Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 58601-58641 [2014-22900]

Download as PDF Vol. 79 Monday, No. 188 September 29, 2014 Part VI Department of Defense tkelley on DSK3SPTVN1PROD with PROPOSALS6 Office of the Secretary 32 CFR Part 232 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents; Proposed Rule VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\29SEP6.SGM 29SEP6 58602 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules personal identifiers or contact information. DEPARTMENT OF DEFENSE Office of the Secretary FOR FURTHER INFORMATION CONTACT: Marcus Beauregard, 571–372–5357. 32 CFR Part 232 SUPPLEMENTARY INFORMATION: [DOD–2013–OS–0133] RIN 0790–AJ10 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents Under Secretary of Defense for Personnel and Readiness, Department of Defense. ACTION: Proposed rule. AGENCY: The Department of Defense (‘‘Department’’) proposes to amend its regulation that implements the Military Lending Act, herein referred to as the ‘‘MLA’’. Among other protections for Service members, the MLA limits the amount of interest that a creditor may charge on ‘‘consumer credit’’ to a maximum annual percentage rate of 36 percent. The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. In addition, the Department is proposing to amend its existing regulation to amend the provisions governing a tool a creditor may use in assessing whether a consumer is a ‘‘covered borrower,’’ modify the disclosures that a creditor must provide to a covered borrower, implement the enforcement provisions of the MLA, as amended, and for other purposes. DATES: Comments must be submitted not later than November 28, 2014. ADDRESSES: You may submit comments, identified by docket number and or Regulatory Information Number (RIN) and title, by any of the following methods; • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Mail: Federal Docket Management System Office, 4800 Mark Center Drive, 2nd Floor, East Tower, Suite 02G09, Alexandria, VA 22350–3100. Instructions: All submissions received must include the agency name and docket number or RIN for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at http:// www.regulations.gov as they are received without change, including any tkelley on DSK3SPTVN1PROD with PROPOSALS6 SUMMARY: VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Retrospective Review This rule is part of DoD’s retrospective plan, completed in August 2011, under Executive Order 13563, ‘‘Improving Regulation and Regulatory Review.’’ DoD’s full plan and updates can be accessed at: http:// www.regulations.gov/#!docketDetail; dct=FR+PR+N+O+SR;rpp=10;po=0; D=DOD-2011-OS-0036. I. Executive Summary A. Purpose of the Regulatory Action The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of 10 U.S.C. 987 to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. More specifically, the Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA 1 would be defined consistently with credit that for decades has been subject to the protections under the Truth in Lending Act (TILA), namely: Credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.2 After observing the effects of its existing regulation during the past six years and based on its review of information provided by a wide variety of persons and entities, the Department believes that this proposal to amend the regulation is appropriate in order to address a wider range of credit products that currently fall outside the scope of the regulation implementing the MLA, streamline the information that a creditor would be required to provide to a covered borrower when consummating a transaction involving consumer credit, and provide a more straightforward mechanism for a creditor to assess whether a consumerapplicant is a covered borrower. In this regard, the Department is aware of misuses of the covered borrower 1 The forms of ‘‘consumer credit’’ that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). 2 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 identification statement whereby a Service member (or covered dependent) falsely declares that he or she is not a covered borrower. The Department believes that, if a creditor unilaterally conducts a covered-borrower check by using the MLA Database, a Service member or his or her dependent would be relieved from making any statement regarding his or her status as a covered borrower. The Department is provided authority in 10 U.S.C 987(h) to establish regulations to implement the MLA. As described in 10 U.S.C. 987(h)(3) the Department, at a minimum, must consult with other Federal agencies ‘‘not less often than once every two years’’ with a view towards revising the regulation implementing the MLA. B. Summary of the Major Provisions of the Department’s Regulatory Action The MLA, as implemented by the Department’s regulation as well as under this proposed regulation, provides two broad classes of requirements applicable to a creditor: first, the creditor may not impose a Military Annual Percentage Rate (MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower (‘‘interest-rate limit’’); second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information (e.g., a statement of the MAPR), both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, by refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and by refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, ‘‘other MLA conditions’’). C. Costs and Benefits The Department anticipates that its regulation, if adopted as proposed, might impose costs of approximately $96 million during the first year, as creditors adapt their systems to comply with the requirements of the MLA and the Department’s regulation. However, after the first year and on an ongoing basis, the annual effect on the economy is expected to be between approximately $13 to $137 million. The Department has estimated the potential savings that could result if the rule reduces the involuntary separations of Service members due to financial distress in sensitivity analyses; at some points in the range of estimates the E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules Department has used to assess the proposal, these savings are estimated to 58603 exceed the compliance costs that would be borne by creditors. FIGURE 1—SUMMARY OF ESTIMATED EFFECTS OF PROPOSED RULE [2013 dollars in millions] First year Sensitivity Analysis: Benefits to the Department .............................. Primary Analysis: Costs to Creditors of Compliance ........................ Primary Analysis: Transfer Payments ............................................... II. Background tkelley on DSK3SPTVN1PROD with PROPOSALS6 A. Overview of the Proposal The Department proposes to amend its regulation 3 that implements 10 U.S.C. 987, which was enacted in section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007,4 and amended by sections 661–663 of the National Defense Authorization Act for Fiscal Year 2013 (‘‘2013 Act’’).5 The 2013 Act amended several provisions of 10 U.S.C. 987. In particular, the 2013 Act added provisions that would permit a covered borrower to recover damages from a creditor who violates a requirement of the MLA,6 and authorizes the agencies ‘‘specified in section 108 of the Truth in Lending Act’’ [‘‘TILA’’] to enforce the requirements of the MLA ‘‘in the manner set forth in that section [of TILA] or under any other applicable authorities available to such agencies by law.’’ 7 Section 663 of the 2013 Act modified the definition of ‘‘dependent’’ in order to make the meaning of that term consistent with parts of the definition that applies in the context of eligibility of a Service member’s dependent for military medical care.8 In addition, section 661 of the 2013 Act amended the MLA to require the Department to consult—‘‘not less often than once every two years’’—with the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (‘‘Bureau’’), the Department of the Treasury, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, and the Office of the Comptroller of the 3 32 CFR part 232 (2013). Law 109–364, 120 Stat. 2266. 5 Public Law 112–239, 126 Stat. 1785. 6 Id. See section 662(a) of the 2013 Act. 7 126 Stat. 1786. See section 662(b) of the 2013 Act. 8 126 Stat. 1786 (defining ‘‘dependent’’ to be a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2)). 4 Public VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Low ... High .. ........... Low ... High .. $0 0 96 NA NA Currency (collectively, ‘‘Federal Agencies’’) with a view towards revising the regulation implementing the MLA. In August 2007, the Department published its regulation to implement the MLA.9 When initially determining the extent to which the protections of the MLA should apply, the Department ‘‘focus[ed] on three problematic credit products that the Department identified in its August 2006 Report to Congress on the Impact of Predatory Lending Practices on Members of the Armed Forces and Their Dependents [(‘‘2006 Report’’)] 10: Payday loans, vehicle title loans, and refund anticipation loans.’’ 11 The Department elected, at that time, to define the scope of ‘‘consumer credit’’ covered by the regulation as a narrow band of products within these three categories of credit; for example, the rule defines a ‘‘payday loan,’’ in relevant part, as ‘‘[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.’’ 12 After observing the effects of its existing regulation, the Department believes that a wider range of credit products offered or extended to Service members reasonably could—and should—be subject to the protections of the MLA, and that the extremely narrow definition of ‘‘consumer credit’’ permits creditors to structure credit products in order to reduce or avoid altogether the obligations of the MLA. For example, if a creditor wishes to market a ‘‘payday loan’’ to a Service member without regard to the 36-percent interest-rate limit under the MLA, the creditor simply needs to adjust the terms or 9 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007). 10 Department of Defense, Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents (August 9, 2006), available at http://www.defense.gov/pubs/ pdfs/Report_to_Congress_final.pdf. 11 72 FR at 50585. 12 32 CFR 232.3(b)(1)(i) (definition of ‘‘consumer credit’’). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 Annual, ongoing $13 137 20 101 120 PV 10-year, 7% discount rate $96 970 144 717 856 PV 10-year, 3% discount rate $128 1,304 194 958 1,139 conditions so that the loan is (i) not closed-end credit, (ii) for a term longer than 91 days, or (iii) for an amount of more than $2,000. Making any of these elementary adjustments to a credit product marketed as a ‘‘payday loan’’ is not illegal, however, the effect is clear: a Service-member borrower would obtain the credit without the protections afforded under the MLA. The Department’s proposal aims to amend the regulation to curb this unfortunate consequence, of which there is ample evidence in the credit markets in which Service members are active participants.13 The Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA 14 would be defined consistently with credit that for decades has been subject to the protections under TILA, namely: credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.15 In general, under the Department’s proposal, any charge that is a ‘‘finance charge’’ under Regulation Z,16 adopted by the Bureau, as well as certain other charges that would be covered as ‘‘interest’’ under 10 U.S.C. 987(i)(3), must be included in the calculation of the MAPR, as applicable to the transaction for consumer credit. However, the Department also proposes to provide a broad exclusion that would allow a creditor who offers consumer credit through a credit card account to 13 See, e.g., section III.A.1 (describing information submitted by various persons in response to the Department’s June 2013 advance notice of proposed rulemaking). 14 The forms of ‘‘consumer credit’’ that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). 15 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). 16 12 CFR part 1026 (2013). E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 58604 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules exclude from the MAPR any ‘‘bona fide’’ fee charged to a credit card account, as discussed more fully in this proposal. The chief consequence of the proposed exclusion from the MAPR for bona fide fees is that a creditor who, for its credit card product(s), currently charges a periodic interest rate of less than the interest-rate limit under 10 U.S.C. 987(b) coupled with one or more fees that carry reasonable costs tied to specific products or services should be able to continue to offer the same product(s) without any adjustments to those price terms. Under the proposal, that creditor would need to confirm that its fees are bona fide, reasonable and customary, and if so, it should be able to continue to offer the same credit card product(s) to covered borrowers by making limited adjustments only to the ‘‘statement of the MAPR,’’ which would be permitted simply to be added to its credit card agreement(s) (and not required to be provided in any advertisement), as discussed below. In addition, the Department is proposing to revise its regulation to provide a creditor with a more straightforward mechanism to assist in assessing the status of a consumer as a covered borrower, in order that the creditor may have ‘‘some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the MLA] as implemented by Part 232.’’ 17 The Department believes that a covered-borrower check could be conducted unilaterally by a creditor by checking the database maintained by the Department and without relying on the borrower (as currently required), akin to the process a creditor currently uses to obtain a consumer report when assessing the creditworthiness of a consumer. Accordingly, the Department proposes to amend the regulation to allow a creditor to access the Department’s online database (the MLA Database) to assess the status of a consumer-applicant for consumer credit and, as discussed below, thereby provide a clearer mechanism for a creditor to obtain the protection of a safe harbor when determining whether a consumer is a covered borrower. Consistent with the Department’s longstanding policy in administering 10 U.S.C. 987, the Department intends to develop this regulation so that its provisions are true to the intent of the MLA without creating a system that unduly impedes the availability of credit that is beneficial to Service 17 72 FR at 50588. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 members or is so burdensome that the creditor cannot comply.18 The Department seeks comment on all aspects of this proposal. The Department also solicits information and data regarding the nature, scope, and prevalence of credit products offered or extended to Service members and their families. In particular, the Department seeks comment on the following alternative: 1. Refining the Department’s current rule for payday loans, vehicle title loans and refund anticipation loans—and the associated benefits and costs; 2. Refining the Department’s current rule and adding all payday loans—and the associated benefits and costs; and 3. Adoption of Regulation Z for consumer credit products—and the associated benefits and costs; As required by 10 U.S.C. 987(h)(3), in developing this proposal the Department has consulted with the Federal Agencies. The Department will continue to consult with these agencies throughout the process of considering revisions to the regulation implementing the MLA. B. Financial Status of Enlisted Service Members In the 2006 Report, the Department provided perspective on why the issue of maintaining the financial stability of Service members and their families is critical to sustaining the all-volunteer force and maintaining its readiness. These concerns remain relevant today. Service members still represent a predominantly young group with 43 percent of Service members aged 25 years old or younger.19 The junior enlisted ranks (E1–E4) comprise 44 percent of the military force.20 Thirty five percent of E1s–E4s are married 21 and 20 percent of them have children or other legal dependents.22 Considering only 11.7 percent of young people in the United States who are out of the military are married at a comparative age, Service members tend to take on relatively more household responsibilities than their civilian counterparts.23 18 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 18157, 18165 (April 11, 2007) (in the context of disclosure requirements, explaining one of the policies for the Department’s proposed regulation implementing the MLA). 19 U.S. Dep’t of Def., 2012 Demographics Profile of the Military Community, at 36. Available at http://www.militaryonesource.mil/12038/MOS/ Reports/2012_Demographics_Report.pdf. 20 Id. at 17. 21 Id. at 44. 22 Id. at 128. 23 U.S. Census Bureau, U.S. Dep’t of Commerce, Statistical Abstract of the United States 2012 table PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 Forty-one percent of enlisted Service members (46% of E1s–E4s) said they had used one or more sources of small dollar lending in the past 12 months. These sources included payday loans, vehicle title loans, bank deposit advance loans, pawn shop loans, cash advances on credit cards, overdraft loans, overdraft lines of credit, overdraft protection from other accounts, relief society loans, and loans from friends and family.24 About 62% of enlisted Service members selected responses indicating that they were able to make ends meet without difficulty. Twelve percent selected the responses ‘‘tough to make ends meet but keeping your head above water,’’ or ‘‘in over your head’’ to describe their financial condition.25 About 26% selected the response ‘‘occasionally have some difficulty making ends meet.’’ When asked about their savings habits, 14% of enlisted Service members selected the option ‘‘spend all the income received and don’t save’’ and 4% selected the option ‘‘don’t know.’’ Forty-four percent selected the option ‘‘regularly set aside money in savings.’’ The remaining 39% selected the option ‘‘save whatever is left at the end of the month.’’ When asked about their savings, about 57% of enlisted Service members indicated that they had at least $500 in savings that would be available for emergencies. Eight percent indicated that they have less than $100 and 17% indicated that they have no emergency savings.26 When asked about experiencing any shortfalls in finances, 47% of enlisted Service members reported having problems in the past 12 months. Specifically, 9% said they had been more than 60 days late in paying mortgage or other debts, 17% reported that they were unable to use bank credit card(s) because the credit limit was reached, 44% reported that they were short cash between paychecks and 12% indicated that they were unable to pay 57 (131st ed. 2011) (11.7 percent of individuals aged 18 through 24 who are not in the military are married). 24 Defense Manpower Data Center (DMDC) QuickCompass of Financial Issues, 2013, Question 30: Have [you][your and/or your spouse][you and/ or your significant other] used any of the following financial products or services to cover expenses in the past 12 months?’’ 25 Id., Question 13: ‘‘Which of the following best describes [your financial condition][the financial condition of you and your spouse][the financial condition of you and your partner or significant other]?’’ 26 Id., Question 15: ‘‘Which of the following best describes [your saving habits][the savings habits of you and your spouse][the savings habits of you and your partner or significant other]? I[We]:’’ E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules monthly bills.27 When asked about how many months in the past 12 were they short on cash, unable to use a credit card because of the credit limit was reached, or unable to pay bills or other debts, 12% said 5 to 7 months and 11% said 8 or more months. The average response was 3.4 months in a 12-month period.28 The results of the Defense Manpower Data Center (‘‘DMDC’’) QuickCompass on Financial Issues tends to indicate that most Service members report sufficient access to safe, low-cost credit, report few problems managing their finances, and report little use of or impact by high-cost credit products on their financial lives. Nevertheless, the DMDC survey results also tend to indicate that a substantial minority of Service members continue to report difficulty managing their finances, and little access to safe, low-cost credit options. While the relative size of these two groups varies across the different types of financial indicators surveyed, the Department estimates that between 12 and 25% of enlisted Service members may face emergency financial short-falls and indicate difficulties managing their finances and avoiding problems with credit. tkelley on DSK3SPTVN1PROD with PROPOSALS6 C. Financial Stability and Readiness The Department makes a significant investment in recruiting, training and retaining highly qualified Service members. The Department expects these Service members to maintain personal readiness standards, including paying their debts and maintaining their ability to attend to the financial needs of their families.29 Losing qualified Service members due to personal issues, such as financial instability, causes loss of mission capability and drives significant replacement costs. The Department estimates that each separation costs the Department $57,333.30 Losing an 27 Id., Question 28: ‘‘During the past 12 months, did any of the following happen to [you][you and your spouse][you and your partner or significant other]? [I was][We were] . . .’’ 28 Id., Question 29: ‘‘In how many of the past 12 months were [you][you and your spouse][you and your significant other] short on cash, unable to use a credit card because of the credit limit was reached, or unable to pay bills or other debts?’’ 29 U.S. Dep’t of Def., Instruction 1344.09, Indebtedness of Military Personnel (2008) (‘‘Members of the Military Services are expected to pay their just financial obligations in a proper and timely manner [to include alimony and child support]. A Service member’s failure to pay a just financial obligation may result in disciplinary action under the Uniform Code of Military Justice [10 U.S.C. 801–940] or a claim pursuant to Article 139 of [10 U.S.C. 801–940].’’). 30 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 VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 experienced mid-grade noncommissioned officer (NCO), who may be in a leadership position or key technical position, may be considerably more expensive in terms of replacement costs and in terms of the degradation of mission effectiveness resulting from a loss of personal reliability for deployment and availability for duty. A study of the potential impact of the use of payday loans on enlisted members in the Air Force found ‘‘significant average declines in overall job performance and retention, and significant increases in severely poor readiness,’’ as a result of using payday loans.31 Additionally, financial concerns detract from mission focus and often times require attention from commanding officers and senior NCOs to resolve outstanding debts and other credit issues. D. Financial Readiness Program As young people with steady pay checks and personal responsibilities which emerge earlier than their contemporaries, junior enlisted Service members need to have a commensurate level of financial acumen and maturity to succeed. Junior enlisted Service members are generally high school graduates who may have started college.32 Prior to entering the military they may have had limited exposure to financial literacy programs within high school, but they are generally unprepared for their financial responsibilities.33 The Department has established the Financial Readiness Program to assist Service members in dealing with financial concerns, by providing messaging, education, and assistance. Throughout each year, the Department provides key messages on personal finance to the military community as part of a strategic communications plan that includes press releases, news articles, interviews, Web sites and social media. The Department has the assistance of each separation costs the Department $52,800 in 2009 dollars). The cost of $57,272 is calculated in 2013 dollars (through November 2013), using the U.S. Dep’t of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI– U), available at ftp://ftp.bls.gov/pub/ special.requests/cpi/cpiai.txt. 31 Scott Carrell and Jonathan Zinman, ‘‘In Harm’s Way? Payday Lending and Military Personnel Performance,’’ August 2008, Abstract. 32 DMDC Survey, question 20: 39% of E1–E4s have a high school diploma, 22% have less than one year of college, 24% have one or more years of college, but no degree. 33 Average score for high school seniors was 48.3% and 62.2% for college students on a financial literacy test measuring (1) Income; (2) money management; (3) saving and investing; and (4) spending and credit. Jump$tart Coalition survey of high school seniors and college students, 2008, page 8. www.jumpstart.org/assets/files/ 2008SurveyBook.pdf. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 58605 nonprofit organizations in delivering messages and programs to promote savings and sound money management. The Department annually promotes the ‘‘Military Saves Campaign,’’ which occurs at the end of February each year as part of ‘‘America Saves,’’ sponsored by the Consumer Federation of America. The campaign asks Service members and their families to pledge towards their own savings goals, and the campaigns are supported by banks and credit unions on military installations. Initiated in 2007, the campaign has signed up 31,527 savers through 2013.34 Additionally, the Financial Institutions National Regulatory Authority (FINRA) Foundation sponsors the ‘‘Save and Invest Program’’ that has provided forums at military installations (33,000 participants), fellowships for 1,200 military spouses to earn a financial counselor credential and give back to the community through 355,000 practicum hours, assistance to wounded warriors (17,000 guides distributed), 800,000 booklets on managing money during military moves and deployments, and access to no cost online tools to assist 150,000 military families with managing credit.35 The Department has established policy requiring Service members to receive financial education throughout their military careers, commencing with an initial course provided within 3 months of having arrived at their first duty station. As Service members assume supervision of others, they are also provided information on policies and practices designed to protect junior military members.36 Each of the Military Services manages its own educational program to fulfill this requirement, based on regulations from the Military Departments. For Fiscal Year 2012, the Military Services reported providing 34,867 briefings to 872,187 participants.37 In addition, the National Guard and Reserve Commands conducted 8,912 sessions, hosted at unit events lasting one-to-three days, attended by 13,480 participants.38 34 Military Saves 2013 Report, page 2, http:// www.militarysaves.org/in-the-newsroom/militarysaves-week-reports. 35 ‘‘Military Financial Readiness Program— Accomplishments To Date,’’ SaveandInvest.org, About the Program, http://www.saveandinvest.org/ MilitaryCenter/About/P124822. 36 DoD Instruction 1342.22, Family Readiness Program, July 3, 2012, page 12, http://www.dtic.mil/ whs/directives/corres/pdf/134222p.pdf. 37 ‘‘Fiscal Year 2012 Annual Report on Family Readiness Programs’’ (internal DoD report), which reflects activities of installation-based Military and Family Support Centers/Reserve Family Program Sites.] 38 Military OneSource internal report for Fiscal Year 2012. E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 58606 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules 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 Servicespecific programs to extend counseling into the military units through designated approved financial educators. For example, the Department of the Navy directs Navy and Marine Corps units to designate and train a Command Financial Specialist (E6 or above) who delivers financial education, conducts basic counseling and makes referrals to certified counselors. The Military Services reported 1,828,299 brief counseling contacts and 161,992 extended counseling contacts for Fiscal Year 2012.39 To supplement the counseling services provided by the Military Services, the Department employs contract counselors through Military One Source to conduct overthe-phone counseling (available 24/7) and 12 in-person sessions for each military client (in a 12 month period). These counselors provided 32,000 inperson sessions for 35,000 Service members and spouses in Fiscal Year 2012.40 To provide monetary support to Service members and their families with financial hardships, the Military Services have partnered with nonprofit charitable organizations chartered to provide relief services to Service members and their families. The four relief societies for the Military Services (Army Emergency Relief, Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard Mutual Assistance) (collectively, the ‘‘Relief Societies’’) provide no-interest loans, grants, and scholarships, and fund other support programs for active-duty military communities. Each of these Relief Societies traditionally has provided no-interest loans and grants for shortfalls in household expenses (e.g., rent, mortgage, or utilities) and for unforeseen emergencies (e.g., auto repair, funeral, or family emergency). Since 2007, each of the Relief Societies also has offered small-dollar loans, which can be drawn without 39 ‘‘Fiscal Year 2012 Annual Report on Family Readiness Programs’’ (internal DoD report), which reflects activities of installation-based Military and Family Support Centers/Reserve Family Program Sites.] 40 Military OneSource internal report for Fiscal Year 2012. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 counseling.41 In total for 2012, the Relief Societies provided $142.2 million in nointerest loans and grants to 159,745 clients.42 E. Regulation in Support of Financial Readiness The Department continues to believe that, consistent with the MLA, there may be a need to limit access to highcost borrowing, even with the Department’s emphasis on delivering messages to save and control debt, education to support managing finances wisely, counseling resources to aid Service members, and financial resources to help Service members cover unforeseen shortfalls and emergencies. As initially stated, the Department expects Service members to manage their resources to cover their just debts and to take care of the needs of their families. Additionally, as messaging and education programs make clear, the Department expects Service members to seek out assistance rather than continue attempting by themselves to manage high-cost debt. In the House Report 112–705 accompanying the 2013 Act, the Department was asked ‘‘to determine if changes to rules implementing [the MLA] are necessary to protect covered borrowers from continuing and evolving predatory lending practices.’’ The Department responded to the request of the House Report by issuing a report in April 2014 (‘‘April 2014 Report’’).43 The April 2014 Report presents data submitted by many sources, including anecdotal information, that assisted in responding to the request of the House Report. The Department recognizes that information submitted for the April 2014 Report was provided by numerous sources, including some surveys conducted by the Department, and the information does not yield definitive results; rather, as the April 2014 Report states, the data ‘‘tend to indicate’’ some 41 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). 42 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). 43 Dep’t of Defense, Report: Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents, April 2014. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 findings 44 and, for many issues, raise important questions that might involve further examination. The April 2014 Report states—specifically in light only of the research and consultation in preparing that Report—that ‘‘the definitions of [consumer credit] in the implementing regulation for the MLA do need to be updated and expanded to ensure that the MLA continues to provide protections to Service members and their families.’’ 45 While observing that certain conditions ‘‘appear’’ to warrant revising the definition of ‘‘consumer credit,’’ 46 the Department has drawn no conclusions regarding the scope or terms of its regulation implementing the MLA. Rather, the April 2014 Report expressly states that ‘‘the Department is working on [a more] comprehensive approach in its redrafting of the implementing regulation for the MLA.’’ 47 The Department is committed to an open and transparent process as its work continues on any potential amendment to its regulation, and, as stated above, invites comment on all aspects of this proposal, particularly data regarding the nature, scope, and prevalence of credit products offered or extended to Service members and their families. The majority of Service members have access to reasonably priced (as well as low-cost) credit, and, as long as they wisely use those resources, they are likely not to need high-cost loans to fulfill their credit needs. In the event that a Service member overwhelms his or her credit, or has not established credit for an emergency, the Department and the Relief Societies are prepared to assist that person in order that he or she might resolve the immediate difficulties and continue to manage his or her income and expenses to a point where he or she can develop a sound financial basis. In circumstances where Service members have taken high-cost loans because no other alternatives appeared to be available, Department counselors and the Relief Societies have found that the existing high-cost debt makes intervention more difficult; these service providers would rather have had the opportunity to have helped resolve issues sooner. III. Key Aspects of the Department’s Proposal A. Proposal To Amend the Scope of ‘‘Consumer Credit’’ The Department proposes to revise the scope of the definition of ‘‘consumer 44 See, e.g., April 2014 Report, at 2. 2014 Report, at 2. 45 April 46 Id. 47 Id. E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 credit’’ to cover a broader range of closed-end and open-end credit products, to be generally consistent with the credit products that for decades have been subject to the requirements of the Bureau’s Regulation Z. When adopting its initial regulation in 2007, the Department focused on three narrowly defined types of products that the Department believed, at that time, most directly acted as sources of the ‘‘debt trap’’ for Service members and their families.48 In addition, the Department expressed its concern about the ‘‘potential for unintended consequences that could adversely affect credit availability if it were to adopt a broadly applicable regulation.’’ 49 At the same time, the Department was careful to avoid engendering any reliance interests in the narrow scope of its initial rule, and, in this regard, expressly stated that ‘‘[t]he Department maintains the ability to issue additional rules in the future .. . . ’’ 50 When the Department adopted its initial regulation, financial-institution creditors, Service members, and others who have an interest in the administration of the MLA were appropriately cautioned that the Department had committed itself to review various sources of data, including ‘‘input from regulatory agencies, consumer protection groups and the credit industry to assess the level of protection provided by the final rule,’’ in order to determine whether ‘‘further revisions [to its regulation] are needed.’’ 51 The Department continues to believe that certain payday loans, vehicle title loans, and refund anticipation loans present the most severe risks to Service members and their families, and remains mindful that more broadly defining the ‘‘consumer credit’’ that would be subject to 10 U.S.C. 987 may present unintended consequences, including a reduction in ‘‘credit 48 See 72 FR at 50582 (observing that ‘‘[t]he combination of little-to-no regard for the borrower’s ability to repay the loan, unrealistic payment schedule, high fees, and interest and the opportunity to roll over the loan instead of repaying it can create a cycle of debt for financially overburdened Service members and their families.’’). 49 72 FR at 50584. 50 72 FR at 50585. In this context, the Department drew attention to its ‘‘ability’’ to issue additional rules. There can be no doubt, especially in light of section 661(b) of the 2013 Act, that the Department has the authority to amend the regulation implementing the protections of the MLA. 10 U.S.C. 987(h)(3) (requiring the Department, at a minimum, to consult with other Federal agencies ‘‘not less often than once every two years’’ with a view towards revising the regulation implementing the MLA). 51 72 FR at 50585. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 availability.’’ At the same time, however, the Department recognizes— particularly in light of its experiences administering the existing regulation— that a broader range of closed-end and open-end credit products carry high costs, many of which far exceed the interest-rate limit established in 10 U.S.C. 987(b), and thereby pose the risks to Service members and their families that the Department has long sought to significantly reduce or eliminate. Consistent with the Department’s stated policy to monitor market developments that affect Service members, since adopting its initial regulation in 2007 the Department informally has gathered information from regulatory agencies, consumer protection groups, and participants in the credit industry to assess whether, and in which respects, the Department should consider revising its regulation implementing the MLA.52 As described above in section II.E., information was submitted for the April 2014 Report issued in response to the House Report. In this regard, the April 2014 Report describes various sources of information, including results from a DMDC QuickCompass survey 53 and a questionnaire the Department distributed to financial counselors and legal assistance attorneys, which mostly requested narrative responses.54 More importantly, and directly to support the Department’s rulemaking process, in June 2013 the Department published an advance notice of proposed rulemaking (‘‘ANPR’’) soliciting comment on several issues relating to its existing regulation.55 In particular, the Department asked whether there is a need to revise the regulation, ‘‘with special attention to the scope of the definition of ‘consumer credit.’ ’’ 56 1. The Department’s June 2013 ANPR The Department received 37 comments in response to the ANPR. Most of the comments were submitted by state agencies, including state attorneys general,57 and consumer 52 See 72 FR at 50585 (‘‘The Department maintains the ability to issue additional rules in the future and the Department plans to continue surveying Service members and will obtain a variety of inputs from regulatory agencies, consumer protection groups and the credit industry to assess the level of protection provided by the final rule.’’). 53 See, e.g., April 2014 Report, at 2. 54 April 2014 Report, app. A. 55 78 FR 36134 (June 17, 2013). 56 Id. 57 California Attorney General, et al., DOD–2013– OS–0133–0002. References herein to the comments note the name of the commenter and the docket number of the submission, available at http:// www.regulations.gov. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 58607 protection groups. Several participants in the credit industry submitted comments,58 as did several individuals. In addition, comments were submitted relating to whether the Department should consider revising its regulation in order to address rent-to-own transactions. Generally, commenters responding to the ANPR urge the Department to take one of three actions relating to the definition of consumer credit: (1) leave untouched the current definition as three enumerated products, as well as the particular definition for each of those products; (2) extend the definition by covering certain additional products, such as overdraft services, rent-to-own transactions, and/or all payday loans; or (3) extend the definition by incorporating the definition of consumer credit in the Bureau’s Regulation Z. Other commenters raise general concerns regarding the narrow scope of the existing definition of consumer credit and urge the Department to adopt a more comprehensive definition, but have not recommended a particular definition. One commenter states that the Department’s current rule has ‘‘significant gaps and loopholes, which lenders exploit to target military borrowers with high interest loans well above the MLA’s [36 percent] rate cap,’’ and is ‘‘particularly concerned with [a] multiple-payment or installment loan[ ]’’ that is not covered by the rule, because the loan has a term of over 91 days or exceeds $2,000.59 This commenter states, more specifically, that ‘‘[i]n Texas, high cost multiple-payment loans with rates often exceeding [600 percent] APR are increasingly offered by payday lenders.’’ 60 In support of its claims regarding the effects of the loopholes in the Department’s current rule, this commenter describes its ‘‘[s]tore visits’’ in Killeen, Texas, in July 2013, where the commenter found companies that had changed their loan products to offer ‘‘high-cost multiple-payment products to [Service] members,’’ 61 and cited as an example particular loan products 58 See, e.g., American Bankers Assoc. et al., DOD– 2013–OS–0133–0022. 59 Texas Appleseed, DOD–2013–OS–0133–0016, at 1–2; see also State of Colorado, DOD–2013–OS– 0133–0034, at 1 (explaining how lenders can circumvent the Military Lending Act by ‘‘offering 92 day loans, loans for $2001, or by structuring the loans as open-end credit’’); but see Credit Union National Association and Defense Credit Union Council, DOD–2013–OS–0133–0032, at 2 (arguing that the current rule has been an ‘‘effective tool’’ and that the 91-day limit for payday loans should not be changed). 60 Texas Appleseed, DOD–2013–OS–0133–0016, at 2. 61 Id. at 3. E:\FR\FM\29SEP6.SGM 29SEP6 58608 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules offered by a national payday lender with two locations in Killeen.62 Another commenter states that under the Department’s current rule, ‘‘lenders have easily circumvented the purpose and protections intended by the MLA.’’ 63 For example, the commenter describes the ‘‘structure of [the] payday loan law’’ 64 in Colorado, which requires ‘‘a minimum loan term of six months.’’ 65 Because of the extended duration of the loan, ‘‘the MLA rate cap of 36 percent does not apply,’’ 66 allowing lenders ‘‘to make loans to service members with an approximate 200 percent annual percentage rate.’’ 67 The commenter urges the Department to revise the rule so that it does not ‘‘contain limits that lenders may use to avoid regulation.’’ 68 Specifically, the commenter recommends that the Department incorporate the definition of consumer credit under TILA, ‘‘so that regardless of the consumer credit transaction amount, structure, or duration, it is subject to MLA’s 36 percent cap on interest rates.’’ 69 Similarly, another commenter states that the Department’s current rule has ‘‘large loopholes that permit lenders to fashion abusive or predatory transactions that avoid the MLA’s protections.’’ 70 The commenter, more specifically, states that lenders can evade protections under the current rule ‘‘by requiring that payday loans be a minimum of $2,001, or have a minimum period of 92 days’’ or by offering ‘‘[a]ny open-ended or revolving payday loan; [a]ny auto title loan for more than 181 days; [a]ny bank loan that is secured by funds on deposit, such as overdraft loans; and [a]ny retail sales credit loan or other similar rent-to-own 62 Id. at 3–4. of Colorado, DOD–2013–OS–0133–0034, at 1; see also California Attorney General, et al., DOD–2013–OS–0133–0002, at 2 (‘‘[T]he narrow categories and definitions create large loopholes that permit lenders to fashion abusive or predatory transactions that avoid the MLA’s protections.’’); but see Missouri Credit Union Association, DOD– 2013–OS–0133–0801, at 1 (arguing that the rule’s objective has been accomplished ‘‘primarily by limiting the impact of the rule to those creditors that offer certain loans which are closed-end credit’’). 64 State of Colorado, DOD–2013–OS–0133–0034, at 1. 65 Id. 66 Id. at 2. 67 Id. 68 Id. 69 Id. 70 California Attorney General, et al., DOD–2013– OS–0133–0002, at 2; see also, Members of the U.S. Senate, DOD–2013–OS–0133–0036, at 1 (arguing that gaps in the rules ‘‘have been taken advantage of by certain lenders’’ who offer ‘‘predatory loan products at exorbitant triple digit effective interest rates and loan products that do not include the additional protections envisioned by the law’’). tkelley on DSK3SPTVN1PROD with PROPOSALS6 63 State VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 transaction.’’ 71 ‘‘[T]o protect military borrowers from predatory lenders who purposefully structure loan transactions so as to avoid the strictures of the MLA,’’ the commenter urges the Department to make the MLA protections ‘‘apply uniformly to the full range of consumer credit loans that present dangers similar to those already covered, including rent-to-own transactions and overdraft loans.’’ 72 One commenter notes that ‘‘inappropriate loans and exorbitant interest payments force many members of the military and their families to forgo other necessities, such as housing or grocery bills.’’ 73 Financial strain ‘‘negatively affects [service member] morale and puts their ability to do their job . . . at risk.’’ 74 The commenter raises a concern about the ‘‘narrow definition of consumer credit’’ and urges the Department to ‘‘modify the definition of consumer credit to ensure that Service Members in all states are protected from all forms of high-cost credit.’’ 75 One commenter expresses concern that ‘‘the rules initially promulgated by the Department contained gaps in the definition of consumer credit.’’ 76 These gaps ‘‘have been taken advantage of by certain lenders’’ to offer ‘‘predatory loan products at exorbitant triple digit effective interest rates and loan products that do not include the additional protections envisioned by the law.’’ 77 The commenter notes that ‘‘the 71 California Attorney General, et al., DOD–2013– OS–0133–0002, at 2. 72 Id.; but see Ohio Credit Union League, DOD– 2013–OS–0133–0027, at 2 (arguing that the current rule is effective and that the Department should protect Service members by ‘‘reviewing and identifying those lending practices that are or can be predatory or abusive on a case by case basis’’). 73 Members of the U.S. House of Representatives, DOD–2013–OS–0133–0035, at 1. 74 Id. 75 Id. at 1–2. See also Washington Department of Veterans Affairs, DOD–2013–OS–0133–0004, at 2 (requesting that the Department ‘‘modify the definition of consumer credit to ensure that service members are protected from all forms of high-cost credit, regardless of the duration or structure of the loan’’); but see American Bankers Assoc., et al., DOD–2013–OS–0133–0022, at 1 (arguing that the Military Lending Act is working as intended and that ‘‘[i]mposing additional requirements on lending to servicemembers would have adverse consequences for members of the armed forces and military families.’’). 76 Members of the U.S. Senate, DOD–2013–OS– 0133–0036, at 1; see also Texas Appleseed, DOD– 2013–OS–0133–0016, at 1 (stating that the current rule has ‘‘significant gaps and loopholes’’); but see American Bankers Assoc., et al., DOD–2013–0133– 0022, at 4 (‘‘The rule adopted in 2007 was structured carefully and struck the proper balance between protecting servicemembers and their families while still ensuring they had access to beneficial products and services.’’). 77 Members of the U.S. Senate, DOD–2013–OS– 0133–0036, at 1. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 Department was given the authority and has inherent flexibility provided under the law’’ to revise the rule to establish a more ‘‘expansive’’ definition of consumer credit to which the protections in the law would apply.78 The commenter urges the Department to include within the scope of the rule ‘‘payday and vehicle title loans of any duration, whether open or closedended,’’ ‘‘tax refund anticipation loans of any duration,’’ as well as to ‘‘consider extending the 36 [percent] APR cap to unsecured installment loans targeted at the military and all other forms of consumer credit.’’ 79 The commenter states that ‘‘[s]ervice members and their families deserve the strongest possible protections and swift action to ensure that all forms of credit offered to members of our armed forces are safe and sound.’’ 80 A group of industry commenters states the Department’s current rule ‘‘is working as intended to protect members of the armed forces and their dependents.’’ 81 These commenters argue that the current rule strikes the correct balance between access to credit and protecting consumers from predatory lending practices. They point to several aspects of the MLA that, in their view, would prevent creditors from offering products to Service members if the current rule’s definition is expanded to encompass other products. Specific concerns under the MLA include: Harsh penalties for noncompliance; duplicative and confusing disclosure requirements; oral disclosure requirements that are inconvenient for various technologies; inability to refinance or reprice debt; ban on arbitration clauses common to many loan contracts; and difficulties identifying all covered borrowers.82 The same commenters specifically request that the rule continue to incorporate definitions provided under the TILA because ‘‘[a]dding separate and disparate definitions undermines the ability of consumers to understand credit products and should be avoided. 78 Id. 79 Id. at 1–2. at 2. 80 Id. 81 American Bankers Assoc. et al., DOD–2013– OS–0133–0022, at 1; see also Missouri Credit Union Association, DOD–2013–OS–0133–0026, at 1 (‘‘[T]he rule’s objective has been accomplished primarily by limiting the impact of the rule to those creditors that offer certain loans which are closedend credit in the form of payday loans, vehicle title loans, and tax refund anticipation loans.’’); but see State of Colorado, DOD–2013–OS–0133–0034, at 1 (arguing that ‘‘lenders have easily circumvented the purpose and protections intended by MLA’’). 82 American Bankers Assoc. et al., DOD–2013– OS–0133–0022, at 1, at 4–5. E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules It would be a step backwards to disconnect the MLA and TILA.’’ 83 One commenter expressed concern that the current rule ‘‘includes limitations which reduce the [MLA’s] effectiveness.’’ 84 This commenter states that ‘‘[a]pproximately one out of every ten veterans reported having more than $40,000 in unsecured debt. For many veterans, some of this debt is acquired while on active duty, often from highcost lenders that frequently target military bases.’’ 85 The commenter states that in at least eleven states, the current rule ‘‘does not apply to all forms of payday lending permitted under state law, and in at least thirteen the rule does not apply to all forms of vehicle title lending.’’ 86 The commenter requests that the Department align consumer credit under the rule with the definition of consumer credit under TILA. The commenter states that ‘‘[t]his inclusive definition will ensure that all service members are covered by the consumer protections envisioned by Congress in 2007 and protect veterans from the long-term effects of predatory lending as they return to civilian life.’’ 87 One commenter states that the Department should ‘‘not lose sight of [a] payday lender’s demonstrated capacity for creative evasion.’’ 88 In particular, the commenter states that he has seen lenders disguise closed-end transactions as open-end, thereby evading requirements of the MLA. The commenter states that some lenders disguise short-term loans as check cashing services and others disguise loans and loan fees using the sale of phone cards or other ‘‘trinkets’’ at inflated prices combined with the delayed presentment of checks. The commenter also states that rent-to-own transactions should be included as consumer credit under the Department’s regulation because ‘‘[i]f evaluated as 83 Id. at 11. Division of Veterans Services, DOD– 2013–OS–0133–0038, at 2; see also State of Colorado, DOD–2013–OS–0133–0034, at 2 (‘‘[T]he definition of consumer credit should be as broad as possible and should not contain limits that lenders may use to avoid regulation.’’); but see American Bankers Assoc. et al., DOD–2013–OS–0133–0022, at 3 (noting that Service members also benefit from many other consumer protections that are not occupation-specific). 85 Id. at 1 (citing Eric Elbogen, Sally Johnson, Ryan Wagner, Virginia Newton, and Jean Beckham, ‘‘Financial Well-Being and Postdeployment Adjustment Among Iraq and Afghanistan War Veterans,’’ Military Medicine 177 (June 2012). 86 Idaho Division of Veterans Services, DOD– 2013–OS–0133–0038, at 2. 87 Id. 88 Michael S. Archer, DOD–2013–OS–0133–0007, at 3; see also State of Colorado, DOD–2013–OS– 0133–0034, at 1 (stating that lenders are easily able to circumvent the current rule’s ‘‘purpose and protections’’). tkelley on DSK3SPTVN1PROD with PROPOSALS6 84 Idaho VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 interest, these extra costs amount to extraordinarily high interest, far in excess of that authorized by the MLA.’’ 89 The commenter also states that the rule should prohibit unreasonable choice-of-venue provisions in a loan contract, specifically pointing to one creditor who requires all lawsuits be brought in Virginia while all the parties and transactions at issue are typically located in North Carolina. Finally, the commenter states that the Department should amend the rule to cover all payday, rent-to-own, installment, and vehicle title loans without respect to the duration of the loan. One commenter states that the Department correctly ‘‘left [rent-to-own] out’’ of the current rule.90 In support of its assertion that the Department properly did not include rent-to-own transactions within the scope of the current rule, the commenter states that ‘‘the [rent-to-own] business model is not extending credit and is, instead, a personal property leasing model.’’ 91 To support this point, the commenter describes a typical rent-to-own transaction where the consumer ‘‘[does] not assume any debt’’ 92 and instead enters into ‘‘weekly, bi-weekly, semimonthly, or monthly rental agreements for consumer durables.’’ 93 The commenter further notes that because rent-to-own transactions are not included in the current rule, ‘‘there was no reason for the industry to modify its practices to escape coverage.’’ 94 One commenter states ‘‘there is no need at this time to revise the rule as it relates to credit unions.’’ 95 Another commenter states that the Department should review and identify ‘‘those lending practices that are or can be predatory or abusive on a case by case basis.’’ 96 This commenter states that a ‘‘one issue approach could have negative unintended consequences for credit unions and other lenders that adhere to fair and equitable lending practices’’ and that such an approach could limit access to beneficial credit for Service members.97 One commenter requesting that the current rule should not be changed states that of over 40,000 complaints in the Better Business Bureau’s complaint database in 2011, only 37 were filed against online military installment lenders.98 The commenter states that installment lending should not be covered by the regulation because it ‘‘provides access to affordable, repayable consumer credit’’ and is ‘‘the safest form of small-dollar lending’’ because it is self-amortizing and thereby protects borrowers from becoming trapped in a cycle of debt.99 94 Id. 89 Michael S. Archer, DOD–2013–OS–0133–0007, at 4. With regard to rent-to-own transactions, the commenter states that the Department should specifically prohibit sellers from tracking consumers’ activity on computers and other electronics. The commenter states that the Department should prohibit contact with commanding officers and other third parties in the debt collection context unless the service member has given written consent after default. But see Rent-A-Center, DOD–2013–OS–0133–0010 (arguing that rent-to-own transactions should not be defined as consumer credit due to the nature of those transactions and legislative and regulatory history). 90 Association of Progressive Rental Organizations, DOD–2013–OS–0133–0012, at 1; see also Aaron’s, Inc., DOD–2013–OS–0133–0028, at 2 (‘‘[A]ny attempt to include the [rent-to-own] transaction] under [the] definition of consumer credit would not be consistent with federal and state laws.’’); but see Shriver Center, DOD–2013– OS–0133–0009, at 2 (‘‘[R]ent-to-own transactions are consumer credit sales and should be protected as consumer credit under the MLA.’’). 91 Association of Progressive Rental Organizations, DOD–2013–OS–0133–0012, at 2. See also Aaron’s, Inc., DOD–2013–OS–0133–0028. In this regard, the Department is cognizant of the consumer protection issues that may arise during rent-to-own transactions. However, consistent with the Department’s determination when adopting the initial regulation in 2007, 72 FR at 50582, rent-toown products usually are not considered credit for purposes of TILA. Accordingly, rent-to-own transactions typically would not be ‘‘consumer credit,’’ as that term is proposed in § 232.3(e). 92 Association of Progressive Rental Organizations, DOD–2013–OS–0133–0012, at 2. 93 Id. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 58609 at 1–2. Credit Union Association, DOD– 2013–OS–0133–0026, at 1; see also Michigan Credit Union League & Affiliates, DOD–2013–OS–0133– 0021, at 1 (‘‘Because of credit unions’ unique structure and the products and services offered to assist Service members, the MCUL does not believe revisions to the rules as they relate to credit unions are necessary or desirable at this time.’’). 