at 2 (supporting an exemption for “federally-supervised depository institutions”); Bellco Credit Union, Dec. 19, 2014, at 2-3 (supporting an exemption for “federally-insured credit unions”). However, other comments argue that the regulation should not distinguish between types of creditors; instead, the regulation should distinguish between types of loans or between certain features of loan products.

See, e.g.,

Nat'l Installment Lenders Assoc., Dec. 9, 2014, at 6.

Associations, Dec. 18, 2014, at 8.

Missouri Credit Union Assoc., Nov. 25, 2014, at 1.

Missouri Credit Union Assoc., Nov. 25, 2014, at 2-3.

See also

The Wisconsin Credit Union League, Dec. 4, 2014, at 1-2.

African-American Credit Union Coalition, Credit Union National Assoc., Defense Credit Union Council, Nat'l Assoc. of Federal Credit Unions, and the Nat'l Assoc. of State Credit Union Supervisors (the “Credit Union Associations”), Dec. 22, 2014, at 1-3.

One credit union argues:

Simply stated, there is a critical and growing need for short-term credit among our military and the working class families that make up the majority of [the credit union's] constituents. . . . [T]he reality is that over 40% of [the credit union's] military members survive on less than $30,000 per year. They have financial emergencies. An unexpected illness, an emergency vehicle repair, or a loss of income in the family often strikes at the worst possible time. Yet, most have no ability to qualify for a traditional loan or credit card due to poor and insufficient credit history. In order to make ends meet, short term credit is the only option. And when there is demand the market will provide an outlet to satisfy that demand. The question for the [Department] then is what market is most appropriate to address this demand. Payday lenders that have shown time and again the ability to circumvent any regulatory attempt to control their lending practices and cap excessive finance charges? Or highly regulated not-for-profit cooperatives that are controlled by the very same members we serve? The [Proposed Rule] makes no distinction between the various players in the market and therefore must not be enacted.

Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 1.

This credit union argues that if the Proposed Rule were to be implemented, covered borrowers who “require short term credit . . . will lose access to the one sector of the financial industry that places consumer fairness at the core of its mission: credit unions.”

Another credit union states that “[b]ecause we strongly believe our military members should have continued access to the same types of fair credit we offer to all of our members, we respectfully encourage the [Department] to reconsider its [Proposed Rule] in several important ways,” and urges the Department to provide an exemption for “credit unions and other insured depository institutions.”

Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 3. Similarly, Bellco Credit Union asserts that, unlike for-profit financial institutions, “[a]s not-for-profit, cooperatives, credit unions have no incentive to extort money from Service members, or any members.” Bellco Credit Union, Dec. 19, 2014, at 3.

Randolph-Brooks Federal Credit Union, Dec. 23, 2014, at 1.

The Department rejects the view that in considering whether to extend the scope of consumer credit to generally track the credit that is subject to Regulation Z the Department must choose between allowing Service members and their families to obtain credit products and services from insured depository institutions and insured credit unions or shutting them out from access to those institutions. The Department is confident that an insured depository institution or insured credit union that places the fair treatment of its consumers at the core of its mission still could find appropriate methods to provide to covered borrowers credit products that comply with the interest-rate limit and other requirements of 10 U.S.C. 987.

Other comments support providing an exemption for an insured depository institution or insured credit union based on the current framework of regulating these entities. A comment on behalf of certain credit card issuers, for example, contends that “the existing robust regulatory and supervisory framework that applies to federally-supervised depository institutions provides a strong basis for exempting such institutions from the scope of the MLA regulations.”

Commerce Bancshares, Inc. similarly states that the Department should “craft a specific exclusion for insured depository institutions, such as Commerce, because they are highly regulated by their prudential regulators, and already prohibited from engaging in abusive practices.”

L. Chanin, Dec. 23, 2014, at 9.

Commerce Bancshares, Inc., Dec. 24, 2014, at 2.

The Department recognizes that the regulation and supervision of an insured depository institution or insured credit union could be among the criteria that the Department, in its discretion, may apply in defining a “creditor”

that would be subject to the MLA. Various provisions of 10 U.S.C. 987 would permit the Department to determine that a partial or complete exemption is justified because, for example, supervision of an bank, thrift, or credit union could effectively limit or prohibit one or more of the activities that are the object of the restrictions under the MLA.

The Department had recognized, both in 2007 and when issuing the Proposed Rule, that in the course of implementing the protections of the MLA the Department should strive towards comity with other federal laws, including considering whether a partial or complete exemption for one or more types of federally regulated financial institutions should be established in deference to the federal laws that may provide protections that are consonant with those of the MLA.

Alternatively, an exemption based on the regulation and supervision of an insured depository institution or insured credit union might reasonably be based, at least in part, on the interest in avoiding unduly duplicative regulatory requirements.

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

As discussed in section III.B., the Department is authorized to establish one or more appropriate exemptions for specific types of creditors under several provisions of 10 U.S.C. 987, such as 987(h) or 987(i).

The 2013 Act amended 10 U.S.C. 987 to grant enforcement authority to certain agencies (as specified in section 108 of TILA),

indicating that an insured depository institution and insured credit union should be subject to the requirements of the MLA, enforceable by the appropriate supervisory agency. Moreover, as staff of the FTC observe, “[e]xempting some [types of] entities could have unintended consequences, including limiting the protections afforded to [covered borrowers] under the MLA, and placing covered entities that comply with the MLA at a competitive disadvantage.”

126 Stat. 1786.

See

section 662(b) of the 2013 Act.

Staff of the FTC, Dec. 22, 2014, at 5.

Supervision to assess whether a financial institution complies with safety-and-soundness principles or mandates, or even with consumer protection requirements, is designed largely for other purposes, and not directly aimed to lower the costs of credit to covered borrowers in the manner that 10 U.S.C. 987 is expressly designed to do. In light of the terms and structure of 10 U.S.C. 987, as well as the Department's review of the comments submitted on the Proposed Rule, the Department finds, at this time, that there is no adequately strong connection between the supervision of an insured depository institution or insured credit union and restrictions on costs of consumer credit to warrant an exemption from the definition of “creditor” for either type of institution.

In the course of periodically consulting with the Federal Agencies and, as the Department may find to be appropriate, periodically reviewing the scope and effects its regulation, the Department could revisit the factors that could justify a limited or complete exemption in favor of a supervised or federally regulated financial institution.

Nevertheless, supervision to assess compliance by an insured depository institution or insured credit union with safety-and-soundness principles or requirements (or other applicable laws) could provide meaningful benefits to borrowers that are the object of the protections of the MLA.

100

And supervision by the Bureau of covered persons who extend credit for compliance with requirements of applicable federal consumer financial laws is conducted with a view towards providing meaningful benefits to borrowers. Accordingly, as discussed in section III.D.2., the Department concludes that supervision of an insured depository institution or insured credit union under applicable federal law is an important element in support of a targeted exclusion from the requirements for computing the MAPR to allow a charge by that type of entity for an application fee for a qualifying closed-end loan.

100

Similarly, supervision of financial-institution licensees by one or more state regulatory agencies for compliance with state laws, including safety-and-soundness requirements and consumer protection laws, could provide benefits to borrowers.