96 Ohio Credit Union League, DOD–2013–OS– 0133–0027, at 2; but see Woodstock Institute, DOD– 2013–OS–0133–0025, at 2 (‘‘In order to beset protect all service members, the Department of Defense should eliminate its narrow product definitions and apply the 36 percent Military APR limit, and additional protections, to all consumer credit products covered by the Truth in Lending Act.’’). 97 Ohio Credit Union League, DOD–2013–OS– 0133–0027, at 2. 98 American Financial Service Association, DOD– 2013–OS–0133–0020 at 2 (citing Jean Ann Fox, The Military Lending Act Five Years Later: Impact On Servicemembers, the High-Cost Small Dollar Loan Market, and the Campaign against Predatory Lending, Consumer Federation of America, (May 29, 2012)). 99 Id. at 2; see also National Installment Lenders Association, DOD–2013–OS–0133–0014, at 1 (arguing that the Department of Defense should instruct Base commanders to ‘‘place off limits to service members any business they find objectionable or predatory’’ instead of amending the rule to cover installment lending); but see Shriver Center, DOD–2013–OS–0133–0009, at 2 (arguing that installment loans can ‘‘have many of the same harmful features the MLA prohibits such as high interest rates, automatic access to a bank account, payment by military allotment, and repeated refinances with no benefit to the consumer’’). 95 Missouri E:\FR\FM\29SEP6.SGM 29SEP6 58610 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 2. Proposal To Amend the Scope of ‘‘Consumer Credit’’ As several commenters state and as the Department itself has observed, a creditor currently may lawfully provide a wide range of closed-end and openend credit products to a Service member that carry inordinately high costs, and many of these credit products can be offered without meaningfully applying underwriting measures that consider the borrower’s ability to repay or with unrealistic payment schedules— precisely the types of risks to Service members that the Department consistently has aimed to diminish. The Department believes that the narrowly defined parameters of the credit products regulated as ‘‘consumer credit’’ under the existing regulation do not effectively provide the protections intended to be afforded to Service members and their families under the MLA. Accordingly, the Department proposes to amend the regulation, in § 232.3(e), so that, in general, consumer credit would be defined consistently with certain credit that long has been subject to the protections under TILA, namely: Credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.100 The Department proposes amendments so that, in general, its rule may rely on the provisions and jurisprudence of the Bureau’s Regulation Z because that regulation substantially regulates the central components of the framework of the MLA, particularly the types of charges that should be included as ‘‘interest’’ 101 and the methods for calculating the annual percentage rate of interest for consumer credit.102 The Department believes that, even as consumer credit may be revised to apply to a broad range of credit products, aligning the key aspects of the framework under the MLA with the terms and standards that have been developed under Regulation Z will greatly facilitate a creditor’s ability to comply with the Department’s regulation. More specifically, the Department proposes, in §§ 232.3(l) and 100 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). 101 See 10 U.S.C. 987(i)(3) (broadly defining ‘‘interest’’). 102 See 10 U.S.C. 987(h)(2) (granting discretion to the Department to prescribe rules regarding ‘‘[t]he method for calculating the applicable annual percentage rate of interest on [consumer credit] obligations’’). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 232.4(c), that any charge that is a ‘‘finance charge’’ under Regulation Z, as well as certain other charges that would be covered as ‘‘interest’’ under 10 U.S.C. 987(i)(3), must be included in the calculation of the MAPR (as applicable to the transaction), and would be subject to the interest-rate limit under 10 U.S.C. 987(b). QUESTION 1: The Department solicits comment on whether an approach should be taken that would define ‘‘consumer credit’’ consistently with certain credit regulated under TILA, and invites suggestions on alternative approaches. QUESTION 2: If the Department were to adopt a regulation as proposed, to what extent, and in what manner, would the Department’s regulation affect the availability of consumer credit to Service members and their dependents or have other consequences? QUESTION 3: If the Department were to adopt a regulation as proposed, to what extent would a creditor, as a practical matter, need to develop separate classes of credit products, namely, one class of products for covered borrowers and other classes for other consumers? QUESTION 4: If the Department continues to pursue an approach that defines ‘‘consumer credit’’ to be generally consistent with certain credit regulated under TILA, should the Department consider a limited or complete exemption for an insured depository institution or insured credit union? What legitimate basis could there be for any exemption for an insured depository institution or insured credit union from the requirements of the MLA, particularly if under this approach other financial institutions would be subject to the Department’s regulation? What other protections relating to credit products already are afforded to—or could be improved for—Service members and their dependents? QUESTION 5: If the Department continues to pursue an approach that defines ‘‘consumer credit’’ to be generally consistent with certain credit regulated under TILA, should the Department consider including one or more exemptions for certain types of credit products, such as student loans? What legitimate basis could there be for any particular exemptions for certain credit products? QUESTION 6: Apart from the conditional exclusion proposed for a credit card account that charges bona fide fees, as discussed below, should the Department consider providing one or more exceptions from the charges that PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 must be included in the MAPR for de minimis bona fide fees associated with an open-end credit line? If so, should that type of exception be limited to an open-end line of credit connected to a deposit account? If so, please specifically describe which fees on these accounts would be bona fide fees eligible for such an exception. What would be the appropriate cost limit of a de minimis fee? If the Department does provide for such an exception to open-end credit (other than for credit card accounts), what parameters should the Department use to limit the exception to prevent evasion of the protections under the MLA? B. Proposed Conditional Exclusion for Credit Card Accounts Even though the Department believes that the consumer credit regulated under the MLA generally should track the scope of credit regulated under Regulation Z, the Department recognizes that imposing the interest-rate limit of 10 U.S.C. 987(b) on credit card products likely would result in dramatic changes to the terms, conditions, and availability of those products to Service members and their families. The important protections Congress intends to provide to Service members and their families under the MLA should be made relevant to a broader range of credit products without unduly impeding the availability of credit that is benign or beneficial to Service members and their families.103 Unlike the vast majority of credit products that are amenable to straightforward pricing mechanisms relating to the cost of the funds borrowed (such as solely on the basis of a fixed or variable interest rate applied for a term or on a periodic basis), credit provided through a credit card account can be provided subject to pricing mechanisms that, in part, account for the value of products or services delivered through the cardholder’s use of the card itself. In this regard, many creditors offer credit card products that, from a consumer’s perspective, generally are subject to periodic interest-rate charges (i.e., the cost of the funds borrowed), plus participation fees and transaction-based fees that may vary, depending on the consumer’s use of the card. The Department believes that most creditors impose bona fide fees expressly tied to specific products or services connected to using the credit card itself and segregable from the cost 103 See 72 FR at 50585 (‘‘The intent of the statute is clearly to restrict or limit credit practices that have a negative impact on Service members without impeding the availability of credit that is benign or beneficial to Service members and their families.’’). E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules of funds borrowed, such as a foreign transaction fee that applies only when the cardholder tenders the card for a purchase made outside of the United States. Even though some of these fees might appear to be relatively high under certain circumstances, the Department believes that credit card products represent a form of consumer credit that, in general, is beneficial to Service members,104 especially insofar as the costs of bona fide fees expressly tied to specific products or services may be imposed only upon the Service member’s own choices regarding the use of the card. If the interest-rate limit of 10 U.S.C. 987(b) were to be flatly imposed on credit card products, then creditors likely would be required to significantly re-structure their current products, services, and pricing mechanisms when providing credit cards to Service members and their families—without a corresponding benefit to the Service members and their families. Flatly applying the interestrate limit of 10 U.S.C. 987(b) to credit card products could result in unusually adverse consequences to both creditors and Service members, especially insofar as some creditors might elect to stop offering these products altogether or suspend certain functions of the card (i.e., use of a card to make purchases in a foreign country) to Service members. The Department also believes that credit card products may warrant special consideration under the MLA because comparable protections for consumers who use these products separately apply under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (‘‘CARD Act’’). For example, the CARD Act, as implemented by the Bureau’s Regulation Z, limits penalty fees on credit cards, including late-payment and over-the-limit fees, to those fees that are ‘‘reasonable and proportional’’ to the omission or violation that triggered the fee.105 Regulation Z provides safe harbor fee ranges designed to facilitate compliance with these requirements of the CARD Act. The CARD Act also limits the total amount of fees that may be charged on an account in its first year: In general, a creditor may not impose fees for a credit card account during the first year that exceed 25 percent of the available line of credit in effect when the account is opened.106 104 In this regard, the Department notes that approximately 68 percent of American families have at least one credit card. See Federal Reserve Board’s Survey of Consumer Finances (2010), available at http://www.federalreserve.gov/pubs/ bulletin/2012/pdf/scf12.pdf p. 67. 105 15 U.S.C. 1665d; 12 CFR 1026.52. 106 15 U.S.C. 1637(n)(1); 12 CFR 1026.52(a). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 In an effort to balance the interests of limiting credit practices that have an adverse impact on Service members without unduly impeding the availability of credit that is benign or beneficial to Service members and their families, the Department has considered proposing a complete exemption from the definition of ‘‘consumer credit’’ for credit extended to a covered borrower under a credit card account. However, the Department believes that certain creditors could take advantage of an opportunity to exploit a complete exemption for credit cards by transforming high-cost, open-end credit products (which otherwise would be covered as ‘‘consumer credit’’) into credit card products. The Department similarly has considered whether exclusions from the MAPR for certain types of fees, such as an application fee or participation fee, should be proposed for credit card accounts in order to preserve current levels of access to those products for Service members and their dependents; however, the Department believes that unqualified exclusions from the MAPR for certain fees, or all non-periodic fees, likewise could be exploited by a creditor who would be allowed to preserve a high-cost, open-end credit product by offering a relatively lower periodic rate coupled with a high application fee, participation fee, or other fee (as described in the exclusion), subject to the restrictions under the CARD Act. To avoid creating clear regulatory gaps in the framework for 10 U.S.C. 987, the Department believes that consumer credit under the MLA should include credit extended to a covered borrower under a credit card account under an open-end (not home-secured) consumer credit plan, except that this form of consumer credit may be subject to a qualified exclusion for bona fide application fees, participation fees, transaction-based fees, and similar fees connected to the use of the credit card.107 Proposed § 232.4(d) would allow a creditor to exclude from the MAPR a bona fide fee—other than a periodic rate—only to the extent that the charge by the creditor is (i) a bona fide 107 The Department maintains that 10 U.S.C. 987(i)(6) grants broad latitude to the Department to ‘‘define which types of consumer credit transactions shall be covered by the law, provided that they do not include the two listed exemptions.’’ 72 FR at 50585. Furthermore, 10 U.S.C. 987(h) grants to the Department discretion to ‘‘prescribe regulations to carry out [the MLA],’’ and, in particular, to prescribe rules relating to ‘‘[t]he method for calculating the applicable annual percentage rate of interest’’ and the ‘‘types of fees’’ that are subject to the restrictions of the MLA. 10 U.S.C. 987(h)(2)(B) and (h)(2)(C). PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 58611 fee and (ii) reasonable and customary for that type of fee. Proposed § 232.4(d)(2) would clarify that certain charges—namely, ‘‘any credit insurance premium, including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements, or to any fees for creditrelated ancillary products sold in connection with and either at or before consummation of the credit transaction or upon account opening’’—may not be excluded as bona fide fees because these charges are expressly included in the definition of ‘‘interest’’ in 10 U.S.C. 987(i)(3). Proposed Standards for Exclusion for Bona Fide Fees The Department believes that the proposed conditions for excluding a bona fide fee from the MAPR—namely, that the fee must be ‘‘reasonable’’ and ‘‘customary’’—would fairly allow Service members and their families to continue to have access to credit card products and limit the opportunity for a creditor to exploit the exclusion for those products. Unlike a complete or targeted exemption for credit card products, the proposed conditional exclusion would not allow a creditor to transform high-cost, open-end credit products into credit card accounts by offering a relatively lower periodic rate coupled with a high application fee, participation fee, or other fee. Under the proposal, a creditor who imposes an unreasonable (in any respect) fee or a fee that is not, in every respect, customary (such as in the manner of the charge or the basis for the computation) in a credit card account for a Service member must include the total amount of the fees—including any fee(s) that otherwise may be eligible for the exclusion—in the MAPR. The ‘‘reasonable and customary’’ conditions for a bona fide fee, as proposed, are intended to be applied flexibly so that, in general, creditors may continue to offer a wide range of credit card products that carry reasonable costs expressly tied to specific products or services and which vary depending upon the Service member’s own choices regarding the use of the card. Proposed §§ 232.4(d)(3)(i)–(v) would provide standards to guide determinations regarding whether a bona fide fee—other than a periodic rate—for a credit card account may be excluded from the calculation of the MAPR as ‘‘reasonable and customary.’’ Like-kind fees. Proposed § 232.4(d)(3)(i) would provide that the bona fide fee must be compared to ‘‘fees typically imposed by other creditors for the same or a substantially similar E:\FR\FM\29SEP6.SGM 29SEP6 58612 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 product or service.’’ The Department believes that this elementary like-kind standard would be appropriate because a creditor should not be required to assess a fee for, say, a balance-transfer service based on the fees that other creditors charge for cash-advance services. Safe harbor. Proposed § 232.4(d)(3)(ii) is designed to provide a firm, yet flexibly adaptable standard for a ‘‘reasonable’’ amount of a bona fide fee. Under this provision, a creditor may compare the amount of the bona fide fee to ‘‘an average amount for a substantially similar fee charged by 5 or more creditors each with at least $3 billion in outstanding loans on U.S. credit card accounts at any time during the 3-year period preceding the time such average is computed.’’ The Department believes that the standard for a ‘‘reasonable’’ amount of a bona fide fee should be sufficiently flexible to allow for changing conditions in the marketplace for products and services provided through credit card accounts, and thus proposes language in the provision (‘‘an average’’ of an amount charged by ‘‘5 or more creditors’’) that would allow a creditor to select any group of 5 or more credit card issuers who each have the qualifying amount of outstanding credit card loans in order to make a determination. The Department believes that using a pool of 5 or more of these qualifying creditors is reasonable because these creditors, taken together, would represent a significant portion of the market for credit card products.108 In order for a creditor to use the fee(s) charged by a credit card issuer when computing an average, the credit card issuer must have had the qualifying amount of loans at any time during the 3-year period preceding the date when the creditor computes the average. If the amount of the creditor’s own bona fide fee is less than or equal to the average of the amount charged by those 5 or more credit card issuers who each have the qualifying amount of outstanding credit card loans, then the creditor’s 108 The Department is aware of at least 16 creditors who hold loans above the proposed asset threshold. See The Nilson Report, Issue 1,025 (Sept. 2013) at 10 (listing 14 MasterCard and Visa issuers with above $3 billion in outstanding loans mid-year 2013); Discover Bank, Consolidated Reports on Condition and Income for A Bank with Domestic Offices Only—FFEIC 041 (July 30, 2013) at 17 (indicating that Discover held more than $49 billion in such loans); and American Express Company, Consolidated Statements of Income (July 17, 2013) at 13 (indicating that American Express held $54.6 billion in cardmember loans. These 16 creditors (who are not the only creditors above the $3 billion threshold) hold over $582 billion in credit card loans or greater than 87 percent of the market in 2013. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 bona fide fee would be reasonable for the purposes of the exclusion. Proposed § 232.4(d)(3)(ii) would set a threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts held by a credit card issuer in order for that issuer’s fees to be eligible for inclusion in an average calculated for the purposes of compliance with the ‘‘reasonable’’ condition of § 232.4(d)(1). The Department proposes the use of a minimum of 5 credit card issuers, each of whom meet the threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts, in order to facilitate a creditor’s ability to compute an average under the safe-harbor provision in light of a very manageable, yet fairly representative, sample of fees in the marketplace for credit card products. The Department believes a threshold of $3 billion of outstanding credit card loans is reasonable because that threshold would include a significant number of credit card issuers, whose credit card products make up the majority of the products in the current credit card market. Moreover, the credit card issuers who hold more than $3 billion in outstanding credit card loans on U.S. credit card accounts offer credit card products that are typical in that marketplace. The Department is aware that many credit card issuers who hold less than $3 billion in outstanding credit card loans on U.S. credit card accounts may offer credit card products with lower or similar fees (relative to issuers who hold more than $3 billion in outstanding credit card loans); these issuers would benefit in a straightforward manner from the proposed method of computing an average for the purposes of the safeharbor proposed in § 232.4(d)(3)(ii). The Department believes that establishing this threshold would prevent a niche issuer charging unreasonable credit card fees from benefiting from the safe harbor, in a manner that evades the intent of the rule, by comparing its fees only to the fees of other niche issuers, rather than a more representative sample of the marketplace. The Department also proposes a rolling 3-year look-back period to facilitate a creditor’s ability to establish that a credit card issuer meets the assetsize standard. This 3-year period should facilitate the process for calculating, and relying on, an average amount for one or more relevant fees because, for example, when a creditor uses information from the past year to establish that a credit card issuer meets the asset-size threshold, the creditor could rely on the fee information relating to that credit card issuer’s credit card products for the PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 next two years. At the same time, the proposed 3-year period could provide stability to the safe-harbor determination, particularly if credit card loan holdings of credit card issuers shift significantly in response to market conditions or otherwise. Furthermore, a 3-year period could provide adequate time for the Department to amend the proposed threshold or safe harbor, as may be necessary.109 The Department believes that all creditors who offer credit card products to Service members and their dependents could readily calculate whether each type of fee associated with those products may fit within the safe harbor because data relating to the fees imposed by other credit card issuers, as well as the amount of credit card loans outstanding, is widely available. With regard to credit card fees, most credit card issuers, particularly all of the largest issuers, make complete contract terms on their current offerings freely available on their Web sites as part of solicitations and applications for their products.110 With regard to the amount of outstanding credit card loans held by a credit card issuer, issuers provide this information in both filings to the Securities and Exchange Commission (SEC filings) and Consolidated Reports of Condition and Income (Call Reports). Both SEC filings 111 and Call Reports 112 are available online without charge. In addition, the Department recognizes that data collected from these and other information sources is compiled in commercially available databases regularly used by financial institutions to track the marketplace for credit card products and services, and the Department believes that creditors should be permitted to reasonably rely upon those industry-specific databases when computing an average fee under proposed § 232.4(d)(3)(ii). For example, a creditor seeking to determine whether another credit card issuer could qualify as one of the 5 109 In this regard, 10 U.S.C. 987(h)(3) requires the Department, at a minimum, to consult with other Federal agencies ‘‘not less often than once every two years’’ with a view towards revising the regulation implementing the MLA. 110 See, e.g., the solicitations available at https://creditcards.chase.com. 111 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. 112 Call Reports for institutions insured by the Federal Deposit Insurance Corporation can be found on the Federal Financial Institutions Examination Council’s Web site, available at https://cdr.ffiec.gov/ public/. Call Reports for credit unions are available online through the National Credit Union Administration’s Web site, available at http:// researchcu.ncua.gov/Views/FindCreditUnions.aspx. E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 creditors for determining the average fee under proposed § 232.4(d)(3)(ii) could download a recent Call Report for an issuer and review Schedule RC–C Part I line 6(a) that provides credit card ‘‘[l]oans to individuals for household, family, and other personal expenditures’’ held by the institution. If that credit card issuer indicated that it held more than $3 billion in outstanding credit card loans, then the creditor could include any fee charged by that credit card issuer in the creditor’s safeharbor calculation under proposed § 232.4(d)(3)(ii). The creditor could find the amounts of the relevant fees for that credit card issuer disclosed on the issuer’s current offerings, as available through a variety of sources, such as the issuer’s Web site. The following example is provided for additional guidance on how a creditor could determine whether its own fees for a credit card account would fit within the safe harbor under proposed § 232.4(d)(3)(ii). Creditor Bank regularly offers a credit card product called the ‘‘Creditor Bank Card.’’ The Creditor Bank Card carries an annual fee of $25, a cash advance fee of 3 percent of a transaction or $5, whichever is greater, and no other fees.113 Creditor Bank is aware of 5 large credit card issuers: Bank A, Bank B, Bank C, Bank D, and Bank E. Creditor Bank consults the SEC filings for each of these 5 banks and finds that all 5 held U.S. credit card loans in excess of $3 billion at some time in the preceding year. Next, Creditor Bank reviews the fees charged on various credit card products issued by those 5 banks. Bank A charges an annual fee of $100 on one credit card product and a $0 annual fee on another credit card product. Bank A charges a cash advance fee of 4 percent of a transaction or $10, whichever is greater, on both of its card products. Bank B charges a $50 annual fee on one credit card product and a $0 annual fee on another credit card product. Bank B charges a cash advance fee of 2 percent of the transaction or $5, whichever is greater, on both its credit card products. Bank C, Bank D, and Bank E each offers one credit card product that carries a $50 annual fee, and a cash advance fee 113 For the sake of simplicity, only two fees are considered in this example. Under proposed § 232.4(d)(1), each bona fide fee must be ‘‘reasonable and customary,’’ and accordingly, a creditor seeking to determine whether all of its bona fide fees fit within the safe harbor under proposed § 232.4(d)(3)(ii) must conduct a separate analysis for each fee. Similarly, the example uses bank cards only for the sake of simplicity. The proposed regulation does not distinguish among types of credit cards (e.g., private label, bank, or retail store cards) or types of creditors. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 of 3 percent of the transaction or $5, whichever is greater. Under proposed § 232.4(d)(3)(ii), Creditor Bank may choose to calculate an average using the highest annual fees charged by each of these other 5 banks. In this case, Creditor Bank could calculate an average fee for the annual participation fee of $60 (the sum of $100 for Bank A, plus $50 for each of Bank B, Bank C, Bank D, and Bank E; divided by 5). Because the Creditor Bank Card’s $25 annual fee falls below the $60 average of fees charged by 5 other banks, Creditor Bank would meet the safe harbor for that fee. Creditor Bank could then undertake the same analysis for cash advance fees, and would be required to consider whether its fee is ‘‘reasonable’’ under the safe harbor with respect to both the percentage charged and the minimum fee. In this case, Creditor Bank could calculate an average cash advance percentage fee of 3 percent and an average cash advance minimum fee of $6. Because the Creditor Bank Card’s percentage fee and minimum fee fall below these averages, Creditor Bank may exclude these bona fide fees from the MAPR under proposed § 232.4(d)(3)(ii). We seek comment on the feasibility of performing this calculation and the associated costs. Reasonable fee. Proposed § 232.4(d)(3)(iii) is designed to clarify that a bona fide fee still may be ‘‘reasonable’’ for the purposes of the exclusion even if that fee is higher than an average amount as calculated under proposed § 232.4(d)(3)(ii). In particular, the Department recognizes that, due to several factors in the marketplace for credit cards, the prices of certain fees could drop from current levels, including to zero, and yet the Department believes that a creditor who charges a reasonable fee still should be permitted to avail itself of the exclusion in paragraph (d)(1) of this section. Accordingly, the Department proposes a provision that expressly states that ‘‘[a] bona fide fee charged by a creditor is not unreasonable solely because other creditors do not charge a fee for the same or a substantially similar product or service.’’ Customary. Proposed § 232.4(d)(3)(iv) would provide a standard to assess whether a bona fide fee is ‘‘customary’’ for the purposes of the exclusion. The touchstone for assessing whether a creditor’s bona fide fee is ‘‘customary’’ is whether ‘‘other creditors typically compute, or customarily have computed,’’ that fee in the manner by which that creditor does so. Nevertheless, the condition that a bona fide fee be ‘‘customary’’ for that type of PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 58613 fee should not be interpreted so as to require creditors to move in lockstep in order to satisfy this condition. The Department intends the standard for a ‘‘customary’’ condition to be applied with sufficient flexibility that a creditor who imposes a bona fide fee in a given manner, such as a fixed amount per transaction, may continue to do so, ‘‘even if substantially all other creditors compute that fee on a percentage basis.’’ Reasonableness for a participation fee. Consistent with the Department’s proposal that the conditions of ‘‘reasonable and customary’’ be applied flexibly, proposed § 232.4(d)(3)(v) would provide a standard in the particular case of a participation fee. The Department recognizes that creditors who issue credit cards provide a range of benefits and services to Service members and their dependents who are cardholders, and some cards may charge a participation fee in lieu of (or in light of lower) transaction-based fees. For example, a creditor may offer a credit card that carries a relatively higher participation fee, yet does not charge a foreign transaction fee. Accordingly, proposed § 232.4(d)(3)(v) would provide a standard stating that ‘‘[a]n amount of a bona fide fee for participation in a credit card account may be reasonable and customary . . . if that amount reasonably and customarily corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account.’’ QUESTION 7: If the Department continues to pursue an approach that defines ‘‘consumer credit’’ to be generally consistent with certain credit regulated under TILA, should the Department consider including an exemption specifically for a credit card account under an open-end (not homesecured) consumer credit plan? Would the consumer protection under TILA be sufficient to be consistent with the requirements of MLA? How would an exemption for consumer credit offered through a credit card account be articulated? QUESTION 8: The Department solicits comment on potential operational issues with applying the regulation under the MLA to credit card products offered in retail sales locations, particularly at the point of sale. How should the Department address any such potential issues in a final rule that may cover some or all credit card products extended to covered borrowers? QUESTION 9: Do the proposed standards appropriately describe E:\FR\FM\29SEP6.SGM 29SEP6 58614 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules whether a bona fide fee may be excluded from the calculation of the MAPR as ‘‘reasonable and customary?’’ If not, please specifically describe the language the Department should use to clarify when a bona fide fee is not required to be included in the MAPR. QUESTION 10: Does the threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts appropriately allow an assessment of whether a bona fide fee is ‘‘reasonable,’’ in light of the fees charged by credit card issuers whose credit card products are typical in the marketplace? If not, what measure(s) should be used to facilitate a creditor’s own assessment of its bona fide fees, for the purposes of complying with conditions proposed in § 232.4(d)(1), while also preventing other creditors who offer credit card products that carry unreasonable fees from benefitting from the safe harbor? Is a pool of 5 or more creditors reasonably large for computing an average fee for the purposes of § 232.4(d)(1)? Does a period of 3 years provide sufficient stability for measuring whether a credit card issuer meets the asset-size standard? If not, what period should be used? tkelley on DSK3SPTVN1PROD with PROPOSALS6 C. Proposal To Revise Provisions Governing Assessment of a Covered Borrower When adopting its initial regulation in 2007, the Department explained that the provisions governing the assessment of a ‘‘covered borrower’’ should balance protections for a covered borrower while also addressing a creditor’s need to have ‘‘some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the MLA] as implemented by Part 232.’’ 114 The Department’s existing regulation seeks to balance these interests by providing a ‘‘safe harbor’’ from the requirements of the regulation for a creditor who, with respect to a consumer credit transaction: first, provides a consumer a prescribed form, the ‘‘covered borrower identification statement,’’ declaring whether he or she is a covered borrower, and the consumer signs the form indicating that he or she is not a covered borrower; and, second, has not determined, using certain optional verification procedures, that the consumer is a covered borrower.115 114 72 FR at 50588. CFR 232.5(a)(1)–(2). However, the Department also issued an important ‘‘caveat’’ to this provision, stating that a creditor may not fit within the safe harbor if the ‘‘creditor obtains documentation as part of the credit transaction reflecting that the applicant is a covered borrower’’ (notwithstanding the signed declaration). 72 FR at 50588. 115 32 VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 The Department is proposing to revise these provisions governing the assessment of a covered borrower for two reasons. First, the Department has become aware of misuses of the covered borrower identification statement whereby a Service member (or covered dependent) falsely declares that he or she is not a covered borrower. The Department is concerned that a Service member seeking a credit product that is subject to the MLA falsely states—either on his or her own initiative or complicit with the creditor in the course of the application process—that he or she is not a covered borrower so that the institution offers the credit product unencumbered by the interest-rate limit and other restrictions of the MLA. While the Department intended the provision of the covered borrower identification statement to afford protections for Service members and their dependents, in actual transactions the dynamic between creditors and individual borrowers has led to widespread misuses of the statement, often resulting in extensions of credit that violate the MLA—plus, adverse effects on Service members or their dependents who make false statements. Furthermore, and benignly, some spouses of active duty Service members may not understand that they are ‘‘dependents’’ covered under the MLA and might unwittingly incorrectly complete the covered borrower identification statement. Accordingly, the Department believes that this section of the regulation should be revised to relieve a Service member or his or her dependent from making any statement regarding his or her status as a covered borrower 116 in the course of a transaction involving consumer credit. Second, the Department believes that the current framework of providing the covered borrower identification statement—which allows the consumer to state either that ‘‘I AM’’ or ‘‘I AM NOT’’ a covered borrower—could be unduly cumbersome for some creditors to administer. In particular, the Department is concerned that, in light of the proposal to cover a broader range of products as consumer credit under the MLA, a creditor should be afforded a more straightforward mechanism to have ‘‘some degree of certainty in determining that the loans [the creditor makes] are in compliance with [the 116 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). PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 MLA] as implemented by Part 232.’’ 117 The Department believes that a coveredborrower check could be conducted unilaterally by a creditor by checking the Department’s database, akin to the unilateral process a creditor currently uses to obtain a consumer report when assessing the creditworthiness of a consumer and to ascertain the consumer’s identity. Accordingly, the Department proposes to revise this section of the regulation in order to provide a clearer mechanism for a creditor to obtain the protection of a safe harbor when assessing whether a consumer is a covered borrower. The Department currently provides an online database, available at https:// www.dmdc.osd.mil/appj/mla/index.jsp, that allows a creditor to determine whether a consumer is a covered borrower under the MLA (the MLA Database). Proposed § 232.5 would provide a conclusive mechanism for a creditor to unilaterally assess the status of a consumer who applies for consumer credit if: first, the creditor checks the MLA Database to determine that consumer-applicant’s status when the creditor enters into a transaction or establishes an account for consumer credit; second, the consumer-applicant does (or does not) appear in the MLA Database; and, third, the creditor retains a record of the information obtained from the MLA Database. The Department anticipates that commercial information-services providers, such as consumer reporting agencies, may choose to supply information products to financial institutions that would include coveredborrower checks as part of those products used to process loan applications. As the Department may determine to be appropriate, the structure, as well as the terms and conditions for use, of the MLA Database could be developed to permit a commercial information-services provider to access the MLA Database for the purposes of obtaining and reselling a search record regarding a consumer. Contemplating that such developments could be made, if appropriate, nothing in proposed § 232.5 would prohibit or otherwise restrict a creditor from using a commercially provided information product to conduct a covered-borrower check, so long as the MLA Database is the underlying source of the data relied on by that creditor. QUESTION 11: If the Department makes appropriate adjustments to the MLA Database, should the Department modify the language of § 232.5 to clarify that a creditor may take advantage of the 117 72 E:\FR\FM\29SEP6.SGM FR at 50588. 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules safe harbor by conducting a coveredborrower check using a commercially provided information product whose underlying data is derived from the MLA Database? If so, please specifically describe the language the Department should use to clarify this aspect of § 232.5. If the vast majority of transactions are amenable to covered-borrower checks conducted solely through information obtained from the MLA Database, the actual status of the consumer as a covered borrower could be material to a consumer credit transaction or account if the creditor has actual knowledge of that consumer’s status. Consistent with the policy underlying the caveat to the existing § 232.5(a), the Department believes that a creditor who has actual knowledge that a consumer is a covered borrower should not be entitled to the safe harbor when entering into a transaction or establishing an account for consumer credit for that borrower. For example, if as part of the creditor’s application or underwriting process, the creditor collects from a covered borrower a copy of the borrower’s current military identification card or other record of the borrower’s status, the creditor would obtain actual knowledge of that borrower’s status, regardless of whether the creditor checks the MLA Database. Proposed § 232.5(c) reflects this policy and provides that the creditor must ‘‘treat the consumer as a covered borrower notwithstanding any determination by that creditor based on information obtained from the [MLA Database].’’ The Department intends for this exception to the safe harbor in proposed § 232.5(b) to apply so that a creditor may not take advantage of an obvious error in the MLA Database when the creditor knows otherwise, and the Department expects these circumstances to be rare. If a creditor conducts a coveredborrower check in reliance on information obtained (including, potentially, indirectly) from the MLA Database, and determines at the outset that a consumer-applicant is not a covered borrower, proposed § 232.5(b)(2) generally would provide a safe harbor from liability under the MLA in the event that the consumer, in fact, is a covered borrower. This situation could occur, for example, in the case that a consumer married to an active duty service member (and, therefore who is a covered borrower himself or herself) has not registered for any military benefits in the Defense Enrollment Eligibility Reporting System which provides the underlying data for the MLA Database. The Department believes a creditor who checks a VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 consumer against the MLA Database has undertaken the best efforts under the circumstances to comply with the MLA and should receive, therefore, protection from liability if the database had contained incorrect information about that consumer. Moreover, a creditor who satisfies the conditions for the safe harbor provided under proposed § 232.5(b)(2) would be free from liability under the MLA at the outset of establishing an account for credit—and throughout the lifespan of that particular account—relating to that consumer. The Department believes the consumer protections of the MLA will be most effectively provided if creditors extending consumer credit with an MAPR exceeding the 36 percent interest-rate limit check the MLA Database before extending that credit to consumers. In order to benefit from the safe-harbor provision under proposed § 232.5(b), a creditor must check the MLA Database whenever a consumer applies for a new consumer credit product or establishes a new account for consumer credit, including a new line of consumer credit that might be associated with a pre-existing transactional account held by the borrower. For example, if a consumer initially opens a checking account with a bank, and then, later, applies for an overdraft line of credit associated with that checking account and which carries a cost in excess of the interest-rate limit, in order to receive the benefit of the safe harbor for purposes of that new line of consumer credit, the bank must check the MLA Database when the consumer applies for the overdraft line of credit, even if the bank previously had checked the MLA Database at the time he or she established the checking account and did not find the consumer in the database. QUESTION 12: If the Department were to adopt a framework for a creditor to conduct a covered-borrower check as proposed in § 232.5, should the Department also adopt an exception from the safe harbor that addresses the situation when the creditor has actual knowledge that a consumer is a covered borrower? What are the likely costs associated with conducting coveredborrower checks as proposed in § 232.5? What alternatives should the Department consider for creditors to conduct covered-borrower checks? Should the Department consider alternative safe harbor provisions for certain types of creditors or certain types of consumer credit, such as credit extended at retail sales locations? Please provide specific language for provisions PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 58615 that would implement these alternatives. QUESTION 13: Should the Department retain a safe harbor for use of the covered borrower identification statement? The Department solicits comment on whether the use of the statement would be unduly cumbersome if the Department expands coverage of the regulation to additional types of credit products? QUESTION 14: Should the Department provide a fallback provision to protect a creditor from liability in the case that the creditor is temporarily or permanently unable to access the internet at the time of conducting a transaction or establishing an account for consumer credit? Should the Department provide protection from liability from the MLA in the case that a creditor can demonstrate that the MLA Database was not operational at the time the creditor attempted to search the database? If so, should the Department address how the creditor may establish that the MLA Database was not operational at the time the creditor attempted the search? IV. Section-by-Section Description of the Proposed Regulation Section 232.1 coverage Authority, purpose, and The Department proposes minor revisions to this section, mainly for the sake of clarity and consistency with provisions of the regulation. Section 232.2 Applicability The Department proposes to amend this section in two respects. First, in the new proposed subsection (a), the Department would add a provision stating: ‘‘Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit.’’ This proposed provision is designed to clarify the Department’s longstanding policy that the requirements under 10 U.S.C. 987, as implemented in the regulation, apply only to a consumer who is a covered borrower ‘‘at the time he or she becomes obligated on a consumer credit transaction covered by this part.’’ 118 The Department believes that defining the scope of the regulation to apply only to a covered borrower when he or she enters into a transaction or establishes an account for consumer credit is consistent with the language and 118 See 32 CFR 232.3(c) (defining a ‘‘covered borrower’’). E:\FR\FM\29SEP6.SGM 29SEP6 58616 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 structure of 10 U.S.C. 987.119 In this regard, the Department believes that 10 U.S.C. 987 should not be interpreted so as to impose restrictions on an existing agreement between a creditor and a consumer involving a credit transaction primarily for personal, family, or household purposes that spring to life when the consumer becomes a covered borrower when he or she begins active duty service in the military. Interpreting 10 U.S.C. 987 as applying only to a covered borrower who holds that status when he or she agrees to obtain the consumer credit is fair to the creditor who, at the outset of the transaction, should be in a position to know the status of its counterparty to the agreement. Moreover, the Department’s longstanding policy regarding this aspect of the scope of 10 U.S.C. 987 is consistent with the provision set forth in § 987(f)(3),120 which makes any credit contract that is prohibited under 10 U.S.C. 987 ‘‘void from the inception of such contract.’’ Section § 987(f)(3) would operate unjustly if a consumer, upon obtaining the status of a covered borrower, could sue the creditor to void an existing credit contract on the grounds that the contract—which may have been entirely lawful when originally entered into with the consumer—violates one or more provisions of 10 U.S.C. 987. One practical consequence of the Department’s longstanding policy is that a creditor is not required to constantly monitor the status of each consumer who has obtained credit or holds an account for credit to assess whether the consumer is a ‘‘covered borrower;’’ rather, the creditor may conduct that assessment, as the creditor may so elect, only at the outset of the transaction or when establishing the account for consumer credit. The Department proposes to adopt corresponding revisions to the language of certain other provisions of the regulation, notably §§ 232.3(f) and 232.5(b)(2), for the sake of clarity and consistency with this policy. Second, the Department proposes to add a new subsection (b) stating: ‘‘The examples in this part are not exclusive. To the extent that an example in this 119 See, e.g., 10 U.S.C. 987(a) (imposing conditions on ‘‘[a] creditor who extends consumer credit’’); 10 U.S.C. 987(c) (requiring certain information to be provided to a covered borrower ‘‘before the issuance of credit’’); 10 U.S.C. 987(e) (declaring that ‘‘[i]t shall be unlawful for any creditor to extend consumer credit to a [covered borrower]’’ that involves certain restrictions or conduct) (emphases added). 120 10 U.S.C. 987(f)(3) (‘‘Any credit agreement, promissory note, or other contract prohibited under this section is void from the inception of such contract.’’). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 part implicates a term or provision of Regulation Z (12 CFR part 1026), issued by the Consumer Financial Protection Bureau to implement the Truth in Lending Act, Regulation Z shall control the meaning of that term or provision.’’ Section 232.3 Definitions (a) Affiliate. The Department proposes a definition of ‘‘affiliate’’ to accompany the definition of ‘‘creditor.’’ This new proposed definition is designed to prevent evasion of the rule, specifically with respect to an entity that would not, when considered alone, qualify as a creditor, but, when considered together with its affiliates, would be engaged in extending credit, as described in § 232.3(i)(3) of the proposed rule. (b) Billing cycle. The Department proposes to define the term consistent with the meaning of this term in Regulation Z. (c) Bureau. The Department proposes to define the term for the Consumer Financial Protection Bureau. (d) Closed-end credit. The Department proposes to define the term consistent with the meaning of this term in Regulation Z. (e) Consumer. The Department proposes to define this term as a natural person. (f) Consumer credit. As discussed above, the Department proposes to define ‘‘consumer credit’’ consistent with the relevant provisions of the Bureau’s Regulation Z. Proposed § 232.3(f)(2) would provide exceptions to ‘‘consumer credit’’ that, in general, track the exceptions in 10 U.S.C. 987(i)(6). Certain credit products may, or may not, be covered under the Department’s proposed definition of ‘‘consumer credit,’’ depending, for example, on whether the particular credit product is subject to a ‘‘finance charge,’’ which the Department likewise proposes to define consistent with the meaning of that term in Regulation Z. Most, if not all, ‘‘deposit advance’’ products would (when offered to a covered borrower) be covered as consumer credit because this type of product typically involves credit extended by a creditor primarily for personal, family, or household purposes for which the borrower pays any fee or charge that is, or is expected to be, repaid from funds available in the borrower’s asset account held by that creditor. Likewise, consistent with Regulation Z,121 an overdraft line of credit with a finance charge would (when offered to a covered borrower) be 121 See 12 CFR 1026.4(c)(3) (imposing certain conditions on a charge for overdraft services that, if not satisfied, would make that charge a ‘‘finance charge’’). PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 covered as consumer credit to the extent that product consists of credit extended by a creditor primarily for personal, family, or household purposes to pay an item that overdraws an asset account and for which the borrower pays any fee or charge, but only if (A) the extension of credit for such an item and (B) the imposition of the fee or charge were previously agreed upon in writing. On the other hand, an overdraft service typically would not be covered as consumer credit because Regulation Z excludes from ‘‘finance charge’’ any charge imposed by a creditor for credit extended to pay an item that overdraws an asset account and for which the borrower pays any fee or charge, unless the payment of such an item and the imposition of the fee or charge were previously agreed upon in writing.122 Consistent with the Department’s existing regulation, proposed § 232.3(f)(2)(iv) would exclude from the scope of ‘‘consumer credit’’ any credit transaction that is an exempt transaction for the purposes of Regulation Z (other than a transaction exempt under 12 CFR 1026.29) 123 or otherwise is not subject to disclosure requirements under Regulation Z. The Department believes, at this time, that the exclusions in proposed § 232.3(f)(2)(iv) are appropriate limitations to the consumer credit that is subject to 10 U.S.C. 987 because these types of exempted credit do not pose risks to Service members and their dependents, and a creditor who already complies with Regulation Z should not be required to independently assess whether certain types of credit exempt under that rule could be subject to the requirements of the MLA. In this regard, this section of the proposed rule would remove the provision in the Department’s existing regulation that provides an exclusion for ‘‘credit secured by a qualified retirement account as defined in the Internal Revenue Code.’’ 124 The Department believes that the intent of this exclusion is sufficiently captured by the exception for any credit transaction that is an exempt transaction for the purposes of Regulation Z, as described in proposed § 232.4(c)(1)(iv). Under § 1026.3(g) of Regulation Z, credit extended to a participant in certain retirement plans is 122 See 12 CFR 1026.4(c)(3). 12 CFR 1026.29, regarding state application for Bureau exemption of a class of transactions within the state. 124 32 CFR 232.3(b)(2)(iv). In addition, the Department now believes that this provision represents a drafting error because, upon closer review, the Department could not locate a reference in the Internal Revenue Code to a ‘‘qualified retirement account,’’ as described in this provision. 123 See E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules not subject to the requirements of Regulation Z. (g) Covered borrower. The Department proposes to revise the definition of ‘‘covered borrower’’ to provide greater clarity and more closely reflect the language of the MLA. Consistent with the plain language of 10 U.S.C. 987(i)(1), the proposed rule would refer to the ‘‘armed forces.’’ This proposed provision also would clarify that the protections provided to members of the armed forces on active duty apply to Service members called or ordered to active duty under titles 10 or 14 of the United States Code, or Service members on active Guard and Reserve duty under title 32. Additionally, the Department proposes to revise the definition of ‘‘dependent’’ to reflect the plain language of the statute, as amended by § 663 of the 2013 Act. The Department believes that the proposed definition of ‘‘dependent,’’ consistent with the term used to establish eligibility for military medical care, would appropriately carry out the intent to simplify the process for determining which family members are covered under 10 U.S.C. 987. QUESTION 15: Does the revised definition of covered borrower appropriately cover active duty Service members and their dependents? (h) Credit. The proposed definition of ‘‘credit’’ is not changed from the Department’s existing regulation.125 (i) Creditor. The Department proposes to define ‘‘creditor’’ to more closely track the language in the definition of the term in 10 U.S.C. 987(i)(5). In addition, in paragraph (i)(3), the Department proposes to interpret the statutory provision of ‘‘engaged in the business of extending consumer credit’’ 126 consistent with the corresponding provision of the Department’s existing regulation, which refers to the definition of ‘‘creditor’’ in Regulation Z.127 (j) Department. The Department proposes to define the term for the Department of Defense. (k) Dwelling. The proposed definition of ‘‘dwelling’’ is not changed from the Department’s existing regulation.128 (l) Electronic fund transfer. The Department proposes to amend the definition of ‘‘electronic fund transfer’’ to have the same meaning as in the regulation issued by the Bureau to implement the Electronic Fund Transfer Act (‘‘EFTA’’), as amended from time to 125 32 CFR 232.3(d). U.S.C. 987(i)(5)(A)(i). 127 32 CFR 232.3(e) (‘‘Creditor means a person who . . . and who otherwise meets the definition of ‘creditor’ for purposes of Regulation Z.’’). 128 32 CFR 232.3(f). 126 10 VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 time (12 CFR part 1005).129 In the context of this provision—which relates only to an exception that would be contained in proposed § 232.8(e)—the Department believes that there is no need to account for the authority of the Board of Governors of the Federal Reserve System under EFTA. (m) Finance charge. The Department proposes to define the term consistent with the meaning of this term in Regulation Z. (n) Military annual percentage rate (MAPR). The Department proposes to define the term as the cost of credit expressed as an annual rate, and requires the MAPR to be calculated in accordance with proposed § 232.4(c). (o) Open-end credit. The Department proposes to define the term consistent with the meaning of this term in Regulation Z. (p) Person. The Department proposes to define the term consistent with the definition of ‘‘person’’ in the Department’s existing regulation.130 (q) Regulation Z. The Department proposes to define the term consistent with the definition of ‘‘Regulation Z’’ in the Department’s existing regulation,131 except that, first, the Department would delete the phrase ‘‘or contract’’ and, second, the Department would include a provision relating to the authority of the Board of Governors of the Federal Reserve System under TILA. Section 232.4 Terms of Consumer Credit Extended to Covered Borrowers Proposed § 232.4(a) is intended to track the restrictions under 10 U.S.C. 987(a). Relative to the language of this provision in the Department’s existing rule, which describes a ‘‘creditor’’ and an ‘‘assignee,’’ the Department is proposing to modify this provision to track the language of the statute and proposed § 232.3(i)(2), which includes an ‘‘assignee’’ within the definition of creditor. Proposed § 232.4(a)(2) would track the restriction under 10 U.S.C. 987(a)(2), which provides that a creditor who extends consumer credit to a covered borrower shall not require the borrower to ‘‘pay interest with respect to the extension of such credit, except as . . . authorized by applicable State or Federal law.’’ The Department understands that this condition on an 129 Currently the term ‘‘electronic fund transfer’’ is defined in section 1005.3(b) of the Bureau’s Regulation E. 12 CFR 1005.3(f). 130 32 CFR 232.3(e) (defining ‘‘person’’ for the purposes of § 232.3 as including a ‘‘natural person, organization, corporation, partnership, proprietorship, association, cooperation, estate, [and] trust.’’ 131 32 CFR 232.3(i). PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 58617 extension of consumer credit possibly could be interpreted to restrict a financial institution, such as a national bank, based in one state from charging interest to covered borrowers residing in another state, which imposes a limit on the interest rate that may be charged, ‘‘except as . . . authorized by [that other] State.’’ The Department believes nothing in 10 U.S.C. 987 or this regulation should be construed so as to affect the Federal law governing the interest rate a financial institution may charge.132 Proposed § 232.4(b) is intended to track the interest-rate limit of 10 U.S.C. 987(b). Proposed § 232.4(c) provides the framework for calculating the MAPR by: First, in § 232.4(c)(1), describing each of the charges that must be included in the MAPR; and second, in § 232.4(c)(2), prescribing the rules for computing the MAPR based on those charges. Proposed § 232.4(c)(1)(i)–(ii) is intended to reflect the charges that must be included as ‘‘interest’’ under 10 U.S.C. 987(i)(3). Relative to the corresponding provisions of the Department’s existing rule,133 the language of these proposed provisions would be amended to reflect the broader scope of consumer credit subject to the regulation, such as by referring to ‘‘the credit transaction for closed-end credit or upon account opening for open-end credit’’ (emphasis added). The proposed exception for a bona fide fee (other than a periodic rate) charged to a credit card account would not apply to the charges set forth in proposed § 232.4(c)(1)(i)–(ii). At this time, the Department proposes to maintain (in proposed § 232.4(c)(1)(ii)) the language of § 232.3(h)(1)(iii), which requires a creditor to include in the MAPR ‘‘fees for credit-related ancillary products sold in connection with and either at or before consummation of the [consumer credit].’’ When adopted in 2007, including in the MAPR only the ‘‘creditrelated ancillary products’’ sold ‘‘either at or before consummation of the credit transaction’’ 134 was designed to be consistent with the scope of consumer credit, which covers only a narrow band of closed-end credit products. However, nothing in the MLA necessarily limits the inclusion in the MAPR of these charges only to those that are sold at the outset of the credit transaction. Particularly insofar as consumer credit would cover open-end credit products, as proposed, the MLA reasonably could 132 In the case of a national bank, for example, see 12 U.S.C. 85; 12 CFR 74001. 133 32 CFR 232.3(h)(1)(ii)–(iii). 134 32 CFR 232.3(h)(1)(iii). E:\FR\FM\29SEP6.SGM 29SEP6 58618 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 be interpreted to require a creditor to include in the MAPR the fee for any ancillary product ‘‘sold with any extension of credit to a [covered borrower]’’ so long as that ancillary product was ‘‘associated with the extension of credit’’ 135—which could arise at any time in an ongoing, openend account for consumer credit. The Department has considered whether to amend the language of proposed § 232.4(c)(1)(ii) to require the inclusion in the MAPR of any fees for creditrelated ancillary products, with respect to open-end credit, sold either upon account opening or at any time during the existence of the account, so long as the consumer was a covered borrower at the time the account was established.136 QUESTION 16: Should the Department consider eliminating the timing condition of § 232.4(c)(1)(ii) to require the inclusion in the MAPR of any fees for credit-related ancillary products sold either upon account opening or at any time during the existence of an account for open-end consumer credit? If so, please specifically describe the scope of an amended § 232.4(c)(1)(ii). For example, how should the Department define a ‘‘credit-related ancillary product?’’ How should the Department define the seller whose charge for a credit-related ancillary product would be subject to inclusion in the MAPR (i.e., ‘‘sold by the creditor’’ or ‘‘sold by the creditor or any affiliate of the creditor’’)? Proposed § 232.4(c)(1)(iii) is intended to describe the charges that must be included in the MAPR in light of the definition of consumer credit, which would chiefly consist of ‘‘[f]inance charges,’’ consistent with Regulation Z. In general, a charge that is excluded as a ‘‘finance charge’’ under Regulation Z also would be excluded from the charges that must be included when calculating the MAPR. As a result, whereas the Department’s existing regulation provides exclusions from the MAPR for late payment fees 137 and taxes required to be paid,138 proposed 135 10 U.S.C. 987(i)(3) (defining ‘‘ ‘interest’’’ generally as including ‘‘all cost elements associated with the extension of credit’’). 136 Amending the scope of § 232.4(c)(1)(ii) by eliminating the timing condition would be consistent with the scope of § 232.4(c)(1)(i) (which tracks § 232.3(h)(1)(ii) of the existing regulation), which does not impose a condition based on the timing of a sale or charge for a credit insurance premium. 137 32 CFR 232.3(h)(2)(i) (excluding from the MAPR ‘‘[f]ees or charges imposed for actual unanticipated late payment, default, delinquency, or similar occurrence’’). 138 32 CFR 232.3(h)(2)(ii) (excluding from the MAPR ‘‘[t]axes or fees prescribed by law that actually are or will be paid to public officials for VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 § 232.4(c) omits these provisions because these charges (as well as other charges) are not finance charges under Regulation Z.139 However, the Department recognizes that, under Regulation Z, a wide range of charges that a creditor may impose in connection with a credit product are excluded as ‘‘finance charges,’’ particularly an application fee and a participation fee.140 If these exclusions from the definition of finance charge were to be maintained in the context of consumer credit covered under the MLA, a creditor would have a strong incentive to evade the interest-rate limit of 10 U.S.C. 987(b) by shifting the costs of a credit product by lowering the interest rate and imposing (or increasing) one or more of these excluded fees. To guard against this obvious result, the Department proposes to specifically include any application fee and any participation fee as charges that generally must be included in the MAPR.141 The exception for a bona fide fee (other than a periodic rate) charged to a credit card account would apply to the charges set forth in proposed § 232.4(c)(1)(iii). Proposed § 232.4(c)(1)(iv) is intended to clarify that, even if a charge set forth in paragraphs (c)(1)(i)–(iii) of this section would be excluded from the finance charge under Regulation Z, that charge nevertheless must be included in the calculation of the MAPR. QUESTION 17: Would this approach to include any application fee or participation fee in the calculation of the MAPR be reasonable to implement the statutory provision of ‘‘interest,’’ which covers ‘‘any other charge or premium with respect to the extension of consumer credit?’’ 142 1. Computing the MAPR The proposed rule contains two provisions for computing the MAPR,143 both of which track the methods already established in Regulation Z. determining the existence of, or for perfecting, releasing, or satisfying a security interest’’). 139 See 12 CFR 1026.4(c). 140 See 12 CFR 1026.4(c)(1) and (c)(4). 141 See also 72 FR at 50587 (explaining the need to define the MAPR so that covered credit products ‘‘cannot evade the 36 percent [interest-rate] limit by including low interest rates with high fees associated with origination, membership, administration, or other cost that may not be captured in the TILA definition of APR’’). 142 10 U.S.C. 987(i)(3). 143 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(B) (authorizing the Department to establish ‘‘[t]he method for calculating the applicable annual percentage rate of interest on such obligations, in accordance with the limit established under [the MLA]’’). PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 First, for closed-end credit, the proposed rule would require a creditor to follow ‘‘the rules for calculating and disclosing the ‘Annual Percentage Rate (APR)’ for credit transactions under Regulation Z,’’ based on the charges required for the MAPR, as set forth in proposed § 232.4(c)(1). In general, the requirements for calculating the APR for closed-end credit under Regulation Z are found in § 1026.22(a)(1), and include the explanations and instructions for computing the APR set forth in appendix J to part 1026. For example, the MAPR for single advance, single payment transactions, such as some types of deposit advance loans, must be computed in accordance with the rules in Regulation Z, such as by following the instructions described in paragraph (c)(5) of appendix J. Based on the formula provided in paragraph (c)(5) of appendix J, in the case of a single advance, single payment transaction loan extended to a covered borrower for a period of 45 days, and for which the advance is $500 and the single payment required consists of the principal amount plus a finance charge of $28.44, for a total payment of $528.44, the MAPR would be 46.14 percent. In this example, the resultant MAPR would exceed the interest-rate limit imposed by 10 U.S.C. 987(b), as set forth in proposed § 232.4(b) of the regulation. Second, for open-end credit, a creditor generally would be required to calculate the MAPR using the methods prescribed in § 1026.14(c)–(d) of Regulation Z, which relates to the ‘‘effective annual percentage rate.’’ 144 Section 1026.14(c) of Regulation Z provides for the methods of computing the annual percentage rate under three scenarios: (1) When the finance charge is determined solely by applying one or more periodic rates; (2) when the finance charge includes a fixed charge that is not due to application of a periodic rate, other than a charge with respect to a specific transaction; and (3) when the finance charge includes a charge relating to a specific transaction during the billing cycle. 144 A creditor subject to § 1026.40 of Regulation Z is not required to comply with § 1026.14(c) (‘‘[that type of] creditor may, at its option, disclose an effective annual percentage rate pursuant to § 1026.7(a)(7) and compute the effective annual percentage [in accordance with the subparagraphs of § 1026.14(c)]’’). However, for the purposes of complying with the Department’s proposed rule when computing a MAPR for open-end credit, any creditor subject to the Department’s regulation would be required to comply with that proposed § 1026.14(c), subject to the proposed § 232.4(c)(2)(ii)(B) (in the event that there is no balance during a billing cycle). E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules For example, suppose a creditor offers a line of credit to a covered borrower primarily for personal, family, or household purposes (commonly referred to as a ‘‘personal line of credit’’), and permits the borrower to repay on a monthly basis. Upon establishing the personal line of credit, the covered borrower borrows $500. The creditor charges a periodic rate of 0.006875 (which corresponds to an annual rate of 8.25 percent), plus a fee of $25, charged when the account is established and annually thereafter. Under these circumstances, pursuant to § 1026.14(c)(2) of Regulation Z the creditor would calculate the MAPR as follows: ‘‘Dividing the total amount of the finance charge for the billing cycle’’—which is $3.44 (corresponding to (0.006875) × ($500)), plus $25—‘‘by the amount of the balance to which it is applicable’’—$500—and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year’’—12 (since the creditor allows the borrower to repay monthly), which is 68.26 percent. In this example, even though the periodic rate (0.006875) would comply with the interest-rate limit under proposed § 232.4(b), the resultant MAPR would be in excess of that limit because the amount borrowed is low at the time the annual fee is imposed. If the covered borrower instead borrows a higher amount, then the creditor still could impose the $25 annual fee and comply with proposed § 232.4(b); for example, if the amount initially borrowed is $1,400, then the resultant MAPR would be 24.73, well below the 36 percent limit. In the case of open-end credit extended through a credit card account, a creditor likewise would be required to calculate the MAPR using the methods prescribed in § 1026.14(c)–(d) of Regulation Z. For example, if a creditor extends credit to a covered borrower through a credit card account and the borrower incurs a finance charge relating to a specific transaction, such as a cash advance transaction, during the billing cycle, then the creditor would calculate the MAPR under the instructions set forth in § 1026.14(c)(3) of Regulation Z. However, in the case of a credit card account the creditor may exclude, pursuant to proposed § 232.4(c)(1)(iii), any bona fide fee (as described in proposed § 232.4(d)) from the finance charges that otherwise must be accounted for; thus, if a charge for the cash advance transaction fits within the exclusion for a bona fide fee under proposed § 232.4(d), then that charge would not be included when computing the MAPR for that billing cycle. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Under certain circumstances, a creditor might not know at the outset of a billing cycle whether the borrower’s use of an open-end line of credit will lead to a finance charge that—through a combination of rates and fees—exceeds the interest-rate limit of the MLA. However, at the end of a billing cycle the creditor would be able to calculate the total charges included in the MAPR and waive an amount necessary to comply with the 36-percent limit of § 232.4(b). QUESTION 18: Are there operational issues with the use of the effective APR methodology for open-end credit products that the Department should consider? If so, are there alternative methods for calculating the MAPR for these products that would be consistent with 10 U.S.C. 987 and that would address the operational issues? Proposed § 232.4(c)(2)(ii)(B) generally would prohibit a creditor from imposing a charge in an open-end credit plan for any billing cycle during which there is no balance. However, this provision would include an exception for a participation fee (which otherwise would be required to be included under proposed § 232.4(c)(1)(iii)(B)) because the Department believes that there might be circumstances in which a creditor should be allowed to charge a bona fide fee for maintaining an openend line of credit for a covered borrower. Still, recognizing that a creditor could structure a high-cost, open-end line of credit to fit within this exception by substantially increasing the participation fee, the Department proposes to limit that fee to $100 per annum, regardless of the billing cycle in which the participation fee is imposed. The Department believes that $100 is the highest reasonable amount that a creditor could charge as a bona fide participation fee, during a billing cycle in which there is no balance, for the purposes of keeping the line of credit open to the covered borrower. Furthermore, proposed § 232.4(c)(2)(ii)(B) would contain a provision to clarify that the $100-per annum limitation on the amount of the participation fee does not apply to a bona fide participation fee charged to a credit card account that would be eligible for the exclusion under proposed § 232.4(d). We seek comment on whether the limit on a participation fee to $100 per annum is reasonable and economically justifiable. 2. Conditional Exclusion From the MAPR for Bona Fide Fees Charged to a Credit Card Account The Department believes that credit card products may warrant special PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 58619 consideration under the MLA. As discussed above, proposed § 232.4(d) would provide the conditional exclusion, including standards relating to the conditions, that allows a creditor to exclude bona fide fees charged to a credit card account from the MAPR. The Department believes that the proposed conditions for excluding a bona fide fee from the MAPR—namely, that the fee must be ‘‘reasonable’’ and ‘‘customary’’—would fairly allow Service members and their dependents to continue to have access to credit card products and limit the opportunity for a creditor to exploit the exclusion for those products. However, as set forth in proposed § 232.4(d)(4), a creditor who imposes any fee that is not a bona fide fee or that fails to meet the conditions of being ‘‘reasonable and customary’’ must include the total amount of those fees, including any bona fide fees, in the MAPR. Thus, if a creditor charges one unreasonable fee or a fee that is not customary in a credit card account for a covered borrower, the creditor must include the total amount of the fees— including any fee(s) that otherwise may be eligible for the exclusion—in the MAPR. As discussed above, the ‘‘reasonable and customary’’ conditions for a bona fide fee, as proposed, are intended to be applied flexibly so that, in general, creditors may continue to offer a wide range of credit card products that carry reasonable costs expressly tied to specific products or services and which vary depending upon the covered borrower’s own choices regarding the use of the card. Section 232.5 Identification of Covered Borrowers As discussed above and except as provided in § 232.5(c), proposed § 232.5 would provide a mechanism for a creditor to unilaterally assess the status of a consumer who applies for consumer credit if: First, the creditor checks the MLA Database to determine that consumer-applicant’s status when the creditor enters into a transaction or establishes an account for consumer credit; second, the consumer-applicant does (or does not) appear in the MLA Database; and, third, the creditor retains a record of the information obtained from the MLA Database. In addition, proposed § 232.5(a) would expressly provide that a creditor is permitted to use other methods, as the creditor may elect, to assess whether a consumer is a covered borrower. Proposed § 232.5(c)(1) would provide that a creditor who has actual knowledge that a consumer is a covered borrower must ‘‘treat the consumer as a E:\FR\FM\29SEP6.SGM 29SEP6 58620 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules covered borrower notwithstanding any determination by that creditor based on information obtained from the [MLA Database].’’ The Department intends for this exception to the safe harbor in proposed § 232.5(b) to apply so that a creditor may not take advantage of an obvious error in the MLA Database when the creditor knows otherwise, and the Department expects these circumstances to be rare. Proposed § 232.5(c)(2) would state that ‘‘actual knowledge’’ of the status of a consumer as a covered borrower may be established ‘‘only on the basis of a record (including any electronic record) collected by the creditor prior to entering into a transaction or establishing an account for consumer credit and maintained in any system used by the creditor that relates to the consumer credit involving that consumer.’’ This proposed paragraph (c)(2) is intended to provide an evidentiary standard to establish whether a creditor might have ‘‘actual knowledge’’ with respect to a consumer’s status relating to a consumer credit transaction or account. Depending on the circumstances, actual knowledge may be established based on the presence of one or more records maintained in the relevant system the creditor uses for the consumer credit transaction or account; under proposed § 232.5(c)(2), actual knowledge may not be established solely on the basis of other kinds of evidence, such as solely on testimony from a borrower that, during the application process, the borrower told the creditor’s employee that the borrower is a Service member on active duty. QUESTION 19: What alternatives should the Department consider for the evidentiary standard articulated in proposed § 232.5(c)(2)? Please provide specific language for provisions that would implement these alternatives. tkelley on DSK3SPTVN1PROD with PROPOSALS6 Section 232.6 Disclosures Mandatory Loan The Department proposes to amend § 232.6 of the regulation to simplify the information that a creditor must provide to a covered borrower when issuing consumer credit, consistent with the requirements of 10 U.S.C. 987(c). In particular, the Department is proposing, first, to eliminate the current requirement for information to be provided ‘‘clearly and conspicuously’’ and, second, to require a creditor to provide a ‘‘statement’’ of the MAPR that describes the charges the creditor may impose, instead of the periodic rate of the MAPR itself ‘‘and the total amount of all charges included in the MAPR,’’ VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 as the existing regulation currently requires. Proposed § 232.6(a) would require a creditor to provide four categories of information to a covered borrower at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit. namely: • A statement of the MAPR applicable to the extension of consumer credit; • Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; • A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or accountopening disclosure (in the case of openend credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement; and • A statement [describing the protections afforded to Service members and their dependents under the MLA].’’ 1. Clear and Conspicuous Requirement The Department’s existing regulation requires each of these categories of information to be provided ‘‘clearly and conspicuously’’ to a covered borrower.145 There might be some benefits to covered borrowers by requiring certain information to be provided in a manner that, relative to other terms and conditions relating to the extension of or account for consumer credit, makes that information clear and conspicuous.146 However, nothing in 10 U.S.C. 987(c) requires information to be provided ‘‘clearly and conspicuously.’’ In addition, Regulation Z independently generally requires disclosures regarding the costs of credit to be provided ‘‘clearly and conspicuously,’’ 147 and requires a creditor to present some types of information in those disclosures in certain formats.148 The Department believes that—particularly in light of the proposal to extend the protections of the MLA to a broader range of transactions of and accounts for consumer credit—a creditor should be relieved from the 145 32 CFR 232.6(a). adopting its rule in 2007, the Department addressed the disclosure requirements of Regulation Z, see, e.g., 72 FR at 50588, but did not address the purposes of imposing a clear-andconspicuous requirement under 10 U.S.C. 987(c). 147 12 CFR 1026.5(a)(1)(i) and 1026.17(a)(1). 148 See, e.g., 12 CFR 1026(a)(3)(iii) (requiring ‘‘[c]ertain account-opening disclosures [to] be provided in a tabular format’’); see also, e.g., 12 CFR 1026.17(a)(1) (prescribing the format of the TILA disclosures for closed-end credit transactions to be ‘‘grouped together, [and] segregated from everything else’’). 146 When PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 obligation to present the categories of information required under 10 U.S.C. 987(c)(1)(A) and 987(c)(1)(C) in a manner that is clear and conspicuous. However, the Department continues to intend that the information which would be required to be provided to a covered borrower must be provided consistent with the format and other requirements of Regulation Z.149 QUESTION 20: If the Department were to adopt a regulation as proposed, to what extent, and in what manner, would the elimination of the clear-andconspicuous requirement affect the presentation of the categories of information required under 10 U.S.C. 987(c)(1)(A) and 987(c)(1)(C)? 2. Statement of the MAPR Proposed § 232.6(a)(1) would require a creditor to provide a ‘‘statement’’ of the MAPR, instead of ‘‘[t]he MAPR applicable to the extension of consumer credit, and the total dollar amount of all charges included in the MAPR,’’ as required under § 232.6(a)(1) of the existing regulation. When adopting this requirement in 2007, the Department recognized that the disclosure of the figures relating to the MAPR would apply only to the discrete forms of closed-end credit defined as ‘‘consumer credit,’’ and therefore interpreted the language of 10 U.S.C. 987(c)(1)(A) to require an annual percentage rate of interest. Nonetheless, the Department then recognized ‘‘the potential confusion inherent in mandating the disclosure of two differing annual percentage rates (the MAPR required by [its] regulation and the APR required by TILA).’’ 150 The Department now believes that this same ‘‘potential confusion’’ would be significantly magnified in the context of a wider range of closed-end and open-end credit products that, under this proposal, would be covered under the MLA. Section 987(c)(1)(A) of the MLA does not, by its terms, require the disclosure of a particular annual percentage rate or the ‘‘amount of all charges’’ applicable to the extension of consumer credit. Rather, 10 U.S.C. 987(c)(1)(A) requires a ‘‘statement of the annual percent rate of interest applicable to the extension of credit’’ (emphasis added), and 10 U.S.C. 987(c)(2) independently requires ‘‘[s]uch disclosures [to] be presented in accordance with terms prescribed by the regulations . . . to implement the [TILA].’’ 151 Taken singly and in 149 See 72 FR at 50588. Accordingly, the information required under the MLA should not be interspersed with the TILA disclosures. 150 72 FR at 50589. 151 10 U.S.C. 987(c)(2). As enacted, the MLA refers in this section to regulations ‘‘issued by the E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 conjunction with each other, these provisions of § 987(c) reasonably should be interpreted as requiring a ‘‘statement’’ regarding the MAPR and, separately, disclosures regarding the particular costs of credit relating to a transaction of or account established for consumer credit that are ‘‘in accordance with the terms’’ of Regulation Z. In addition, section 987(i)(4) of the MLA provides that the term ‘‘ ‘annual percentage rate’ has the same meaning as in section 107 of [TILA], as implemented by regulations of the [Bureau].’’ That term also includes ‘‘all fees and charges,’’ including certain charges that may be exempt from the term ‘‘finance charge’’ under Regulation Z.152 The Department believes that, in light of section 987(i)(4) (‘‘‘annual percentage rate’ has the same meaning as in section 107 of [TILA], as implemented by the [Bureau]’’), section 987(c)(1)(A) of the MLA (‘‘A statement of the annual percentage rate of interest’’) should not be interpreted to require a creditor to calculate and disclose to a covered borrower a definitive figure for the ‘‘annual percentage rate’’ of interest applicable to the consumer credit that could include additional charges that must be counted as ‘‘interest,’’ and thereby would be materially different from the figure the creditor is required (under section 987(c)(1)(B) of the MLA) to compute and disclose under TILA. Instead, the Department believes that the appropriate approach to interpret the tension between sections 987(i)(4), 987(c)(1)(A), and 987(c)(1)(B) is to subject a creditor to one set of requirements for calculating and disclosing the costs of the extension of credit, namely, the requirements under TILA. One clear and beneficial consequence of interpreting these ambiguous provisions of the MLA under this approach is that a creditor would not be required to provide to a covered borrower two different numerical disclosures, which inevitably would lead to confusion.153 Board of Governors of the Federal Reserve System’’ (Board) to implement TILA. Subject to certain exceptions, notably under section 1029(c) of the Consumer Financial Protection Act of 2010, 12 U.S.C. 5519(c), the Board’s authorities to prescribe rules implementing the federal consumer financial laws have been transferred to the Bureau. 12 U.S.C. 5581. Accordingly, the Department now generally looks to the rules prescribed by the Bureau implementing TILA, except with respect to certain creditors. See proposed § 232.3(p) (describing the application of the Board’s Regulation Z, 12 CFR part 226, to certain creditors). 152 See 12 U.S.C. 1026(c). 153 In this regard, the Department also recognizes that many creditors likely would adopt disclosures and contract documents that would be designed to be provided to both consumers who are not entitled VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 In light of the scope of the proposed definition of consumer credit, which would encompass open-end credit products, the Department proposes to exercise its discretion under the MLA 154 to interpret 10 U.S.C. 987(c)(1)(A) more straightforwardly to require, in § 232.6(c), a creditor to provide a description of ‘‘the charges the creditor may impose, in accordance with this part and subject to the terms and conditions of the agreement relating to the consumer credit to calculate the MAPR.’’ This proposed section also would clarify that a creditor would not be required to ‘‘describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MAPR that apply to the extension of consumer credit.’’ The Department believes that the disclosure of the items relating to the costs of consumer credit (e.g., a periodic rate and other finance charges) that apply to a particular transaction or account, including the format of those items, should be governed under Regulation Z, consistent with the provisions of 10 U.S.C. 987(c)(1)(B) and 987(c)(2). Accordingly, under the Department’s proposal, a creditor should be able to streamline its compliance with these requirements under 10 U.S.C. 987(c) by providing to a covered borrower the same disclosures the creditor must (in any event) provide to a consumer under Regulation Z, plus a statement of the MAPR. In order to facilitate compliance with that latter requirement, proposed § 232.6(c)(3) provides a model statement that a creditor could use. Proposed § 232.6(c)(2) provides that a creditor may include a statement of the MAPR in its agreement with the covered borrower for the transaction of or account established for consumer credit. Consistent with the Department’s interpretation of its existing regulation,155 proposed § 232.6(c)(2) would expressly provide that the statement of the MAPR is not required in any advertisement relating to consumer credit. QUESTION 21: If the Department were to adopt a regulation as proposed, to the protections under the MLA and to covered borrowers. The Department’s proposed interpretation of sections 987(i)(4), 987(c)(1)(A), and 987(c)(1)(B) of the MLA, which would require a creditor to provide the cost disclosures only required by TILA, would reduce the general confusion to non-covered borrowers assessing the costs of credit products that are not covered by the MLA. 154 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(A) (authorizing the Department to prescribe regulations establishing ‘‘[d]isclosures required of any creditor that extends consumer credit to a [covered borrower]’’). 155 72 at 50589. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 58621 to what extent, and in what manner, would the requirement to provide a description of ‘‘the charges the creditor may impose, in accordance with this part and subject to the terms and conditions of the agreement relating to the consumer credit to calculate the MAPR,’’ instead of a definitive figure for the ‘‘annual percentage rate’’ of interest applicable to the consumer credit, affect the offering or provision of that credit to a covered borrower? 3. One-Time Delivery of Information; Methods of Delivery; Refinancing a Covered Loan Proposed § 232.6(b) would establish rules relating to transactions involving a creditor and assignee or multiple creditors. More specifically, proposed § 232.6(b)(1) would provide that the information required under the MLA is ‘‘not required to be provided to a covered borrower more than once for the transaction or the account established for consumer credit with respect to that borrower.’’ (However, the disclosures required by Regulation Z, described in proposed § 232.6(a)(2), would remain subject to Regulation Z, and not the one-time delivery provision in proposed § 232.6(b)(1).) Proposed § 232.6(b)(2) would require multiple creditors to agree among themselves as to how to provide the information required under the MLA. Proposed § 232.6(d) would establish rules relating to the methods of delivery, which are substantively similar to the rules under the existing regulation. Under proposed § 232.6(d)(1), a creditor would be required to provide the information required under the MLA ‘‘in writing in a form the covered borrower can keep.’’ And under proposed § 232.6(d)(2), consistent with the structure and intent of the existing regulation,156 a creditor would be required to orally provide the information required under the MLA, or provide a method for the covered borrower to obtain oral disclosures when the borrower engages in a mail transaction, an internet transaction, or a credit transaction conducted at the point-of-sale in connection with the sale of a nonfinancial product or service. In this regard, the Department recognizes that its proposal to extend the scope of consumer credit to apply to a broader range of closed-end and open-end credit products would encompass credit offered at retail locations for nonfinancial products or services; similar to the treatment of a mail or internet transaction under the existing 156 See 10 U.S.C. 987(c)(1) (requiring information to be provided ‘‘orally’’). E:\FR\FM\29SEP6.SGM 29SEP6 58622 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 regulation, the Department believes that, because a creditor is not present to interact orally with a covered borrower, the creditor should be permitted to provide a toll-free telephone number on or with the written disclosures so that the borrower may obtain the oral disclosures when obtaining consumer credit at the point-of-sale for a nonfinancial product or service. Proposed § 232.6(e) would keep intact the current provision, currently found in § 232.6(c) of the Department’s regulation, that requires ‘‘a new statement’’—to correspond with the statement of the MAPR under proposed § 232.6(a)(1)—and ‘‘disclosures under this section only when the transaction for that credit would be considered a new transaction that requires disclosures under Regulation Z.’’ 4. Proposal To Eliminate Disclosure Under § 232.6(a)(4) Under the Department’s existing regulation (as well as this proposed regulation), § 232.6(a)(4) requires a creditor to provide to a covered borrower a specific statement regarding protections for Service members and their dependents under Federal law and resources that may be available to assist them with financial matters (‘‘Statement of Federal Protections’’). Consistent with the Department’s stance when proposing its initial regulation in 2007,157 the Department intends to develop this regulation so that its provisions are true to the intent of the MLA without creating a system that is so burdensome that the creditor cannot comply. If the Department were to adopt in the final rule the provisions relating to the statement of the MAPR, including the model statement set forth in proposed § 232.6(c)(3), and maintain the general statement regarding the protections under the MLA, under § 232.6(a)(4), a creditor effectively would be required to provide two, potentially overlapping items of information before or at the time the covered borrower becomes obligated on the transaction or establishes an account for the consumer credit. The Department recognizes that, whereas a ‘‘statement’’ of the MAPR is required by 10 U.S.C. 987(c)(1)(A), the Statement of Federal Protections under § 232.6(a)(4) is solely a function of the Department’s discretion to require a creditor to 157 When proposing its initial regulation in April 2007, the Department addressed the disclosure requirements under § 232.6(a) and stated: ‘‘As with other aspects of the statute, the Department’s intention has been to develop a regulation that is true to the intent of the statute without creating a system that is so burdensome that the creditor cannot comply.’’ 72 FR at 18165. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 provide certain disclosures.158 In light of other aspects of the Department’s proposal, the Department is concerned that these two, potentially duplicative disclosure requirements could create a system that would be relatively burdensome for a creditor to comply with. The Department recognizes the need to consider balancing Service members’ and their dependents’ interests in receiving useful information with creditors’ compliance burdens; thus, the Department could take certain steps to reduce the overall amount of and simplify the information relating to extensions of consumer credit. Accordingly, the Department is considering whether to eliminate § 232.6(a)(4) that requires a creditor to provide the Statement of Federal Protections. QUESTION 22: Please specifically describe the benefits currently provided to a covered borrower by requiring a creditor to provide a specific statement describing the protections afforded to Service members and their dependents under the MLA, as set forth in § 232.6(a)(4). What would be the likely costs or benefits of eliminating the requirement in § 232.6(a)(4) to provide this specific statement? QUESTION 23: The Department solicits comment on whether the proposal adequately addresses compliance challenges involving the provision of oral disclosures required by the MLA. The Department invites comment on alternatives that would balance the informational needs of covered borrowers with the compliance burden of creditors. Section 232.7 Preemption Proposed § 232.7 would revise the corresponding section of the Department’s existing regulation to reflect amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a)(1) of the 2013 Act. In particular, § 232.7(b)(1) would be amended to reflect the prohibition against a state to authorize creditors to charge covered borrowers rates of interest for ‘‘any consumer credit or loans’’ that are higher than the legal limit for residents of the state (emphasis added). To mirror the language in 10 U.S.C. 987(d)(2), proposed § 232.7(b)(1) also would revise the term ‘‘rates of interest’’ to ‘‘annual percentage rates of interest.’’ Additionally, § 232.7(b)(2) would be amended to clarify that the prohibition against a state to permit a violation or waiver of any state law protections on the basis of a covered borrower’s nonresident or military status to 158 10 PO 00000 U.S.C. 987(h)(2)(A). Frm 00022 Fmt 4701 Sfmt 4702 protections ‘‘covering consumer credit,’’ consistent with the amendment in section 661(a)(2) of the 2013 Act. Section 232.8 Limitations When the Department adopted its initial regulation in 2007, § 232.8(a) provided an exception from the prohibition, set forth in 10 U.S.C. 987(e)(1), against rolling over, renewing, or refinancing consumer credit that had been extended to a covered borrower by the same creditor. The exception allows the same creditor to renew or refinance consumer credit to the covered borrower if ‘‘the new transaction results in more favorable terms to the covered borrower, such as a lower MAPR.’’ 159 Commenters on the Department’s initial proposal expressed concerns that the morefavorable-terms standard was ‘‘too subjective and would create uncertainty about what terms are ‘more beneficial,’ ’’ and ‘‘suggested that financial institutions might err on the side of caution and forego entering transactions that could benefit the borrower in order to avoid any potential liability.’’ 160 Whereas the existing exception had been adopted in the context of a narrow band of products within the three categories initially defined as consumer credit, this proposal to extend the scope of consumer credit increases the potential risks associated with any perceived ambiguity in the morefavorable-terms standard. Proposed § 232.8(a) would track the language of the refinancing prohibition of 10 U.S.C. 987(e)(1),161 but would limit the application of that prohibition to a relatively narrow group of creditors. More specifically, the Department would exercise its discretion to define a creditor for the purposes of 10 U.S.C. 987 162 by defining—only for the purposes of § 232.8(a)—the term ‘‘creditor’’ to mean ‘‘a person engaged in the business of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the 159 32 CFR 232.8(a)(1). FR at 50589. 161 In addition, the Department proposes to substantially preserve the provision which currently states: ‘‘This part shall not apply to a transaction permitted by this paragraph when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this part because the consumer was not a covered borrower at the time of the original transaction.’’ 162 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(i)(5)(A)(ii) (authorizing the Department to establish ‘‘additional criteria [for the definition of creditor] as are specified for such purpose in regulations prescribed under [the MLA]’’). 160 72 E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 relevant law), provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union.’’ Restricting the application of the refinancing prohibition to creditors who are engaged in the business of ‘‘deferred presentment transactions or similar payday loan transactions (as described in the relevant law)’’ would be consistent with the structure, language, and intent of the prohibition, which is designed to apply to a creditor who rolls over, renews, repays, refinances, or consolidates consumer credit that the creditor itself already extended to a covered borrower, thereby ensnaring the borrower in the debt trap that the Department described in its 2006 Report.163 The Department believes that payday lenders commonly engage in these transactions. Moreover, the Department believes that restricting the application of the refinancing prohibition to that specified class of creditors would permit most creditors, including a wide range of banks, thrifts, and credit unions, to offer beneficial forms of consumer credit, such as workout loans and other favorable refinancing transactions, to their covered-borrower customers. Proposed § 232.8(e) generally would track the language of § 232.8(a)(5) of the existing regulation. Proposed § 232.8(f) would track the language of the prohibition of 10 U.S.C. 987(e)(6), but would provide an exemption for a unique class of creditors. More specifically, the Department would exercise its discretion to define a creditor for the purposes of 10 U.S.C. 987 164 by excluding—only for the purposes of § 232.8(f)—from the term ‘‘creditor’’ military welfare societies and the service relief societies, as described in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4) and: Army Emergency Relief, the Air Force Aid Society, the NavyMarine Corps Relief Society, and the Coast Guard Mutual Assistance. Federal law provides that a loan to a Service 163 See 2006 Report, at 14. See also Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products 24–25 (April 2013), available at http://files.consumerfinance.gov/f/ 201304_cfpb_payday-dap-whitepaper.pdf (discussing the sustained use of payday loans, and stating that for consumers who conducted at least seven payday loan transactions in a year, the majority of those transactions ‘‘were taken on a nearly continuous basis.’’). 164 10 U.S.C. 987(h)(1) (authorizing the Department to prescribe regulations to carry out the MLA); 10 U.S.C. 987(i)(5)(A)(ii) (authorizing the Department to establish ‘‘additional criteria [for the definition of creditor] as are specified for such purpose in regulations prescribed under [the MLA]’’). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 member from one of these specified Relief Societies may be repaid through deductions from the pay of the borrowing Service member.165 In the Department’s experience, the specified Relief Societies provide essential emergency financial assistance to Service members. The specified Relief Societies make low- and no-cost loans, as well as grants, to Service members repayable through an allotment of military pay.166 Recognizing the unique and important role of the specified Relief Societies, and the long history of the specified Relief Societies in supporting the welfare of Service members and their families, the Department encourages Service members facing financial need to utilize the services provided by the specified Relief Societies. In light of the specialized operations of each of the specified Relief Societies, which currently depend crucially on the use of an allotment from a Servicemember borrower’s pay, and consistent with the Department’s regulations on deductions from pay under 37 U.S.C. 1007, the Department proposes to exclude the Relief Societies specified in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4) from the definition of ‘‘creditor’’ only for the purposes of the prohibition in § 232.8(f). In all other respects, proposed § 232.8 would substantially preserve the language of the existing provisions of § 232.8. However, the Department proposes to amend the structure of § 232.8 by eliminating subsection § 232.8(b) (and make other conforming amendments) because the definition of ‘‘creditor,’’ in proposed § 232.3(i)(2), would include an assignee of a covered creditor. QUESTION 24: What would be the likely costs or benefits of revising the refinancing prohibition in 10 U.S.C. 987(e)(1) to apply only to a specific type of creditor who is ‘‘engaged in the business of extending consumer credit 165 37 U.S.C. 1007(h). 166 See Army Emergency Relief: http:// www.aerhq.org/dnn563/Portals/0/ AERAnnualReport2012.pdf, ‘‘[i]n 2012, AER provided more than $68.6 million in no-interest loans and grants to 55,342 Soldiers and Families and their Families;’’ Air Force Aid Society: http:// www.afas.org/file/documents/2012-AnnualReport.pdf, ‘‘2012 direct assistance totaled nearly $18 million, and includes more than 40,000 assists to Airmen and their families;’’ Navy-Marine Corps Relief Society http://b.3cdn.net/nmcrs/ 45f955f5204f8ca1df_mlbruu7ib.pdf, ‘‘FY12 63,392 Clients received financial assistance, $41.8 million;’’ Coast Guard Mutual Aid: http:// www.cgmahq.org/Financial/AnnualReports/ 2012.pdf, ‘‘[o]verall in 2012, CGMA distributed more than $4.27 million in direct financial assistance to over 5,900 Coast Guard individuals and their families.’’ PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 58623 subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the relevant law),’’ and to not include a creditor that is ‘‘chartered or licensed under Federal or State law as a bank, savings association, or credit union?’’ QUESTION 25: What would be the likely costs or benefits of amending the prohibition in 10 U.S.C. 987(e)(5) to apply to creditors other than a creditor who is ‘‘chartered or licensed under Federal or State law as a bank, savings association, or credit union?’’ QUESTION 26: Should the Department consider a broader exemption from the term ‘‘creditor’’ for the military welfare societies and the service Relief Societies specified in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4)? Section 232.9 Penalties and Remedies Proposed § 232.9(a)–(d) would preserve the language of those provisions of the existing regulation. The Department proposes to add a new § 232.9(e) to reflect (with conforming changes to the language) the civilliability provisions of the MLA enacted in section 662(a) of the 2013 Act. Section 232.10 Enforcement Administrative The Department proposes to add a new § 232.10 to reflect (with conforming changes to the language) the administrative-enforcement provisions of the MLA enacted in section 662(b) of the 2013 Act. Section 232.11 Servicemembers Civil Relief Act Provisions Unaffected As a consequence of adding a new section for the administrativeenforcement provisions, the existing § 232.10 would be re-numbered to § 232.11, without any change to the language of that section. Section 232.12 Effective Dates The Department proposes to amend the section relating to the effective dates of the regulation, now § 232.12, particularly to reflect the effective dates of amendments to the MLA enacted in the 2013 Act. Proposed § 232.12(a) would amend the language of § 232.11 of the existing regulation to reflect the amendments that would be adopted in the Department’s forthcoming final rule. Consistent with the current § 232.11, consumer credit extended to a covered borrower any time on or after October 1, 2007, and up to the effective date of the Department’s forthcoming final rule E:\FR\FM\29SEP6.SGM 29SEP6 58624 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules would be subject to the requirements of the Department’s existing rule. Proposed § 232.12(b) generally would apply the requirements of the Department’s forthcoming final rule only to new transactions or accounts involving consumer credit that are consummated or established after the effective date of the final rule. The Department believes that this provision would be equitable, particularly to avoid the potential injustice and operational difficulties that could arise if new requirements under the amended regulation were to apply to pre-existing transactions or accounts involving consumer credit to covered borrowers. However, proposed § 232.12(b) would provide exceptions to allow certain provisions of § 232.7(b) and § 232.9(e), as discussed below, to become effective prior to the effective date of the Department’s forthcoming final rule. Proposed § 232.12(c) would provide that ‘‘the amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a) of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 112–239, 126 Stat. 1785), as reflected in § 232.7(b), shall take effect on January 2, 2014.’’ Section 661(c)(2)(A) of the 2013 Act provides, in relevant part, that the amendments enacted in section 661(a) of that Act shall take effect on ‘‘the date that is one year after the date of enactment of this Act.’’ 167 As a result, only the amendments made in § 232.7(b)(1)—adding the phrase ‘‘any consumer credit’’ before ‘‘loans’’—and § 232.7(b)(2)—adding the phrase ‘‘covering consumer credit’’ after ‘‘State consumer lending protections’’—would be effective on January 2, 2014. Proposed § 232.12(d) would provide that civil-liability provisions adopted in § 232.9(e) ‘‘shall apply with respect to consumer credit extended on or after January 2, 2013.’’ This subsection reflects the effective date, established in section 662(c) of the 2013 Act, of the civil-liability provisions enacted in section 662(a) of that Act. tkelley on DSK3SPTVN1PROD with PROPOSALS6 V. Regulatory Analyses A. Analysis Under Executive Orders 12866 and 13563 In accordance with the requirements of Executive Orders 12866 168 and 13563 169 (‘‘EO 12866’’ and ‘‘EO 13563’’), the Department has assessed the expected costs associated with the proposal to amend its regulation to extend the protections of 10 U.S.C. 987 167 10 U.S.C. 987 note. Planning and Review, 58 FR 51735 (Oct. 4, 1993). 169 Improving Regulation and Regulatory Review, 76 FR 3821 (Jan. 21, 2011). 168 Regulatory VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 to a broader range of closed-end and open-end credit products offered or extended to covered borrowers. In addition, the Department has provided a sensitivity analysis that examines potential benefits. 1. Executive Summary EO 12866 and EO 13563 direct executive agencies, including the Department, to assess the anticipated present and future benefits and costs of available regulatory alternatives— including both quantitative measures and qualitative measures—using the best available techniques. A determination has been made that this proposed regulation is a significant regulatory action, as defined in EO 12866 and as supplemented by EO 13563, in that this regulation, if adopted as proposed, might have an annual effect on the economy of $100 million or more. Accordingly, this proposed regulation has been reviewed by the Office of Management and Budget (‘‘OMB’’). The regulatory impact assessment prepared by the Department for this proposed regulation is provided below. The Department anticipates that its regulation, if adopted as proposed, might impose costs of approximately $96 million during the first year, as creditors adapt their systems to comply with the requirements of the MLA and the Department’s regulation. After the first year and on an ongoing basis, the annual cost to the economy is expected to be approximately $20 million. The Department provides a sensitivity analysis examining scenarios in which the proposed rule would, if adopted, reduce the incidence of involuntary separation of Service members due to financial distress; the benefits under these scenarios range from $13 million to $137 million annually. The MLA, as implemented by the Department’s regulation as well as under this proposed regulation, provides two broad classes of requirements applicable to a creditor: first, the creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit to a covered borrower (‘‘interest-rate limit’’); second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information (e.g., a statement of the MAPR), both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, by refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 consumer credit, and by refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit (collectively, ‘‘other MLA conditions’’). The interest-rate limit results in a transfer payment because the amount of interest revenue to be foregone by a creditor—that is, the amount of interest revenue that a creditor otherwise could receive by imposing an MAPR of greater than 36 percent—necessarily corresponds to the amount saved by the covered borrower. The Department recognizes that the other MLA conditions of the proposed regulation could lead to various types of compliance costs for creditors, and the estimated cumulative amount of those quantified costs on an ongoing, annual basis is approximately $20 million. The other MLA conditions are anticipated to impose direct financial costs on a creditor that are not reasonably expected to be offset by any quantifiable, financial benefit to a covered borrower. For example, the Department believes that, for the purposes of conducting this assessment under EO 12866 and EO 13563, the estimated costs on creditors associated with the requirement to provide to covered borrowers a statement of the MAPR is not offset by any financial benefit to the borrowers, even though borrowers generally do obtain some non-quantifiable benefits from receiving the statement. Similarly, the Department expects that creditors will face compliance costs when using the Department’s MLA Database to assess whether consumer-applicants are covered borrowers and maintaining records of that information, as provided in proposed § 232.5(b), and consumers reasonably can be assumed to be indifferent to the functions associated with conducting covered-borrower checks through the MLA Database and not receive any readily quantifiable, financial benefits thereof. The Department believes, as discussed above in section III.C., there are benefits to a system for conducting a coveredborrower check that minimizes, or eliminates, the opportunity for a covered borrower to make a false statement regarding his or her status when applying for consumer credit. Likewise, the Department recognizes that the proposal could impose certain types of costs on covered borrowers, including a potential reduction in access to available credit. Nevertheless, as discussed above in section II.E., 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 E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules likely not to need high-cost loans to fulfill their credit needs. The scenario analysis that examines the potential benefit of the Department’s proposal are the savings attributable to lower recruiting and training expenses associated with the reduction in involuntary separation of Service members due to financial distress. Each separation of a Service member is estimated to cost the Department $57,333, and the Department estimates that each year approximately 4,703 to 7,957 Service members are involuntarily separated due to financial distress. If the Department’s proposed regulation could reduce the annual number of involuntary separations due to financial distress from between five to 30 percent, the savings to the Department are expected to be in the range of approximately $13.47 million to $136.85 million each year. Figure 1 (which also appears in the Executive Summary, in section I.C.) provides a summary of the anticipated 58625 benefits and (costs) of the Department’s proposed regulation,170 and the estimates are provided for the first year, on an annual (ongoing basis), and for a ten-year period, applying discount rates of both 7 percent and 3 percent, consistent with guidance issued by OMB.171 Nevertheless, the Department has assessed the amounts of value that potentially may be involved in the transfer payments due to the interestrate limit, and those amounts are summarized in Figure 2. FIGURE 1—SUMMARY OF ESTIMATED EFFECTS OF PROPOSED RULE [2013 dollars in millions] Sensitivity Analysis: Benefits to the Department ........................... Primary Analysis: Costs to Creditors of Compliance ................. Primary Analysis: Transfer Payments ........................................ PV 10-year, 7% discount rate Annual, ongoing First year PV 10-year, 3% discount rate Low ............................... High .............................. $0 0 $13 137 $96 970 $128 1,304 ....................................... 96 20 144 194 Low ............................... High .............................. NA NA 101 120 717 856 958 1,139 FIGURE 2—ESTIMATED VALUE OF TRANSFER PAYMENTS UNDER THE PROPOSED RULE [2013 dollars in millions] Annual, ongoing Transfer Payments: Low ....................................................................................................................................... High ...................................................................................................................................... tkelley on DSK3SPTVN1PROD with PROPOSALS6 2. Need for the Regulation and Consideration of Alternatives The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of 10 U.S.C. 987 to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. More specifically, as discussed above, the Department proposes to amend its regulation so that, in general, consumer credit covered under the MLA 172 would be defined consistently with credit that for decades has been subject to the protections under TILA, namely: credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a 170 For the sake of brevity and clarity, the estimated savings to creditors, as discussed below, are not included in the computations represented in Figure 1. 171 See OMB Circular A–4 (Regulatory Planning and Review), at 31–34 (recommending, for regulatory analysis, providing estimates of net VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 $101 120 10-year, 7% discount rate $716 856 10-year, 3% discount rate $957 1,139 written agreement in more than four installments.173 In developing this proposal, the Department has consulted with the Federal Agencies (pursuant to 10 U.S.C. 987(h)(3)), and in the course of that process has considered a range of alternatives to the provisions contained in this proposal. For example, as discussed above in section III.B., in developing the provisions for the conditional exclusion for credit card accounts, the Department has considered proposing a complete exemption from the definition of ‘‘consumer credit’’ for credit extended to a covered borrower under a credit card account. The Department similarly has considered whether exclusions from the MAPR for certain types of fees, such as an application fee or participation fee, should be proposed for credit card accounts in order to preserve current levels of access to those products for Service members and their dependents. The Department also has considered alternative mechanisms and thresholds for the provision in proposed § 232.4(d)(3)(ii) would set a threshold of $3 billion in outstanding credit card loans on U.S. credit card accounts held by a credit card issuer in order for that issuer’s fees to be eligible for inclusion in an average calculated for the purposes of compliance with the ‘‘reasonable’’ condition of § 232.4(d)(1). Similarly, in developing the provisions relating to a creditor’s assessment of a covered borrower, the Department has considered alternatives to the creditor’s use of the MLA Database in order to obtain the benefit benefits using discount rates of both 3 percent and 7 percent), available at http://www.whitehouse.gov/ sites/default/files/omb/assets/omb/circulars/a004/ a-4.pdf. 172 The forms of ‘‘consumer credit’’ that may be covered by the MLA are subject to certain exceptions, notably for a residential mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B). 173 See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the regulation, in relevant part, to credit that is subject to a finance charge or is payable by a written agreement in more than four installments). PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 E:\FR\FM\29SEP6.SGM 29SEP6 58626 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 of a safe harbor under proposed § 232.5(b)(2). In this regard, the Department has considered whether to retain a safe harbor for a creditor’s use of the covered borrower identification statement, and explicitly seeks comment on that alternative.174 Likewise, the Department has considered alternative provisions relating to a creditor’s use of the MLA Database via commercial information-services providers, such as consumer reporting agencies, and seeks comment on that approach.175 In light of the data and other information available to the Department at this time, the Department has considered alternative approaches to the provisions of the proposal and, as appropriate, explicitly solicits comments on the alternatives the Department should consider.176 After observing the effects of its existing regulation during the past six years and based on its review of information provided by a wide variety of persons and entities, the Department believes that this proposal to amend the regulation is appropriate in order to address a wider range of credit products that currently fall outside the scope of the MLA, streamline the information that a creditor would be required to provide to a covered borrower when consummating a transaction involving consumer credit, and provide a more straightforward mechanism for a creditor to conclusively assess whether a consumer-applicant is a covered borrower. In this regard, as discussed above in section III.C., the Department is aware of misuses of the covered borrower identification statement whereby a Service member (or covered dependent) falsely declares that he or she is not a covered borrower. The Department believes that, if a creditor unilaterally conducts a coveredborrower check by using the MLA Database, a Service member or his or her dependent would be relieved from making any statement regarding his or her status as a covered borrower. 3. Estimate of Anticipated Costs Associated With Other MLA Conditions The other MLA conditions that would apply to creditors who offer consumer credit products that would be subject to the proposed regulation might present several types of compliance costs to those creditors. For example, if a creditor extends consumer credit to a covered borrower only in the form of a credit card product (and who thus currently is not subject to the MLA), the 174 See section III.C., question 13. section III.C., question 11. 176 See, e.g., section III.B., question 10. 175 See VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 creditor might encounter various costs associated with complying with requirements for: adjustment of computer systems and software to provide for calculation of the MAPR (pursuant to § 232.4(b)); the use of the MLA Database and the retention of records relating to its covered-borrower determinations (under proposed § 232.5(b)); the mandatory loan disclosures (under proposed § 232.6); and each of the statutory limitations applicable to consumer credit (under proposed § 232.8). The Department believes that some of the compliance costs due to the other MLA conditions are not material to the quantifiable aspects of this regulatory impact assessment because some costs are minimal (relative to the creditor’s other compliance costs or the creditor’s overall costs of operations when providing consumer credit) or not amenable to measurement.177 Accordingly, for the purposes of this regulatory impact assessment, the Department has focused its quantitative assessment of costs on two areas that, based on the Department’s experience, are reasonably likely to impose costs: First, the disclosures required by the MLA to be provided by a creditor to a covered borrower (under proposed § 232.6); and, second, the use of the MLA Database and the retention of records for covered-borrower determinations (under proposed § 232.5(b)). In addition, for the purposes of this regulatory impact assessment, the Department addresses the potential costs associated with the prohibition against requiring a covered borrower to submit to arbitration in the case of a dispute involving an extension of consumer credit (under proposed § 232.8(c)). The Department recognizes that this assessment does not capture all possible compliance costs associated with the proposed regulation. Indeed, the Department anticipates that a creditor who chooses to extend credit with a cost that may exceed the interest-rate limit or implicate the limitations in proposed § 232.8 might need to adjust its computer and software systems to 177 For example, the Department believes that the costs associated with the prohibition against requiring a covered borrower to waive his or her rights under any otherwise applicable provision of law (as provided in proposed § 232.8(b)) is not material to this regulatory impact assessment because the potential costs of this prohibition are negligible. Moreover, there is no reasonable basis for the Department to estimate the potential costs associated with this prohibition, in part because the Department believes so few—if any—creditors currently require, as part of their standard agreements in credit products, a consumer to waive rights under applicable provisions of State or Federal law. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 calculate the MAPR, develop new policies and procedures, and train staff on new procedures for identifying covered borrowers and taking advantage of the proposed safe harbor under proposed § 232.5. Further, creditors likely would select different techniques for meeting compliance obligations under the proposal. The cost burden on each creditor could vary depending on the business decisions made by that creditor. Acknowledging the limits of the assessment and pursuant to the directive of EO 12866 and EO 13563, the Department has sought to quantify the important potential costs of the proposal and to identify important nonquantified potential costs and benefits.178 As the Department assesses whether to amend its regulation, as proposed, the Department will further consider the potential benefits and costs of extending the protections of the MLA to a broader range of closed-end and open-end credit products. There are several areas where additional information could assist the Department in better estimating the potential benefits, costs, and effects of amending its regulation. The Department requests interested parties to provide specific data relating to the benefits and costs of amending the regulation, as proposed, including costs to implement measures to adjust computer systems and to train personnel. The Department seeks comments on whether all anticipated costs have been adequately captured in the analysis. Please provide information on the type of costs and the magnitude of costs by providing relevant data and studies. Disclosures. Under the Department’s existing regulation (‘‘status quo alternative’’), a creditor who extends to a covered borrower one or more of the three consumer credit products covered by the regulation must ‘‘clearly and conspicuously’’ disclose: (i) A 178 In considering the costs associated with updating computer programs, the Department relies on analysis from the Government Accountability Office (GAO) examining the costs of implementing changes to minimum payment disclosures for credit card accounts. There, GAO found that credit card issuers were unable to provide precise estimates of, among others, the cost of computer programming to provide the revised disclosures. GAO found that estimates of the computer programming cost varied widely, from $5,000 to $1 million. For large issuers, GAO concluded that these one-time costs would be very small when compared with large issuers’ net income. For smaller issuers, GAO concluded that work to implement changes would be done largely by third-party processors, accustomed to reprogramming required to managing cardholder data and processing billing statements. U.S. Gov’t Accountability Office, GAO–06–434, Credit Cards: Customized Minimum Payment Disclosures Would Provide More Information to Consumers, but Impact Could Vary (April 2006). E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 numerical value for the MAPR applicable to the extension of credit, including the total dollar amount of all charges included in the MAPR; (ii) any disclosures required by Regulation Z; (iii) a clear description of the payment obligation (which may be satisfied by a payment schedule provided pursuant to Regulation Z); and (iv) a Statement of Federal Protections. A creditor must provide the information orally and in writing prior to consummation of the credit transactions. For mail and internet transactions, the creditor may provide, with the written disclosures, a toll-free telephone number that the borrower may use to obtain the oral disclosures. Section 232.6 of the proposed rule would amend the provisions relating to the information required by the MLA to simplify the information that a creditor must provide to a covered borrower when extending consumer credit. The proposal would relieve a creditor of the obligation to disclose ‘‘clearly and conspicuously’’ the information required by the MLA. Additionally, the Department would eliminate the requirement that a creditor disclose a numerical value for the MAPR or ‘‘the total dollar amount of all charges,’’ and instead would require a creditor to provide a description of the charges that the creditor may impose. Thus, in general, the proposal would permit a creditor to streamline compliance with the disclosure requirements under 10 U.S.C. 987(c) by providing to a covered borrower the same information the creditor must provide to a consumer under Regulation Z, plus a statement of the MAPR. In order to facilitate compliance, the proposed regulation provides a model statement that a creditor could use. Consistent with the Department’s interpretation of its existing regulation, the proposal expressly provides that the statement of the MAPR would not be required in any advertisement relating to consumer credit. The Department estimates that there are approximately 191 million transactions each year in which creditors would provide the required information,179 generally included as 179 To estimate the number of consumer credit transactions each year, the Department relies on data from the Federal Reserve Bank of New York’s Consumer Credit Panel. See Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit (August 2013). For the six months prior to the second quarter of 2013, there were approximately 159 million credit inquiries. The Department assumes that 60 percent of these inquiries were for credit accounts that would be consumer credit under proposed § 232.3(f). This estimate does not differentiate between credit applications and credit accounts opened. If most VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 part of their standard credit agreements. The Department assumes that all creditors, other than creditors who offer only residential mortgage loans or loans expressly to finance the purchase of personal property (neither of which loans is consumer credit), will provide these disclosures, and believes that, based on these assumptions, approximately 40,000 creditors would be subject to the proposed regulation.180 The Department seeks comments on whether the estimate of 40,000 creditors is reasonable. Please provide data and studies that support the comment. (a) Statement of the MAPR For creditors who currently provide disclosures to covered borrowers (under the status quo alternative), the proposed rule is expected to reduce some of their compliance costs by eliminating the requirement to disclose a numerical value for the MAPR. The Department estimates that eliminating the requirement under the status quo to disclose a numerical value for the MAPR would reduce the compliance costs for creditors who currently offer forms of consumer credit by $71,900 per year. Over ten years, the Department estimates that the total savings to this class of creditors would be between $0.58 million (at a 7 percent discount rate) and $0.69 million (at a 3 percent discount rate). The proposal to require the provision of a statement of the MAPR, which may be satisfied through the use of a model statement, is anticipated to cost all creditors approximately $19 million during the first year, principally due to the costs of modifying the documents given to covered borrowers (such as a contract for consumer credit).181 The creditors only supply the required information as part of their account agreements which are provided at the time of account opening, then the overall number of transactions involving the provision of that information would be lower than is estimated here. 180 The Department bases this estimate on relevant numbers of establishments published by the Bureau of Labor Statistics, the FDIC, and NCUA. See BLS, Quarterly Census of Employment and Wages, NAICS 522291 Consumer Lending, NAICS 522298 All Other Nondepository Credit Intermediation (2012) (the annual average number of establishments for consumer lending is 14,544; the annual average number of all other nondepository establishments for credit intermediation is 8,963); FDIC Institution Directory, available at http://www2.fdic.gov/IDASP/ (reporting 6,812 insured institutions) (accessed January 2014); and NCUA Annual Report 145 (2012), available at http://www.ncua.gov/Legal/Documents/Reports/ AR2012.pdf (reporting 9,369 credit unions) (accessed January 2014). 181 The Department estimates that set-up for the statement of the MAPR will take 20 hours, and that staff time for the set-up of the proposed disclosure will be 50 percent data entry and information processing workers, 40 percent supervisors of office PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 58627 Department estimates that, on an ongoing basis, providing the statement of the MAPR would add approximately 50 seconds to each transaction when provided orally and require one-quarter of a printed page when included in standard account disclosures. To estimate the cost of providing the statement of the MAPR orally, the Department assumes that this statement is provided by a creditor’s teller or sales person, provided only to covered borrowers, and that there are approximately 2 million covered borrowers, each opening two credit accounts per year.182 The Department estimates that the ongoing cost to creditors for the additional transaction time in orally providing the statement of MAPR will be approximately $0.69 million per year.183 Over ten years, the total costs to creditors of providing a statement of the MAPR orally during inperson transactions would be between $4.88 million (at a 7 percent discount rate) and $6.57 million (at a 3 percent discount rate). The Department further assumes that creditors will update standard account disclosures for all consumer credit accounts and that the printing and paper costs are five cents per page.184 The Department estimates that the ongoing costs for additional printing would be approximately $2.39 million per year.185 Over ten years, the total and administrative support workers, and 10 percent legal counsel. U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wages 2012, Table 1 (mean hourly wage for data entry and information processing workers is $15.11; mean hourly wage for supervisors of office and administrative support workers is $25.40; mean hourly wage for legal counsel is $62.93), available at http://www.bls.gov/news.release/ocwage.t01.htm. The Department calculates the total estimated cost by multiplying the mean hourly wage by the portion of time for each classification of worker expected to be involved in modifying the documents. 182 In this regard, the Department has estimated the potential costs only for in-person transactions. These figures do not relate to applications involving the use of the creditor-supplied telephone number for the oral delivery of the required information. 183 The Department reaches this estimate by computing the cost of the additional transaction time, calculated by multiplying the number of transactions (4 million) by the mean hourly wage for financial tellers ($12.40) and the portion of hour that the disclosure will take in a typical transaction (1/72nd of an hour). U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wage Table 1 (May 2012) (mean hourly wage for financial tellers is $12.40). 184 The Department relies on estimates of paper and printing costs recently published by the Department of Labor. Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure,77 FR 5632, 5654 (Feb. 3, 2012). 185 The Department reaches this estimate by computing the cost of the additional printing and paper for the disclosure, calculated by multiplying the number of transactions (191 million) by the cost E:\FR\FM\29SEP6.SGM Continued 29SEP6 58628 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 costs to creditors of providing a printed statement of the MAPR would be between $16.93 million (at a 7 percent discount rate) and $22.75 million (at a 3 percent discount rate). Taking the additional transaction time for oral disclosure and the additional printing and paper expenses for written disclosure together, the Department estimates that the total costs to all creditors of providing the statement of the MAPR would be $3.08 million each year. Over ten years, the Department estimates that the total costs to all creditors of providing the statement of the MAPR would be between $21.81 million (at a 7 percent discount rate) and $29.32 million (at a 3 percent discount rate). Additionally, creditors may experience some increase in call volume and costs associated with providing oral disclosures if borrowers engage in consumer credit transactions by mail, internet, or at the point of sale in association with the sale of a nonfinancial product or service. The Department seeks comment, as well as data (as may be appropriate), on its supposition regarding the costs associated with these sales channels. Due to the lack of readily available data, the Department has not quantified the potential costs of any increase in this call volume; however, the Department has sought to streamline and minimize the compliance burden associated with all disclosures, including the requirement to orally provide the required information. Proposed § 232.6(d)(2) reflects the Department’s effort to minimize the burden on creditors while retaining the structure and intent of the current regulation. The Department seeks comment on the assumptions invoked in this section. Please provide comment on the reasonableness of the assumptions and likelihood of the associated costs. Please provide data and studies that support the comment. (b) Statement of Federal Protections Under the proposal, like the status quo alternative, a creditor still must provide to a covered borrower the Statement of Federal Protections. However, because the proposal would apply the protections of 10 U.S.C. 987 to a broader scope of credit transactions, an additional 20,000 creditors would provide the Statement of Federal Protections, as required by proposed § 232.6(a)(4). The Department estimates that incorporating the 111 words in the required Statement of Federal Protections into existing disclosures or contract documents would cost newly obligated creditors approximately $9.60 million in set-up costs during the first year.186 On an ongoing basis, the Department estimates that providing the Statement of Federal Protections would add approximately 50 seconds to each transaction when the disclosure is provided orally and require one-quarter of a printed page when included in standard account disclosures. To estimate the cost of orally providing the Statement of Federal Protections, the Department assumes that this statement is provided by a creditor’s teller or sales person, provided only to covered borrowers, and that there are approximately 2 million covered borrowers, each opening two credit accounts per year. The Department estimates that the cost to creditors of providing the Statement of Federal Protections orally will be approximately $0.69 million per year.187 Over ten years, the total costs to creditors of providing the Statement of Federal Protections orally during in-person transactions would be between $4.88 million (at a 7 percent discount rate) and $6.57 million (at a 3 percent discount rate). The Department further assumes that creditors will update standard account disclosures for all credit accounts and that the printing and paper costs are five cents per page.188 The Department estimates that the ongoing costs for additional printing would be approximately $2.39 million per year.189 Over ten years, the total costs to creditors of providing the Statement of Federal Protections in account agreements would be between $16.93 million (at a 7 percent discount rate) and $22.75 million (at a 3 percent discount rate). Taking the additional transaction time for oral disclosure and the additional printing and paper expenses for written disclosure together, the Department estimates that the total costs to all creditors of providing the Statement of Federal Protections would be $3.08 million each year. Over ten years, the Department estimates that the total costs to all creditors of providing the Statement of Federal Protections would be between $21.81 million (at a 7 percent discount rate) and $29.32 million (at a 3 percent discount rate). Because some creditors obligated under the current rule may provide the Statement of Federal Protections to covered borrowers, the actual additional cost of the proposal over the status quo alternative could be lower than the Department’s estimate. Additionally, as with the statement of the MAPR, the Department realizes that creditors might experience some increase in call volume and costs associated with providing oral disclosures if borrowers engage in consumer credit transactions by mail, internet, or at the point of sale in association with the sale of a nonfinancial product or service. The Department has not quantified the potential costs of any increase in this call volume; however, the Department has sought to streamline and minimize the compliance burden associated with all disclosures, including the MLA’s oral disclosure requirement. Proposed § 232.6(d)(2) reflects the Department’s effort to minimize the burden on creditors while retaining the structure and intent of the current regulation. Figure 3a provides a summary of the anticipated benefits and (costs) associated with the disclosures under the Department’s proposed regulation. per page ($.05) and the portion of the page used for the disclosure (0.25 page). 186 The Department estimates that set-up for the Statement will take 20 hours and that staff time for the set-up of proposed disclosures will be 50 percent data entry and information processing workers, 40 percent supervisors of office and administrative support workers, and 10 percent legal counsel. U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wages Table 1 (2012) (mean hourly wage for data entry and information processing workers is $15.11; mean hourly wage for supervisors of office and administrative support workers is $25.40; mean hourly wage for legal counsel is $62.93). http:// www.bls.gov/news.release/ocwage.t01.htm. The Department calculates the total estimated cost by multiplying the mean hourly wage by the portion of time for each classification of worker expected to be involved in modifying the documents. 187 The Department reaches this estimate by computing the cost of the additional transaction time, calculated by multiplying the number of transactions (4 million) by the mean hourly wage for financial tellers ($12.40) and the portion of hour that the disclosure will take in a typical transaction (1/72nd of an hour). U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wage Table 1 (May 2012) (mean hourly wage for financial tellers is $12.40). 188 U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wages Table 1 (May 2012). See also Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure, 77 FR 5632, 5654 (Feb. 3, 2012) (estimating costs of printing and paper). 189 The Department reaches this estimate by computing the cost of the additional printing and paper for the disclosure, calculated by multiplying the number of transactions (191 million) by the cost per page ($.05) and the portion of the page used for the disclosure (0.25 page). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules 58629 FIGURE 3A—ESTIMATED BENEFITS AND COSTS OF DISCLOSURES UNDER THE PROPOSED RULE [2013 dollars in millions] PV 10-year, 7% discount rate Annual, ongoing First year PV 10-year, 3% discount rate $0.00 19 0.00 10 0.00 $0.07 n/a 3 n/a 3 $0.58 n/a 22 n/a 22 $0.69 n/a 29 n/a 29 Total Net Costs ......................................................................................... tkelley on DSK3SPTVN1PROD with PROPOSALS6 Benefits of eliminating requirement to disclose numerical MAPR .................. Set up costs of Proposed Statement of the MAPR ......................................... Ongoing costs of Proposed Statement of the MAPR (oral and printed) ......... Set up costs of Statement of Federal Protections (additional creditors) ........ Ongoing costs of Statement of Federal Protections (oral and printed) .......... 29 6 43 58 Department seeks comment on the assumptions invoked in this section. Please provide comment on the reasonableness of these assumptions and likelihood of the associated costs. Please provide data and studies that support the comment. Identification of Covered Borrowers. Under the status quo, the Department believes that a creditor who offers a covered payday loan, vehicle title loan, or refund anticipation loan typically assesses the status of a consumerapplicant by providing a selfcertification form which is completed by the applicant, as provided in § 232.5. The Department proposes to modify the process for conducting a coveredborrower check so that a creditor may unilaterally assess the status of a consumer-applicant, rather than relying on the applicant to complete a selfdeclaration form. Proposed § 232.5(b), if adopted, would allow a creditor to access the MLA Database to assess the status of a consumer-applicant for consumer credit, and would provide a safe harbor from liability under the MLA for a creditor who uses the MLA Database (except when a creditor has actual knowledge about the status of the consumer-applicant), finds that the consumer is not a covered borrower, and maintains a record of the information obtained from the database. The Department assumes that all creditors, other than creditors who offer only residential mortgage loans or loans expressly to finance the purchase of personal property (neither of which loans is consumer credit), will establish processes for querying the MLA Database and retaining records of covered-borrower checks. As described above, the Department believes that, based on these assumptions, approximately 40,000 creditors would be subject to the proposed regulation. The Department believes that setting up the process to use the MLA Database and retain records of queries will take each creditor 70 hours of labor time. Based on these assumptions, the VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Department estimates that the total costs relating to setting up the processes to use the MLA Database and take advantage of the safe harbor in proposed § 232.5(b) would be $67.22 million.190 The Department has observed that, in general, creditors who currently offer consumer credit products, as defined by the Department’s existing regulation, require all consumer-applicants to complete the self-declaration form. For the purposes of this analysis, the Department assumes that a creditor requests the consumer-applicant to complete the self-declaration form only once. For a creditor who currently offers a form of consumer credit, as defined by the Department’s existing rule, replacing the self-declaration form with a process to use the MLA Database is estimated to result in a savings from transaction time, printing and paper costs, as well as a reduction in legal risks. Further, the Department assumes that creditors choosing to avail themselves of the MLA Database and the safe harbor in proposed § 232.5(b) will retain a record of the result of the database query in electronic form. According to the FDIC, approximately 2 million households report using a payday loan, and 1.45 million households report using a refund anticipation loan in the past year.191 In a comment letter submitted to the Bureau, the auto title lending industry association reports having 1 million customers.192 The Department assumes 190 The Department estimates that staff time to set up access to the MLA Database and the processes to record and retain information will be 50 percent data entry and information processing workers, 40 percent supervisors of office and administrative support workers, and 10 percent legal counsel. U.S. Dep’t of Labor, Bureau of Labor and Statistics, Occupational Employment and Wages Table 1 (2012) (mean hourly wage for data entry and information processing workers is $15.11; mean hourly wage for supervisors of office and administrative support workers is $25.40; mean hourly wage for legal counsel is $62.93). 191 Federal Deposit Insurance Corp., Addendum to the FDIC National Survey of Unbanked and Underbanked Households (June 2013). 192 American Association of Responsible Auto Lenders (AARAL), Comment letter to Consumer PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 that there is one transaction per household, and further assumes that processing each self-certification form costs five cents (conservatively assuming only the costs per page for printing and paper). Given these assumptions of volume and cost—4.45 million transactions involving a printed self-declaration form—the Department estimates that for those creditors who currently offer consumer credit products, the savings on printing and paper will be $222,500 per year; over ten years, the Department estimates a savings of between $1.58 million (at a 7 percent discount rate) and $2.12 million (at a 3 percent discount rate). The Department has not quantified the expected savings for creditors with respect to the potential reduction in transaction time or legal risk. The Department expects that proposed § 232.5(b), if adopted, would prompt all creditors who offer consumer credit with an MAPR of more than 36 percent (which would include some creditors who offer credit products with credit insurance premiums or fees for credit-related ancillary products sold in connection with the consumer credit) to assess the status of consumer-applicants as potential covered borrowers. Depository institutions or credit unions that offer open-end lines of credit, such as deposit advance loans, might choose to use the MLA Database before offering or extending those types of loans, and thereby take advantage of the safe harbor in the proposed § 232.5(b), to identify potential covered borrowers within their respective account portfolios. In addition, other creditors may choose to query the database, regardless of the terms of their credit products, particularly through batch processing of their customer accounts. The Department estimates that of the estimated 191 million covered credit Financial Protection Bureau (CFPB Docket No. CFPB–HQ–2011–2) (2011). E:\FR\FM\29SEP6.SGM 29SEP6 58630 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules applications each year,193 there will be approximately 70 million applications when creditors choose to query the MLA Database as a single-record check. For each of these single-record checks, the inquiry and record retention is expected to add approximately 60 seconds to each new consumer credit transaction. The Department estimates that the total cost to creditors for using the database and retaining records relating to consumer-applicants would be approximately $14.47 million per year; 194 over ten years, the total cost of using the MLA Database would be between $102.56 million (at a 7 percent discount rate) and $137.87 million (at a 3 percent discount rate). Because modern credit applications, whether conducted online or in person, involve highly automated systems for underwriting, the Department expects that many creditors who issue credit cards and other creditors will choose to develop systems that make the marginal increase in time for querying the MLA Database negligible. The Department has not sought to estimate the potential costs associated with computer programming or including a coveredborrower check in automated underwriting.195 Figure 3b provides a summary of the anticipated benefits and (costs) associated with the covered-borrower checks under the Department’s proposed regulation. FIGURE 3B—ESTIMATED BENEFITS AND COSTS OF COVERED-BORROWER CHECKS UNDER THE PROPOSED RULE [2013 dollars in millions] First year PV 10-year, 7% discount rate Annual PV 10-year, 3% discount rate Benefits of Eliminating Printing and Paper Costs for Self-Certification .......... Set-up Costs to Use MLA Database ............................................................... Covered-Borrower Checks .............................................................................. $0.00 67 0.00 $0.22 n/a 14 $2 n/a 103 $2 n/a 138 Total .......................................................................................................... 67 14 101 136 tkelley on DSK3SPTVN1PROD with PROPOSALS6 Department seeks comment on the assumptions invoked in this section. Please provide comment on the reasonableness of these assumptions and the likelihood of the associated costs. Please provide data and studies that support the comment. Prohibition on Requiring Arbitration. The MLA prohibits a creditor from ‘‘requir[ing] a covered borrower to submit to arbitration or impos[ing] onerous legal notice provisions in the case of a dispute’’ relating to an extension of consumer credit,196 and this restriction is reflected in proposed § 232.8(c). Under the status quo, the prohibition against requiring a covered borrower to submit to arbitration applies only to certain payday loans, vehicle title loans, and refund anticipation loans. If the Department adopts the regulation as proposed, then the prohibition against requiring arbitration (in proposed § 232.8(c)) would apply to agreements for a significantly broader range of credit products, such as credit cards and deposit advance loans. The Department recognizes that extending the application of the prohibition in proposed § 232.8(c) likely would lead to costs, primarily as a result of the significantly broader range of creditors affected by that prohibition. Nevertheless, the Department has not endeavored to quantify the costs of the restriction itself, such as the costs that might be associated with making modifications to standard agreements or potentially increased exposures to disputes litigated in courts. The Department seeks comment on the potential costs to creditors, across a variety of contracts implicated by the prohibition in proposed § 232.8(c), who offer forms of consumer credit that could be affected by the prohibition against requiring arbitration. Each year, thousands of well-trained Service members are compelled to leave military service because they experience financial distress that leads to the revocation of their security clearances. The Department has direct experience with this process of involuntary separation, which generally involves a Service member becoming overextended in debt—which occurs due to a wide range of factors—defaulting on one or more credit agreements (either by making late payments or by failing to make payments), and experiencing a deterioration in the credit score or credit history prepared by a consumer reporting agency for that individual. The individual’s deteriorating creditworthiness presents an exposure to the Department that the individual poses a security risk, which ultimately warrants separation. As discussed in sections II.C and II.D, the Department makes a significant investment in recruiting, training, and progressing each qualified Service member. Losing a qualified soldier, sailor, airman, or Marine can cause a loss of mission capability, and there are substantial costs associated with replacing that Service member. Even though, for the purposes of this regulatory impact assessment under EO 12866 and EO 13563, the most direct effect of the interest-rate limit is a transfer payment, a secondary—yet no less direct—effect is the reduction in the 193 The Department estimates 191 million relying on data from the Federal Reserve Bank of New York’s Consumer Credit Panel. See, Federal Reserve Bank of New Year, Quarterly Report on Household Debt and Credit (August 2013). For the six months prior to the second quarter of 2013, there were about 159 million credit inquiries. The Department assumes that 60 percent of these inquiries were for credit accounts that would be consumer credit under proposed § 232.3(f). 194 The Department calculates the estimated cost by multiplying the expected number of transactions involving a covered borrower check (70 million) by the mean hourly wage for financial tellers ($12.40) and the additional transaction time expected (1/60th of an hour). 195 In considering the costs associated with updating computer programs, the Department relies on analysis from GAO examining the costs of implementing changes to minimum payment disclosures for credit card accounts. There, GAO found that credit card issuers were unable to provide precise estimates of, among others, the cost of computer programming to provide the revised disclosures. GAO found that estimates of the computer programming cost varied widely, from $5,000 to $1 million. For large issuers, GAO concluded that these one-time costs would be very small when compared with large issuers’ net income. For smaller issuers, GAO concluded that work to implement changes would be done largely by third-party processors, accustomed to reprogramming required to managing cardholder data and processing billing statements. U.S. Gov’t Accountability Office, GAO–06–434, Credit Cards: Customized Minimum Payment Disclosures Would Provide More Information to Consumers, but Impact Could Vary (April 2006). 196 10 U.S.C. 987(e)(3). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 4. Sensitivity Analysis on Potential Benefits PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules overall amount of debt owed to creditors by covered borrowers. The Department believes if the interest-rate limit were to apply to a broader range of credit products, the overall amount of debt owed to creditors would be reduced; as a result, regardless of the original occasions for incurring debts, Service members reasonably may be expected to have a lower incidence of financial distress, and a correspondingly lower incidence of involuntary separation. Thus, the Department believes that the savings of the Department’s costs associated with replacing Service members who are involuntarily separated constitute benefits for the purposes of this regulatory impact assessment—entirely independently of the transfer payment flowing from the interest-rate limit—and are amenable to being quantified. More generally, the anticipated improvements in military readiness and Service-member retention lie at the core of 10 U.S.C. 987. Military Readiness and Service Member Retention. The most substantial—as well as meaningfully quantifiable—benefit of the Department’s proposed regulation, if adopted, would be the reduction in involuntary separations among Service members due to financial distress. The Department also anticipates that the proposed regulation would entail nonquantifiable benefits, reducing stress for Service members or their families, which currently affects approximately two-thirds of military families who report experiencing stress related to their financial condition.197 The Department estimates that each separation costs the Department $57,333.198 The Department estimates the potential impact of adopting the proposed regulation by using two alternative approximations of the current number of separations attributable to financial distress. tkelley on DSK3SPTVN1PROD with PROPOSALS6 (a) Estimate One For the years 2003 through 2011, there was an average of 55,036 involuntary separations per year. Of those involuntary separations that were due to legal or standard-of-conduct issues—an average of 19,893 per year— 197 Blue Star Families, The 2013 Military Family Lifestyle Survey 11 (May 2013). 198 U.S. Gov’t Accountability Office, GAO–11– 170, Military Personnel: Personnel and Cost Data Associated with Implementing DOD’s Homosexual Conduct Policy (January 20, 2011) (estimating that each separation costs the Department $52,800 in 2009 dollars). The cost of $57,333 is calculated in 2013 dollars (through December 2013), using the U.S. Dep’t of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI– U), available at ftp://ftp.bls.gov/pub/ special.requests/cpi/cpiai.txt. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 the Department estimates that approximately half are attributable to a loss of security clearance, and, of these, 80 percent are due to financial distress.199 Based on this data and these assumptions, the Department estimates that, going forward, there would be approximately 7,957 separations each year due to financial distress. (b) Estimate Two In 2005, there were 1,999 revocations of security clearances in the Navy and Marine Corps, representing 8.5 percent of involuntary separations.200 Approximately 80 percent of the revocations of security clearances are due to financial distress.201 The Department conservatively estimates the number of separations due to financial distress at 25 percent, rather than attempt to identify separations not triggered by a loss of security clearance.202 Based on this data and these assumptions, the Department estimates that, going forward, there would be approximately 4,703 separations each year due to financial distress.203 The Department estimates that the 10year cost of involuntary separations due to financial distress is between $1.912 billion and $4.348 billion. However, the Department believes that these calculations significantly underestimate the impact of involuntary separations due to financial distress on Servicemember retention and military readiness, primarily because the loss of security clearance is only one way that financial distress leads to separation from military service. Furthermore, involuntary separation is only one of the ways to detect the impact of financial distress on military readiness; excessive debt—which is less manageable at higher rates of interest—likewise can 199 U.S. Dep’t of Defense, Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 39 (August 9, 2006), available at http://www.defense.gov/pubs/ pdfs/Report_to_Congress_final.pdf. 200 Amy Klamper, ‘‘Breakthrough,’’ Navy League of the United States (October 2006). 201 U.S. Dep’t of Defense, Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 9 (August 9, 2006), available at http://www.defense.gov/pubs/ pdfs/Report_to_Congress_final.pdf. 202 Service members also could be separated in a number of other ways; for example, this number does not attempt to account for separations where a Service member is court-marshaled for failure to pay debts. 203 Thus, in estimate two, the Department computes the total number of separations per year as follows: the approximate total number of revocations per year [(1,999)/(0.0850)] multiplied by 0.80, yields the revocations due to financial distress of 18,814; and 25 percent of that figure is 4,703. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 58631 impair a Service member’s eligibility to deploy or to reenlist. The Department acknowledges that the proposed regulation, if adopted as proposed, would not entirely eliminate financial distress among Service members. However, the Department expects that extending the protections of 10 U.S.C. 987 to a broader range of credit products would significantly reduce the incidence of derogatory items in the credit files of Service members (maintained by consumer reporting agencies), and thereby improve the Service members’ respective capacities to manage and pay debts. The Department estimates that the proposal, if adopted, would reduce the separations associated with financial distress. To assess the anticipated savings reasonably attributable to a reduction in involuntary separations, the Department has used three estimates of the possible reduction in involuntary separations: 5 percent,204 17.5 percent,205 and 30 percent.206 The Department believes that estimating between 5 percent and 30 percent reduction in the total number of these separations is reasonable in light of the conservative assumptions relating to the separations due to financial distress. The Department seeks comment on the reasonableness of these estimates. Please provide data and studies that support the comment. The Department estimates that the proposed regulation, if adopted, would result in savings from involuntary separations due to financial distress of between $13.47 million and $136.85 204 See, generally, Scott Carrell & Jonathan Zinman, In Harm’s Way? Payday Loan Access and Military Personnel Performance (January 2013) (estimating a 5 percent increase in negative personnel outcomes for Service members with access to high-cost payday loans). The Department uses this study to estimate a low-end of the possible reduction in separations. This estimate likely is less reliable than other estimates of separations included in this analysis because the study does not directly measure the impact of high-cost loans on borrower personnel outcomes. 205 See, generally, Department of Navy, Personnel Security Appeals Board, CY 2011 Activity Report at 7 (in 2011, 47 percent of denied appeals of revoked security clearances were due to financial problems) available at www.ncis.navy.mil/securitypolicy/ PSAB/PSAB%20Activity%20Reports/ CY11%20PSAB%20Activity%20Report.pdf); Consumer Federation of America, et al, DOD–2013– OS–0133–0030, at 3 (noting that for the Department of Navy the portion of denied appeals of revoked security clearances due to financial distress declined from 57 percent in 2006 to 47 percent in 2011). The Department uses the percentage of the decline (17.5) as a midpoint estimate. 206 See, generally, Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America (2012) at 16–17 (for the Department of the Navy, overall denied appeals of revoked security clearances declined by 30 percent from 2006 to 2010). E:\FR\FM\29SEP6.SGM 29SEP6 58632 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules million per year. Over ten years, the proposal would save the Department between $95.52 million and $1.304 billion. Figure 4 provides a summary of the anticipated savings that reasonably could be attributable to reduction in involuntary separations due to financial distress. FIGURE 4—SCENARIO ANALYSIS OF COSTS SAVINGS FROM REDUCTIONS IN SEPARATIONS [2013 dollars in millions] 10-year, 7% discount rate Annual 10-year, 3% discount rate Estimate One: 7,957 separations per year Separations Reduced by 30% ..................................................................................................... Separations Reduced by 17.5% .................................................................................................. Separations Reduced by 5% ....................................................................................................... $137 80 23 $970 567 162 $1,304 763 217 81 47 13 574 335 96 771 451 128 Estimate Two: 4,703 separations per year Separations Reduced by 30% ..................................................................................................... Separations Reduced by 17.5% .................................................................................................. Separations Reduced by 5% ....................................................................................................... In addition to reducing the quantifiable costs associated with separations due to financial distress, the Department believes that the proposed regulation, if adopted, would reduce non-quantifiable costs associated with financial strains on Service members. High-cost debt can detract from mission focus, reduce productivity, and require the attention of supervisors and commanders. Additionally, if the Department’s proposed regulation is adopted, the protections afforded to covered borrowers under the MLA might, over time, improve the Department’s capabilities to retain Service members. In this regard, one study found that access to extremely high-cost debt decreases military readiness by increasing the presence of unfavorable credit information in the files of consumer reporting agencies, and by producing a significant decline in job performance, reducing the overall eligibility of Service members for reenlistment.207 tkelley on DSK3SPTVN1PROD with PROPOSALS6 5. Estimate of Amount of Transfer Payments The Department believes that the interest-rate limit and the corresponding provisions governing computation of the MAPR could entail some costs, particularly for creditors who might need to adjust their systems to compute 207 Scott Carrell & Jonathan Zinman, In Harm’s Way? Payday Loan Access and Military Personnel Performance (January 2013) at 23, available at http://www.econ.ucdavis.edu/faculty/scarrell/ payday.pdf (‘‘Overall the results provide ammunition for the Pentagon’s concern that payday borrowing has adverse effects on military readiness. We find that payday loan access produces a significant decline in overall job performance (as measured by a 3.9% increase in reenlistment ineligibility), and a concomitant decline in retention. We also find that a measure of severely poor readiness (the presence of an Unfavorable Information File) increases by 5.3%.’’). VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 the MAPR in accordance with the standards of the proposed regulation. The Department anticipates that the great majority of creditors should be able to compute the MAPR for their credit products without significantly redesigning their computing or accounting systems. However, there might be a relatively small number of creditors who offer credit insurance products or credit-related ancillary products with loans who might encounter costs to adjust their computing or accounting systems to comply with the new standards, if adopted as proposed. For example, credit card issuers whose fees fit within the bona fide fee safe harbor would not be required to calculate an effective APR cost element of the MAPR, provided that the periodic rate falls below 36 percent APR. The Department anticipates that only a small number of creditors would offer credit products requiring calculation of an effective APR cost element of the MAPR. For this limited class of creditors, the Department recognizes that adjustments to computing or accounting systems could entail some costs, however, there are no reliable data on how many creditors would pursue such product offerings nor data that would allow the Department to develop a quantifiable estimate of the potential costs associated with compliance with the interest-rate limit and the provisions governing computation of the MAPR. Thus, for the purposes of this analysis under EO 12866 and EO 13563, the Department has assessed the potential effects of the interest-rate limit only in terms of the amount of the transfer payments relating to certain consumer credit products. Even though the interest-rate limit of 10 U.S.C. 987(b) results in transfer payments from various creditors to PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 covered borrowers, and thus does not affect the benefits-cost analysis under EO 12866 and EO 13563, the Department has estimated the amounts involved in these payments. For the purposes of assessing the amounts involved in the transfer payments, the Department has considered estimates of the current cost of credit and usage rates for four types of consumer credit, namely: (i) Credit card products, (ii) payday loans, (iii) auto title loans, and (iv) installment loans. In the credit card market, the Department believes that most creditors should be able to comply with the limitation on the MAPR by continuing to offer credit card products with minimal or no alternations to their current pricing practices. In this regard, few, if any, creditors who offer credit card products charge periodic rates that exceed the interest-rate limit of 10 U.S.C. 987(b) and proposed § 232.4(b). Taking into account the exclusion for bona fide fees under proposed § 232.4(d), the Department expects that nearly all of the amount of the transfer payments in credit card products will be due to revenues that would be foregone from credit insurance, debt cancellation, and credit-related ancillary products sold to covered borrowers. The Department estimates the amount of the transfer payments by taking the difference of the cost of credit for a typical credit card with a credit insurance or debt cancellation product and 36 percent MAPR, less the payout rate on a credit insurance or debt protection product. To calculate the range of possible transfer payments associated with credit card products, the Department estimates an amount per account, and then makes a high- and low-end estimate of the number of Service members with credit cards who E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS6 also carry a credit insurance or debt cancellation product that would cause the MAPR to exceed the 36-percent threshold. In this regard, the Department’s estimate is conservative because the data relate only to consumer credit obtained by Service members, and not to other categories of individuals who could be covered borrowers. The Department is aware that there are other credit-related ancillary products that may be sold in connection with, and either at or before, the account opening. The Department has not estimated the amount of the transfer payments that might be associated with those credit-related ancillary products. To estimate the amount of the transfer payment for each credit card account, the Department assumes that 78 percent of Service members have a credit card,208 revolving an average balance of $5,000.209 The Department further assumes that a typical debt-cancellation product costs $1.10 per $100 of balance and has a payout rate of 21 percent.210 Assuming that a borrower makes only the minimum payment each month on this card while paying 28 percent APR, under the proposal, a creditor who offers a credit card with these terms could charge a fee for a credit insurance or debt cancellation product of no more than $0.67 per $100 of balance per month, a price of 8 percent interest per year. For a credit card with a credit insurance or debt cancellation product carrying standard prices, the amount transferred from a creditor to a covered borrower—that is, when the creditor complies with the 36-percent MAPR limit and foregoes revenue that the borrower thereby saves—would be $886 per card over ten years.211 Second, from an examination of credit card offers, the Department estimates that between 44 and 100 percent of the 78 percent of Service members who have a credit card account have a card 208 Blue Star Families, The 2013 Military Family Lifestyle Survey 34 (May 2013). 