D. Application or Participation Fees

1. In General

Many commenters urge the Department to modify the definition of consumer credit set forth in the Proposed Rule to accommodate schemes that many financial institutions use involving a fixed fee, commonly an `application' or `processing' fee, plus an interest-rate charge. As one commenter explains:

The ability to offer small-dollar loans, open or closed-end, most often requires assessing a fixed fee in conjunction with higher interest rates to recover costs. As an example, an application fee is charged to offset underwriting requirements, which include accessing credit bureaus, decision processing (automated or manual), and regulatory notifications, for an approved or denied loan. . . . This balance between fixed fee and reduced interest earnings allows a banking institution to recover its costs and continue its small-dollar lending. It must be noted that the above example is illustrative of how banking institutions recover costs, not generate significant income, from small-dollar lending.

101

Assoc. of Military Banks of America, Dec. 18, 2014, at 2.

The Department has no occasion to dispute this account of how financial institutions could structure credit products, particularly small-dollar loans, to borrowers. Similarly to the way that a saver uses separate envelopes to allocate cash for different purposes (

e.g.,

groceries, fuel), a bank or credit union could split its revenue between fixed fees, periodic interest, and other charges, nominally associated with different phases of a credit transaction or account (

e.g.,

origination, servicing, regulatory compliance). But from the perspective of the covered borrower who is the focus of protection under 10 U.S.C. 987, the financial institution's own apportioning of revenue among the various `fees' and `interest' does not change the key fact that it is all part of an aggregate bundle of costs “associated with the extension of credit.”

102

10 U.S.C. 987(i)(3) (defining the term “interest,” in relevant part, to “include[ ] all cost elements associated with the extension of credit”).

The Department remains concerned that if an application fee or participation fee were to be excluded from the elements that must be included in the calculation of the MAPR (under § 232.4(c))—the principal basis of the NCUA's argument to provide an exclusion for a PAL made in accordance with its regulation

103

—a creditor would have a strong incentive to evade the interest-rate limit by shifting the costs of a credit product by offering an interest rate below that limit and imposing (or increasing) one or more of those fees. Moreover, the Department believes that a creditor could attempt to impose an application or processing fee—regardless of whether formally tied to or nominally associated with the costs of processing the application—in order to obtain revenue that replaces (or pre-funds) periodic interest revenue, particularly for a covered borrower whose creditworthiness is low (and who thus has a higher risk of defaulting on periodic interest).

104

One credit union, for example, explains that its own small-dollar credit product includes an “annual fee” that “replaces traditional underwriting and is used to offset the historical default rate of nearly 10%, thereby making the product financially sustainable”—for the credit union.

105

103

NCUA, Dec. 16, 2014, at 6.

104

The Department does not mean to imply that, when providing a PAL, a credit union would not conform to its underwriting standards.

See

12 CFR 701.21(c)(2)-(3) (requiring a Federal credit union to establish written policies for making loans or establishing lines of credit and to keep a credit application on file for each borrower supporting the credit union's decision to make the loan or establish the line of credit); 701.21(c)(8) (requiring a Federal credit union to implement appropriate underwriting guidelines for minimizing risk, including when making PALs, by, for example, “requiring a borrower to verify employment by producing at least two recent pay stubs”).

105

Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 2.

See also

Assoc. of Military Banks of America,

Dec. 18, 2014, at 2 (stating that the “fixed cost [relating to origination] may be much higher on a small-dollar loan amount” and that small-dollar loans have “higher delinquency rates”).

The Department observes that 10 U.S.C. 987(b) and the provisions that define “annual percentage rate” and “interest” which are integral to that interest-rate limit, taken together, are designed to thwart high cost lending to Service members and their families—not solely loan products that carry the very highest costs. Accordingly, and consistent with its authorities to prescribe “consumer credit” and the method for computing the MAPR of “interest,” the Department concludes that, in general, an application fee charged to a covered borrower must be accounted for when computing the MAPR.

2. Exclusion for Application Fee Charged by a Federal Credit Union or Insured Depository Institution When Making a Qualifying Closed-End Loan

The NCUA states (and many credit unions share the NCUA's view) that a PAL structured in accordance with the NCUA's regulation

106

for that product likely could not be provided by a credit union to a covered-borrower member in many cases in which such loans would otherwise be made, because, given the short duration of such loans, the total charge for the PAL, which is a function of the periodic interest charged plus the application fee, would exceed the interest-rate limit of the MLA.

107

The NCUA notes that, under its regulation, a credit union may charge an application fee that “reflects the actual costs associated with processing the application, not to exceed $20,”

108

and that the NCUA interprets the relevant provision of the Federal Credit Union Act (“FCU Act”) so that the term “finance charge” does not include an application fee, consistent with the interpretation of finance charge under Regulation Z.

109

Because of the treatment of an application fee under the Proposed Rule, which is at variance with the treatment of that fee under the NCUA's regulation for a PAL, the NCUA urges the Department to adopt a final rule that contains an exemption for a PAL. Similarly, an association representing credit unions argues that credit unions are different from other types of financial institutions, in part, because the FCU Act imposes a statutory limit on the interest rate that a credit union may charge for a loan,

110

and (if adopted) the Proposed Rule “could provide a challenge for credit unions to provide small-dollar loans because of the change in definition of finance charge and how it relates to how the MAPR is calculated.”

111

The NCUA “respectfully submits that a PAL with a military APR exceeding 36 percent is still a responsible credit product and that PALs should not be subject to the [interest-rate limit of the MLA].”

112

106

12 CFR 701.21(c)(7)(iii).

107

NCUA, Dec. 16, 2014, at 6.

108

NCUA, Dec. 16, 2014, at 4.

109

NCUA, Dec. 16, 2014, at 6.

110

Nat'l Assoc. of Federal Credit Unions, Dec. 23, 2014, at 2.

111

Nat'l Assoc. of Federal Credit Unions, Dec. 23, 2014, at 3.

112

NCUA, Dec. 16, 2014, at 6.

Even though the Department has determined that an application fee fits within the (ambiguous, but broad) definitions of “interest” and “annual percentage rate” in the MLA, the Department also recognizes that the FCU Act establishes an express restriction on the amount of interest that a federal credit union may charge to a member-consumer,

113

which is comparable to the interest-rate limit of the MLA. The Department concludes that this federal law warrants a measure of respect or comity. More broadly, there is an appropriate federal interest in implementing the requirements of the MLA, to the extent practicable, in a manner designed to promote due comity with, as well as to avoid direct conflict with, other federal laws or federal regulations which are expressly intended to regulate the cost of credit extended to consumers.

114

The Department concludes that in the case of a short-duration loan, which squarely presents arithmetic obstacles for any creditor who must simultaneously comply with the MLA and an annual interest-rate limit set by another federal law or a comparable federal regulation addressing the cost of credit, the express restriction on the amount of interest that may be charged to a borrower under that other federal law or federal regulation should not be disregarded in the course of the Department's implementation of the MLA.

113

12 U.S.C. 1757(5)(A)(vi).

114

Under Executive Order 12866, the Department must, to the extent permitted by law and where applicable, take care to avoid prescribing a rule that is “inconsistent, incompatible, or duplicative with its other regulations or those of other Federal Agencies.” Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993), § 1(b)(10).

After review of comments on the Proposed Rule—including those contending that PALs are necessary forms of short-term, small-dollar loans (complete with the charge of an application fee) for covered borrowers

115

—the Department expresses no view on the potential benefits for a covered borrower from a short-term loan provided by a federal credit union or insured depository institution. Still, the Department is mindful that the charge of an application fee, though permissible under other law, poses a cost to a covered borrower, and when combined with the interest rate the overall cost to the borrower from a loan extended by a federally supervised bank or credit union still could exceed the interest-rate limit of the MLA. Nonetheless, the Department elects to exercise its discretion under 10 U.S.C. 987(h) and 987(i)(6) to implement the requirements of the MLA in a manner that affords comity with other federal laws that expressly limit the costs of credit products that may be provided to covered borrowers. Accordingly, the Department determines to modify § 232.4(c)(1) to contain an exception that allows a “Federal credit union” or an “insured depository institution”—as those terms are defined in § 232.3—to exclude from the computation of the MAPR an application fee charged when making a “short-term, small amount loan,” which is defined in § 232.3(t).

115

See, e.g.,

Nat'l Assoc. of Federal Credit Unions, Dec. 23, 2014, at 3 (“Many of these types of loans are loss-leaders in credit unions and are offered strictly for the benefit of their members who are in need of short-term [,] small-dollar alternatives to payday lenders. . . . Also, these types of loans give credit unions another opportunity to work with members to get them back into the traditional banking system and away from unregulated or under-regulated predatory actors.”).

Consistent with the Department's policy to implement the requirements of the MLA in a manner that affords comity with other federal laws that expressly limit the interest rate of credit products that may be provided to covered borrowers, the Department adopts the exclusion in § 232.4(c)(1)(iii)(B) to apply to the FCU Act and to other similar federal laws that apply to insured depository institutions. In particular, the exclusion would apply to a closed-end loan that is “[s]ubject to and made in accordance with a Federal law (other than the [MLA]) that expressly limits the interest rate or cost that a Federal credit union or an insured depository institution may charge on an extension of credit.”

116

In defining that closed-end loan, the Department has established the further condition that the limitation “in that law is comparable to a limitation of an annual percentage rate of interest of 36 percent.”

117

The language in

§ 232.4(c)(1)(iii)(B)—“other than an application fee charged by a Federal credit union or an insured depository institution when making a short-term, small amount loan”—is not limited to an extension of credit by a federal credit union that is subject to the FCU Act. This provision, therefore, provides comity to not only the FCU Act, but also to federal laws applicable to other insured depository institutions if the laws were to be enacted to include a cost limitation comparable to the MLA on loans made to the general public.

116

12 CFR 232.3(t)(1) (prescribing a new definition for a “[s]hort-term, small amount loan”).

117

Id.

At this time, the Department has crafted the exclusion in § 232.4(c)(1)(iii)(B) only with respect to a closed-end loan subject to a “Federal law (other than 10 U.S.C. 987) that expressly limits the rate of interest”

118

that a qualifying creditor may charge for the loan. The Department recognizes that, over time, the landscape of federal requirements designed to limit finance charges or other costs of credit to consumers could be altered, particularly by the adoption of new regulations applicable to creditors, notably federal credit unions and insured depository institutions. If new regulations that sanction types of short-term or small-dollar loans involving application fees (or similar charges) are implemented by one or more federal agencies, the Department could reevaluate the contours of the exclusion for an application fee for a short-term, small amount loan.

118

32 CFR 232.3(t)(1).

The exclusion from the elements required to be included when computing the MAPR applies to an application fee charged when making a “short-term, small amount loan,” defined in § 232.3(t). As a matter of deference to FCU Act and the NCUA's authorities under that Act, this new term is designed to contain certain elements of the short-duration, closed-end loan product prescribed by the NCUA's regulation

119

that the Department finds are integral for protecting a covered borrower and, at the same time, may be stated generally so that insured depository institutions also could be eligible for the exclusion.

119

12 CFR 701.21(c)(7)(iii).

First, § 232.3(t)(2)(i) provides that the relevant law or rule must contain “[a] fixed numerical limit on the maximum maturity term, which term shall not exceed 9 months.” The short duration of the loan is the key arithmetic predicate for the exclusion for the application fee, and the Department has arrived at the upper boundary by selecting a maximum term which is fifty percent greater than the maximum term permitted under the NCUA's regulation.

120

This subparagraph sets the maximum term of the closed-end loan to the lesser of (i) the fixed numerical limit established by the federal law or rule that the creditor must comply with or (ii) 9 months.

120

12 CFR 701.21(c)(7)(iii)(2).

Second, the condition in § 232.3(t)(2)(ii), namely, that the “law or rule contains a fixed numerical limit on any application fee that may be charged to a consumer who applies for such closed-end loan,” is consistent with one of the key conditions in the NCUA's regulation.

121

The limitation on the amount of the application fee that a federal credit union may charge to a covered borrower flows from the NCUA's considered judgment regarding how to implement the provisions of the FCU Act. The Department's determination to accommodate, to this extent, the structure of a PAL, and similar federal laws that may be adopted, does not require a broader scope of exception from the general MAPR approach.

122

121

12 CFR 701.21(c)(7)(iii)(7).

122

In the process of assessing whether to provide an exclusion from the elements that must be included when computing the MAPR for an application fee, the Department has considered whether to establish (

e.g.,

in § 232.3(t)) a fixed numerical limit or a percentage-based limitation (

e.g.,

a limit based on a percentage of the credit to be extended or the amount of available credit for an open-end credit account) for that fee. The Department believes that there are benefits associated with directly establishing a fixed limit on the amount of the application fee that a creditor could charge, and the Department retains the discretion to adjust this aspect (as well as related aspects) of the rule, as may be appropriate. However, at this time, the Department concludes that the language in § 232.3(t) stating that the “law or rule [must contain] a fixed numerical limit on any application fee that may be charged” accomplishes the central purpose of the desired limit and, equally importantly, is designed so that these particular requirements under the MLA afford comity with that other federal law or rule which imposes the same type of limit.

In addition to defining the “short-term, small amount loan” so that the creditor making the qualifying closed-end loan product must adhere to certain conditions integral for protecting a covered borrower, the Department has established a restriction on the number of times that a creditor may impose an application fee without being required to include that fee when computing the MAPR. Under § 232.4(c)(1)(iii)(B), a creditor who is a federal credit union or insured depository institution is not required to include in the MAPR an application fee charged for the qualifying closed-end loan product if the creditor charges the fee only once “in any rolling 12-month period.”

123

The fee is, after all, an “application fee,” and if a covered borrower seeks to obtain a second or third of these short-duration loans during one year, the creditor already knows who the borrower is and reasonably could be expected to have on file information bearing on the covered borrower's creditworthiness. In the Department's judgement, there is no adequate basis—consistent with the interest-rate limit of 10 U.S.C. 987(b) and the other terms of the MLA relating to that limit—for allowing a creditor to repeatedly exclude an application fee from the computation of the MAPR for multiple closed-end loans, each of which is structured to be repaid within a matter of months. If a creditor charges a second application fee to a covered borrower who applies for a second short-term, small amount loan within that same 12-month period, then that second fee (and any subsequent application fee charged during that period) is not eligible for the exclusion and must be included when computing the MAPR for that loan.