209 FINRA Investor Education Foundation, Financial Capability in the United States, Military Survey (October 2010). 210 U.S. Gov’t Accountability Office, GAO–11– 311, Credit Cards: Consumer Costs for Debt Protection Can be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight 9, 21 (March 2011). 211 This calculation assumes a beginning balance of $5,000 and that the borrower pays only the minimum payment, calculated as 4 percent of the monthly balance. Under the status quo, the APR is 28 percent and the debt cancellation is $1.10 per $1,000 of outstanding balance, and the sum of payments over ten years is $12,696. Under the proposal, the APR is 28 percent and the debt cancellation is $.67 per $1,000 of outstanding balance, and the sum of payments over ten years is $11,810. VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 with an APR sufficiently high that if the creditor also sells a credit insurance or debt cancellation product, the cost of credit could exceed the limit in 10 U.S.C. 987(b). The Department assumes that 7 percent of these accounts actually use credit insurance or debt cancellation; therefore the estimates are based on the assumption that between 3 percent and 7 percent of the 78 percent of Service members holding credit cards have a credit insurance or debt cancellation product.212 At the high-end, assuming that 78 percent of Service members have a credit card that, given typical costs, might exceed the interest-rate limit if the borrower purchases credit insurance or debt cancellation and pays a penalty APR, and that 7 percent of these borrowers actually do purchase such a product, the amount that would be transferred is estimated to be $6.75 million per year.213 Over ten years, the discounted amount that would be transferred would be between $54.13 million (at a 7 percent discount rate) and $61.17 million (at a 3 percent discount rate). At the low-end, assuming that 44 percent of Service members have a credit card that, given typical fees, might exceed the interest-rate limit if the borrower purchases credit insurance or debt cancellation and pays a penalty APR, and that 7 percent of these borrowers actually do purchase such a product, the amount that would be transferred is estimated to be $2.97 million per year.214 Over ten years, the discounted amount that would be transferred would be between $23.82 million (at a 7 percent discount rate) and $26.91 million (at a 3 percent discount rate). For non-credit card credit products that would be subject to the proposed 212 U.S. Gov’t Accountability Office, GAO–11– 311, Credit Cards: Consumer Costs for Debt Protection Can be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight 7 (March 2011). 213 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a credit card account (78 percent), the percentage of accounts with costs that might exceed the interest rate limit if the borrower purchases add-on products (100 percent), the percentage of accounts where the borrower actually purchases add-on products (7 percent), and the amount transferred per card ($886). 214 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a credit card account (78 percent), the percentage of accounts with costs that might exceed the interest rate limit if the borrower purchases add-on products (44 percent), the percentage of accounts where the borrower actually purchases add-on products (7 percent), and the amount transferred per card ($886). PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 58633 regulation, the Department estimates the amount that would be transferred due to the interest-rate limit by considering three segments of that market for consumer credit: Payday loans, auto title loans, and non-purchase money installment loans. The Department assumes that approximately 12 percent of Service members use non-credit card credit products that would be covered under the Department’s regulation, if adopted as proposed.215 The prices associated with these credit products vary widely; for any given creditor, the amount that would be transferred as a result of compliance with the interestrate limit depends on how much that creditor charges for credit extended under the status quo. In order to estimate the amount that would be transferred, the Department assumes that between 7 percent and 4.9 percent of Service members use payday loans with a median APR of 391 percent and a median ten transactions per year, each borrowed for 14 days,216 0.3 percent of Service members use auto title loans with a median APR of 300 percent,217 and 7 percent of Service members use installment loans with a median APR of 80 percent.218 Given typical prices of payday loans and borrowing patterns, the Department estimates that the value that would be 215 See Department of Defense, Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents (August 9, 2006), available at http://www.defense.gov/pubs/ pdfs/Report_to_Congress_final.pdf; Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America (2012); U.S. Gov’t Accountability Office, GAO–05–349, Military Personnel: DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized (April 2005); The Pew Charitable Trusts, Payday Lending in America: Who Borrowers, Where They Borrow, and Why 4 (July 2012). 216 See Department of Defense, Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents (August 9, 2006), available at http://www.defense.gov/pubs/ pdfs/Report_to_Congress_final.pdf; Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America (2012); Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products 8 (April 2013). The Department further assumes that borrowers take a median of 10 loans per year, those loans are for $392 and carry an average 14-day term. See Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products (April 2013). Some, though not all, transactions involving these products are subject to the protections of 10 U.S.C. 987 under the current rule. See, e.g., section II.A. 217 Consumer Federation of America and Center for Responsible Lending, Driven to Disaster: CarTitle Lending and Its Impact on Consumers 3 (2013); U.S. Gov’t Accountability Office, GAO–05– 349, Military Personnel: DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized (April 2005); Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America (2012). 218 See Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America (2012). E:\FR\FM\29SEP6.SGM 29SEP6 58634 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules transferred is $534 per borrower per year for payday loans.219 Assuming that 4.9 percent of Service members use payday loans each year, the Department estimates that the proposed regulation would result in transfer payments of $36.74 million per year relating to the domestic payday lending industry.220 Over ten years, the Department estimates that the amount of the transfer payments relating to the domestic payday lending industry would be between $260.45 million (at a 7 percent discount rate) and $350.11 million (at a 3 percent discount rate). Alternatively, assuming that 7 percent of Service members use payday loans each year, the Department estimates that the amount of transfer payments on the domestic payday lending industry would be $52.16 million per year.221 Over ten years, the Department estimates that the transfer payments under the proposed regulation would be between $369.80 million (at a 7 percent discount rate) and $497.11 million (at a 3 percent discount rate). Approximately 7 percent of volume in payday loans is done by online lenders based offshore.222 The Department estimates that the transfer payments relating to these offshore creditors would be between $2.57 million and $3.65 million per year. Over ten years, the Department estimates that the total amount of the transfer payments relating to these offshore creditors would be between $18.23 million (at a 7 percent discount rate, assuming 4.9 percent usage) and $34.80 million (at a 3 percent discount rate, assuming 7 percent usage). Assuming that 0.3 percent of Service members use auto title loans each year and that the average auto title loan carries an APR of 300 percent, the Department estimates that the interestrate limit would lead to transfer payments relating to the auto title lending industry of $0.87 million per year.223 Over ten years, the Department estimates that the total amount of the transfer payments relating to auto title lenders would be between $6.14 million (at a 7 percent discount rate) and $8.26 million (at a 3 percent discount rate). Assuming that 7 percent of Service members use high-cost installment loans each year and that the average installment loan carries an APR of 80 percent, the Department estimates that the interest-rate limit would result in transfer payments relating to the domestic installment lending industry of $60.06 million per year.224 Over ten years, the Department estimates that the total amount of transfer payments from installment-loan creditors would be between $425.77 million (at a 7 percent discount rate) and $572.35 million (at a 3 percent discount rate). Approximately 7 percent of volume in the high-cost installment lending market is done by online lenders based offshore.225 The Department estimates the proposed regulation would result in transfer payments relating to these offshore creditors of approximately $4.20 million per year. Over ten years, the total amount of transfer payments from these offshore creditors are estimated to be between $29.80 million (at a 7 percent discount rate) and $40.06 million (at a 3 percent discount rate). Overall, the Department estimates that the total amount of transfer payments relating to these four categories of consumer credit products would be between $100.64 million and $119.84 million per year; over ten years, the overall amount of these transfer payments would be between $716.18 million (assuming lower usage rates and a 7 percent discount rate) and $1.139 billion (assuming higher usage rates and a 3 percent discount rate). Of these overall amounts, between $6.77 million and $7.85 million of the transfer payments would relate to offshore creditors, and between $48.03 million and $74.86 million over ten years. The transfer payments from domestic creditors would be between $93.87 million and $111.99 million per year; over ten years, these transfer payments would be between $668.15 million (assuming lower usage rates and a 7 percent discount rate) and $1.064 billion (assuming higher usage rates and a 3 percent discount rate). Figure 5 provides a summary of all of these figures for the transfer payments. FIGURE 5—AMOUNT OF TRANSFER PAYMENTS RELATING TO THE INTEREST-RATE LIMIT [2013 dollars in millions] Annual tkelley on DSK3SPTVN1PROD with PROPOSALS6 Payday: (1) At 4.9% usage ................................................................................................................ (2) At 7% usage ................................................................................................................... Auto title ....................................................................................................................................... Installment .................................................................................................................................... 219 The Department assumes that the average loan amount is $392, ten loans of 14 days each are taken in a year, and the average APR is 391 percent. The Department calculates the transfer amount per borrower by finding the difference between the cost of a typical loan under the status quo, assuming that the loan falls outside the scope of the current rule ($588), and the permissible cost of a loan complying with the 36 percent interest rate limitation ($54). 220 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a payday loan (4.9 percent), and the amount transferred per account ($534). 221 The Department calculates the estimated transfer amount by multiplying the number of active duty service members (1.4 million) by the percentage with a payday loan (7 percent), and the amount transferred per account ($534). 222 See Stephens Inc., Forging Ahead: Growth, Opportunity and the Direction of the Alternative Financial Services Sector, presentation to the VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Community Financial Services Association of America, March 7, 2013 (estimating that one-third of lending volume is online and that 20 percent of the online market is offshore). 223 The Department assumes that the average principal borrowed is $951, average APR is 300 percent, and the average loan term is 30 days. The Department calculates the transfer amount per borrower by finding the difference between the cost of a typical loan under the status quo, assuming that the loan falls outside the scope of the current rule ($235), and the permissible cost of a loan complying with the 36 percent interest rate limitation ($28). See Susanna Montezemolo, Car-Title Lending, Center for Responsible Lending, July 2013, available at http://www.responsiblelending.org/state-oflending/reports/7-Car-Title-Loans.pdf. See Consumer Federation of America, Policy Brief: Gaps in the Military Lending Act Leave Many Service Members Vulnerable to Abusive Lending Practices, July 2013, available at http://www.consumerfed.org/ pdfs/130725-policybrief-mla-cfa.pdf (finding that a PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 $37 52 0.87 60 PV 10-year, 7% discount rate $260 370 6 426 PV 10-year, 3% discount rate $350 497 8 572 typical auto title loan has a 300 percent APR). The Department does not have data regarding auto-title creditors located offshore. 224 The Department assumes that a typical loan is $1,000 and borrowed for two years. Under the status quo with an APR of 80 percent, the monthly payment is $85 per month, for a sum of payments of $2,032. Under the proposal with an APR of 36 percent, the monthly payment is $59, for a sum of payments of $1,417, a difference of $615. For information on typical military installment loans, see Jean Ann Fox, The Military Lending Act Five Years Later, Consumer Federation of America, May 2012. 225 See Stephens Inc., Forging Ahead: Growth, Opportunity and the Direction of the Alternative Financial Services Sector, presentation to the Community Financial Services Association of America, March 7, 2013 (estimating that one-third of lending volume is online and that 20 percent of the online market is offshore). E:\FR\FM\29SEP6.SGM 29SEP6 58635 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules FIGURE 5—AMOUNT OF TRANSFER PAYMENTS RELATING TO THE INTEREST-RATE LIMIT—Continued [2013 dollars in millions] PV 10-year, 7% discount rate Annual Credit Cards: (1) At 3% of cards ................................................................................................................ (2) At 7% of cards ................................................................................................................ TOTAL Low (4.9% payday, 3% cards) ............................................................................................. High (7% payday, 7% cards) ............................................................................................... tkelley on DSK3SPTVN1PROD with PROPOSALS6 Apart from the MLA, for active duty Service members who are materially affected by virtue of his or her military service, the Servicemembers Civil Relief Act (SCRA) limits the permissible rate of interest on outstanding pre-service balances at 6 percent APR.226 To avail himself or herself of the protections of the SCRA, a Service member must make a written request to the creditor. Because data is unavailable on the extent to which creditors are reducing pre-service obligations for Service members, the Department is unable to adjust the estimated amount of the transfer payments relating to the interest-rate limit of the proposed regulation to account for the potential effects of the SCRA. Furthermore, the Department does not expect that the interest rate limitation will have undesirable side-effects for Service members. The Department observes that numerous creditors currently supply credit to Service members in a manner that already should comply with the interest-rate limit. In the Department’s experience, covered borrowers enjoy access to lowand no-cost credit. For example, to provide monetary support to Service members and their families with financial hardships, the Military Services have partnered with nonprofit charitable organizations chartered to provide relief services to Service members and their families. The four Relief Societies for the Military Services provide no-interest loans and grants for shortfalls in household expenses and unforeseen emergencies. B. Unfunded Mandates Reform Act (Sec. 202, Pub. L. 104–4) The Department certifies that this proposed regulation does not contain a Federal mandate that may result in the expenditure by State, local, and tribal governments, in aggregate, or by the private sector of $100 million or more in any one year.227 226 50 App. USC 527(a). analysis in section IV.A. for calculations. The Department expects expenditure by the private 227 See VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 C. Regulatory Flexibility Act The Department certifies that this proposed regulation is not subject to the Regulatory Flexibility Act (‘‘RFA’’) 228 because the regulation, if adopted as proposed, would not have a significant economic impact on a substantial number of small entities. The North American Industrial Classification (NAIC) codes for the affected businesses are the following: (a) 522110—Commercial Banking (b) 522130—Credit Unions (c) 522210—Credit Card Issuing (d) 522291—Consumer Lending Pursuant to the Small Business Administration (SBA) Small Business Size Standards, a consumer lending business is a ‘‘small business entity’’ if it has less than $35.5 million in receipts. According to the 2007 Economic Census (the last year for which data is available), approximately 96 percent of firms in NAIC code 522291 are small business entities. For the other three potentially affected businesses, the SBA Small Business Size Standards considers any business with less than $500 million in assets to be a small business entity. Approximately 81 percent of firms in NAIC code 522110 and 94 percent of firms in NAIC code 522130 are small business entities. Overwhelmingly, credit card products are issued by insured depository institutions and, therefore, small business entities issuing credit cards (included within NAIC code 522210) are covered by the previously described codes. While a substantial portion of firms in each affected market are ‘‘small business entities,’’ Service members and their dependents make up only a small sector of approximately $96.03 million in the implementation year for setting up the required disclosures and optional database inquiry and record retention process. On an ongoing basis, the Department expects expenditure by the private sector of $20.34 million to comply with the required disclosures and optional database inquiry and record retention procedures during the course of credit transactions. 228 5 U.S.C. 601. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 PV 10-year, 3% discount rate 3 7 24 54 27 61 101 120 716 856 958 1,139 portion of the consumers for those businesses. Because only approximately 2.5 percent of households in the United States include an active duty Service member, the interest-rate limit and other MLA conditions of the proposed regulation would affect a small percentage of the consumers served by entities that could be creditors covered by this regulation. Thus, the Department concludes that—even though there appears to be a large percentage of small business entities in each affected class of business—the proposed regulation would not (for the purposes of the RFA) have a significant economic impact on a substantial number of small businesses because those businesses nonetheless have very few customers who are covered borrowers. The Department seeks comment, particularly from potentially affected small businesses themselves, on the possible impact of the proposed rule on small businesses. Please provide data and studies that support the comment. D. Paperwork Reduction Act Proposed §§ 232.5 and 232.6 contain information-collection requirements. The Department has submitted the following proposal to OMB under the provisions of the Paperwork Reduction Act.229 Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the Department, including whether the information will have practical utility; (b) the accuracy of the estimate of the burden of the proposed information collection; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the information collection on respondents. Title: Database Inquiry and Mandatory Loan Disclosures as Part of Limitations on Terms of Consumer Credit Extended to Service Members and Their Dependents. 229 44 E:\FR\FM\29SEP6.SGM U.S.C. 3502, 3506–07. 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 58636 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules Type of Request: Reinstatement with change. Number of Respondents: 40,000. Responses per Respondent: Varies by type of respondent. Annual Responses: 191 million. Average Burden per Response: Varies by type of response. On an ongoing basis, respondents likely will spend 1 minute (0.02 hours) for single-record borrower inquiry (70 million); 1.67 minutes (0.03 hours) for orally providing the required information to covered borrowers (4 million responses); and 0 minutes for printed disclosures included in all consumer credit contracts (191 million). In the first year, there is expected to be a onetime burden of 110 labor hours to set up the mandatory oral and printed disclosures, as well as a process for conducting covered-borrower checks and retaining records. Annual Burden Hours: 4,000,000 setup burden hours in the first year; 1,266,747 ongoing burden hours each year. Needs and Uses: With respect to any extension of consumer credit to a covered borrower, a creditor would be required to provide to the borrower (a) a statement of the MAPR and (b) a Statement of Federal Protections. In approximately 4 million transactions, the required information would be provided orally as well as in a printed document; in approximately 191 million transactions, the required information would be included in standard account agreements. Additionally, a creditor may, at its discretion, identify the status of a consumer-applicant by querying the MLA Database and, in the event that the inquiry indicates that consumerapplicant is not a covered borrower, take advantage of a safe harbor from liability under 10 U.S.C. 987 by retaining a record of the information obtained from the database. Affected Public: Creditors making loans that are subject to a finance charge or payable by a written agreement in more than four installments, except for loans that are mortgage loans and purchase-money financing for vehicles or other personal property. Frequency: One set of disclosures for each transaction involving consumer credit; one database inquiry for each transaction involving consumer credit. Respondents’ Obligation: Mandatory loan disclosures; optional database inquiry and subsequent record retention. OMB Desk Officer Written comments and recommendations on the proposed information collection should be sent to VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 Ms. Jasmeet Seehra at the Office of Management and Budget, DoD Desk Officer, Room 10102, New Executive Office Building, Washington, DC 20503, with a copy to the Office of the Deputy Assistant Secretary of Defense (Military Community and Family Policy), 4000 Defense Pentagon, Washington, DC 20301–4000. Comments can be received from 30 to 60 days after the date of this document, but comments to OMB will be most useful if received by OMB within 30 days after the date of this document. You may also submit comments, identified by docket number and title, by the following method: * Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. Instructions: All submissions received must include the agency name, docket number and title for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at http:// www.regulations.gov as they are received without change, including any personal identifiers or contact information. To request more information on this proposed information collection or to obtain a copy of the proposal and associated collection instruments, please write to Office of the Deputy Assistant Secretary of Defense (Military Community and Family Policy), 4000 Defense Pentagon, Washington, DC 20301–4000, Marcus Beauregard, 571– 372–5357. E. Executive Order 13132 Federalism Executive Order 13132 (‘‘EO 13132’’) requires Executive departments and agencies, including the Department, to identify regulatory actions that have significant federalism implications. A regulation has federalism implications if it has substantial direct effects on the States, on the relationship or distribution of power between the Federal Government and the States, or on the distribution of power and responsibilities among various levels of government. The provisions of this part, as required by 10 U.S.C. 987, override state statutes inconsistent with this part to the extent that these provisions provide different protections for covered borrowers than those provided to residents of that State. As discussed in the section-by-section description of the proposed regulation, in section III, the proposal would revise the corresponding section of the Department’s existing regulation to PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 reflect amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a)(1) of the 2013 Act. This amendment clarifies the scope of state laws subject to preemption by 10 U.S.C. 987. The proposed regulation, if adopted as proposed, would not affect in any manner the powers and authorities that any State may have or affect the distribution of power and responsibilities between Federal and State levels of government. Therefore, the Department has determined that the proposed regulation has no federalism implications that warrant the preparation of a Federalism Assessment in accordance with EO 13132. List of Subjects in 32 CFR Part 232 Loan programs, Reporting and recordkeeping requirements, Service members. For the reasons set forth in the preamble, chapter I of title 32, Code of Federal Regulations is proposed to be amended by revising part 232 to read as follows: PART 232—LIMITATIONS ON TERMS OF CONSUMER CREDIT EXTENDED TO SERVICE MEMBERS AND DEPENDENTS Sec. 232.1 Authority, purpose, and coverage. 232.2 Applicability; examples. 232.3 Definitions. 232.4 Terms of consumer credit extended to covered borrowers. 232.5 Identification of covered borrower. 232.6 Mandatory loan disclosures. 232.7 Preemption. 232.8 Limitations. 232.9 Penalties and remedies. 232.10 Administrative enforcement. 232.11 Servicemembers Civil Relief Act provisions unaffected. 232.12 Effective dates. Authority: 10 U.S.C. 987. § 232.1 Authority, purpose, and coverage. (a) Authority. This part is issued by the Department of Defense to implement 10 U.S.C. 987. (b) Purpose. The purpose of this part is to impose limitations on the cost and terms of certain extensions of credit to Service members and their dependents, and to provide additional protections relating to such transactions in accordance with 10 U.S.C. 987. (c) Coverage. This part defines the types of transactions involving ‘‘consumer credit,’’ a ‘‘creditor,’’ and a ‘‘covered borrower’’ that are subject to the regulation, consistent with the provisions of 10 U.S.C. 987. In addition, this part: (1) Provides the maximum allowable amount of all charges, and the types of E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules charges, that may be associated with a covered extension of consumer credit; (2) Requires a creditor to provide to a covered borrower a statement of the Military Annual Percentage Rate, or MAPR, before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit. The statement required by this part differs from and is in addition to the disclosures that must be provided to consumers under the Truth in Lending Act; (3) Provides for the method a creditor must use in calculating the MAPR; and (4) Contains such other criteria and limitations as the Secretary of Defense has determined appropriate, consistent with the provisions of 10 U.S.C. 987. § 232.2 Applicability; examples. (a) Applicability. This part applies to consumer credit extended by a creditor to a covered borrower, as those terms are defined in this part. Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit. (b) Examples. The examples in this part are not exclusive. To the extent that an example in this part implicates a term or provision of Regulation Z (12 CFR part 1026), issued by the Consumer Financial Protection Bureau to implement the Truth in Lending Act, Regulation Z shall control the meaning of that term or provision. tkelley on DSK3SPTVN1PROD with PROPOSALS6 § 232.3 Definitions. (a) Affiliate means any person that controls, is controlled by, or is under common control with another person. (b) Billing cycle has the same meaning as ‘‘billing cycle’’ in Regulation Z. (c) Bureau means the Consumer Financial Protection Bureau. (d) Closed-end credit means consumer credit (but for the conditions applicable to consumer credit under this part) other than consumer credit that is ‘‘open-end credit’’ as that term is defined in Regulation Z. (e) Consumer means a natural person. (f)(1) Consumer credit means credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is: (i) Subject to a finance charge; or (ii) Payable by a written agreement in more than four installments. (2) Exceptions. Notwithstanding paragraph (f)(1) of this section, consumer credit does not mean: (i) A residential mortgage, which is any credit transaction secured by an interest in the covered borrower’s VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 dwelling, including a transaction to finance the purchase or initial construction of a dwelling, any refinance transaction, home equity loan or line of credit, or reverse mortgage; (ii) Any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased; (iii) Any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased; and (iv) Any credit transaction that is an exempt transaction for the purposes of Regulation Z (other than a transaction exempt under 12 CFR 1026.29) or otherwise is not subject to disclosure requirements under Regulation Z. (g) Covered borrower means a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member (as defined in this paragraph) or a dependent (as defined in this paragraph) of a covered member. (1) The term ‘‘covered member’’ means a member of the armed forces who is serving on— (i) Active duty pursuant to title 10, title 14, or title 32, United States Code, under a call or order that does not specify a period of 30 days or fewer, or (ii) Active Guard and Reserve duty, as that term is defined in 10 U.S.C. 101(d)(6). (2) The term ‘‘dependent’’ with respect to a covered member means a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2). (h) Credit means the right granted to a consumer by a creditor to defer payment of debt or to incur debt and defer its payment. (i) Creditor, except as provided in § 232.8(a) and § 232.8(f), means a person who is: (1) Engaged in the business of extending consumer credit; or (2) An assignee of a person described in paragraph (i)(1) of this section with respect to any consumer credit extended. (3) For the purposes of this definition, a creditor is engaged in the business of extending consumer credit if the creditor considered by itself and together with its affiliates meets the transaction standard for a ‘‘creditor’’ under Regulation Z with respect to extensions of consumer credit to covered borrowers. (j) Department means the Department of Defense. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 58637 (k) Dwelling means a residential structure that contains one to four units, whether or not the structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and manufactured home. (l) Electronic fund transfer has the same meaning as in the regulation issued by the Bureau to implement the Electronic Fund Transfer Act, as amended from time to time (12 CFR part 1005). (m) Finance charge has the same meaning as ‘‘finance charge’’ in Regulation Z. (n) Military annual percentage rate (MAPR). The MAPR is the cost of the consumer credit expressed as an annual rate, and shall be calculated in accordance with § 232.4(c). (o) Open-end credit means consumer credit that (but for the conditions applicable to consumer credit under this part) is ‘‘open-end credit’’ under Regulation Z. (p) Person means a natural person or organization, including any corporation, partnership, proprietorship, association, cooperative, estate, trust, or government unit. (q) Regulation Z means any rules, or interpretations thereof, issued by the Bureau to implement the Truth in Lending Act, as amended from time to time, including any interpretation or approval issued by an official or employee duly authorized by the Bureau to issue such interpretations or approvals. However, for any provision of this part requiring a creditor to comply with Regulation Z, a creditor who is subject to Regulation Z (12 CFR part 226) issued by the Board of Governors of the Federal Reserve System must continue to comply with 12 CFR part 226. Words that are not defined in this rule have the same meanings given to them in Regulation Z (12 CFR part 1026) issued by the Bureau, as amended from time to time, including any interpretation thereof by the Bureau or an official or employee of the Bureau duly authorized by the Bureau to issue such interpretations. Words that are not defined in this part or Regulation Z, or any interpretation thereof, have the meanings given to them by State or Federal law. § 232.4 Terms of consumer credit extended to covered borrowers. (a) General conditions. A creditor who extends consumer credit to a covered borrower may not require the covered borrower to pay an MAPR for the credit with respect to such extension of credit, except as: E:\FR\FM\29SEP6.SGM 29SEP6 tkelley on DSK3SPTVN1PROD with PROPOSALS6 58638 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules (1) Agreed to under the terms of the credit agreement or promissory note; (2) Authorized by applicable State or Federal law; and (3) Not specifically prohibited by this part. (b) Limit on cost of consumer credit. A creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit. (c) Calculation of the MAPR. (1) Charges included in the MAPR. The charges for the MAPR shall include, as applicable to the extension of consumer credit: (i) Credit insurance premiums, including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements; (ii) Fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction for closed-end credit or upon account opening for open-end credit; and (iii) Except for a bona fide fee (other than a periodic rate) which may be excluded under paragraph (d) of this section: (A) Finance charges associated with the consumer credit; (B) Any application fee charged to a covered borrower who applies for consumer credit; and (C) Any fee imposed for participation in any plan or arrangement for consumer credit, subject to paragraph (c)(2)(ii)(B) of this section. (iv) Certain exclusions of Regulation Z inapplicable. Any charge set forth in paragraphs (c)(1)(i)–(iii) of this section shall be included in the calculation of the MAPR even if that charge would be excluded from the finance charge under Regulation Z. (2) Computing the MAPR—(i) Closedend credit. For closed-end credit, the MAPR shall be calculated following the rules for calculating and disclosing the ‘‘Annual Percentage Rate (APR)’’ for credit transactions under Regulation Z based on the charges set forth in paragraph (c)(1) of this section. (ii) Open-end credit—(A) In general. Except as provided in paragraph (c)(2)(ii)(B) of this section, for open-end credit, the MAPR shall be calculated following the rules for calculating the effective annual percentage rate for a billing cycle as set forth in § 1026.14(c)– (d) of Regulation Z (as if a creditor must comply with that section) based on the charges set forth in paragraph (c)(1) of this section. Notwithstanding § 1026.14(c)–(d) of Regulation Z, the amount of charges related to opening, VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 renewing, or continuing an account must be included in the calculation of the MAPR to the extent those charges are set forth in paragraph (c)(1) of this section. (B) No balance during a billing cycle. For open-end credit, if the MAPR cannot be calculated in a billing cycle because there is no balance in the billing cycle, a creditor may not impose any fee or charge during that billing cycle, except that the creditor may impose a fee for participation in any plan or arrangement for that open-end credit so long as the participation fee does not exceed $100 per annum, regardless of the billing cycle in which the participation fee is imposed; provided, however, that the $100-per annum limitation on the amount of the participation fee does not apply to a bona fide participation fee imposed in accordance with paragraph (d) of this section. (d) Bona fide fee charged to a credit card account—(1) In general. For consumer credit extended in a credit card account under an open-end (not home-secured) consumer credit plan, a bona fide fee, other than a periodic rate, is not a charge required to be included in the MAPR pursuant to paragraph (c)(1) of this section. The exclusion provided for any bona fide fee under this paragraph applies only to the extent that the charge by the creditor is a bona fide fee, and must be reasonable and customary for that type of fee. (2) Ineligible items. The exclusion for bona fide fees in paragraph (d)(1) of this section does not apply to any credit insurance premium, including charges for single premium credit insurance, fees for debt cancellation or debt suspension agreements, or to any fees for credit-related ancillary products sold in connection with and either at or before consummation of the credit transaction or upon account opening. (3) Standards relating to bona fide fees—(i) Like-kind fees. To assess whether a bona fide fee is reasonable and customary under paragraph (d)(1) of this section, the fee must be compared to fees typically imposed by other creditors for the same or a substantially similar product or service. For example, when assessing a bona fide cash advance fee, that fee must be compared to fees charged by other creditors for transactions in which consumers receive extensions of credit in the form of cash or its equivalent. (ii) Safe harbor. A bona fide fee is reasonable under paragraph (d)(1) of this section if the amount of the fee is less than or equal to an average amount of a fee for the same or a substantially similar product or service charged by 5 PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 or more creditors each with at least $3 billion in outstanding loans on U.S. credit card accounts at any time during the 3-year period preceding the time such average is computed. (iii) Reasonable fee. A bona fide fee that is higher than an average amount, as calculated under paragraph (d)(3)(ii) of this section, also may be reasonable under paragraph (d)(1) of this section depending on other factors relating to the credit card account. A bona fide fee charged by a creditor is not unreasonable solely because other creditors do not charge a fee for the same or a substantially similar product or service. (iv) Customary. A bona fide fee computed as a percentage of the amount of a transaction is customary under paragraph (d)(1) of this section so long as other creditors typically compute, or customarily have computed, that fee for the same or a substantially similar product or service on a percentage basis. Nothing in this paragraph (d)(3)(iv) shall prohibit a bona fide fee that is a fixed amount from being customary for the purpose of meeting the condition set forth in paragraph (d)(1) of this section, even if substantially all other creditors currently compute that fee on a percentage basis. Nothing in this paragraph (d)(3)(iv) shall prohibit a bona fide fee that is charged on a percentage basis from being customary for the purpose of meeting the condition set forth in paragraph (d)(1) of this section, even if substantially all other creditors currently charge a fixed amount. (v) Indicia of reasonableness for a participation fee. An amount of a bona fide fee for participation in a credit card account may be reasonable and customary under paragraph (d)(1) of this section if that amount reasonably and customarily corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account. For example, even if other creditors typically charge $100 per annum for participation in credit card accounts, a $400 fee nevertheless may be reasonable and customary if (relative to other accounts carrying participation fees) the credit made available to the covered borrower is significantly higher or additional services or other benefits are offered under that account. (4) If a creditor imposes any fee (other than a periodic rate) that is not a bona fide fee and imposes a finance charge to a covered borrower, the total amount of those fees, including any bona fide fees, and other finance charges shall be E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules included in the MAPR pursuant to paragraph (c) of this section. (5) Rule of construction. Nothing in paragraph (d)(1) of this section authorizes the imposition of fees or charges otherwise prohibited by this part or by other applicable State or Federal law. tkelley on DSK3SPTVN1PROD with PROPOSALS6 § 232.5 Identification of covered borrower. (a) In general. A creditor may conclusively determine whether credit is offered or extended to a covered borrower, and thus may be subject to 10 U.S.C. 987 and the requirements of this part, by assessing the status of a consumer in accordance with this section. A creditor also is permitted to assess whether a consumer is a covered borrower by using other methods, as the creditor may elect. (b) Safe harbor—(1) Department database. To determine whether a consumer is a covered borrower, a creditor may verify the status of a consumer by accessing the information relating to that consumer, if any, in the database maintained by the Department, available at http://www.dmdc.osd.mil/ mla/owa/home. A search of the Department’s database requires the entry of the consumer’s last name, date of birth, and Social Security number. (2) Determination and recordkeeping. Except as provided in paragraph (c) of this section, when a creditor enters into a transaction or establishes an account for consumer credit, a determination by a creditor regarding the status of a consumer based on information obtained from the Department’s database shall be deemed to be conclusive with respect to that transaction or account involving consumer credit between the creditor and that consumer, so long as that creditor maintains a record of the information so obtained. (c) Actual knowledge. (1) If at the time a creditor enters into a transaction or establishes an account for consumer credit the creditor has actual knowledge that a consumer is a covered borrower, the creditor shall treat the consumer as a covered borrower notwithstanding any determination by that creditor based on information obtained from the Department’s database. Actual knowledge that a consumer is a covered borrower obtained after a creditor has entered into a transaction or established an account for consumer credit shall not affect that transaction or account if the prior determination by that creditor was based solely on information obtained from the Department’s database. (2) For the purposes of this section, actual knowledge of the status of a consumer as a covered borrower may be VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 established only on the basis of a record (including any electronic record) collected by the creditor prior to entering into a transaction or establishing an account for consumer credit and maintained in any system used by the creditor that relates to the consumer credit involving that consumer. § 232.6 Mandatory loan disclosures. (a) Required information. With respect to any extension of consumer credit (including any consumer credit originated or extended through the internet) to a covered borrower, a creditor shall provide to the covered borrower the following information before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit: (1) A statement of the MAPR applicable to the extension of consumer credit; (2) Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; (3) A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or accountopening disclosure (in the case of openend credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement; and (4) A statement that ‘‘Federal law provides important protections to regular or reserve members of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer, and their dependents. Members of the Armed Forces and their dependents may be able to obtain financial assistance from Army Emergency Relief, Navy and Marine Corps Relief Society, the Air Force Aid Society, or Coast Guard Mutual Aid. Members of the Armed Forces and their dependents may request free legal advice regarding an application for credit from a service legal assistance office or financial counseling from a consumer credit counselor.’’ (b) One-time delivery; multiple creditors. (1) The information described in paragraphs (a)(1), (a)(3), and (a)(4) of this section are not required to be provided to a covered borrower more than once for the transaction or the account established for consumer credit with respect to that borrower. (2) Multiple creditors. If a transaction involves more than one creditor, the creditors shall agree among themselves PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 58639 which creditor must provide the information described in paragraphs (a)(1), (a)(3), and (a)(4) of this section. (c) Statement of the MAPR—(1) In general. A creditor may satisfy the requirement of paragraph (a)(1) of this section by describing the charges the creditor may impose, in accordance with this part and subject to the terms and conditions of the agreement relating to the consumer credit to calculate the MAPR. Paragraph (a)(1) of this section shall not be construed as requiring a creditor to describe the MAPR as a numerical value or to describe the total dollar amount of all charges in the MAPR that apply to the extension of consumer credit. (2) Method of providing a statement regarding the MAPR. A creditor may include a statement of the MAPR applicable to the consumer credit in the agreement with the covered borrower involving the consumer credit transaction. Paragraph (a)(1) of this section shall not be construed as requiring a creditor to include a statement of the MAPR applicable to an extension of consumer credit in any advertisement relating to the credit. (3) Model statement. A statement substantially similar to the following statement may be used for the purpose of paragraph (a)(1) of this section: ‘‘Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: the costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for a credit card account); and any participation fee charged (other than certain participation fees for a credit card account).’’ (d) Methods of delivery—(1) Written disclosures. The creditor shall provide the information required by paragraphs (a)(1), (a)(3), and (a)(4) of this section in writing in a form the covered borrower can keep. (2) Oral disclosures. The creditor also shall orally provide the information required by paragraphs (a)(1), (a)(3), and (a)(4) of this section. In mail transactions, internet transactions, and transactions conducted at the point-ofsale in connection with the sale of a nonfinancial product or service, the creditor satisfies this requirement if it provides a toll-free telephone number E:\FR\FM\29SEP6.SGM 29SEP6 58640 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules on or with the written disclosures that a covered borrower may use to obtain oral disclosures and the creditor provides oral disclosures when the covered borrower contacts the creditor for this purpose. (e) When disclosures are required for refinancing or renewal of covered loan. The refinancing or renewal of consumer credit requires new disclosures under this section only when the transaction for that credit would be considered a new transaction that requires disclosures under Regulation Z. § 232.7 Preemption. (a) Inconsistent laws. 10 U.S.C. 987 as implemented by this part preempts any State or Federal law, rule or regulation, including any State usury law, to the extent such law, rule or regulation is inconsistent with this part, except that any such law, rule or regulation is not preempted by this part to the extent that it provides protection to a covered borrower greater than those protections provided by 10 U.S.C. 987 and this part. (b) Different treatment under State law of covered borrowers is prohibited. A State may not: (1) Authorize creditors to charge covered borrowers rates of interest for any consumer credit or loans that are higher than the legal limit for residents of the State, or (2) Permit the violation or waiver of any State consumer lending protection covering consumer credit that is for the benefit of residents of the State on the basis of the covered borrower’s nonresident or military status, regardless of the covered borrower’s domicile or permanent home of record, provided that the protection would otherwise apply to the covered borrower. tkelley on DSK3SPTVN1PROD with PROPOSALS6 § 232.8 Limitations. Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which: (a) The creditor rolls over, renews, repays, refinances, or consolidates any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower. This paragraph shall not apply to a transaction when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this paragraph because the consumer was not a covered borrower at the time of the original transaction. For the purposes of this paragraph only, the term ‘‘creditor’’ means a person engaged in the business VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the relevant law), provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union. (b) The covered borrower is required to waive the covered borrower’s right to legal recourse under any otherwise applicable provision of State or Federal law, including any provision of the Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.). (c) The creditor requires the covered borrower to submit to arbitration or imposes other onerous legal notice provisions in the case of a dispute. (d) The creditor demands unreasonable notice from the covered borrower as a condition for legal action. (e) The creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with § 232.4(b), the creditor may: (1) Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law; (2) Require direct deposit of the consumer’s salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or (3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction. (f) The creditor requires as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay the obligation. For the purposes of this paragraph only, the term ‘‘creditor’’ shall not include a ‘‘military welfare society,’’ as defined in 10 U.S.C. 1033(b)(2), or a ‘‘service relief society,’’ as defined in 37 U.S.C. 1007(h)(4). (g) The covered borrower is prohibited from prepaying the consumer credit or is charged a penalty fee for prepaying all or part of the consumer credit. § 232.9 Penalties and remedies. (a) Misdemeanor. A creditor who knowingly violates 10 U.S.C. 987 as implemented by this part shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both. (b) Preservation of other remedies. The remedies and rights provided under 10 U.S.C. 987 as implemented by this PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 part are in addition to and do not preclude any remedy otherwise available under State or Federal law or regulation to the person claiming relief under the statute, including any award for consequential damages and punitive damages. (c) Contract void. Any credit agreement, promissory note, or other contract with a covered borrower that fails to comply with 10 U.S.C. 987 as implemented by this part or which contains one or more provisions prohibited under 10 U.S.C. 987 as implemented by this part is void from the inception of the contract. (d) Arbitration. Notwithstanding 9 U.S.C. 2, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit to a covered borrower pursuant to this part shall be enforceable against any covered borrower, or any person who was a covered borrower when the agreement was made. (e) Civil liability—(1) In general. A person who violates 10 U.S.C. 987 as implemented by this part with respect to any person is civilly liable to such person for: (i) Any actual damage sustained as a result, but not less than $500 for each violation; (ii) Appropriate punitive damages; (iii) Appropriate equitable or declaratory relief; and (iv) Any other relief provided by law. (2) Costs of the action. In any successful action to enforce the civil liability described in paragraph (e)(1) of this section, the person who violated 10 U.S.C. 987 as implemented by this part is also liable for the costs of the action, together with reasonable attorney fees as determined by the court. (3) Effect of finding of bad faith and harassment. In any successful action by a defendant under this section, if the court finds the action was brought in bad faith and for the purpose of harassment, the plaintiff is liable for the attorney fees of the defendant as determined by the court to be reasonable in relation to the work expended and costs incurred. (4) Defenses. A person may not be held liable for civil liability under paragraph (e) of this section if the person shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors, except that an error of E:\FR\FM\29SEP6.SGM 29SEP6 Federal Register / Vol. 79, No. 188 / Monday, September 29, 2014 / Proposed Rules legal judgment with respect to a person’s obligations under 10 U.S.C. 987 as implemented by this part is not a bona fide error. (5) Jurisdiction, venue, and statute of limitations. An action for civil liability under paragraph (e) of this section may be brought in any appropriate United States district court, without regard to the amount in controversy, or in any other court of competent jurisdiction, not later than the earlier of: (i) Two years after the date of discovery by the plaintiff of the violation that is the basis for such liability; or (ii) Five years after the date on which the violation that is the basis for such liability occurs. § 232.10 Administrative enforcement. tkelley on DSK3SPTVN1PROD with PROPOSALS6 The provisions of this part, other than § 232.9(a), shall be enforced by the agencies specified in section 108 of the Truth in Lending Act (15 U.S.C. 1607) in the manner set forth in that section VerDate Sep<11>2014 17:17 Sep 26, 2014 Jkt 232001 or under any other applicable authorities available to such agencies by law. § 232.11 Servicemembers Civil Relief Act protections unaffected. Nothing in this part may be construed to limit or otherwise affect the applicability of section 207 and any other provisions of the Servicemembers Civil Relief Act (50 U.S.C. App. 527). § 232.12 Effective dates. (a) Prior extensions of consumer credit. Consumer credit that is extended to a covered borrower and consummated any time between October 1, 2007, and [EFFECTIVE DATE OF FINAL REGULATION, AS AMENDED], are subject to the requirements of this part as were established by the Department and effective on October 1, 2007. (b) New extensions of consumer credit. Except as provided in paragraphs (c) and (d) of this section, the PO 00000 Frm 00041 Fmt 4701 Sfmt 9990 58641 requirements of this part, as amended by the Department and effective as of [EFFECTIVE DATE OF FINAL REGULATION], shall apply only to a consumer credit transaction or account for consumer credit consummated or established on or after [EFFECTIVE DATE OF FINAL REGULATION]. (c) Provisions of 10 U.S.C. 987(d)(2). The amendments to 10 U.S.C. 987(d)(2) enacted in section 661(a) of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 112–239, 126 Stat. 1785), as reflected in § 232.7(b) of this part, shall take effect on January 2, 2014. (d) Civil liability remedies. The provisions set forth in § 232.9(e) shall apply with respect to consumer credit extended on or after January 2, 2013. Dated: September 22, 2014. Aaron Siegel, Alternate OSD Federal Register Liaison Officer, Department of Defense. [FR Doc. 2014–22900 Filed 9–26–14; 8:45 am] BILLING CODE 5001–06–P E:\FR\FM\29SEP6.SGM 29SEP6