123

The Department has considered whether to establish (

e.g.,

in § 232.3(t) or in § 232.4(c)(1)(iii)(B)) a more restrictive limit on the number of times a creditor may charge an “application fee.” For example, the Department has considered whether to adopt a condition on the exclusion that would restrict a creditor from charging an application fee not more than once in any two calendar years or not more than once for any covered borrower. The Department believes that there could be benefits associated with a more restrictive limit on the exclusion from this required element of the MAPR, and the Department retains the discretion to adjust this aspect (as well as related aspects) of the rule, as may be appropriate.

The upshot is that even though at this time the Department declines to adopt a general exemption for a federal credit union or an insured depository institution, the Department adopts new terms (notably, in §§ 232.3(t) and 232.4(c)(1)(iii)(B)) that allow either type of entity to exclude an application fee from the computation of the MAPR for a qualifying closed-end loan. By crafting this targeted exclusion, the Department affords comity to the FCU Act and similar federal laws, and nonetheless adopts a final rule that requires a federal credit union (or insured depository institution, as the case may be) to comply with the other MLA conditions when making a short-term, small amount loan.

The Department has considered other approaches that would afford comity with the FCU Act or other similar federal laws. For example, the Department has considered whether, as the NCUA and other comments argue, a PAL should be wholly excluded from the scope of “consumer credit,” and the Department concludes that that would be a step too far. In the Department's judgment, the Department may exercise

its discretion, out of comity toward other federal programs, to make some accommodation toward the provisions of those programs—but such comity does not require accommodating every aspect of such other programs, without any reciprocal accommodation of requirements under such other programs in the direction of MLA standards.

E. Conditional Exclusion for Credit Card Accounts

1. In General

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. Many commenters echo the Department's own recognition and underscore that a typical creditor that issues a credit card would be required to revamp the fee, terms, and other conditions for that credit product when offering it to a covered borrower or, more drastically, disqualify a covered borrower from opening that credit card account. One commenter, for example, offers the view that the Proposed Rule would, if adopted, “have a material and substantial impact on thousands of credit card issuers who must redesign technology, sales processes, and business strategies while incurring significant legal risk to comply with a proposal that affords Service members no increased protections.”

124

Schwartz & Ballen LLP, Dec. 24, 2014, at 4.

See also

Associations, Dec. 18, 2014, at 56-57 (describing some examples of types of costs that could be incurred when a creditor provides a credit card account to a covered borrower, and stating that “[w]hile we do not have exact costs, implementing, running and maintaining a shadow control process for MAPR compliance”—including for credit card accounts whose transaction fees could be subject to an exemption under § 232.4(d)—“will be in the millions of dollars for the larger banks and a comparably expensive redundancy for community banks”).

In this regard, when issuing the Proposed Rule the Department requested that interested parties “provide specific data relating to the benefits and costs of amending the regulation, including costs to implement measures to adjust computer systems and to train personnel. . . . Please provide information on the type of costs and the magnitude of costs by providing relevant data and studies.” 79 FR 58626. The Department does not dispute the views (as expressed in these two, as well as in other, comments) that creditors will encounter certain costs to adjust their business operations in order to comply with the interest-rate limit and other requirements of the MLA. Nonetheless, the comment from Schwartz & Ballen LLP offers no data in support of its view, and the Associations offer scant data.

As the Department explained when issuing the Proposed Rule, 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 or, as discussed above, a combination of an `application' fee and a periodic rate), 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.

Comments on the Proposed Rule do not dispute that the cost of the funds borrowed in a credit card account can be segregated from the fees that a creditor expressly ties to specific products or services for using the credit card itself. For example, a foreign transaction fee that applies when the cardholder tenders the card for a purchase made outside of the United States can be segregated from the interest charge that the creditor may impose for the funds loaned to make that purchase. Even though some of these fees might appear to be relatively high under certain circumstances, the Department believes that the costs of bona fide fees expressly tied to specific products or services which may be imposed upon the covered borrower's own choices regarding the use of the card can meaningfully be distinguished from the cost of borrowing itself. 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 covered borrowers, especially because 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 those covered borrowers.

125

See, e.g.,

Associations, Dec. 18, 2014, at 37 (In the context of addressing the application of the Proposed Rule to open-end credit, particularly credit cards, the Associations state: “Given the challenges, complexities, and costs of creating a system to segregate a small minority of customers, calculate the MAPR, and waive fees, especially when coupled with all of the other provisions in the [Proposed Rule] and the accompanying risk, a rational choice for individual lenders or the market as a whole might be simply not to make those products available to covered borrowers or not offer covered consumer credit to anyone.”).

The Department also continues to believe that credit card products warrant special consideration under the MLA because comparable protections for consumers who use these products separately apply under the CARD Act. For example, the CARD Act, as implemented by the Bureau's Regulation Z, generally prohibits a card issuer from opening a credit card account or increasing the credit limit on an existing account without considering the consumer's ability to repay the amount borrowed on the account.

126

The CARD Act 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.

127

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.

128

126

15 U.S.C. 1665e; 12 CFR 1026.51(a) (effectively requiring a card issuer to consider whether a consumer can “make the required minimum periodic payments under the terms of the account based on the consumer's current income or assets and the consumer's current obligations”).

127

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

128

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

Several comments state that the CARD Act provides substantial protections to consumer-cardholders and that the protections under that law are sufficient to justify a wholesale exclusion from the definition of consumer credit for credit card accounts. One commenter, for example, explains that the prohibition against opening a credit card account or increasing the credit limit on an existing account without considering the consumer's ability to repay “helps prevent [covered borrowers] from obtaining credit that they may find difficult to repay.

129

A comment on behalf of certain credit card issuers concludes that “[b]alancing these costs against the benefits should lead to the conclusion that imposition of special rules for credit card lending to active duty service members is not justified or appropriate in light of the significant consumer protections already in place as a result of the CARD Act.”

130

The Associations even go so far to state:

“Though Congress created these broad consumer protections when it passed the CARD Act in 2009, what it did not do was expand application of MLA to credit cards, even though they were exempt from the MLA at that time.

131

If Congress had felt it necessary to apply MLA to credit cards, it could and would have done so in 2009.”

132

129

Schwartz & Ballen LLP, Dec. 24, 2014, at 3.

130

L. Chanin, Dec. 23, 2014, at 12.

131

Associations, Dec. 18, 2014, at 19. On this claim, the Associations do not cite the provision of 10 U.S.C. 987 (or other law) that had provided an “exempt[ion]” for credit card accounts.

132

Associations, Dec. 18, 2014, at 19. The Association's argument is curious because the contrary inference appears to be more compelling. When Congress enacted the CARD Act (and again when Congress enacted the 2013 Act), Congress declined to amend 10 U.S.C. 987 in order to provide a partial or complete exemption from the scope of “consumer credit” for a credit card account that is subject to the CARD Act; thus, a reasonable interpretation of 10 U.S.C. 987 in light of the enactment of the CARD Act is that a credit card account appropriately should be regulated as “consumer credit,” subject to the Department's authorities to prescribe regulations that may include conditions or criteria applicable to a credit card account.

See, e.g.,

10 U.S.C. 987(h)(2)(D)-(E).

Even though the CARD Act provides certain protections for all consumers that are not inconsistent with overarching objectives evident under the MLA, the Department has determined, at this time, that the interest-rate limit and other requirements of the MLA should not be completely set aside in reliance on the CARD Act for covered borrowers. The Department continues to believe 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.

133

In this regard, forty U.S. Senators support the Department's “comprehensive approach” because, they believe, this approach “is essential to preventing future evasions.”

134

Nevertheless, the Department recognizes the benefits of implementing the protections of the MLA in a manner that balances the interests of limiting credit practices that have an adverse impact on covered borrowers without unduly impeding the availability of credit that is benign or beneficial to those borrowers. Accordingly, the Department is adopting a final rule that: (1) Contains a qualified exclusion from the requirements relating to the computation of the MAPR for a credit card account for a fee that is both “bona fide” and “reasonable” for that type of fee; and (2) temporarily provides a complete exemption from the definition of “consumer credit” for credit extended to a covered borrower under a credit card account.

133

In this regard, the New York State Department of Financial Services (NY Dep't Financial Services) argues that the Proposed Rule “falls short” of providing appropriate consumer protections intended by the MLA, in part, because “undefined `bona fide' fess [would not be] included in the calculation of the [MAPR], which could allow lenders to charge exorbitant interest rates under the guise of permissible fees.” NY Dep't Financial Services, Dec. 24, 2014, at 3.

134

Sen. Jack Reed et al., Nov. 25, 2014, at 1.

Even though the Department's general policy is to avoid, when possible, creating regulatory gaps in the framework for 10 U.S.C. 987, the Department believes that, for a definite period of time as set forth in the rule, consumer credit under the MLA should not include credit extended to a covered borrower under a credit card account under an open-end (not home-secured) consumer credit plan. However, when the exemption for a credit card account expires, this form of consumer credit would 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 under § 232.4(d).

135

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 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).

2. Standards for Exclusion for Bona Fide Fees

Section 232.4(d) of the final rule allows 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 for that type of fee.

Among other comments on the proposed exclusion for a bona fide fee, many focus on the provision that would have required the fee to be “customary” in order to be excluded from the MAPR. In criticizing this aspect of the Proposed Rule, commenters believe that this condition could thwart innovation because a creditor would not be able to show that a fee for a newly-designed product or service for a credit card is “customary.”

136

Even though the Department believes that this type of criticism is misplaced,

137

the Department has determined to omit this condition from the final rule.

136

See, e.g.,

Associations Dec. 18, 2014, at 38 (“First, a fee that few or no other creditors charge is tautologically `not customary' and consequently will be deemed ineligible for the exception.”).

137

The Associations, for example, fail to recognize that the Department's rule does not affect the extent to which a creditor could charge fees on consumers who are not covered borrowers. Under the Proposed Rule, if creditors would have succeeded in the huge marketplace of non-covered borrower cardholders in making a fee for a novel or innovative service “customary” (or in making the fee itself “customary”)—that is, commonly used or encountered—then a creditor would have been permitted to claim that that type of fee would qualify as “customary” in a credit card account for a covered borrower. This dimension of the conditional exemption remains relevant because, under § 232.4(d)(3)(ii)-(iv), a creditor is permitted to rely on practices and amounts used by other creditors in the huge marketplace of non-covered borrower cardholders when assessing whether a fee charged by that creditor to a covered borrower is “reasonable.”

The Department believes that the conditions for excluding a bona fide fee from the MAPR—namely, that the fee must be bona fide and “reasonable”—fairly allows 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. A conditional exclusion is designed to bar a creditor from transforming 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 final rule, a creditor who imposes a fee that is not bona fide or unreasonable in a credit card account for a covered borrower 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 ” condition for a bona fide fee should 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 bona fide, specific products or services and which vary depending upon the Service member's own choices regarding the use of the card.

Sections 232.4(d)(3) provides 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.”

3. Like-Kind Fees

Section 232.4(d)(3)(i) provides 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 is appropriate because a creditor should not be permitted to assess the

reasonableness of a fee for, say, a balance-transfer service based on the fees that other creditors charge for cash-advance services.

A comment on behalf of certain credit card issuers contends that the like-kind standard is “not workable in practice because it disregards the fact that there can be significant differences between issuers' credit cards and fails to provide a clear basis for determining what constitutes a comparable product or service.”

138

On this point, the comment for these credit card issuers presents two principal arguments.

139

First, the comment raises a series of rhetorical questions relating to potentially different features of “rewards programs,” and asks “[h]ow will a [creditor] determine whether a fee imposed in connection with its rewards program is substantially similar to, or the same as, another issuer's rewards program?” The like-kind standard does not require a creditor to compare its rewards program to other

rewards programs,

per se; rather, the like-kind standard requires a creditor to assess the reasonableness of the

fee

charged for its rewards program to the fees charged by other creditors for their rewards programs, respectively. In this way, the like-kind standard does not allow a creditor to compare a “rewards program fee” (an amount other than zero) to the “foreign transaction fee” charged by another creditor (which could be, say, three percent of the amount of the purchase) in order to assess whether its reward program fee is reasonable under § 232.4(d)(1). Moreover, in the case of a creditor that imposes a fee for participation in a credit card account that includes a “rewards program,” the creditor is permitted under § 232.4(d)(3)(iv) to assess the reasonableness of the participation fee by taking into account the potential value of any `rewards points' that may be awarded to a covered borrower.

138

L. Chanin, Dec. 23, 2014, at 16.

139

L. Chanin, Dec. 23, 2014, at 16-17. The comment also raises a question regarding whether a creditor (say, Bank A) that issues its credit card on one payment network (

e.g.,

MasterCard) is “the same as” a card that another creditor (Bank B) issues on another payment network (

e.g.,

American Express). However, the comment fails to describe (or is at least incomplete as to) whether either creditor charges a fee to the cardholder that is connected to the bona fide service of processing payments over a given network. Nevertheless, assuming that the comment's example is pertinent, if Bank A charges a “payment network fee” to a covered borrower for the use of the MasterCard network to process payments on that card, then Bank A must compare the amount of that fee to the “payment network fees” charged by other creditors in order to assess whether that fee is reasonable under § 232.4(d)(1).

Second, the comment on behalf of these credit card issuers observes that creditors “treat specific types of transactions differently and the imposition of a fee for a particular type of transaction is not the same across all [creditors].” The like-kind standard does not contain a presumption that a creditor's assessment of a fee for a product or service must be relative to the product or service that is identical across all creditors; rather, the like-kind standard is designed to guard against the possibility that a creditor could improperly assess its (high) fee for one service (or type of transaction) relative to the (lower) fees charged by other creditors for a service (or type of transaction) that is different in kind. By describing the comparison to be made as between “the same

or substantially similar

product[s] or service[s]” (emphasis added), the Department expects creditors in the marketplace of credit card accounts to charge certain fees tied to products or services that, despite variances, can be classified in a manner that would allow a creditor to fairly assess the reasonableness of its bona fide fees. In order to illustrate their apparent confusion regarding the application of the like-kind standard under § 232.4(d)(3)(i), the comment on behalf of these credit card issuers offers this example:

Different [creditors] treat different types of transactions as a `cash advance' transaction. For example, some [creditors] treat transactions involving traveler's checks, money orders or gift cards as a cash advance transaction because those [creditors] consider those transactions to be `cash equivalents' while other [creditors] do not. Under the [Proposed Rule], if [Creditor A] assesses a cash advance fee for four types of transactions, and [Creditor B] assesses a cash advance fee for only two of the four types of transactions, it is not clear whether [Creditor A] or [Creditor B] could deem their fees to be `like-kind' fees.