Agencies

[Federal Register Volume 79, Number 188 (Monday, September 29, 2014)]
[Proposed Rules]
[Pages 58601-58641]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22900]



[[Page 58601]]

Vol. 79

Monday,

No. 188

September 29, 2014

Part VI





Department of Defense





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Office of the Secretary





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32 CFR Part 232





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

Federal Register / Vol. 79 , No. 188 / Monday, September 29, 2014 / 
Proposed Rules

[[Page 58602]]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 232

[DOD-2013-OS-0133]
RIN 0790-AJ10


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

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

ACTION: Proposed rule.

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

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

ADDRESSES: You may submit comments, identified by docket number and or 
Regulatory Information Number (RIN) and title, by any of the following 
methods;
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Federal Docket Management System Office, 4800 Mark 
Center Drive, 2nd Floor, East Tower, Suite 02G09, Alexandria, VA 22350-
3100.
    Instructions: All submissions received must include the agency name 
and docket number or RIN for this Federal Register document. The 
general policy for comments and other submissions from members of the 
public is to make these submissions available for public viewing on the 
Internet at http://www.regulations.gov as they are received without 
change, including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT: Marcus Beauregard, 571-372-5357.

SUPPLEMENTARY INFORMATION: 

Retrospective Review

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

I. Executive Summary

A. Purpose of the Regulatory Action

    The Department is proposing to amend its existing regulation 
primarily for the purpose of extending the protections of 10 U.S.C. 987 
to a broader range of closed-end and open-end credit products, rather 
than the limited credit products currently defined as consumer credit. 
More specifically, the Department proposes to amend its regulation so 
that, in general, consumer credit covered under the MLA \1\ would be 
defined consistently with credit that for decades has been subject to 
the protections under the Truth in Lending Act (TILA), namely: Credit 
offered or extended to a covered borrower primarily for personal, 
family, or household purposes, and that is (i) subject to a finance 
charge or (ii) payable by a written agreement in more than four 
installments.\2\
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    \1\ The forms of ``consumer credit'' that may be covered by the 
MLA are subject to certain exceptions, notably for a residential 
mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B).
    \2\ See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the 
regulation, in relevant part, to credit that is subject to a finance 
charge or is payable by a written agreement in more than four 
installments).
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    After observing the effects of its existing regulation during the 
past six years and based on its review of information provided by a 
wide variety of persons and entities, the Department believes that this 
proposal to amend the regulation is appropriate in order to address a 
wider range of credit products that currently fall outside the scope of 
the regulation implementing the MLA, streamline the information that a 
creditor would be required to provide to a covered borrower when 
consummating a transaction involving consumer credit, and provide a 
more straightforward mechanism for a creditor to assess whether a 
consumer-applicant is a covered borrower. In this regard, the 
Department is aware of misuses of the covered borrower identification 
statement whereby a Service member (or covered dependent) falsely 
declares that he or she is not a covered borrower. The Department 
believes that, if a creditor unilaterally conducts a covered-borrower 
check by using the MLA Database, a Service member or his or her 
dependent would be relieved from making any statement regarding his or 
her status as a covered borrower.
    The Department is provided authority in 10 U.S.C 987(h) to 
establish regulations to implement the MLA. As described in 10 U.S.C. 
987(h)(3) the Department, at a minimum, must consult with other Federal 
agencies ``not less often than once every two years'' with a view 
towards revising the regulation implementing the MLA.

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

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

C. Costs and Benefits

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

[[Page 58603]]

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

                             Figure 1--Summary of Estimated Effects of Proposed Rule
                                           [2013 dollars in millions]
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                                                                      Annual,     PV 10-year, 7%  PV 10-year, 3%
                                                    First year        ongoing      discount rate   discount rate
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Sensitivity Analysis: Benefits to  Low..........              $0             $13             $96            $128
 the Department.
                                   High.........               0             137             970           1,304
Primary Analysis: Costs to         .............              96              20             144             194
 Creditors of Compliance.
Primary Analysis: Transfer         Low..........              NA             101             717             958
 Payments.
                                   High.........              NA             120             856           1,139
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II. Background

A. Overview of the Proposal

    The Department proposes to amend its regulation \3\ that implements 
10 U.S.C. 987, which was enacted in section 670 of the John Warner 
National Defense Authorization Act for Fiscal Year 2007,\4\ and amended 
by sections 661-663 of the National Defense Authorization Act for 
Fiscal Year 2013 (``2013 Act'').\5\
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    \3\ 32 CFR part 232 (2013).
    \4\ Public Law 109-364, 120 Stat. 2266.
    \5\ Public Law 112-239, 126 Stat. 1785.
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    The 2013 Act amended several provisions of 10 U.S.C. 987. In 
particular, the 2013 Act added provisions that would permit a covered 
borrower to recover damages from a creditor who violates a requirement 
of the MLA,\6\ and authorizes the agencies ``specified in section 108 
of the Truth in Lending Act'' [``TILA''] to enforce the requirements of 
the MLA ``in the manner set forth in that section [of TILA] or under 
any other applicable authorities available to such agencies by law.'' 
\7\ Section 663 of the 2013 Act modified the definition of 
``dependent'' in order to make the meaning of that term consistent with 
parts of the definition that applies in the context of eligibility of a 
Service member's dependent for military medical care.\8\ In addition, 
section 661 of the 2013 Act amended the MLA to require the Department 
to consult--``not less often than once every two years''--with the 
Board of Governors of the Federal Reserve System, the Consumer 
Financial Protection Bureau (``Bureau''), the Department of the 
Treasury, the Federal Deposit Insurance Corporation, the Federal Trade 
Commission, the National Credit Union Administration, and the Office of 
the Comptroller of the Currency (collectively, ``Federal Agencies'') 
with a view towards revising the regulation implementing the MLA.
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    \6\ Id. See section 662(a) of the 2013 Act.
    \7\ 126 Stat. 1786. See section 662(b) of the 2013 Act.
    \8\ 126 Stat. 1786 (defining ``dependent'' to be a person 
described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 
1072(2)).
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    In August 2007, the Department published its regulation to 
implement the MLA.\9\ When initially determining the extent to which 
the protections of the MLA should apply, the Department ``focus[ed] on 
three problematic credit products that the Department identified in its 
August 2006 Report to Congress on the Impact of Predatory Lending 
Practices on Members of the Armed Forces and Their Dependents [(``2006 
Report'')] \10\: Payday loans, vehicle title loans, and refund 
anticipation loans.'' \11\ The Department elected, at that time, to 
define the scope of ``consumer credit'' covered by the regulation as a 
narrow band of products within these three categories of credit; for 
example, the rule defines a ``payday loan,'' in relevant part, as 
``[c]losed-end credit with a term of 91 days or fewer in which the 
amount financed does not exceed $2,000.'' \12\
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    \9\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents, 72 FR 50580 (Aug. 31, 2007).
    \10\ Department of Defense, Report On Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents (August 9, 2006), available at http://www.defense.gov/
pubs/pdfs/ReporttoCongressfinal.pdf.
    \11\ 72 FR at 50585.
    \12\ 32 CFR 232.3(b)(1)(i) (definition of ``consumer credit'').
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    After observing the effects of its existing regulation, the 
Department believes that a wider range of credit products offered or 
extended to Service members reasonably could--and should--be subject to 
the protections of the MLA, and that the extremely narrow definition of 
``consumer credit'' permits creditors to structure credit products in 
order to reduce or avoid altogether the obligations of the MLA. For 
example, if a creditor wishes to market a ``payday loan'' to a Service 
member without regard to the 36-percent interest-rate limit under the 
MLA, the creditor simply needs to adjust the terms or conditions so 
that the loan is (i) not closed-end credit, (ii) for a term longer than 
91 days, or (iii) for an amount of more than $2,000. Making any of 
these elementary adjustments to a credit product marketed as a ``payday 
loan'' is not illegal, however, the effect is clear: a Service-member 
borrower would obtain the credit without the protections afforded under 
the MLA. The Department's proposal aims to amend the regulation to curb 
this unfortunate consequence, of which there is ample evidence in the 
credit markets in which Service members are active participants.\13\
---------------------------------------------------------------------------

    \13\ See, e.g., section III.A.1 (describing information 
submitted by various persons in response to the Department's June 
2013 advance notice of proposed rulemaking).
---------------------------------------------------------------------------

    The Department proposes to amend its regulation so that, in 
general, consumer credit covered under the MLA \14\ would be defined 
consistently with credit that for decades has been subject to the 
protections under TILA, namely: credit offered or extended to a covered 
borrower primarily for personal, family, or household purposes, and 
that is (i) subject to a finance charge or (ii) payable by a written 
agreement in more than four installments.\15\ In general, under the 
Department's proposal, any charge that is a ``finance charge'' under 
Regulation Z,\16\ adopted by the Bureau, as well as certain other 
charges that would be covered as ``interest'' under 10 U.S.C. 
987(i)(3), must be included in the calculation of the MAPR, as 
applicable to the transaction for consumer credit. However, the 
Department also proposes to provide a broad exclusion that would allow 
a creditor who offers consumer credit through a credit card account to

[[Page 58604]]

exclude from the MAPR any ``bona fide'' fee charged to a credit card 
account, as discussed more fully in this proposal. The chief 
consequence of the proposed exclusion from the MAPR for bona fide fees 
is that a creditor who, for its credit card product(s), currently 
charges a periodic interest rate of less than the interest-rate limit 
under 10 U.S.C. 987(b) coupled with one or more fees that carry 
reasonable costs tied to specific products or services should be able 
to continue to offer the same product(s) without any adjustments to 
those price terms. Under the proposal, that creditor would need to 
confirm that its fees are bona fide, reasonable and customary, and if 
so, it should be able to continue to offer the same credit card 
product(s) to covered borrowers by making limited adjustments only to 
the ``statement of the MAPR,'' which would be permitted simply to be 
added to its credit card agreement(s) (and not required to be provided 
in any advertisement), as discussed below.
---------------------------------------------------------------------------

    \14\ The forms of ``consumer credit'' that may be covered by the 
MLA are subject to certain exceptions, notably for a residential 
mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B).
    \15\ See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the 
regulation, in relevant part, to credit that is subject to a finance 
charge or is payable by a written agreement in more than four 
installments).
    \16\ 12 CFR part 1026 (2013).
---------------------------------------------------------------------------

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

    \17\ 72 FR at 50588.
---------------------------------------------------------------------------

    Consistent with the Department's longstanding policy in 
administering 10 U.S.C. 987, the Department intends to develop this 
regulation so that its provisions are true to the intent of the MLA 
without creating a system that unduly impedes the availability of 
credit that is beneficial to Service members or is so burdensome that 
the creditor cannot comply.\18\
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    \18\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents, 72 FR 18157, 18165 (April 11, 2007) (in the 
context of disclosure requirements, explaining one of the policies 
for the Department's proposed regulation implementing the MLA).
---------------------------------------------------------------------------

    The Department seeks comment on all aspects of this proposal. The 
Department also solicits information and data regarding the nature, 
scope, and prevalence of credit products offered or extended to Service 
members and their families.
    In particular, the Department seeks comment on the following 
alternative:
    1. Refining the Department's current rule for payday loans, vehicle 
title loans and refund anticipation loans--and the associated benefits 
and costs;
    2. Refining the Department's current rule and adding all payday 
loans--and the associated benefits and costs; and
    3. Adoption of Regulation Z for consumer credit products--and the 
associated benefits and costs;
    As required by 10 U.S.C. 987(h)(3), in developing this proposal the 
Department has consulted with the Federal Agencies. The Department will 
continue to consult with these agencies throughout the process of 
considering revisions to the regulation implementing the MLA.

B. Financial Status of Enlisted Service Members

    In the 2006 Report, the Department provided perspective on why the 
issue of maintaining the financial stability of Service members and 
their families is critical to sustaining the all-volunteer force and 
maintaining its readiness. These concerns remain relevant today.
    Service members still represent a predominantly young group with 43 
percent of Service members aged 25 years old or younger.\19\ The junior 
enlisted ranks (E1-E4) comprise 44 percent of the military force.\20\ 
Thirty five percent of E1s-E4s are married \21\ and 20 percent of them 
have children or other legal dependents.\22\ Considering only 11.7 
percent of young people in the United States who are out of the 
military are married at a comparative age, Service members tend to take 
on relatively more household responsibilities than their civilian 
counterparts.\23\
---------------------------------------------------------------------------

    \19\ U.S. Dep't of Def., 2012 Demographics Profile of the 
Military Community, at 36. Available at http://
www.militaryonesource.mil/12038/MOS/Reports/
2012DemographicsReport.pdf.
    \20\ Id. at 17.
    \21\ Id. at 44.
    \22\ Id. at 128.
    \23\ U.S. Census Bureau, U.S. Dep't of Commerce, Statistical 
Abstract of the United States 2012 table 57 (131st ed. 2011) (11.7 
percent of individuals aged 18 through 24 who are not in the 
military are married).
---------------------------------------------------------------------------

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

    \24\ Defense Manpower Data Center (DMDC) QuickCompass of 
Financial Issues, 2013, Question 30: Have [you][your and/or your 
spouse][you and/or your significant other] used any of the following 
financial products or services to cover expenses in the past 12 
months?''
    \25\ Id., Question 13: ``Which of the following best describes 
[your financial condition][the financial condition of you and your 
spouse][the financial condition of you and your partner or 
significant other]?''
---------------------------------------------------------------------------

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

    \26\ Id., Question 15: ``Which of the following best describes 
[your saving habits][the savings habits of you and your spouse][the 
savings habits of you and your partner or significant other]? 
I[We]:''
---------------------------------------------------------------------------

    When asked about experiencing any shortfalls in finances, 47% of 
enlisted Service members reported having problems in the past 12 
months. Specifically, 9% said they had been more than 60 days late in 
paying mortgage or other debts, 17% reported that they were unable to 
use bank credit card(s) because the credit limit was reached, 44% 
reported that they were short cash between paychecks and 12% indicated 
that they were unable to pay

[[Page 58605]]

monthly bills.\27\ When asked about how many months in the past 12 were 
they short on cash, unable to use a credit card because of the credit 
limit was reached, or unable to pay bills or other debts, 12% said 5 to 
7 months and 11% said 8 or more months. The average response was 3.4 
months in a 12-month period.\28\
---------------------------------------------------------------------------

    \27\ Id., Question 28: ``During the past 12 months, did any of 
the following happen to [you][you and your spouse][you and your 
partner or significant other]? [I was][We were] . . .''
    \28\ Id., Question 29: ``In how many of the past 12 months were 
[you][you and your spouse][you and your significant other] short on 
cash, unable to use a credit card because of the credit limit was 
reached, or unable to pay bills or other debts?''
---------------------------------------------------------------------------

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

C. Financial Stability and Readiness

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

    \29\ U.S. Dep't of Def., Instruction 1344.09, Indebtedness of 
Military Personnel (2008) (``Members of the Military Services are 
expected to pay their just financial obligations in a proper and 
timely manner [to include alimony and child support]. A Service 
member's failure to pay a just financial obligation may result in 
disciplinary action under the Uniform Code of Military Justice [10 
U.S.C. 801-940] or a claim pursuant to Article 139 of [10 U.S.C. 
801-940].'').
    \30\ U.S. Gov't Accountability Office, GAO-11-170, Military 
Personnel: Personnel and Cost Data Associated with Implementing 
DOD's Homosexual Conduct Policy (January 20, 2011) (estimating that 
each separation costs the Department $52,800 in 2009 dollars). The 
cost of $57,272 is calculated in 2013 dollars (through November 
2013), using the U.S. Dep't of Labor, Bureau of Labor Statistics, 
Consumer Price Index, All Urban Consumers (CPI-U), available at 
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
    \31\ Scott Carrell and Jonathan Zinman, ``In Harm's Way? Payday 
Lending and Military Personnel Performance,'' August 2008, Abstract.
---------------------------------------------------------------------------

D. Financial Readiness Program

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

    \32\ DMDC Survey, question 20: 39% of E1-E4s have a high school 
diploma, 22% have less than one year of college, 24% have one or 
more years of college, but no degree.
    \33\ Average score for high school seniors was 48.3% and 62.2% 
for college students on a financial literacy test measuring (1) 
Income; (2) money management; (3) saving and investing; and (4) 
spending and credit. Jump$tart Coalition survey of high school 
seniors and college students, 2008, page 8. www.jumpstart.org/assets/files/2008SurveyBook.pdf.
    \34\ Military Saves 2013 Report, page 2, http://www.militarysaves.org/in-the-newsroom/military-saves-week-reports.
    \35\ ``Military Financial Readiness Program--Accomplishments To 
Date,'' SaveandInvest.org, About the Program, http://www.saveandinvest.org/MilitaryCenter/About/P124822.
---------------------------------------------------------------------------

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

    \36\ DoD Instruction 1342.22, Family Readiness Program, July 3, 
2012, page 12, http://www.dtic.mil/whs/directives/corres/pdf/134222p.pdf.
    \37\ ``Fiscal Year 2012 Annual Report on Family Readiness 
Programs'' (internal DoD report), which reflects activities of 
installation-based Military and Family Support Centers/Reserve 
Family Program Sites.]
    \38\ Military OneSource internal report for Fiscal Year 2012.

---------------------------------------------------------------------------

[[Page 58606]]

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

    \39\ ``Fiscal Year 2012 Annual Report on Family Readiness 
Programs'' (internal DoD report), which reflects activities of 
installation-based Military and Family Support Centers/Reserve 
Family Program Sites.]
    \40\ Military OneSource internal report for Fiscal Year 2012.
---------------------------------------------------------------------------

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

    \41\ 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).
    \42\ See Army Emergency Relief, Soldiers Helping Soldiers: Army 
Emergency Relief 2012 Annual Report, at 13 (2013); Navy-Marine Corps 
Relief Society, 2012 Annual Report, at 11 (2013); Air Force Aid 
Soc'y, Air Force Aid Society 2012 Annual Report, at 6 (2013); Coast 
Guard Mut. Assistance, 2012 Annual Report, at 2 (2013).
---------------------------------------------------------------------------

E. Regulation in Support of Financial Readiness

    The Department continues to believe that, consistent with the MLA, 
there may be a need to limit access to high-cost borrowing, even with 
the Department's emphasis on delivering messages to save and control 
debt, education to support managing finances wisely, counseling 
resources to aid Service members, and financial resources to help 
Service members cover unforeseen shortfalls and emergencies. As 
initially stated, the Department expects Service members to manage 
their resources to cover their just debts and to take care of the needs 
of their families. Additionally, as messaging and education programs 
make clear, the Department expects Service members to seek out 
assistance rather than continue attempting by themselves to manage 
high-cost debt.
    In the House Report 112-705 accompanying the 2013 Act, the 
Department was asked ``to determine if changes to rules implementing 
[the MLA] are necessary to protect covered borrowers from continuing 
and evolving predatory lending practices.'' The Department responded to 
the request of the House Report by issuing a report in April 2014 
(``April 2014 Report'').\43\ The April 2014 Report presents data 
submitted by many sources, including anecdotal information, that 
assisted in responding to the request of the House Report. The 
Department recognizes that information submitted for the April 2014 
Report was provided by numerous sources, including some surveys 
conducted by the Department, and the information does not yield 
definitive results; rather, as the April 2014 Report states, the data 
``tend to indicate'' some findings \44\ and, for many issues, raise 
important questions that might involve further examination. The April 
2014 Report states--specifically in light only of the research and 
consultation in preparing that Report--that ``the definitions of 
[consumer credit] in the implementing regulation for the MLA do need to 
be updated and expanded to ensure that the MLA continues to provide 
protections to Service members and their families.'' \45\ While 
observing that certain conditions ``appear'' to warrant revising the 
definition of ``consumer credit,'' \46\ the Department has drawn no 
conclusions regarding the scope or terms of its regulation implementing 
the MLA. Rather, the April 2014 Report expressly states that ``the 
Department is working on [a more] comprehensive approach in its 
redrafting of the implementing regulation for the MLA.'' \47\ The 
Department is committed to an open and transparent process as its work 
continues on any potential amendment to its regulation, and, as stated 
above, invites comment on all aspects of this proposal, particularly 
data regarding the nature, scope, and prevalence of credit products 
offered or extended to Service members and their families.
---------------------------------------------------------------------------

    \43\ Dep't of Defense, Report: Enhancement of Protections on 
Consumer Credit for Members of the Armed Forces and Their 
Dependents, April 2014.
    \44\ See, e.g., April 2014 Report, at 2.
    \45\ April 2014 Report, at 2.
    \46\ Id.
    \47\ Id.
---------------------------------------------------------------------------

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

III. Key Aspects of the Department's Proposal

A. Proposal To Amend the Scope of ``Consumer Credit''

    The Department proposes to revise the scope of the definition of 
``consumer

[[Page 58607]]

credit'' to cover a broader range of closed-end and open-end credit 
products, to be generally consistent with the credit products that for 
decades have been subject to the requirements of the Bureau's 
Regulation Z. When adopting its initial regulation in 2007, the 
Department focused on three narrowly defined types of products that the 
Department believed, at that time, most directly acted as sources of 
the ``debt trap'' for Service members and their families.\48\ In 
addition, the Department expressed its concern about the ``potential 
for unintended consequences that could adversely affect credit 
availability if it were to adopt a broadly applicable regulation.'' 
\49\ At the same time, the Department was careful to avoid engendering 
any reliance interests in the narrow scope of its initial rule, and, in 
this regard, expressly stated that ``[t]he Department maintains the 
ability to issue additional rules in the future .. . . '' \50\ When the 
Department adopted its initial regulation, financial-institution 
creditors, Service members, and others who have an interest in the 
administration of the MLA were appropriately cautioned that the 
Department had committed itself to review various sources of data, 
including ``input from regulatory agencies, consumer protection groups 
and the credit industry to assess the level of protection provided by 
the final rule,'' in order to determine whether ``further revisions [to 
its regulation] are needed.'' \51\
---------------------------------------------------------------------------

    \48\ See 72 FR at 50582 (observing that ``[t]he combination of 
little-to-no regard for the borrower's ability to repay the loan, 
unrealistic payment schedule, high fees, and interest and the 
opportunity to roll over the loan instead of repaying it can create 
a cycle of debt for financially overburdened Service members and 
their families.'').
    \49\ 72 FR at 50584.
    \50\ 72 FR at 50585. In this context, the Department drew 
attention to its ``ability'' to issue additional rules. There can be 
no doubt, especially in light of section 661(b) of the 2013 Act, 
that the Department has the authority to amend the regulation 
implementing the protections of the MLA. 10 U.S.C. 987(h)(3) 
(requiring the Department, at a minimum, to consult with other 
Federal agencies ``not less often than once every two years'' with a 
view towards revising the regulation implementing the MLA).
    \51\ 72 FR at 50585.
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    The Department continues to believe that certain payday loans, 
vehicle title loans, and refund anticipation loans present the most 
severe risks to Service members and their families, and remains mindful 
that more broadly defining the ``consumer credit'' that would be 
subject to 10 U.S.C. 987 may present unintended consequences, including 
a reduction in ``credit availability.'' At the same time, however, the 
Department recognizes--particularly in light of its experiences 
administering the existing regulation--that a broader range of closed-
end and open-end credit products carry high costs, many of which far 
exceed the interest-rate limit established in 10 U.S.C. 987(b), and 
thereby pose the risks to Service members and their families that the 
Department has long sought to significantly reduce or eliminate.
    Consistent with the Department's stated policy to monitor market 
developments that affect Service members, since adopting its initial 
regulation in 2007 the Department informally has gathered information 
from regulatory agencies, consumer protection groups, and participants 
in the credit industry to assess whether, and in which respects, the 
Department should consider revising its regulation implementing the 
MLA.\52\ As described above in section II.E., information was submitted 
for the April 2014 Report issued in response to the House Report. In 
this regard, the April 2014 Report describes various sources of 
information, including results from a DMDC QuickCompass survey \53\ and 
a questionnaire the Department distributed to financial counselors and 
legal assistance attorneys, which mostly requested narrative 
responses.\54\
---------------------------------------------------------------------------

    \52\ See 72 FR at 50585 (``The Department maintains the ability 
to issue additional rules in the future and the Department plans to 
continue surveying Service members and will obtain a variety of 
inputs from regulatory agencies, consumer protection groups and the 
credit industry to assess the level of protection provided by the 
final rule.'').
    \53\ See, e.g., April 2014 Report, at 2.
    \54\ April 2014 Report, app. A.
---------------------------------------------------------------------------

    More importantly, and directly to support the Department's 
rulemaking process, in June 2013 the Department published an advance 
notice of proposed rulemaking (``ANPR'') soliciting comment on several 
issues relating to its existing regulation.\55\ In particular, the 
Department asked whether there is a need to revise the regulation, 
``with special attention to the scope of the definition of `consumer 
credit.' '' \56\
---------------------------------------------------------------------------

    \55\ 78 FR 36134 (June 17, 2013).
    \56\ Id.
---------------------------------------------------------------------------

1. The Department's June 2013 ANPR
    The Department received 37 comments in response to the ANPR. Most 
of the comments were submitted by state agencies, including state 
attorneys general,\57\ and consumer protection groups. Several 
participants in the credit industry submitted comments,\58\ as did 
several individuals. In addition, comments were submitted relating to 
whether the Department should consider revising its regulation in order 
to address rent-to-own transactions.
---------------------------------------------------------------------------

    \57\ California Attorney General, et al., DOD-2013-OS-0133-0002. 
References herein to the comments note the name of the commenter and 
the docket number of the submission, available at http://www.regulations.gov.
    \58\ See, e.g., American Bankers Assoc. et al., DOD-2013-OS-
0133-0022.
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    Generally, commenters responding to the ANPR urge the Department to 
take one of three actions relating to the definition of consumer 
credit: (1) leave untouched the current definition as three enumerated 
products, as well as the particular definition for each of those 
products; (2) extend the definition by covering certain additional 
products, such as overdraft services, rent-to-own transactions, and/or 
all payday loans; or (3) extend the definition by incorporating the 
definition of consumer credit in the Bureau's Regulation Z. Other 
commenters raise general concerns regarding the narrow scope of the 
existing definition of consumer credit and urge the Department to adopt 
a more comprehensive definition, but have not recommended a particular 
definition.
    One commenter states that the Department's current rule has 
``significant gaps and loopholes, which lenders exploit to target 
military borrowers with high interest loans well above the MLA's [36 
percent] rate cap,'' and is ``particularly concerned with [a] multiple-
payment or installment loan[ ]'' that is not covered by the rule, 
because the loan has a term of over 91 days or exceeds $2,000.\59\ This 
commenter states, more specifically, that ``[i]n Texas, high cost 
multiple-payment loans with rates often exceeding [600 percent] APR are 
increasingly offered by payday lenders.'' \60\ In support of its claims 
regarding the effects of the loopholes in the Department's current 
rule, this commenter describes its ``[s]tore visits'' in Killeen, 
Texas, in July 2013, where the commenter found companies that had 
changed their loan products to offer ``high-cost multiple-payment 
products to [Service] members,'' \61\ and cited as an example 
particular loan products

[[Page 58608]]

offered by a national payday lender with two locations in Killeen.\62\
---------------------------------------------------------------------------

    \59\ Texas Appleseed, DOD-2013-OS-0133-0016, at 1-2; see also 
State of Colorado, DOD-2013-OS-0133-0034, at 1 (explaining how 
lenders can circumvent the Military Lending Act by ``offering 92 day 
loans, loans for $2001, or by structuring the loans as open-end 
credit''); but see Credit Union National Association and Defense 
Credit Union Council, DOD-2013-OS-0133-0032, at 2 (arguing that the 
current rule has been an ``effective tool'' and that the 91-day 
limit for payday loans should not be changed).
    \60\ Texas Appleseed, DOD-2013-OS-0133-0016, at 2.
    \61\ Id. at 3.
    \62\ Id. at 3-4.
---------------------------------------------------------------------------

    Another commenter states that under the Department's current rule, 
``lenders have easily circumvented the purpose and protections intended 
by the MLA.'' \63\ For example, the commenter describes the ``structure 
of [the] payday loan law'' \64\ in Colorado, which requires ``a minimum 
loan term of six months.'' \65\ Because of the extended duration of the 
loan, ``the MLA rate cap of 36 percent does not apply,'' \66\ allowing 
lenders ``to make loans to service members with an approximate 200 
percent annual percentage rate.'' \67\ The commenter urges the 
Department to revise the rule so that it does not ``contain limits that 
lenders may use to avoid regulation.'' \68\ Specifically, the commenter 
recommends that the Department incorporate the definition of consumer 
credit under TILA, ``so that regardless of the consumer credit 
transaction amount, structure, or duration, it is subject to MLA's 36 
percent cap on interest rates.'' \69\
---------------------------------------------------------------------------

    \63\ State of Colorado, DOD-2013-OS-0133-0034, at 1; see also 
California Attorney General, et al., DOD-2013-OS-0133-0002, at 2 
(``[T]he narrow categories and definitions create large loopholes 
that permit lenders to fashion abusive or predatory transactions 
that avoid the MLA's protections.''); but see Missouri Credit Union 
Association, DOD-2013-OS-0133-0801, at 1 (arguing that the rule's 
objective has been accomplished ``primarily by limiting the impact 
of the rule to those creditors that offer certain loans which are 
closed-end credit'').
    \64\ State of Colorado, DOD-2013-OS-0133-0034, at 1.
    \65\ Id.
    \66\ Id. at 2.
    \67\ Id.
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

    Similarly, another commenter states that the Department's current 
rule has ``large loopholes that permit lenders to fashion abusive or 
predatory transactions that avoid the MLA's protections.'' \70\ The 
commenter, more specifically, states that lenders can evade protections 
under the current rule ``by requiring that payday loans be a minimum of 
$2,001, or have a minimum period of 92 days'' or by offering ``[a]ny 
open-ended or revolving payday loan; [a]ny auto title loan for more 
than 181 days; [a]ny bank loan that is secured by funds on deposit, 
such as overdraft loans; and [a]ny retail sales credit loan or other 
similar rent-to-own transaction.'' \71\ ``[T]o protect military 
borrowers from predatory lenders who purposefully structure loan 
transactions so as to avoid the strictures of the MLA,'' the commenter 
urges the Department to make the MLA protections ``apply uniformly to 
the full range of consumer credit loans that present dangers similar to 
those already covered, including rent-to-own transactions and overdraft 
loans.'' \72\
---------------------------------------------------------------------------

    \70\ California Attorney General, et al., DOD-2013-OS-0133-0002, 
at 2; see also, Members of the U.S. Senate, DOD-2013-OS-0133-0036, 
at 1 (arguing that gaps in the rules ``have been taken advantage of 
by certain lenders'' who offer ``predatory loan products at 
exorbitant triple digit effective interest rates and loan products 
that do not include the additional protections envisioned by the 
law'').
    \71\ California Attorney General, et al., DOD-2013-OS-0133-0002, 
at 2.
    \72\ Id.; but see Ohio Credit Union League, DOD-2013-OS-0133-
0027, at 2 (arguing that the current rule is effective and that the 
Department should protect Service members by ``reviewing and 
identifying those lending practices that are or can be predatory or 
abusive on a case by case basis'').
---------------------------------------------------------------------------

    One commenter notes that ``inappropriate loans and exorbitant 
interest payments force many members of the military and their families 
to forgo other necessities, such as housing or grocery bills.'' \73\ 
Financial strain ``negatively affects [service member] morale and puts 
their ability to do their job . . . at risk.'' \74\ The commenter 
raises a concern about the ``narrow definition of consumer credit'' and 
urges the Department to ``modify the definition of consumer credit to 
ensure that Service Members in all states are protected from all forms 
of high-cost credit.'' \75\
---------------------------------------------------------------------------

    \73\ Members of the U.S. House of Representatives, DOD-2013-OS-
0133-0035, at 1.
    \74\ Id.
    \75\ Id. at 1-2. See also Washington Department of Veterans 
Affairs, DOD-2013-OS-0133-0004, at 2 (requesting that the Department 
``modify the definition of consumer credit to ensure that service 
members are protected from all forms of high-cost credit, regardless 
of the duration or structure of the loan''); but see American 
Bankers Assoc., et al., DOD-2013-OS-0133-0022, at 1 (arguing that 
the Military Lending Act is working as intended and that 
``[i]mposing additional requirements on lending to servicemembers 
would have adverse consequences for members of the armed forces and 
military families.'').
---------------------------------------------------------------------------

    One commenter expresses concern that ``the rules initially 
promulgated by the Department contained gaps in the definition of 
consumer credit.'' \76\ These gaps ``have been taken advantage of by 
certain lenders'' to offer ``predatory loan products at exorbitant 
triple digit effective interest rates and loan products that do not 
include the additional protections envisioned by the law.'' \77\ The 
commenter notes that ``the Department was given the authority and has 
inherent flexibility provided under the law'' to revise the rule to 
establish a more ``expansive'' definition of consumer credit to which 
the protections in the law would apply.\78\ The commenter urges the 
Department to include within the scope of the rule ``payday and vehicle 
title loans of any duration, whether open or closed-ended,'' ``tax 
refund anticipation loans of any duration,'' as well as to ``consider 
extending the 36 [percent] APR cap to unsecured installment loans 
targeted at the military and all other forms of consumer credit.'' \79\ 
The commenter states that ``[s]ervice members and their families 
deserve the strongest possible protections and swift action to ensure 
that all forms of credit offered to members of our armed forces are 
safe and sound.'' \80\
---------------------------------------------------------------------------

    \76\ Members of the U.S. Senate, DOD-2013-OS-0133-0036, at 1; 
see also Texas Appleseed, DOD-2013-OS-0133-0016, at 1 (stating that 
the current rule has ``significant gaps and loopholes''); but see 
American Bankers Assoc., et al., DOD-2013-0133-0022, at 4 (``The 
rule adopted in 2007 was structured carefully and struck the proper 
balance between protecting servicemembers and their families while 
still ensuring they had access to beneficial products and 
services.'').
    \77\ Members of the U.S. Senate, DOD-2013-OS-0133-0036, at 1.
    \78\ Id. at 1-2.
    \79\ Id. at 2.
    \80\ Id.
---------------------------------------------------------------------------

    A group of industry commenters states the Department's current rule 
``is working as intended to protect members of the armed forces and 
their dependents.'' \81\ These commenters argue that the current rule 
strikes the correct balance between access to credit and protecting 
consumers from predatory lending practices. They point to several 
aspects of the MLA that, in their view, would prevent creditors from 
offering products to Service members if the current rule's definition 
is expanded to encompass other products. Specific concerns under the 
MLA include: Harsh penalties for non-compliance; duplicative and 
confusing disclosure requirements; oral disclosure requirements that 
are inconvenient for various technologies; inability to refinance or 
reprice debt; ban on arbitration clauses common to many loan contracts; 
and difficulties identifying all covered borrowers.\82\ The same 
commenters specifically request that the rule continue to incorporate 
definitions provided under the TILA because ``[a]dding separate and 
disparate definitions undermines the ability of consumers to understand 
credit products and should be avoided.