Of course they could. More precisely, § 232.4(d)(3)(i) would allow Creditor A to assess the reasonableness of the `cash advance' fee that applies to all four types of transactions by comparing its fee to the fee charged by another group of creditors who cover fewer than those transactions within their own structures of fees. Sections 232.4(d)(1) and 232.4(d)(3)(i) do not require a strict correlation among comparators. Even though each transaction that Creditor A classifies in its cardholder agreement as subject to a `cash advance' fee has distinctive features bearing on a payment (

e.g.,

a traveler's check provides for a countersignature by the consumer-purchaser of the check when he or she negotiates the check), all of the transactions fit within the same class because each allows the cardholder to tender an item or instrument as if it were cash (and instead of the credit card itself). In this way, Creditor A would be permitted to assess the fee it charges for selling a traveler's check as a bona fide `cash advance' fee and compare the amount of that fee to the amount that Creditor B charges for the sale of a gift card—even if Creditor B does not use the same label of `cash advance' fee for that transaction.

To provide additional clarity on the application of the like-kind standard, the Department has modified § 232.4(d)(3)(i) by adding the statement: “Conversely, when assessing a foreign transaction fee, that fee may not be compared to a cash advance fee because the foreign transaction fee involves the service of exchanging the consumer's currency (

e.g.,

a reserve currency) for the local currency demanded by a merchant for a good or service, and does not involve the provision of cash to the consumer.”

4. Safe Harbor

Section 232.4(d)(3)(ii) provides 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 of whose U.S. credit cards in force is at least $3 billion in an outstanding balance (or at least $3 billion in loans on U.S. credit card accounts initially extended by the creditor) at any time during the 3-year period preceding the time such average is computed.” In this regard, the Department has modified § 232.4(d)(3)(ii) to clarify that a creditor may meet the $3-billion threshold even if the creditor has sold the credit card loans to a special-purpose vehicle or entered into another arrangement so that securities backed by the loans may be issued. 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, as proposed, the Department has adopted language in the provision (“an average” of an amount charged by “5 or more creditors”) that allows a creditor to select any group of 5 or more credit card issuers who each have the qualifying amount of 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.

140

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 met the $3-billion threshold 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 meets the $3-billion threshold, then the creditor's bona fide fee is reasonable for the purposes of the exclusion.

Section 232.4(d)(3)(ii) sets a threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts held by a credit card issuer (or at least $3 billion in loans on U.S. credit card accounts initially extended by the creditor) 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 has adopted the use of a minimum of 5 credit card issuers, each of whom meet the $3-billion threshold, 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 has concluded that a $3 billion threshold of 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 (or had initially had originated more than $3 billion of 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 do not meet the $3-billion threshold 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 representative sample of the marketplace.

The Department also has adopted, as proposed, 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 is designed to 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 3-year period is expected to 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 is expected to provide adequate time for the Department to amend the threshold or safe harbor, as may be necessary.

141

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.

142

Indeed, subject to certain conditions, TILA, as amended by the CARD Act, requires a creditor to maintain an internet site on which the creditor must post its written agreement with a cardholder, and must provide that agreement to the Bureau to be made publicly available on the Bureau's site.

143

142

See, e.g.,

the solicitations available at

https://creditcards.chase.com

143

15 U.S.C. 1632(d).

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

144

and Call Reports

145

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 § 232.4(d)(3)(ii).

144

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

145

Call Reports for institutions insured by the FDIC 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 NCUA'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 § 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 § 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.

5. Reasonable Fee

Section 232.4(d)(3)(iii) provides 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 has adopted 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.”

6. Reasonableness for a Participation Fee

Consistent with the Department's policy that the “reasonable” amount of a bona fide fee is a standard designed to be applied flexibly, § 232.4(d)(3)(v) provides 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, § 232.4(d)(3)(v) provides a standard stating that “[a]n amount of a bona fide fee for participation in a credit card account may be reasonable . . . if that amount reasonably 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.”

F. Assessment of a Covered Borrower

1. In General

Many comments on the Proposed Rule focus on the transition in the method that a creditor could use to determine whether an applicant is a covered borrower. The Department continues to be keenly aware of the practical implications of offering a safe harbor relating to a creditor's assessment of an applicant to determine whether a credit transaction or account is subject to the Department's rule implementing the protections of the MLA. Nonetheless, nothing in 10 U.S.C. 987 mandates the provision of any safe harbor for a “covered-borrower check;” the Department elects to maintain the existence of a safe harbor in § 232.5 in the exercise of the authorities granted to it in the law.

In their comment on § 232.5 of the Proposed Rule, the Associations incorrectly state that there would be a “requirement for lenders to query the Department's [MLA Database]. . . .”

146

Many other commenters similarly err:

147

Neither the Department's existing rule nor the Proposed Rule would have required a creditor to take any action to assess whether any consumer-applicant is a covered borrower. And nothing in the Department's final rule requires a creditor to conduct a covered-borrower check. Moreover (if the creditor elects to conduct that check), the final rule does not prescribe any method for a covered-borrower check.

146

Associations, Dec. 18, 2014, at 27. The thrust of the Associations' criticism in this sentence is that the use of the MLA Database would “overtax an already unreliable system and inconvenience all consumer credit applicants.” The Department addresses this criticism by allowing a creditor to use the existing safe harbor for up to one year after the effective date of the final rule.

See

12 CFR 232.13(b).

147

See, e.g.,

Penn State Federal Credit Union, Dec. 12, 2014, at 1 (“The method of identifying servicemembers and dependents to comply with the rule should be changed. Instead of forcing lenders to check the [MLA Database] for every extension of consumer credit to any individual, servicemembers and dependents could self-identify.”); Small Business Administration (“SBA”) Office of Advocacy, Dec. 18, 2014, at 4 (“Requiring small entities to check every customer to determine if he or she is a military member or a military dependent could become burdensome. The business may need to train its staff on how to use the [MLA Database]. If the [MLA Database] is not operating, the small entity may lose a non-military customer while it is trying to ascertain whether the customer is a covered borrower.”)

To underscore the Department's consistent policy regarding a covered-borrower check, the Department has modified § 232.5 to state, at the outset: “A creditor is permitted to apply its own method to assess whether a consumer is a covered borrower.”

148

Under the Department's final rule, as under the existing rule and the Proposed Rule, a creditor who seeks to ascertain whether consumer-applicants are covered borrowers may use a “simple check box on credit applications,” as one commenter suggests,

149

or any other method that suits its business operations.

148

32 CFR 232.5(a).

149

Penn State Federal Credit Union, Dec. 12, 2014, at 1.

Nevertheless, the Department still believes that a creditor should be afforded a degree of certainty regarding whether an extension of consumer credit is being made to a covered borrower, and to accomplish that purpose adopts new safe-harbor consistent with the provision contained in the Proposed Rule. The Department continues to believe that the dynamic between creditors and borrowers in actual transactions has led to widespread misuses of the individual's self-certification statement,

150

which also have resulted in adverse effects on Service members or their dependents who make false statements. Accordingly, the Department has adopted a safe-harbor provision designed to relieve a Service member or his or her dependent from making any statement regarding his or her status as a covered borrower

151

in the course of a transaction involving consumer credit. Only if a creditor chooses to have a legally conclusive—but not the only factually conclusive—mechanism to determine whether a consumer seeking to obtain consumer credit is a covered borrower would the creditor need to use one or both of the methods set forth in § 232.5(b)(2), and maintain a record of the information so obtained, as set forth in § 232.5(b)(3).

152

150

As the Department observed when issuing the Proposed Rule, 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. 79 FR 58614.

151

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).

152

In this regard, a creditor would not need to use the MLA Database when processing a consumer's application for a loan that is not consumer credit, such as a residential mortgage loan.

The Department also recognizes the reasonable concerns, raised in many comments on the Proposed Rule, regarding the various interests of creditors in using the MLA Database and the potential costs associated with changing systems for processing consumer credit applications to do so. For example, one commenter expresses the view that a small entity might not have the “financial resources” to use the MLA Database and thus “recommend[s] that small entities be allowed to continue to operate under a safe harbor that requires military members and their dependents to self-identify.”

153

Consistent with the general provision that affords a creditor one year to comply with the requirements of the final rule, § 232.13(b) provides that a creditor may continue to operate under the existing safe harbor for identifying a

covered borrower (as set forth in § 232.5(a) of the regulation established by the Department and effective on October 1, 2007) for up to one year after the effective date of the regulation.

153

SBA Office of Advocacy, Dec. 18, 2014, at 4. Similarly, the Associations contend (though without offering any data that could support their views) that § 232.5 of the Proposed Rule “will impose significant costs on all depository institutions, especially small institutions, related to the necessary changes to operating systems, security, procedures, and staff training, and the continuing costs associated with compliance monitoring and examination.” Associations, Dec. 18, 2014, at 27.

2. Use of MLA Database or Consumer Report Obtained From a Nationwide Consumer Reporting Agency Permitted

The Department adopts a new safe harbor in § 232.5(b) that permits a creditor to legally conclusively determine whether a consumer is a covered borrower by using information obtained either: (i) Directly or indirectly from the MLA Database or (ii) in a consumer report from a nationwide consumer reporting agency or a reseller who provides such a consumer report. If the creditor uses one of these two methods (or both, as the creditor may elect), the creditor's determination would be conclusive with respect to that transaction or account involving consumer credit, so long as the creditor maintains a record of the information so obtained.

As the Department stated when issuing the Proposed Rule, commercial information-services providers reasonably might be anticipated to supply information products to financial institutions that would include covered-borrower checks as part of the products used to process loan applications. Nothing in § 232.5(b)(2)(i) prohibits or restricts a creditor from using a commercially-provided product containing information obtained from the MLA Database to conduct a covered-borrower check.

154

To make this aspect of the rule more clear, the Department adopts § 232.5(b)(2)(i) to state that “a creditor may verify the status of a consumer by accessing information relating to that consumer, if any,

obtained directly or indirectly

from the database maintained by the Department” (emphasis added).

155

154

However, even if the Department's rule implementing the MLA does not restrict a creditor from using a commercially provided information product to conduct a covered-borrower check, a commercial entity seeking to use the MLA Database and to re-sell data obtained from the MLA Database must comply with the terms and conditions for use of the database.

155

Moreover, nothing in § 232.5(b)(2)(i) restricts a consumer reporting agency (including a nationwide consumer reporting agency) from providing information obtained exclusively from the MLA Database.

Nevertheless, several commenters encourage the Department to provide greater flexibility to creditors that may wish to use commercially provided information with underlying data supported by the Department's database. For example, the American Financial Services Association suggests that “[i]f the Department proceeds with the proposed safe harbor, the Department should 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.”

156

In addition to permitting the use of information obtained from the MLA Database, the Department should provide a second method for verifying the status of covered borrowers. In § 232.5(b)(2)(ii), the Department allows a creditor to use information relating to a consumer contained in a consumer report obtained from a nationwide consumer reporting agency, or a reseller of such a consumer report (

i.e.,

a reseller who obtains the underlying report from a nationwide consumer reporting agency). The Department believes that information contained in a consumer report should be permitted to be used for the purposes of the safe harbor in § 232.5(b) because the Fair Credit Reporting Act (“FCRA”)

157

imposes stringent requirements on the assembly of information for, disclosure of, and use of a consumer report; the Department believes that, taken together, these requirements should be sufficient to provide the degree of accuracy necessary for a creditor to make a legally conclusive determination regarding the status of a consumer for purposes of compliance with the MLA. In particular, the Department believes that a covered borrower would not face a material risk of being mis-identified as not having that status by a creditor's use of a consumer report because, under the FCRA, a consumer reporting agency must “follow reasonable procedures to assure the maximum possible accuracy of the information concerning the individual about whom the report relates.”

158

The Department has crafted § 232.5(b)(2)(ii) broadly to allow a creditor to “[use] information relating to that consumer, if any, contained in a consumer report.” Although the MLA Database may be one source of information nationwide credit reporting agencies might draw upon, nothing in this subparagraph requires the information contained in the consumer report bearing on the covered-borrower check to be derived solely from the MLA Database.

159

A creditor may use information contained in a consumer report obtained from a nationwide consumer reporting agency, or from a reseller who obtains the underlying consumer report from a nationwide consumer reporting agency, even if the nationwide consumer reporting agency has developed data from sources other than the MLA Database that bears on the status of the consumer vis-à-vis a covered borrower.

156

American Financial Services Association (“AFSA”), Comment, Dec. 22, 2014, at 16-17. See also, Equifax, Dec. 26, 2014, at 4 (“Companies like Equifax have decades of experience running and maintaining data bases, and would be a superior choice to having the Department attempt to expand, run and maintain a database . . . .”); Nat'l Assoc. of Consumer Credit Administrators, Dec. 12, 2014 at 5 (“Our Association supports the creation of a safe harbor for creditors which conduct covered-borrower checks using a product supported by the MLA Database.”)

157

15 U.S.C. 1681-1681x.

158

15 U.S.C. 1681e(b).

159

In this regard, the Department notes that a nationwide consumer reporting agency that provides to its client-creditors consumer reports containing covered-borrower data derived solely from the MLA Database may enable those creditors to use either of the two methods for the safe harbor in § 232.5(b).

Nevertheless, at this time the Department is concerned that, despite the requirements of (and enforcement mechanisms that apply under) the FCRA, all consumer reporting agencies might not have sufficiently robust systems in place that would provide the degree of accuracy for covered-borrower checks that would warrant granting a safe harbor to their client-creditors. The Department observes that certain supervisory and regulatory mechanisms currently apply primarily (or exclusively) to nationwide consumer reporting agencies that reasonably can be expected to lead those entities to maintain sufficiently robust systems that would provide the degree of accuracy for covered-borrower checks. Consistent with the Department's approach to incrementally adopt and, as appropriate, amend its regulation to implement the protections of the MLA, the Department at this time is restricting the source of the consumer report that is eligible for the safe harbor in § 232.5(b)(2)(ii) to a nationwide consumer reporting agency or a reseller who obtains such a report (from a nationwide consumer reporting agency). As the Department gains more experience observing the effects of its regulation and continues to consult with the Federal Agencies, the Department may, as appropriate, review and consider whether to amend this provision of the regulation.