[[Page 58609]]

It would be a step backwards to disconnect the MLA and TILA.'' \83\
---------------------------------------------------------------------------

    \81\ American Bankers Assoc. et al., DOD-2013-OS-0133-0022, at 
1; see also Missouri Credit Union Association, DOD-2013-OS-0133-
0026, at 1 (``[T]he rule's objective has been accomplished primarily 
by limiting the impact of the rule to those creditors that offer 
certain loans which are closed-end credit in the form of payday 
loans, vehicle title loans, and tax refund anticipation loans.''); 
but see State of Colorado, DOD-2013-OS-0133-0034, at 1 (arguing that 
``lenders have easily circumvented the purpose and protections 
intended by MLA'').
    \82\ American Bankers Assoc. et al., DOD-2013-OS-0133-0022, at 
1, at 4-5.
    \83\ Id. at 11.
---------------------------------------------------------------------------

    One commenter expressed concern that the current rule ``includes 
limitations which reduce the [MLA's] effectiveness.'' \84\ This 
commenter states that ``[a]pproximately one out of every ten veterans 
reported having more than $40,000 in unsecured debt. For many veterans, 
some of this debt is acquired while on active duty, often from high-
cost lenders that frequently target military bases.'' \85\ The 
commenter states that in at least eleven states, the current rule 
``does not apply to all forms of payday lending permitted under state 
law, and in at least thirteen the rule does not apply to all forms of 
vehicle title lending.'' \86\ The commenter requests that the 
Department align consumer credit under the rule with the definition of 
consumer credit under TILA. The commenter states that ``[t]his 
inclusive definition will ensure that all service members are covered 
by the consumer protections envisioned by Congress in 2007 and protect 
veterans from the long-term effects of predatory lending as they return 
to civilian life.'' \87\
---------------------------------------------------------------------------

    \84\ Idaho Division of Veterans Services, DOD-2013-OS-0133-0038, 
at 2; see also State of Colorado, DOD-2013-OS-0133-0034, at 2 
(``[T]he definition of consumer credit should be as broad as 
possible and should not contain limits that lenders may use to avoid 
regulation.''); but see American Bankers Assoc. et al., DOD-2013-OS-
0133-0022, at 3 (noting that Service members also benefit from many 
other consumer protections that are not occupation-specific).
    \85\ Id. at 1 (citing Eric Elbogen, Sally Johnson, Ryan Wagner, 
Virginia Newton, and Jean Beckham, ``Financial Well-Being and 
Postdeployment Adjustment Among Iraq and Afghanistan War Veterans,'' 
Military Medicine 177 (June 2012).
    \86\ Idaho Division of Veterans Services, DOD-2013-OS-0133-0038, 
at 2.
    \87\ Id.
---------------------------------------------------------------------------

    One commenter states that the Department should ``not lose sight of 
[a] payday lender's demonstrated capacity for creative evasion.'' \88\ 
In particular, the commenter states that he has seen lenders disguise 
closed-end transactions as open-end, thereby evading requirements of 
the MLA. The commenter states that some lenders disguise short-term 
loans as check cashing services and others disguise loans and loan fees 
using the sale of phone cards or other ``trinkets'' at inflated prices 
combined with the delayed presentment of checks. The commenter also 
states that rent-to-own transactions should be included as consumer 
credit under the Department's regulation because ``[i]f evaluated as 
interest, these extra costs amount to extraordinarily high interest, 
far in excess of that authorized by the MLA.'' \89\ The commenter also 
states that the rule should prohibit unreasonable choice-of-venue 
provisions in a loan contract, specifically pointing to one creditor 
who requires all lawsuits be brought in Virginia while all the parties 
and transactions at issue are typically located in North Carolina. 
Finally, the commenter states that the Department should amend the rule 
to cover all payday, rent-to-own, installment, and vehicle title loans 
without respect to the duration of the loan.
---------------------------------------------------------------------------

    \88\ Michael S. Archer, DOD-2013-OS-0133-0007, at 3; see also 
State of Colorado, DOD-2013-OS-0133-0034, at 1 (stating that lenders 
are easily able to circumvent the current rule's ``purpose and 
protections'').
    \89\ Michael S. Archer, DOD-2013-OS-0133-0007, at 4. With regard 
to rent-to-own transactions, the commenter states that the 
Department should specifically prohibit sellers from tracking 
consumers' activity on computers and other electronics. The 
commenter states that the Department should prohibit contact with 
commanding officers and other third parties in the debt collection 
context unless the service member has given written consent after 
default. But see Rent-A-Center, DOD-2013-OS-0133-0010 (arguing that 
rent-to-own transactions should not be defined as consumer credit 
due to the nature of those transactions and legislative and 
regulatory history).
---------------------------------------------------------------------------

    One commenter states that the Department correctly ``left [rent-to-
own] out'' of the current rule.\90\ In support of its assertion that 
the Department properly did not include rent-to-own transactions within 
the scope of the current rule, the commenter states that ``the [rent-
to-own] business model is not extending credit and is, instead, a 
personal property leasing model.'' \91\ To support this point, the 
commenter describes a typical rent-to-own transaction where the 
consumer ``[does] not assume any debt'' \92\ and instead enters into 
``weekly, bi-weekly, semi-monthly, or monthly rental agreements for 
consumer durables.'' \93\ The commenter further notes that because 
rent-to-own transactions are not included in the current rule, ``there 
was no reason for the industry to modify its practices to escape 
coverage.'' \94\
---------------------------------------------------------------------------

    \90\ Association of Progressive Rental Organizations, DOD-2013-
OS-0133-0012, at 1; see also Aaron's, Inc., DOD-2013-OS-0133-0028, 
at 2 (``[A]ny attempt to include the [rent-to-own] transaction] 
under [the] definition of consumer credit would not be consistent 
with federal and state laws.''); but see Shriver Center, DOD-2013-
OS-0133-0009, at 2 (``[R]ent-to-own transactions are consumer credit 
sales and should be protected as consumer credit under the MLA.'').
    \91\ Association of Progressive Rental Organizations, DOD-2013-
OS-0133-0012, at 2. See also Aaron's, Inc., DOD-2013-OS-0133-0028. 
In this regard, the Department is cognizant of the consumer 
protection issues that may arise during rent-to-own transactions. 
However, consistent with the Department's determination when 
adopting the initial regulation in 2007, 72 FR at 50582, rent-to-own 
products usually are not considered credit for purposes of TILA. 
Accordingly, rent-to-own transactions typically would not be 
``consumer credit,'' as that term is proposed in Sec.  232.3(e).
    \92\ Association of Progressive Rental Organizations, DOD-2013-
OS-0133-0012, at 2.
    \93\ Id.
    \94\ Id. at 1-2.
---------------------------------------------------------------------------

    One commenter states ``there is no need at this time to revise the 
rule as it relates to credit unions.'' \95\ Another commenter states 
that the Department should review and identify ``those lending 
practices that are or can be predatory or abusive on a case by case 
basis.'' \96\ This commenter states that a ``one issue approach could 
have negative unintended consequences for credit unions and other 
lenders that adhere to fair and equitable lending practices'' and that 
such an approach could limit access to beneficial credit for Service 
members.\97\
---------------------------------------------------------------------------

    \95\ Missouri Credit Union Association, DOD-2013-OS-0133-0026, 
at 1; see also Michigan Credit Union League & Affiliates, DOD-2013-
OS-0133-0021, at 1 (``Because of credit unions' unique structure and 
the products and services offered to assist Service members, the 
MCUL does not believe revisions to the rules as they relate to 
credit unions are necessary or desirable at this time.'').
    \96\ Ohio Credit Union League, DOD-2013-OS-0133-0027, at 2; but 
see Woodstock Institute, DOD-2013-OS-0133-0025, at 2 (``In order to 
beset protect all service members, the Department of Defense should 
eliminate its narrow product definitions and apply the 36 percent 
Military APR limit, and additional protections, to all consumer 
credit products covered by the Truth in Lending Act.'').
    \97\ Ohio Credit Union League, DOD-2013-OS-0133-0027, at 2.
---------------------------------------------------------------------------

    One commenter requesting that the current rule should not be 
changed states that of over 40,000 complaints in the Better Business 
Bureau's complaint database in 2011, only 37 were filed against online 
military installment lenders.\98\ The commenter states that installment 
lending should not be covered by the regulation because it ``provides 
access to affordable, repayable consumer credit'' and is ``the safest 
form of small-dollar lending'' because it is self-amortizing and 
thereby protects borrowers from becoming trapped in a cycle of 
debt.\99\
---------------------------------------------------------------------------

    \98\ American Financial Service Association, DOD-2013-OS-0133-
0020 at 2 (citing Jean Ann Fox, The Military Lending Act Five Years 
Later: Impact On Servicemembers, the High-Cost Small Dollar Loan 
Market, and the Campaign against Predatory Lending, Consumer 
Federation of America, (May 29, 2012)).
    \99\ Id. at 2; see also National Installment Lenders 
Association, DOD-2013-OS-0133-0014, at 1 (arguing that the 
Department of Defense should instruct Base commanders to ``place off 
limits to service members any business they find objectionable or 
predatory'' instead of amending the rule to cover installment 
lending); but see Shriver Center, DOD-2013-OS-0133-0009, at 2 
(arguing that installment loans can ``have many of the same harmful 
features the MLA prohibits such as high interest rates, automatic 
access to a bank account, payment by military allotment, and 
repeated refinances with no benefit to the consumer'').

---------------------------------------------------------------------------

[[Page 58610]]

2. Proposal To Amend the Scope of ``Consumer Credit''
    As several commenters state and as the Department itself has 
observed, a creditor currently may lawfully provide a wide range of 
closed-end and open-end credit products to a Service member that carry 
inordinately high costs, and many of these credit products can be 
offered without meaningfully applying underwriting measures that 
consider the borrower's ability to repay or with unrealistic payment 
schedules--precisely the types of risks to Service members that the 
Department consistently has aimed to diminish.
    The Department believes that the narrowly defined parameters of the 
credit products regulated as ``consumer credit'' under the existing 
regulation do not effectively provide the protections intended to be 
afforded to Service members and their families under the MLA. 
Accordingly, the Department proposes to amend the regulation, in Sec.  
232.3(e), so that, in general, consumer credit would be defined 
consistently with certain credit that long has been subject to the 
protections under TILA, namely: Credit offered or extended to a covered 
borrower primarily for personal, family, or household purposes, and 
that is (i) subject to a finance charge or (ii) payable by a written 
agreement in more than four installments.\100\
---------------------------------------------------------------------------

    \100\ See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the 
regulation, in relevant part, to credit that is subject to a finance 
charge or is payable by a written agreement in more than four 
installments).
---------------------------------------------------------------------------

    The Department proposes amendments so that, in general, its rule 
may rely on the provisions and jurisprudence of the Bureau's Regulation 
Z because that regulation substantially regulates the central 
components of the framework of the MLA, particularly the types of 
charges that should be included as ``interest'' \101\ and the methods 
for calculating the annual percentage rate of interest for consumer 
credit.\102\ The Department believes that, even as consumer credit may 
be revised to apply to a broad range of credit products, aligning the 
key aspects of the framework under the MLA with the terms and standards 
that have been developed under Regulation Z will greatly facilitate a 
creditor's ability to comply with the Department's regulation. More 
specifically, the Department proposes, in Sec. Sec.  232.3(l) and 
232.4(c), that any charge that is a ``finance charge'' under Regulation 
Z, as well as certain other charges that would be covered as 
``interest'' under 10 U.S.C. 987(i)(3), must be included in the 
calculation of the MAPR (as applicable to the transaction), and would 
be subject to the interest-rate limit under 10 U.S.C. 987(b).
---------------------------------------------------------------------------

    \101\ See 10 U.S.C. 987(i)(3) (broadly defining ``interest'').
    \102\ See 10 U.S.C. 987(h)(2) (granting discretion to the 
Department to prescribe rules regarding ``[t]he method for 
calculating the applicable annual percentage rate of interest on 
[consumer credit] obligations'').
---------------------------------------------------------------------------

    QUESTION 1: The Department solicits comment on whether an approach 
should be taken that would define ``consumer credit'' consistently with 
certain credit regulated under TILA, and invites suggestions on 
alternative approaches.
    QUESTION 2: If the Department were to adopt a regulation as 
proposed, to what extent, and in what manner, would the Department's 
regulation affect the availability of consumer credit to Service 
members and their dependents or have other consequences?
    QUESTION 3: If the Department were to adopt a regulation as 
proposed, to what extent would a creditor, as a practical matter, need 
to develop separate classes of credit products, namely, one class of 
products for covered borrowers and other classes for other consumers?
    QUESTION 4: If the Department continues to pursue an approach that 
defines ``consumer credit'' to be generally consistent with certain 
credit regulated under TILA, should the Department consider a limited 
or complete exemption for an insured depository institution or insured 
credit union? What legitimate basis could there be for any exemption 
for an insured depository institution or insured credit union from the 
requirements of the MLA, particularly if under this approach other 
financial institutions would be subject to the Department's regulation? 
What other protections relating to credit products already are afforded 
to--or could be improved for--Service members and their dependents?
    QUESTION 5: If the Department continues to pursue an approach that 
defines ``consumer credit'' to be generally consistent with certain 
credit regulated under TILA, should the Department consider including 
one or more exemptions for certain types of credit products, such as 
student loans? What legitimate basis could there be for any particular 
exemptions for certain credit products?
    QUESTION 6: Apart from the conditional exclusion proposed for a 
credit card account that charges bona fide fees, as discussed below, 
should the Department consider providing one or more exceptions from 
the charges that must be included in the MAPR for de minimis bona fide 
fees associated with an open-end credit line? If so, should that type 
of exception be limited to an open-end line of credit connected to a 
deposit account? If so, please specifically describe which fees on 
these accounts would be bona fide fees eligible for such an exception. 
What would be the appropriate cost limit of a de minimis fee? If the 
Department does provide for such an exception to open-end credit (other 
than for credit card accounts), what parameters should the Department 
use to limit the exception to prevent evasion of the protections under 
the MLA?

B. Proposed Conditional Exclusion for Credit Card Accounts

    Even though the Department believes that the consumer credit 
regulated under the MLA generally should track the scope of credit 
regulated under Regulation Z, the Department recognizes that imposing 
the interest-rate limit of 10 U.S.C. 987(b) on credit card products 
likely would result in dramatic changes to the terms, conditions, and 
availability of those products to Service members and their families. 
The important protections Congress intends to provide to Service 
members and their families under the MLA should be made relevant to a 
broader range of credit products without unduly impeding the 
availability of credit that is benign or beneficial to Service members 
and their families.\103\ Unlike the vast majority of credit products 
that are amenable to straightforward pricing mechanisms relating to the 
cost of the funds borrowed (such as solely on the basis of a fixed or 
variable interest rate applied for a term or on a periodic basis), 
credit provided through a credit card account can be provided subject 
to pricing mechanisms that, in part, account for the value of products 
or services delivered through the cardholder's use of the card itself. 
In this regard, many creditors offer credit card products that, from a 
consumer's perspective, generally are subject to periodic interest-rate 
charges (i.e., the cost of the funds borrowed), plus participation fees 
and transaction-based fees that may vary, depending on the consumer's 
use of the card.
---------------------------------------------------------------------------

    \103\ See 72 FR at 50585 (``The intent of the statute is clearly 
to restrict or limit credit practices that have a negative impact on 
Service members without impeding the availability of credit that is 
benign or beneficial to Service members and their families.'').
---------------------------------------------------------------------------

    The Department believes that most creditors impose bona fide fees 
expressly tied to specific products or services connected to using the 
credit card itself and segregable from the cost

[[Page 58611]]

of funds borrowed, such as a foreign transaction fee that applies only 
when the cardholder tenders the card for a purchase made outside of the 
United States. Even though some of these fees might appear to be 
relatively high under certain circumstances, the Department believes 
that credit card products represent a form of consumer credit that, in 
general, is beneficial to Service members,\104\ especially insofar as 
the costs of bona fide fees expressly tied to specific products or 
services may be imposed only upon the Service member's own choices 
regarding the use of the card. If the interest-rate limit of 10 U.S.C. 
987(b) were to be flatly imposed on credit card products, then 
creditors likely would be required to significantly re-structure their 
current products, services, and pricing mechanisms when providing 
credit cards to Service members and their families--without a 
corresponding benefit to the Service members and their families. Flatly 
applying the interest-rate limit of 10 U.S.C. 987(b) to credit card 
products could result in unusually adverse consequences to both 
creditors and Service members, especially insofar as some creditors 
might elect to stop offering these products altogether or suspend 
certain functions of the card (i.e., use of a card to make purchases in 
a foreign country) to Service members.
---------------------------------------------------------------------------

    \104\ In this regard, the Department notes that approximately 68 
percent of American families have at least one credit card. See 
Federal Reserve Board's Survey of Consumer Finances (2010), 
available at http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf p. 67.
---------------------------------------------------------------------------

    The Department also believes that credit card products may warrant 
special consideration under the MLA because comparable protections for 
consumers who use these products separately apply under the Credit Card 
Accountability Responsibility and Disclosure Act of 2009 (``CARD 
Act''). For example, the CARD Act, as implemented by the Bureau's 
Regulation Z, limits penalty fees on credit cards, including late-
payment and over-the-limit fees, to those fees that are ``reasonable 
and proportional'' to the omission or violation that triggered the 
fee.\105\ Regulation Z provides safe harbor fee ranges designed to 
facilitate compliance with these requirements of the CARD Act. The CARD 
Act also limits the total amount of fees that may be charged on an 
account in its first year: In general, a creditor may not impose fees 
for a credit card account during the first year that exceed 25 percent 
of the available line of credit in effect when the account is 
opened.\106\
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 1665d; 12 CFR 1026.52.
    \106\ 15 U.S.C. 1637(n)(1); 12 CFR 1026.52(a).
---------------------------------------------------------------------------

    In an effort to balance the interests of limiting credit practices 
that have an adverse impact on Service members without unduly impeding 
the availability of credit that is benign or beneficial to Service 
members and their families, the Department has considered proposing a 
complete exemption from the definition of ``consumer credit'' for 
credit extended to a covered borrower under a credit card account. 
However, the Department believes that certain creditors could take 
advantage of an opportunity to exploit a complete exemption for credit 
cards by transforming high-cost, open-end credit products (which 
otherwise would be covered as ``consumer credit'') into credit card 
products.
    The Department similarly has considered whether exclusions from the 
MAPR for certain types of fees, such as an application fee or 
participation fee, should be proposed for credit card accounts in order 
to preserve current levels of access to those products for Service 
members and their dependents; however, the Department believes that 
unqualified exclusions from the MAPR for certain fees, or all non-
periodic fees, likewise could be exploited by a creditor who would be 
allowed to preserve a high-cost, open-end credit product by offering a 
relatively lower periodic rate coupled with a high application fee, 
participation fee, or other fee (as described in the exclusion), 
subject to the restrictions under the CARD Act.
    To avoid creating clear regulatory gaps in the framework for 10 
U.S.C. 987, the Department believes that consumer credit under the MLA 
should include credit extended to a covered borrower under a credit 
card account under an open-end (not home-secured) consumer credit plan, 
except that this form of consumer credit may be subject to a qualified 
exclusion for bona fide application fees, participation fees, 
transaction-based fees, and similar fees connected to the use of the 
credit card.\107\ Proposed Sec.  232.4(d) would allow a creditor to 
exclude from the MAPR a bona fide fee--other than a periodic rate--only 
to the extent that the charge by the creditor is (i) a bona fide fee 
and (ii) reasonable and customary for that type of fee. Proposed Sec.  
232.4(d)(2) would clarify that certain charges--namely, ``any credit 
insurance premium, including charges for single premium credit 
insurance, fees for debt cancellation or debt suspension agreements, or 
to any fees for credit-related ancillary products sold in connection 
with and either at or before consummation of the credit transaction or 
upon account opening''--may not be excluded as bona fide fees because 
these charges are expressly included in the definition of ``interest'' 
in 10 U.S.C. 987(i)(3).
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    \107\ The Department maintains that 10 U.S.C. 987(i)(6) grants 
broad latitude to the Department to ``define which types of consumer 
credit transactions shall be covered by the law, provided that they 
do not include the two listed exemptions.'' 72 FR at 50585. 
Furthermore, 10 U.S.C. 987(h) grants to the Department discretion to 
``prescribe regulations to carry out [the MLA],'' and, in 
particular, to prescribe rules relating to ``[t]he method for 
calculating the applicable annual percentage rate of interest'' and 
the ``types of fees'' that are subject to the restrictions of the 
MLA. 10 U.S.C. 987(h)(2)(B) and (h)(2)(C).
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Proposed Standards for Exclusion for Bona Fide Fees
    The Department believes that the proposed conditions for excluding 
a bona fide fee from the MAPR--namely, that the fee must be 
``reasonable'' and ``customary''--would fairly allow Service members 
and their families to continue to have access to credit card products 
and limit the opportunity for a creditor to exploit the exclusion for 
those products. Unlike a complete or targeted exemption for credit card 
products, the proposed conditional exclusion would not allow a creditor 
to transform high-cost, open-end credit products into credit card 
accounts by offering a relatively lower periodic rate coupled with a 
high application fee, participation fee, or other fee. Under the 
proposal, a creditor who imposes an unreasonable (in any respect) fee 
or a fee that is not, in every respect, customary (such as in the 
manner of the charge or the basis for the computation) in a credit card 
account for a Service member must include the total amount of the 
fees--including any fee(s) that otherwise may be eligible for the 
exclusion--in the MAPR. The ``reasonable and customary'' conditions for 
a bona fide fee, as proposed, are intended to be applied flexibly so 
that, in general, creditors may continue to offer a wide range of 
credit card products that carry reasonable costs expressly tied to 
specific products or services and which vary depending upon the Service 
member's own choices regarding the use of the card.
    Proposed Sec. Sec.  232.4(d)(3)(i)-(v) would provide standards to 
guide determinations regarding whether a bona fide fee--other than a 
periodic rate--for a credit card account may be excluded from the 
calculation of the MAPR as ``reasonable and customary.''
    Like-kind fees. Proposed Sec.  232.4(d)(3)(i) would provide that 
the bona fide fee must be compared to ``fees typically imposed by other 
creditors for the same or a substantially similar

[[Page 58612]]

product or service.'' The Department believes that this elementary 
like-kind standard would be appropriate because a creditor should not 
be required to assess a fee for, say, a balance-transfer service based 
on the fees that other creditors charge for cash-advance services.
    Safe harbor. Proposed Sec.  232.4(d)(3)(ii) is designed to provide 
a firm, yet flexibly adaptable standard for a ``reasonable'' amount of 
a bona fide fee. Under this provision, a creditor may compare the 
amount of the bona fide fee to ``an average amount for a substantially 
similar fee charged by 5 or more creditors each with at least $3 
billion in outstanding loans on U.S. credit card accounts at any time 
during the 3-year period preceding the time such average is computed.'' 
The Department believes that the standard for a ``reasonable'' amount 
of a bona fide fee should be sufficiently flexible to allow for 
changing conditions in the marketplace for products and services 
provided through credit card accounts, and thus proposes language in 
the provision (``an average'' of an amount charged by ``5 or more 
creditors'') that would allow a creditor to select any group of 5 or 
more credit card issuers who each have the qualifying amount of 
outstanding credit card loans in order to make a determination. The 
Department believes that using a pool of 5 or more of these qualifying 
creditors is reasonable because these creditors, taken together, would 
represent a significant portion of the market for credit card 
products.\108\
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    \108\ The Department is aware of at least 16 creditors who hold 
loans above the proposed asset threshold. See The Nilson Report, 
Issue 1,025 (Sept. 2013) at 10 (listing 14 MasterCard and Visa 
issuers with above $3 billion in outstanding loans mid-year 2013); 
Discover Bank, Consolidated Reports on Condition and Income for A 
Bank with Domestic Offices Only--FFEIC 041 (July 30, 2013) at 17 
(indicating that Discover held more than $49 billion in such loans); 
and American Express Company, Consolidated Statements of Income 
(July 17, 2013) at 13 (indicating that American Express held $54.6 
billion in cardmember loans. These 16 creditors (who are not the 
only creditors above the $3 billion threshold) hold over $582 
billion in credit card loans or greater than 87 percent of the 
market in 2013.
---------------------------------------------------------------------------

    In order for a creditor to use the fee(s) charged by a credit card 
issuer when computing an average, the credit card issuer must have had 
the qualifying amount of loans at any time during the 3-year period 
preceding the date when the creditor computes the average. If the 
amount of the creditor's own bona fide fee is less than or equal to the 
average of the amount charged by those 5 or more credit card issuers 
who each have the qualifying amount of outstanding credit card loans, 
then the creditor's bona fide fee would be reasonable for the purposes 
of the exclusion.
    Proposed Sec.  232.4(d)(3)(ii) would set a threshold of $3 billion 
in outstanding credit card loans on U.S. credit card accounts held by a 
credit card issuer in order for that issuer's fees to be eligible for 
inclusion in an average calculated for the purposes of compliance with 
the ``reasonable'' condition of Sec.  232.4(d)(1). The Department 
proposes the use of a minimum of 5 credit card issuers, each of whom 
meet the threshold of $3 billion in outstanding credit card loans on 
U.S. credit card accounts, in order to facilitate a creditor's ability 
to compute an average under the safe-harbor provision in light of a 
very manageable, yet fairly representative, sample of fees in the 
marketplace for credit card products. The Department believes a 
threshold of $3 billion of outstanding credit card loans is reasonable 
because that threshold would include a significant number of credit 
card issuers, whose credit card products make up the majority of the 
products in the current credit card market. Moreover, the credit card 
issuers who hold more than $3 billion in outstanding credit card loans 
on U.S. credit card accounts offer credit card products that are 
typical in that marketplace. The Department is aware that many credit 
card issuers who hold less than $3 billion in outstanding credit card 
loans on U.S. credit card accounts may offer credit card products with 
lower or similar fees (relative to issuers who hold more than $3 
billion in outstanding credit card loans); these issuers would benefit 
in a straightforward manner from the proposed method of computing an 
average for the purposes of the safe-harbor proposed in Sec.  
232.4(d)(3)(ii). The Department believes that establishing this 
threshold would prevent a niche issuer charging unreasonable credit 
card fees from benefiting from the safe harbor, in a manner that evades 
the intent of the rule, by comparing its fees only to the fees of other 
niche issuers, rather than a more representative sample of the 
marketplace.
    The Department also proposes a rolling 3-year look-back period to 
facilitate a creditor's ability to establish that a credit card issuer 
meets the asset-size standard. This 3-year period should facilitate the 
process for calculating, and relying on, an average amount for one or 
more relevant fees because, for example, when a creditor uses 
information from the past year to establish that a credit card issuer 
meets the asset-size threshold, the creditor could rely on the fee 
information relating to that credit card issuer's credit card products 
for the next two years. At the same time, the proposed 3-year period 
could provide stability to the safe-harbor determination, particularly 
if credit card loan holdings of credit card issuers shift significantly 
in response to market conditions or otherwise. Furthermore, a 3-year 
period could provide adequate time for the Department to amend the 
proposed threshold or safe harbor, as may be necessary.\109\
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    \109\ In this regard, 10 U.S.C. 987(h)(3) requires the 
Department, at a minimum, to consult with other Federal agencies 
``not less often than once every two years'' with a view towards 
revising the regulation implementing the MLA.
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    The Department believes that all creditors who offer credit card 
products to Service members and their dependents could readily 
calculate whether each type of fee associated with those products may 
fit within the safe harbor because data relating to the fees imposed by 
other credit card issuers, as well as the amount of credit card loans 
outstanding, is widely available. With regard to credit card fees, most 
credit card issuers, particularly all of the largest issuers, make 
complete contract terms on their current offerings freely available on 
their Web sites as part of solicitations and applications for their 
products.\110\ With regard to the amount of outstanding credit card 
loans held by a credit card issuer, issuers provide this information in 
both filings to the Securities and Exchange Commission (SEC filings) 
and Consolidated Reports of Condition and Income (Call Reports). Both 
SEC filings \111\ and Call Reports \112\ are available online without 
charge. In addition, the Department recognizes that data collected from 
these and other information sources is compiled in commercially 
available databases regularly used by financial institutions to track 
the marketplace for credit card products and services, and the 
Department believes that creditors should be permitted to reasonably 
rely upon those industry-specific databases when computing an average 
fee under proposed Sec.  232.4(d)(3)(ii).
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    \110\ See, e.g., the solicitations available at https://creditcards.chase.com.
    \111\ 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.
    \112\ Call Reports for institutions insured by the Federal 
Deposit Insurance Corporation can be found on the Federal Financial 
Institutions Examination Council's Web site, available at https://cdr.ffiec.gov/public/. Call Reports for credit unions are available 
online through the National Credit Union Administration's Web site, 
available at http://researchcu.ncua.gov/Views/FindCreditUnions.aspx.
---------------------------------------------------------------------------

    For example, a creditor seeking to determine whether another credit 
card issuer could qualify as one of the 5

[[Page 58613]]

creditors for determining the average fee under proposed Sec.  
232.4(d)(3)(ii) could download a recent Call Report for an issuer and 
review Schedule RC-C Part I line 6(a) that provides credit card 
``[l]oans to individuals for household, family, and other personal 
expenditures'' held by the institution. If that credit card issuer 
indicated that it held more than $3 billion in outstanding credit card 
loans, then the creditor could include any fee charged by that credit 
card issuer in the creditor's safe-harbor calculation under proposed 
Sec.  232.4(d)(3)(ii). The creditor could find the amounts of the 
relevant fees for that credit card issuer disclosed on the issuer's 
current offerings, as available through a variety of sources, such as 
the issuer's Web site.
    The following example is provided for additional guidance on how a 
creditor could determine whether its own fees for a credit card account 
would fit within the safe harbor under proposed Sec.  232.4(d)(3)(ii). 
Creditor Bank regularly offers a credit card product called the 
``Creditor Bank Card.'' The Creditor Bank Card carries an annual fee of 
$25, a cash advance fee of 3 percent of a transaction or $5, whichever 
is greater, and no other fees.\113\ Creditor Bank is aware of 5 large 
credit card issuers: Bank A, Bank B, Bank C, Bank D, and Bank E. 
Creditor Bank consults the SEC filings for each of these 5 banks and 
finds that all 5 held U.S. credit card loans in excess of $3 billion at 
some time in the preceding year. Next, Creditor Bank reviews the fees 
charged on various credit card products issued by those 5 banks. Bank A 
charges an annual fee of $100 on one credit card product and a $0 
annual fee on another credit card product. Bank A charges a cash 
advance fee of 4 percent of a transaction or $10, whichever is greater, 
on both of its card products. Bank B charges a $50 annual fee on one 
credit card product and a $0 annual fee on another credit card product. 
Bank B charges a cash advance fee of 2 percent of the transaction or 
$5, whichever is greater, on both its credit card products. Bank C, 
Bank D, and Bank E each offers one credit card product that carries a 
$50 annual fee, and a cash advance fee of 3 percent of the transaction 
or $5, whichever is greater.
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    \113\ For the sake of simplicity, only two fees are considered 
in this example. Under proposed Sec.  232.4(d)(1), each bona fide 
fee must be ``reasonable and customary,'' and accordingly, a 
creditor seeking to determine whether all of its bona fide fees fit 
within the safe harbor under proposed Sec.  232.4(d)(3)(ii) must 
conduct a separate analysis for each fee. Similarly, the example 
uses bank cards only for the sake of simplicity. The proposed 
regulation does not distinguish among types of credit cards (e.g., 
private label, bank, or retail store cards) or types of creditors.
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    Under proposed Sec.  232.4(d)(3)(ii), Creditor Bank may choose to 
calculate an average using the highest annual fees charged by each of 
these other 5 banks. In this case, Creditor Bank could calculate an 
average fee for the annual participation fee of $60 (the sum of $100 
for Bank A, plus $50 for each of Bank B, Bank C, Bank D, and Bank E; 
divided by 5). Because the Creditor Bank Card's $25 annual fee falls 
below the $60 average of fees charged by 5 other banks, Creditor Bank 
would meet the safe harbor for that fee. Creditor Bank could then 
undertake the same analysis for cash advance fees, and would be 
required to consider whether its fee is ``reasonable'' under the safe 
harbor with respect to both the percentage charged and the minimum fee. 
In this case, Creditor Bank could calculate an average cash advance 
percentage fee of 3 percent and an average cash advance minimum fee of 
$6. Because the Creditor Bank Card's percentage fee and minimum fee 
fall below these averages, Creditor Bank may exclude these bona fide 
fees from the MAPR under proposed Sec.  232.4(d)(3)(ii). We seek 
comment on the feasibility of performing this calculation and the 
associated costs.
    Reasonable fee. Proposed Sec.  232.4(d)(3)(iii) is designed to 
clarify that a bona fide fee still may be ``reasonable'' for the 
purposes of the exclusion even if that fee is higher than an average 
amount as calculated under proposed Sec.  232.4(d)(3)(ii). In 
particular, the Department recognizes that, due to several factors in 
the marketplace for credit cards, the prices of certain fees could drop 
from current levels, including to zero, and yet the Department believes 
that a creditor who charges a reasonable fee still should be permitted 
to avail itself of the exclusion in paragraph (d)(1) of this section. 
Accordingly, the Department proposes a provision that expressly states 
that ``[a] bona fide fee charged by a creditor is not unreasonable 
solely because other creditors do not charge a fee for the same or a 
substantially similar product or service.''
    Customary. Proposed Sec.  232.4(d)(3)(iv) would provide a standard 
to assess whether a bona fide fee is ``customary'' for the purposes of 
the exclusion. The touchstone for assessing whether a creditor's bona 
fide fee is ``customary'' is whether ``other creditors typically 
compute, or customarily have computed,'' that fee in the manner by 
which that creditor does so. Nevertheless, the condition that a bona 
fide fee be ``customary'' for that type of fee should not be 
interpreted so as to require creditors to move in lockstep in order to 
satisfy this condition. The Department intends the standard for a 
``customary'' condition to be applied with sufficient flexibility that 
a creditor who imposes a bona fide fee in a given manner, such as a 
fixed amount per transaction, may continue to do so, ``even if 
substantially all other creditors compute that fee on a percentage 
basis.''
    Reasonableness for a participation fee. Consistent with the 
Department's proposal that the conditions of ``reasonable and 
customary'' be applied flexibly, proposed Sec.  232.4(d)(3)(v) would 
provide a standard in the particular case of a participation fee. The 
Department recognizes that creditors who issue credit cards provide a 
range of benefits and services to Service members and their dependents 
who are cardholders, and some cards may charge a participation fee in 
lieu of (or in light of lower) transaction-based fees. For example, a 
creditor may offer a credit card that carries a relatively higher 
participation fee, yet does not charge a foreign transaction fee. 
Accordingly, proposed Sec.  232.4(d)(3)(v) would provide a standard 
stating that ``[a]n amount of a bona fide fee for participation in a 
credit card account may be reasonable and customary . . . if that 
amount reasonably and customarily corresponds to the credit limit in 
effect or credit made available when the fee is imposed, to the 
services offered under the credit card account, or to other factors 
relating to the credit card account.''
    QUESTION 7: If the Department continues to pursue an approach that 
defines ``consumer credit'' to be generally consistent with certain 
credit regulated under TILA, should the Department consider including 
an exemption specifically for a credit card account under an open-end 
(not home-secured) consumer credit plan? Would the consumer protection 
under TILA be sufficient to be consistent with the requirements of MLA? 
How would an exemption for consumer credit offered through a credit 
card account be articulated?
    QUESTION 8: The Department solicits comment on potential 
operational issues with applying the regulation under the MLA to credit 
card products offered in retail sales locations, particularly at the 
point of sale. How should the Department address any such potential 
issues in a final rule that may cover some or all credit card products 
extended to covered borrowers?
    QUESTION 9: Do the proposed standards appropriately describe

[[Page 58614]]

whether a bona fide fee may be excluded from the calculation of the 
MAPR as ``reasonable and customary?'' If not, please specifically 
describe the language the Department should use to clarify when a bona 
fide fee is not required to be included in the MAPR.
    QUESTION 10: Does the threshold of $3 billion in outstanding credit 
card loans on U.S. credit card accounts appropriately allow an 
assessment of whether a bona fide fee is ``reasonable,'' in light of 
the fees charged by credit card issuers whose credit card products are 
typical in the marketplace? If not, what measure(s) should be used to 
facilitate a creditor's own assessment of its bona fide fees, for the 
purposes of complying with conditions proposed in Sec.  232.4(d)(1), 
while also preventing other creditors who offer credit card products 
that carry unreasonable fees from benefitting from the safe harbor? Is 
a pool of 5 or more creditors reasonably large for computing an average 
fee for the purposes of Sec.  232.4(d)(1)? Does a period of 3 years 
provide sufficient stability for measuring whether a credit card issuer 
meets the asset-size standard? If not, what period should be used?