3. Modification To Use Information Solely at the Time of Processing an Application

Several entities contend that under the safe-harbor provisions proposed in § 232.5, in conjunction with the definition of “covered borrower,” in § 232.3(g), a creditor would have needed to conduct “at least two checks of the

[MLA Database] per applicant, one upon receiving the application, and the other at the point the applicant `becomes obligated' on a transaction or establishes an account.”

160

In § 232.3(g) of the Proposed Rule, the Department proposed to define the term “covered borrower,” in part, as a consumer who,

at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit,

[meets other criteria]” (emphasis added); and in proposed § 232.5(b)(2) of the Proposed Rule, the Department described the process of obtaining information from the MLA Database “when a creditor enters into a transaction or establishes an account for consumer credit.” The likelihood that a creditor seeking to use the safe harbor under § 232.5(b) would need to check the MLA Database or use a consumer report more than once—that is, at the time of processing the application for consumer credit and at least once thereafter—is heightened for credit card accounts because, as the Associations observe, “[c]onsumers typically do not become `obligated' on credit cards . . . until the first transaction or a certain period after delivery of the card, as recognized under [Regulation Z].”

161

160

Schwartz & Ballen LLP, Dec. 23, 2014, at 5.

See also

Michigan Credit Union League & Affiliates, Dec. 26, 2014, at 3 (“Depending on the complexity of the institution, the credit union may have to review multiple record systems to comply with the `actual knowledge' requirement and will likely entail manual reviews by credit union staff to ensure records are thoroughly and accurately searched.”).

165

Associations, Dec. 18, 2014, at 28.

After considering the potential benefits of affording protections under the MLA to a covered borrower who is mis-identified through the creditor's use of the MLA Database or through some other method, the Department concludes that a creditor who conducts a covered-borrower check in reliance on information obtained from the MLA Database or from a consumer report obtained from a nationwide consumer reporting agency, and determines at the outset that a consumer-applicant is not a covered borrower should be provided a safe harbor from liability under the MLA—even if, in fact, that consumer is a covered borrower. If a creditor were to use either or both of the methods in § 232.5(b)(2) to ascertain the status of a consumer who applies for consumer credit, that creditor would demonstrate its best efforts under the circumstances to comply with the MLA, as implemented by the Department's regulation, and should receive, therefore, protection from liability if the database contains incorrect information about that consumer. Accordingly, the Department has determined that § 232.5(c) of the Proposed Rule should not be retained in the final rule.

Under § 232.5 of the final rule, no inference may be drawn concerning the validity of a creditor's own method—that is, a method other than one of the methods in § 232.5(b)(2)—to assess whether a consumer is a covered borrower. If a dispute regarding the requirements of the MLA were to arise in a case when the creditor had used its own method to assess the status of a consumer, then the issue of whether the consumer is or had been a covered borrower is a question of fact, and the parties would be subject to the rules of evidence, including the burdens of production, that apply to that case. More specifically, the absence of the actual-knowledge exception to the safe-harbor provision (as had been proposed § 232.5(c)) in light of the absence of any requirement to use any method to identify a consumer as a covered borrower (

see

§ 232.5(a) of the final rule) shall not be construed to create any presumption in favor of a creditor that elects to use its own method to ascertain whether a consumer is a covered borrower.

A comment on behalf of certain credit card issuers seeks clarification regarding the potential effects of certain “customer management actions, such as credit line increases.”

166

The Department believes that an action by a creditor within an existing account, such as to increase the available credit that a consumer may draw upon in an account, does not alter the status of the

creditor's prior determination for that account. The Department has adopted a new provision, in § 232.5(b)(3), to clarify this aspect of the operation of the safe harbor. However, the Department maintains that, in order to benefit from the safe-harbor provision under § 232.5(b), a creditor must use a method in § 232.5(b)(2) whenever extending a new consumer credit product or newly establishing an 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, for example, use information obtained from the MLA Database when processing the consumer's application for (or at the time of establishing) the overdraft line of credit, even if the bank previously had used information from the MLA Database at the time the consumer established the checking account and did not find the consumer in the database.

166

L. Chanin, Dec. 23, 2014, at 20.

IV. Section-by-Section Description of the Regulation

Section 232.1 Authority, purpose, and coverage

The Department adopts this section as proposed.

Section 232.2 Applicability

The Department adopts this section as proposed, with a few amendments, including an example, to clarify that the protections of 10 U.S.C. 987 apply only when the consumer continues to hold the status as a covered borrower.

The Department proposed to add new subsection (a), 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.” The Department continues to believe 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.

167

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.

168

Correspondingly, 10 U.S.C. 987 should apply only when the consumer (who is a covered borrower at the outset of the transaction, or when establishing an account, for consumer credit) continues to be a covered borrower. A comment on behalf of certain credit card issuers observes that the Proposed Rule “does not address account `roll-off'—

i.e.,

whether the MLA protections continue to apply once the service member is no longer on active duty or exits the military.”

169

The Department has modified § 232.2(a)—as well as the definition of “covered borrower” in § 232.3(g), as discussed below—to clarify that the regulation does not apply to a transaction or account for credit relating to a consumer (which otherwise would be consumer credit) when the consumer no longer is a covered borrower.

167

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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In this regard, the Department explained that its 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). (“Any credit agreement, promissory note, or other contract prohibited under this section is void from the inception of such contract.”). In proposing § 232.2(a), the Department explained 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.” 79 FR 58616.

169

L. Chanin, Dec. 23, 2014, at 20.

The Department adopts corresponding revisions to 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.

The Department adopts § 232.2(b) as proposed.

Section 232.3 Definitions

(a) Affiliate.

The Department adopts the term “affiliate” as proposed. As previously explained, this 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).

(b) Billing cycle.

The Department adopts the term “billing cycle” as proposed.

The Department adopts the term “Bureau” as proposed.

(d) Closed-end credit.

The Department adopts the term “closed-end credit” as proposed.

(e) Consumer.

The Department adopts the term “consumer” as proposed.

(f) Consumer credit.

As discussed above, the Department defines “consumer credit” consistent with the relevant provisions of the Bureau's Regulation Z.

Sections 232.3(f)(2)(i)-(iii) provide exceptions to “consumer credit” that track the exceptions to that term in the MLA.

The Department's existing rule, as well as the Proposed Rule, interpreted 10 U.S.C. 987(i)(6)(A) to exclude from consumer credit “any credit transaction secured by an interest in the

covered borrower's

dwelling,”

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whereas the statutory provision flatly excludes “a residential mortgage.” A few comments ask the Department to modify § 232.3(f)(2)(i) in order that other types of transactions secured by property, such as the dwelling of another person, would be eligible for the exclusion.

171

The Department concludes that subparagraph (f)(2)(i) should reflect the language and the scope of the exclusion in the MLA—“a residential mortgage”—and amends that provision accordingly.

170

See

proposed 12 CFR 232.3(f)(2)(i), 79 FR 58637 (emphasis added).

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