C. Proposal To Revise Provisions Governing Assessment of a Covered 
Borrower

    When adopting its initial regulation in 2007, the Department 
explained that the provisions governing the assessment of a ``covered 
borrower'' should balance protections for a covered borrower while also 
addressing a creditor's need to have ``some degree of certainty in 
determining that the loans [the creditor makes] are in compliance with 
[the MLA] as implemented by Part 232.'' \114\ The Department's existing 
regulation seeks to balance these interests by providing a ``safe 
harbor'' from the requirements of the regulation for a creditor who, 
with respect to a consumer credit transaction: first, provides a 
consumer a prescribed form, the ``covered borrower identification 
statement,'' declaring whether he or she is a covered borrower, and the 
consumer signs the form indicating that he or she is not a covered 
borrower; and, second, has not determined, using certain optional 
verification procedures, that the consumer is a covered borrower.\115\ 
The Department is proposing to revise these provisions governing the 
assessment of a covered borrower for two reasons.
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    \114\ 72 FR at 50588.
    \115\ 32 CFR 232.5(a)(1)-(2). However, the Department also 
issued an important ``caveat'' to this provision, stating that a 
creditor may not fit within the safe harbor if the ``creditor 
obtains documentation as part of the credit transaction reflecting 
that the applicant is a covered borrower'' (notwithstanding the 
signed declaration). 72 FR at 50588.
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    First, the Department has become aware of misuses of the covered 
borrower identification statement whereby a Service member (or covered 
dependent) falsely declares that he or she is not a covered borrower. 
The Department is concerned that a Service member seeking a credit 
product that is subject to the MLA falsely states--either on his or her 
own initiative or complicit with the creditor in the course of the 
application process--that he or she is not a covered borrower so that 
the institution offers the credit product unencumbered by the interest-
rate limit and other restrictions of the MLA. While the Department 
intended the provision of the covered borrower identification statement 
to afford protections for Service members and their dependents, in 
actual transactions the dynamic between creditors and individual 
borrowers has led to widespread misuses of the statement, often 
resulting in extensions of credit that violate the MLA--plus, adverse 
effects on Service members or their dependents who make false 
statements. Furthermore, and benignly, some spouses of active duty 
Service members may not understand that they are ``dependents'' covered 
under the MLA and might unwittingly incorrectly complete the covered 
borrower identification statement. Accordingly, the Department believes 
that this section of the regulation should be revised to relieve a 
Service member or his or her dependent from making any statement 
regarding his or her status as a covered borrower \116\ in the course 
of a transaction involving consumer credit.
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    \116\ 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).
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    Second, the Department believes that the current framework of 
providing the covered borrower identification statement--which allows 
the consumer to state either that ``I AM'' or ``I AM NOT'' a covered 
borrower--could be unduly cumbersome for some creditors to administer. 
In particular, the Department is concerned that, in light of the 
proposal to cover a broader range of products as consumer credit under 
the MLA, a creditor should be afforded a more straightforward mechanism 
to have ``some degree of certainty in determining that the loans [the 
creditor makes] are in compliance with [the MLA] as implemented by Part 
232.'' \117\ The Department believes that a covered-borrower check 
could be conducted unilaterally by a creditor by checking the 
Department's database, akin to the unilateral process a creditor 
currently uses to obtain a consumer report when assessing the 
creditworthiness of a consumer and to ascertain the consumer's 
identity. Accordingly, the Department proposes to revise this section 
of the regulation in order to provide a clearer mechanism for a 
creditor to obtain the protection of a safe harbor when assessing 
whether a consumer is a covered borrower.
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    \117\ 72 FR at 50588.
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    The Department currently provides an online database, available at 
https://www.dmdc.osd.mil/appj/mla/index.jsp, that allows a creditor to 
determine whether a consumer is a covered borrower under the MLA (the 
MLA Database). Proposed Sec.  232.5 would provide a conclusive 
mechanism for a creditor to unilaterally assess the status of a 
consumer who applies for consumer credit if: first, the creditor checks 
the MLA Database to determine that consumer-applicant's status when the 
creditor enters into a transaction or establishes an account for 
consumer credit; second, the consumer-applicant does (or does not) 
appear in the MLA Database; and, third, the creditor retains a record 
of the information obtained from the MLA Database.
    The Department anticipates that commercial information-services 
providers, such as consumer reporting agencies, may choose to supply 
information products to financial institutions that would include 
covered-borrower checks as part of those products used to process loan 
applications. As the Department may determine to be appropriate, the 
structure, as well as the terms and conditions for use, of the MLA 
Database could be developed to permit a commercial information-services 
provider to access the MLA Database for the purposes of obtaining and 
reselling a search record regarding a consumer. Contemplating that such 
developments could be made, if appropriate, nothing in proposed Sec.  
232.5 would prohibit or otherwise restrict a creditor from using a 
commercially provided information product to conduct a covered-borrower 
check, so long as the MLA Database is the underlying source of the data 
relied on by that creditor.
    QUESTION 11: If the Department makes appropriate adjustments to the 
MLA Database, should the Department modify the language of Sec.  232.5 
to clarify that a creditor may take advantage of the

[[Page 58615]]

safe harbor by conducting a covered-borrower check using a commercially 
provided information product whose underlying data is derived from the 
MLA Database? If so, please specifically describe the language the 
Department should use to clarify this aspect of Sec.  232.5.
    If the vast majority of transactions are amenable to covered-
borrower checks conducted solely through information obtained from the 
MLA Database, the actual status of the consumer as a covered borrower 
could be material to a consumer credit transaction or account if the 
creditor has actual knowledge of that consumer's status. Consistent 
with the policy underlying the caveat to the existing Sec.  232.5(a), 
the Department believes that a creditor who has actual knowledge that a 
consumer is a covered borrower should not be entitled to the safe 
harbor when entering into a transaction or establishing an account for 
consumer credit for that borrower. For example, if as part of the 
creditor's application or underwriting process, the creditor collects 
from a covered borrower a copy of the borrower's current military 
identification card or other record of the borrower's status, the 
creditor would obtain actual knowledge of that borrower's status, 
regardless of whether the creditor checks the MLA Database. Proposed 
Sec.  232.5(c) reflects this policy and provides that the creditor must 
``treat the consumer as a covered borrower notwithstanding any 
determination by that creditor based on information obtained from the 
[MLA Database].'' The Department intends for this exception to the safe 
harbor in proposed Sec.  232.5(b) to apply so that a creditor may not 
take advantage of an obvious error in the MLA Database when the 
creditor knows otherwise, and the Department expects these 
circumstances to be rare.
    If a creditor conducts a covered-borrower check in reliance on 
information obtained (including, potentially, indirectly) from the MLA 
Database, and determines at the outset that a consumer-applicant is not 
a covered borrower, proposed Sec.  232.5(b)(2) generally would provide 
a safe harbor from liability under the MLA in the event that the 
consumer, in fact, is a covered borrower. This situation could occur, 
for example, in the case that a consumer married to an active duty 
service member (and, therefore who is a covered borrower himself or 
herself) has not registered for any military benefits in the Defense 
Enrollment Eligibility Reporting System which provides the underlying 
data for the MLA Database. The Department believes a creditor who 
checks a consumer against the MLA Database has undertaken the best 
efforts under the circumstances to comply with the MLA and should 
receive, therefore, protection from liability if the database had 
contained incorrect information about that consumer. Moreover, a 
creditor who satisfies the conditions for the safe harbor provided 
under proposed Sec.  232.5(b)(2) would be free from liability under the 
MLA at the outset of establishing an account for credit--and throughout 
the lifespan of that particular account--relating to that consumer.
    The Department believes the consumer protections of the MLA will be 
most effectively provided if creditors extending consumer credit with 
an MAPR exceeding the 36 percent interest-rate limit check the MLA 
Database before extending that credit to consumers. In order to benefit 
from the safe-harbor provision under proposed Sec.  232.5(b), a 
creditor must check the MLA Database whenever a consumer applies for a 
new consumer credit product or establishes a new account for consumer 
credit, including a new line of consumer credit that might be 
associated with a pre-existing transactional account held by the 
borrower. For example, if a consumer initially opens a checking account 
with a bank, and then, later, applies for an overdraft line of credit 
associated with that checking account and which carries a cost in 
excess of the interest-rate limit, in order to receive the benefit of 
the safe harbor for purposes of that new line of consumer credit, the 
bank must check the MLA Database when the consumer applies for the 
overdraft line of credit, even if the bank previously had checked the 
MLA Database at the time he or she established the checking account and 
did not find the consumer in the database.
    QUESTION 12: If the Department were to adopt a framework for a 
creditor to conduct a covered-borrower check as proposed in Sec.  
232.5, should the Department also adopt an exception from the safe 
harbor that addresses the situation when the creditor has actual 
knowledge that a consumer is a covered borrower? What are the likely 
costs associated with conducting covered-borrower checks as proposed in 
Sec.  232.5? What alternatives should the Department consider for 
creditors to conduct covered-borrower checks? Should the Department 
consider alternative safe harbor provisions for certain types of 
creditors or certain types of consumer credit, such as credit extended 
at retail sales locations? Please provide specific language for 
provisions that would implement these alternatives.
    QUESTION 13: Should the Department retain a safe harbor for use of 
the covered borrower identification statement? The Department solicits 
comment on whether the use of the statement would be unduly cumbersome 
if the Department expands coverage of the regulation to additional 
types of credit products?
    QUESTION 14: Should the Department provide a fallback provision to 
protect a creditor from liability in the case that the creditor is 
temporarily or permanently unable to access the internet at the time of 
conducting a transaction or establishing an account for consumer 
credit? Should the Department provide protection from liability from 
the MLA in the case that a creditor can demonstrate that the MLA 
Database was not operational at the time the creditor attempted to 
search the database? If so, should the Department address how the 
creditor may establish that the MLA Database was not operational at the 
time the creditor attempted the search?

IV. Section-by-Section Description of the Proposed Regulation


Section 232.1  Authority, purpose, and coverage

    The Department proposes minor revisions to this section, mainly for 
the sake of clarity and consistency with provisions of the regulation.


Section 232.2  Applicability

    The Department proposes to amend this section in two respects.
    First, in the new proposed subsection (a), the Department would add 
a provision stating: ``Nothing in this part applies to a credit 
transaction or account relating to a consumer who is not a covered 
borrower at the time he or she becomes obligated on a credit 
transaction or establishes an account for credit.'' This proposed 
provision is designed to clarify the Department's longstanding policy 
that the requirements under 10 U.S.C. 987, as implemented in the 
regulation, apply only to a consumer who is a covered borrower ``at the 
time he or she becomes obligated on a consumer credit transaction 
covered by this part.'' \118\
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    \118\ See 32 CFR 232.3(c) (defining a ``covered borrower'').
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    The Department believes that defining the scope of the regulation 
to apply only to a covered borrower when he or she enters into a 
transaction or establishes an account for consumer credit is consistent 
with the language and

[[Page 58616]]

structure of 10 U.S.C. 987.\119\ In this regard, the Department 
believes that 10 U.S.C. 987 should not be interpreted so as to impose 
restrictions on an existing agreement between a creditor and a consumer 
involving a credit transaction primarily for personal, family, or 
household purposes that spring to life when the consumer becomes a 
covered borrower when he or she begins active duty service in the 
military. Interpreting 10 U.S.C. 987 as applying only to a covered 
borrower who holds that status when he or she agrees to obtain the 
consumer credit is fair to the creditor who, at the outset of the 
transaction, should be in a position to know the status of its 
counterparty to the agreement. Moreover, the Department's longstanding 
policy regarding this aspect of the scope of 10 U.S.C. 987 is 
consistent with the provision set forth in Sec.  987(f)(3),\120\ which 
makes any credit contract that is prohibited under 10 U.S.C. 987 ``void 
from the inception of such contract.'' Section Sec.  987(f)(3) would 
operate unjustly if a consumer, upon obtaining the status of a covered 
borrower, could sue the creditor to void an existing credit contract on 
the grounds that the contract--which may have been entirely lawful when 
originally entered into with the consumer--violates one or more 
provisions of 10 U.S.C. 987. One practical consequence of the 
Department's longstanding policy is that a creditor is not required to 
constantly monitor the status of each consumer who has obtained credit 
or holds an account for credit to assess whether the consumer is a 
``covered borrower;'' rather, the creditor may conduct that assessment, 
as the creditor may so elect, only at the outset of the transaction or 
when establishing the account for consumer credit. The Department 
proposes to adopt corresponding revisions to the language of certain 
other provisions of the regulation, notably Sec. Sec.  232.3(f) and 
232.5(b)(2), for the sake of clarity and consistency with this policy.
---------------------------------------------------------------------------

    \119\ See, e.g., 10 U.S.C. 987(a) (imposing conditions on ``[a] 
creditor who extends consumer credit''); 10 U.S.C. 987(c) (requiring 
certain information to be provided to a covered borrower ``before 
the issuance of credit''); 10 U.S.C. 987(e) (declaring that ``[i]t 
shall be unlawful for any creditor to extend consumer credit to a 
[covered borrower]'' that involves certain restrictions or conduct) 
(emphases added).
    \120\ 10 U.S.C. 987(f)(3) (``Any credit agreement, promissory 
note, or other contract prohibited under this section is void from 
the inception of such contract.'').
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    Second, the Department proposes to add a new subsection (b) 
stating: ``The examples in this part are not exclusive. To the extent 
that an example in this part implicates a term or provision of 
Regulation Z (12 CFR part 1026), issued by the Consumer Financial 
Protection Bureau to implement the Truth in Lending Act, Regulation Z 
shall control the meaning of that term or provision.''


Section 232.3   Definitions

    (a) Affiliate. The Department proposes a definition of 
``affiliate'' to accompany the definition of ``creditor.'' This new 
proposed definition is designed to prevent evasion of the rule, 
specifically with respect to an entity that would not, when considered 
alone, qualify as a creditor, but, when considered together with its 
affiliates, would be engaged in extending credit, as described in Sec.  
232.3(i)(3) of the proposed rule.
    (b) Billing cycle. The Department proposes to define the term 
consistent with the meaning of this term in Regulation Z.
    (c) Bureau. The Department proposes to define the term for the 
Consumer Financial Protection Bureau.
    (d) Closed-end credit. The Department proposes to define the term 
consistent with the meaning of this term in Regulation Z.
    (e) Consumer. The Department proposes to define this term as a 
natural person.
    (f) Consumer credit. As discussed above, the Department proposes to 
define ``consumer credit'' consistent with the relevant provisions of 
the Bureau's Regulation Z. Proposed Sec.  232.3(f)(2) would provide 
exceptions to ``consumer credit'' that, in general, track the 
exceptions in 10 U.S.C. 987(i)(6).
    Certain credit products may, or may not, be covered under the 
Department's proposed definition of ``consumer credit,'' depending, for 
example, on whether the particular credit product is subject to a 
``finance charge,'' which the Department likewise proposes to define 
consistent with the meaning of that term in Regulation Z. Most, if not 
all, ``deposit advance'' products would (when offered to a covered 
borrower) be covered as consumer credit because this type of product 
typically involves credit extended by a creditor primarily for 
personal, family, or household purposes for which the borrower pays any 
fee or charge that is, or is expected to be, repaid from funds 
available in the borrower's asset account held by that creditor. 
Likewise, consistent with Regulation Z,\121\ an overdraft line of 
credit with a finance charge would (when offered to a covered borrower) 
be covered as consumer credit to the extent that product consists of 
credit extended by a creditor primarily for personal, family, or 
household purposes to pay an item that overdraws an asset account and 
for which the borrower pays any fee or charge, but only if (A) the 
extension of credit for such an item and (B) the imposition of the fee 
or charge were previously agreed upon in writing. On the other hand, an 
overdraft service typically would not be covered as consumer credit 
because Regulation Z excludes from ``finance charge'' any charge 
imposed by a creditor for credit extended to pay an item that overdraws 
an asset account and for which the borrower pays any fee or charge, 
unless the payment of such an item and the imposition of the fee or 
charge were previously agreed upon in writing.\122\
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    \121\ See 12 CFR 1026.4(c)(3) (imposing certain conditions on a 
charge for overdraft services that, if not satisfied, would make 
that charge a ``finance charge'').
    \122\ See 12 CFR 1026.4(c)(3).
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    Consistent with the Department's existing regulation, proposed 
Sec.  232.3(f)(2)(iv) would exclude from the scope of ``consumer 
credit'' any credit transaction that is an exempt transaction for the 
purposes of Regulation Z (other than a transaction exempt under 12 CFR 
1026.29) \123\ or otherwise is not subject to disclosure requirements 
under Regulation Z. The Department believes, at this time, that the 
exclusions in proposed Sec.  232.3(f)(2)(iv) are appropriate 
limitations to the consumer credit that is subject to 10 U.S.C. 987 
because these types of exempted credit do not pose risks to Service 
members and their dependents, and a creditor who already complies with 
Regulation Z should not be required to independently assess whether 
certain types of credit exempt under that rule could be subject to the 
requirements of the MLA.
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    \123\ See 12 CFR 1026.29, regarding state application for Bureau 
exemption of a class of transactions within the state.
---------------------------------------------------------------------------

    In this regard, this section of the proposed rule would remove the 
provision in the Department's existing regulation that provides an 
exclusion for ``credit secured by a qualified retirement account as 
defined in the Internal Revenue Code.'' \124\ The Department believes 
that the intent of this exclusion is sufficiently captured by the 
exception for any credit transaction that is an exempt transaction for 
the purposes of Regulation Z, as described in proposed Sec.  
232.4(c)(1)(iv). Under Sec.  1026.3(g) of Regulation Z, credit extended 
to a participant in certain retirement plans is

[[Page 58617]]

not subject to the requirements of Regulation Z.
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    \124\ 32 CFR 232.3(b)(2)(iv). In addition, the Department now 
believes that this provision represents a drafting error because, 
upon closer review, the Department could not locate a reference in 
the Internal Revenue Code to a ``qualified retirement account,'' as 
described in this provision.
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    (g) Covered borrower. The Department proposes to revise the 
definition of ``covered borrower'' to provide greater clarity and more 
closely reflect the language of the MLA. Consistent with the plain 
language of 10 U.S.C. 987(i)(1), the proposed rule would refer to the 
``armed forces.'' This proposed provision also would clarify that the 
protections provided to members of the armed forces on active duty 
apply to Service members called or ordered to active duty under titles 
10 or 14 of the United States Code, or Service members on active Guard 
and Reserve duty under title 32. Additionally, the Department proposes 
to revise the definition of ``dependent'' to reflect the plain language 
of the statute, as amended by Sec.  663 of the 2013 Act. The Department 
believes that the proposed definition of ``dependent,'' consistent with 
the term used to establish eligibility for military medical care, would 
appropriately carry out the intent to simplify the process for 
determining which family members are covered under 10 U.S.C. 987.
    QUESTION 15: Does the revised definition of covered borrower 
appropriately cover active duty Service members and their dependents?
    (h) Credit. The proposed definition of ``credit'' is not changed 
from the Department's existing regulation.\125\
---------------------------------------------------------------------------

    \125\ 32 CFR 232.3(d).
---------------------------------------------------------------------------

    (i) Creditor. The Department proposes to define ``creditor'' to 
more closely track the language in the definition of the term in 10 
U.S.C. 987(i)(5). In addition, in paragraph (i)(3), the Department 
proposes to interpret the statutory provision of ``engaged in the 
business of extending consumer credit'' \126\ consistent with the 
corresponding provision of the Department's existing regulation, which 
refers to the definition of ``creditor'' in Regulation Z.\127\
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    \126\ 10 U.S.C. 987(i)(5)(A)(i).
    \127\ 32 CFR 232.3(e) (``Creditor means a person who . . . and 
who otherwise meets the definition of `creditor' for purposes of 
Regulation Z.'').
---------------------------------------------------------------------------

    (j) Department. The Department proposes to define the term for the 
Department of Defense.
    (k) Dwelling. The proposed definition of ``dwelling'' is not 
changed from the Department's existing regulation.\128\
---------------------------------------------------------------------------

    \128\ 32 CFR 232.3(f).
---------------------------------------------------------------------------

    (l) Electronic fund transfer. The Department proposes to amend the 
definition of ``electronic fund transfer'' to have the same meaning as 
in the regulation issued by the Bureau to implement the Electronic Fund 
Transfer Act (``EFTA''), as amended from time to time (12 CFR part 
1005).\129\ In the context of this provision--which relates only to an 
exception that would be contained in proposed Sec.  232.8(e)--the 
Department believes that there is no need to account for the authority 
of the Board of Governors of the Federal Reserve System under EFTA.
---------------------------------------------------------------------------

    \129\ Currently the term ``electronic fund transfer'' is defined 
in section 1005.3(b) of the Bureau's Regulation E. 12 CFR 1005.3(f).
---------------------------------------------------------------------------

    (m) Finance charge. The Department proposes to define the term 
consistent with the meaning of this term in Regulation Z.
    (n) Military annual percentage rate (MAPR). The Department proposes 
to define the term as the cost of credit expressed as an annual rate, 
and requires the MAPR to be calculated in accordance with proposed 
Sec.  232.4(c).
    (o) Open-end credit. The Department proposes to define the term 
consistent with the meaning of this term in Regulation Z.
    (p) Person. The Department proposes to define the term consistent 
with the definition of ``person'' in the Department's existing 
regulation.\130\
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    \130\ 32 CFR 232.3(e) (defining ``person'' for the purposes of 
Sec.  232.3 as including a ``natural person, organization, 
corporation, partnership, proprietorship, association, cooperation, 
estate, [and] trust.''
---------------------------------------------------------------------------

    (q) Regulation Z. The Department proposes to define the term 
consistent with the definition of ``Regulation Z'' in the Department's 
existing regulation,\131\ except that, first, the Department would 
delete the phrase ``or contract'' and, second, the Department would 
include a provision relating to the authority of the Board of Governors 
of the Federal Reserve System under TILA.
---------------------------------------------------------------------------

    \131\ 32 CFR 232.3(i).
---------------------------------------------------------------------------

Section 232.4 Terms of Consumer Credit Extended to Covered Borrowers

    Proposed Sec.  232.4(a) is intended to track the restrictions under 
10 U.S.C. 987(a). Relative to the language of this provision in the 
Department's existing rule, which describes a ``creditor'' and an 
``assignee,'' the Department is proposing to modify this provision to 
track the language of the statute and proposed Sec.  232.3(i)(2), which 
includes an ``assignee'' within the definition of creditor.
    Proposed Sec.  232.4(a)(2) would track the restriction under 10 
U.S.C. 987(a)(2), which provides that a creditor who extends consumer 
credit to a covered borrower shall not require the borrower to ``pay 
interest with respect to the extension of such credit, except as . . . 
authorized by applicable State or Federal law.'' The Department 
understands that this condition on an extension of consumer credit 
possibly could be interpreted to restrict a financial institution, such 
as a national bank, based in one state from charging interest to 
covered borrowers residing in another state, which imposes a limit on 
the interest rate that may be charged, ``except as . . . authorized by 
[that other] State.'' The Department believes nothing in 10 U.S.C. 987 
or this regulation should be construed so as to affect the Federal law 
governing the interest rate a financial institution may charge.\132\
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    \132\ In the case of a national bank, for example, see 12 U.S.C. 
85; 12 CFR 74001.
---------------------------------------------------------------------------

    Proposed Sec.  232.4(b) is intended to track the interest-rate 
limit of 10 U.S.C. 987(b).
    Proposed Sec.  232.4(c) provides the framework for calculating the 
MAPR by: First, in Sec.  232.4(c)(1), describing each of the charges 
that must be included in the MAPR; and second, in Sec.  232.4(c)(2), 
prescribing the rules for computing the MAPR based on those charges.
    Proposed Sec.  232.4(c)(1)(i)-(ii) is intended to reflect the 
charges that must be included as ``interest'' under 10 U.S.C. 
987(i)(3). Relative to the corresponding provisions of the Department's 
existing rule,\133\ the language of these proposed provisions would be 
amended to reflect the broader scope of consumer credit subject to the 
regulation, such as by referring to ``the credit transaction for 
closed-end credit or upon account opening for open-end credit'' 
(emphasis added). The proposed exception for a bona fide fee (other 
than a periodic rate) charged to a credit card account would not apply 
to the charges set forth in proposed Sec.  232.4(c)(1)(i)-(ii).
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    \133\ 32 CFR 232.3(h)(1)(ii)-(iii).
---------------------------------------------------------------------------

    At this time, the Department proposes to maintain (in proposed 
Sec.  232.4(c)(1)(ii)) the language of Sec.  232.3(h)(1)(iii), which 
requires a creditor to include in the MAPR ``fees for credit-related 
ancillary products sold in connection with and either at or before 
consummation of the [consumer credit].'' When adopted in 2007, 
including in the MAPR only the ``credit-related ancillary products'' 
sold ``either at or before consummation of the credit transaction'' 
\134\ was designed to be consistent with the scope of consumer credit, 
which covers only a narrow band of closed-end credit products. However, 
nothing in the MLA necessarily limits the inclusion in the MAPR of 
these charges only to those that are sold at the outset of the credit 
transaction. Particularly insofar as consumer credit would cover open-
end credit products, as proposed, the MLA reasonably could

[[Page 58618]]

be interpreted to require a creditor to include in the MAPR the fee for 
any ancillary product ``sold with any extension of credit to a [covered 
borrower]'' so long as that ancillary product was ``associated with the 
extension of credit'' \135\--which could arise at any time in an 
ongoing, open-end account for consumer credit. The Department has 
considered whether to amend the language of proposed Sec.  
232.4(c)(1)(ii) to require the inclusion in the MAPR of any fees for 
credit-related ancillary products, with respect to open-end credit, 
sold either upon account opening or at any time during the existence of 
the account, so long as the consumer was a covered borrower at the time 
the account was established.\136\
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    \134\ 32 CFR 232.3(h)(1)(iii).
    \135\ 10 U.S.C. 987(i)(3) (defining `` `interest''' generally as 
including ``all cost elements associated with the extension of 
credit'').
    \136\ Amending the scope of Sec.  232.4(c)(1)(ii) by eliminating 
the timing condition would be consistent with the scope of Sec.  
232.4(c)(1)(i) (which tracks Sec.  232.3(h)(1)(ii) of the existing 
regulation), which does not impose a condition based on the timing 
of a sale or charge for a credit insurance premium.
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    QUESTION 16: Should the Department consider eliminating the timing 
condition of Sec.  232.4(c)(1)(ii) to require the inclusion in the MAPR 
of any fees for credit-related ancillary products sold either upon 
account opening or at any time during the existence of an account for 
open-end consumer credit? If so, please specifically describe the scope 
of an amended Sec.  232.4(c)(1)(ii). For example, how should the 
Department define a ``credit-related ancillary product?'' How should 
the Department define the seller whose charge for a credit-related 
ancillary product would be subject to inclusion in the MAPR (i.e., 
``sold by the creditor'' or ``sold by the creditor or any affiliate of 
the creditor'')?
    Proposed Sec.  232.4(c)(1)(iii) is intended to describe the charges 
that must be included in the MAPR in light of the definition of 
consumer credit, which would chiefly consist of ``[f]inance charges,'' 
consistent with Regulation Z. In general, a charge that is excluded as 
a ``finance charge'' under Regulation Z also would be excluded from the 
charges that must be included when calculating the MAPR. As a result, 
whereas the Department's existing regulation provides exclusions from 
the MAPR for late payment fees \137\ and taxes required to be 
paid,\138\ proposed Sec.  232.4(c) omits these provisions because these 
charges (as well as other charges) are not finance charges under 
Regulation Z.\139\
---------------------------------------------------------------------------

    \137\ 32 CFR 232.3(h)(2)(i) (excluding from the MAPR ``[f]ees or 
charges imposed for actual unanticipated late payment, default, 
delinquency, or similar occurrence'').
    \138\ 32 CFR 232.3(h)(2)(ii) (excluding from the MAPR ``[t]axes 
or fees prescribed by law that actually are or will be paid to 
public officials for determining the existence of, or for 
perfecting, releasing, or satisfying a security interest'').
    \139\ See 12 CFR 1026.4(c).
---------------------------------------------------------------------------

    However, the Department recognizes that, under Regulation Z, a wide 
range of charges that a creditor may impose in connection with a credit 
product are excluded as ``finance charges,'' particularly an 
application fee and a participation fee.\140\ If these exclusions from 
the definition of finance charge were to be maintained in the context 
of consumer credit covered under the MLA, a creditor would have a 
strong incentive to evade the interest-rate limit of 10 U.S.C. 987(b) 
by shifting the costs of a credit product by lowering the interest rate 
and imposing (or increasing) one or more of these excluded fees. To 
guard against this obvious result, the Department proposes to 
specifically include any application fee and any participation fee as 
charges that generally must be included in the MAPR.\141\ The exception 
for a bona fide fee (other than a periodic rate) charged to a credit 
card account would apply to the charges set forth in proposed Sec.  
232.4(c)(1)(iii).
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    \140\ See 12 CFR 1026.4(c)(1) and (c)(4).
    \141\ See also 72 FR at 50587 (explaining the need to define the 
MAPR so that covered credit products ``cannot evade the 36 percent 
[interest-rate] limit by including low interest rates with high fees 
associated with origination, membership, administration, or other 
cost that may not be captured in the TILA definition of APR'').
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    Proposed Sec.  232.4(c)(1)(iv) is intended to clarify that, even if 
a charge set forth in paragraphs (c)(1)(i)-(iii) of this section would 
be excluded from the finance charge under Regulation Z, that charge 
nevertheless must be included in the calculation of the MAPR.
    QUESTION 17: Would this approach to include any application fee or 
participation fee in the calculation of the MAPR be reasonable to 
implement the statutory provision of ``interest,'' which covers ``any 
other charge or premium with respect to the extension of consumer 
credit?'' \142\
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    \142\ 10 U.S.C. 987(i)(3).
---------------------------------------------------------------------------

1. Computing the MAPR
    The proposed rule contains two provisions for computing the 
MAPR,\143\ both of which track the methods already established in 
Regulation Z.
---------------------------------------------------------------------------

    \143\ 10 U.S.C. 987(h)(1) (authorizing the Department to 
prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(B) 
(authorizing the Department to establish ``[t]he method for 
calculating the applicable annual percentage rate of interest on 
such obligations, in accordance with the limit established under 
[the MLA]'').
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    First, for closed-end credit, the proposed rule would require a 
creditor to follow ``the rules for calculating and disclosing the 
`Annual Percentage Rate (APR)' for credit transactions under Regulation 
Z,'' based on the charges required for the MAPR, as set forth in 
proposed Sec.  232.4(c)(1). In general, the requirements for 
calculating the APR for closed-end credit under Regulation Z are found 
in Sec.  1026.22(a)(1), and include the explanations and instructions 
for computing the APR set forth in appendix J to part 1026.
    For example, the MAPR for single advance, single payment 
transactions, such as some types of deposit advance loans, must be 
computed in accordance with the rules in Regulation Z, such as by 
following the instructions described in paragraph (c)(5) of appendix J. 
Based on the formula provided in paragraph (c)(5) of appendix J, in the 
case of a single advance, single payment transaction loan extended to a 
covered borrower for a period of 45 days, and for which the advance is 
$500 and the single payment required consists of the principal amount 
plus a finance charge of $28.44, for a total payment of $528.44, the 
MAPR would be 46.14 percent. In this example, the resultant MAPR would 
exceed the interest-rate limit imposed by 10 U.S.C. 987(b), as set 
forth in proposed Sec.  232.4(b) of the regulation.
    Second, for open-end credit, a creditor generally would be required 
to calculate the MAPR using the methods prescribed in Sec.  1026.14(c)-
(d) of Regulation Z, which relates to the ``effective annual percentage 
rate.'' \144\ Section 1026.14(c) of Regulation Z provides for the 
methods of computing the annual percentage rate under three scenarios: 
(1) When the finance charge is determined solely by applying one or 
more periodic rates; (2) when the finance charge includes a fixed 
charge that is not due to application of a periodic rate, other than a 
charge with respect to a specific transaction; and (3) when the finance 
charge includes a charge relating to a specific transaction during the 
billing cycle.
---------------------------------------------------------------------------

    \144\ A creditor subject to Sec.  1026.40 of Regulation Z is not 
required to comply with Sec.  1026.14(c) (``[that type of] creditor 
may, at its option, disclose an effective annual percentage rate 
pursuant to Sec.  1026.7(a)(7) and compute the effective annual 
percentage [in accordance with the subparagraphs of Sec.  
1026.14(c)]''). However, for the purposes of complying with the 
Department's proposed rule when computing a MAPR for open-end 
credit, any creditor subject to the Department's regulation would be 
required to comply with that proposed Sec.  1026.14(c), subject to 
the proposed Sec.  232.4(c)(2)(ii)(B) (in the event that there is no 
balance during a billing cycle).

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[[Page 58619]]

    For example, suppose a creditor offers a line of credit to a 
covered borrower primarily for personal, family, or household purposes 
(commonly referred to as a ``personal line of credit''), and permits 
the borrower to repay on a monthly basis. Upon establishing the 
personal line of credit, the covered borrower borrows $500. The 
creditor charges a periodic rate of 0.006875 (which corresponds to an 
annual rate of 8.25 percent), plus a fee of $25, charged when the 
account is established and annually thereafter. Under these 
circumstances, pursuant to Sec.  1026.14(c)(2) of Regulation Z the 
creditor would calculate the MAPR as follows: ``Dividing the total 
amount of the finance charge for the billing cycle''--which is $3.44 
(corresponding to (0.006875) x ($500)), plus $25--``by the amount of 
the balance to which it is applicable''--$500--and multiplying the 
quotient (expressed as a percentage) by the number of billing cycles in 
a year''--12 (since the creditor allows the borrower to repay monthly), 
which is 68.26 percent. In this example, even though the periodic rate 
(0.006875) would comply with the interest-rate limit under proposed 
Sec.  232.4(b), the resultant MAPR would be in excess of that limit 
because the amount borrowed is low at the time the annual fee is 
imposed. If the covered borrower instead borrows a higher amount, then 
the creditor still could impose the $25 annual fee and comply with 
proposed Sec.  232.4(b); for example, if the amount initially borrowed 
is $1,400, then the resultant MAPR would be 24.73, well below the 36 
percent limit.
    In the case of open-end credit extended through a credit card 
account, a creditor likewise would be required to calculate the MAPR 
using the methods prescribed in Sec.  1026.14(c)-(d) of Regulation Z. 
For example, if a creditor extends credit to a covered borrower through 
a credit card account and the borrower incurs a finance charge relating 
to a specific transaction, such as a cash advance transaction, during 
the billing cycle, then the creditor would calculate the MAPR under the 
instructions set forth in Sec.  1026.14(c)(3) of Regulation Z. However, 
in the case of a credit card account the creditor may exclude, pursuant 
to proposed Sec.  232.4(c)(1)(iii), any bona fide fee (as described in 
proposed Sec.  232.4(d)) from the finance charges that otherwise must 
be accounted for; thus, if a charge for the cash advance transaction 
fits within the exclusion for a bona fide fee under proposed Sec.  
232.4(d), then that charge would not be included when computing the 
MAPR for that billing cycle.
    Under certain circumstances, a creditor might not know at the 
outset of a billing cycle whether the borrower's use of an open-end 
line of credit will lead to a finance charge that--through a 
combination of rates and fees--exceeds the interest-rate limit of the 
MLA. However, at the end of a billing cycle the creditor would be able 
to calculate the total charges included in the MAPR and waive an amount 
necessary to comply with the 36-percent limit of Sec.  232.4(b).
    QUESTION 18: Are there operational issues with the use of the 
effective APR methodology for open-end credit products that the 
Department should consider? If so, are there alternative methods for 
calculating the MAPR for these products that would be consistent with 
10 U.S.C. 987 and that would address the operational issues?
    Proposed Sec.  232.4(c)(2)(ii)(B) generally would prohibit a 
creditor from imposing a charge in an open-end credit plan for any 
billing cycle during which there is no balance. However, this provision 
would include an exception for a participation fee (which otherwise 
would be required to be included under proposed Sec.  
232.4(c)(1)(iii)(B)) because the Department believes that there might 
be circumstances in which a creditor should be allowed to charge a bona 
fide fee for maintaining an open-end line of credit for a covered 
borrower. Still, recognizing that a creditor could structure a high-
cost, open-end line of credit to fit within this exception by 
substantially increasing the participation fee, the Department proposes 
to limit that fee to $100 per annum, regardless of the billing cycle in 
which the participation fee is imposed. The Department believes that 
$100 is the highest reasonable amount that a creditor could charge as a 
bona fide participation fee, during a billing cycle in which there is 
no balance, for the purposes of keeping the line of credit open to the 
covered borrower. Furthermore, proposed Sec.  232.4(c)(2)(ii)(B) would 
contain a provision to clarify that the $100-per annum limitation on 
the amount of the participation fee does not apply to a bona fide 
participation fee charged to a credit card account that would be 
eligible for the exclusion under proposed Sec.  232.4(d). We seek 
comment on whether the limit on a participation fee to $100 per annum 
is reasonable and economically justifiable.
2. Conditional Exclusion From the MAPR for Bona Fide Fees Charged to a 
Credit Card Account
    The Department believes that credit card products may warrant 
special consideration under the MLA. As discussed above, proposed Sec.  
232.4(d) would provide the conditional exclusion, including standards 
relating to the conditions, that allows a creditor to exclude bona fide 
fees charged to a credit card account from the MAPR. The Department 
believes that the proposed conditions for excluding a bona fide fee 
from the MAPR--namely, that the fee must be ``reasonable'' and 
``customary''--would fairly allow Service members and their dependents 
to continue to have access to credit card products and limit the 
opportunity for a creditor to exploit the exclusion for those products.
    However, as set forth in proposed Sec.  232.4(d)(4), a creditor who 
imposes any fee that is not a bona fide fee or that fails to meet the 
conditions of being ``reasonable and customary'' must include the total 
amount of those fees, including any bona fide fees, in the MAPR. Thus, 
if a creditor charges one unreasonable fee or a fee that is not 
customary in a credit card account for a covered borrower, the creditor 
must include the total amount of the fees--including any fee(s) that 
otherwise may be eligible for the exclusion--in the MAPR. As discussed 
above, the ``reasonable and customary'' conditions for a bona fide fee, 
as proposed, are intended to be applied flexibly so that, in general, 
creditors may continue to offer a wide range of credit card products 
that carry reasonable costs expressly tied to specific products or 
services and which vary depending upon the covered borrower's own 
choices regarding the use of the card.

Section 232.5 Identification of Covered Borrowers

    As discussed above and except as provided in Sec.  232.5(c), 
proposed Sec.  232.5 would provide a mechanism for a creditor to 
unilaterally assess the status of a consumer who applies for consumer 
credit if: First, the creditor checks the MLA Database to determine 
that consumer-applicant's status when the creditor enters into a 
transaction or establishes an account for consumer credit; second, the 
consumer-applicant does (or does not) appear in the MLA Database; and, 
third, the creditor retains a record of the information obtained from 
the MLA Database. In addition, proposed Sec.  232.5(a) would expressly 
provide that a creditor is permitted to use other methods, as the 
creditor may elect, to assess whether a consumer is a covered borrower.
    Proposed Sec.  232.5(c)(1) would provide that a creditor who has 
actual knowledge that a consumer is a covered borrower must ``treat the 
consumer as a

[[Page 58620]]

covered borrower notwithstanding any determination by that creditor 
based on information obtained from the [MLA Database].'' The Department 
intends for this exception to the safe harbor in proposed Sec.  
232.5(b) to apply so that a creditor may not take advantage of an 
obvious error in the MLA Database when the creditor knows otherwise, 
and the Department expects these circumstances to be rare.
    Proposed Sec.  232.5(c)(2) would state that ``actual knowledge'' of 
the status of a consumer as a covered borrower may be established 
``only on the basis of a record (including any electronic record) 
collected by the creditor prior to entering into a transaction or 
establishing an account for consumer credit and maintained in any 
system used by the creditor that relates to the consumer credit 
involving that consumer.'' This proposed paragraph (c)(2) is intended 
to provide an evidentiary standard to establish whether a creditor 
might have ``actual knowledge'' with respect to a consumer's status 
relating to a consumer credit transaction or account. Depending on the 
circumstances, actual knowledge may be established based on the 
presence of one or more records maintained in the relevant system the 
creditor uses for the consumer credit transaction or account; under 
proposed Sec.  232.5(c)(2), actual knowledge may not be established 
solely on the basis of other kinds of evidence, such as solely on 
testimony from a borrower that, during the application process, the 
borrower told the creditor's employee that the borrower is a Service 
member on active duty.
    QUESTION 19: What alternatives should the Department consider for 
the evidentiary standard articulated in proposed Sec.  232.5(c)(2)? 
Please provide specific language for provisions that would implement 
these alternatives.

Section 232.6 Mandatory Loan Disclosures

    The Department proposes to amend Sec.  232.6 of the regulation to 
simplify the information that a creditor must provide to a covered 
borrower when issuing consumer credit, consistent with the requirements 
of 10 U.S.C. 987(c). In particular, the Department is proposing, first, 
to eliminate the current requirement for information to be provided 
``clearly and conspicuously'' and, second, to require a creditor to 
provide a ``statement'' of the MAPR that describes the charges the 
creditor may impose, instead of the periodic rate of the MAPR itself 
``and the total amount of all charges included in the MAPR,'' as the 
existing regulation currently requires.
    Proposed Sec.  232.6(a) would require a creditor to provide four 
categories of information to a covered borrower at the time the 
borrower becomes obligated on the transaction or establishes an account 
for the consumer credit. namely:
     A statement of the MAPR applicable to the extension of 
consumer credit;
     Any disclosure required by Regulation Z, which shall be 
provided only in accordance with the requirements of Regulation Z that 
apply to that disclosure;
     A clear description of the payment obligation of the 
covered borrower, as applicable. A payment schedule (in the case of 
closed-end credit) or account-opening disclosure (in the case of open-
end credit) provided pursuant to paragraph (a)(2) of this section 
satisfies this requirement; and
     A statement [describing the protections afforded to 
Service members and their dependents under the MLA].''
1. Clear and Conspicuous Requirement
    The Department's existing regulation requires each of these 
categories of information to be provided ``clearly and conspicuously'' 
to a covered borrower.\145\ There might be some benefits to covered 
borrowers by requiring certain information to be provided in a manner 
that, relative to other terms and conditions relating to the extension 
of or account for consumer credit, makes that information clear and 
conspicuous.\146\ However, nothing in 10 U.S.C. 987(c) requires 
information to be provided ``clearly and conspicuously.'' In addition, 
Regulation Z independently generally requires disclosures regarding the 
costs of credit to be provided ``clearly and conspicuously,'' \147\ and 
requires a creditor to present some types of information in those 
disclosures in certain formats.\148\ The Department believes that--
particularly in light of the proposal to extend the protections of the 
MLA to a broader range of transactions of and accounts for consumer 
credit--a creditor should be relieved from the obligation to present 
the categories of information required under 10 U.S.C. 987(c)(1)(A) and 
987(c)(1)(C) in a manner that is clear and conspicuous. However, the 
Department continues to intend that the information which would be 
required to be provided to a covered borrower must be provided 
consistent with the format and other requirements of Regulation Z.\149\
---------------------------------------------------------------------------

    \145\ 32 CFR 232.6(a).
    \146\ When adopting its rule in 2007, the Department addressed 
the disclosure requirements of Regulation Z, see, e.g., 72 FR at 
50588, but did not address the purposes of imposing a clear-and-
conspicuous requirement under 10 U.S.C. 987(c).
    \147\ 12 CFR 1026.5(a)(1)(i) and 1026.17(a)(1).
    \148\ See, e.g., 12 CFR 1026(a)(3)(iii) (requiring ``[c]ertain 
account-opening disclosures [to] be provided in a tabular format''); 
see also, e.g., 12 CFR 1026.17(a)(1) (prescribing the format of the 
TILA disclosures for closed-end credit transactions to be ``grouped 
together, [and] segregated from everything else'').
    \149\ See 72 FR at 50588. Accordingly, the information required 
under the MLA should not be interspersed with the TILA disclosures.
---------------------------------------------------------------------------

    QUESTION 20: If the Department were to adopt a regulation as 
proposed, to what extent, and in what manner, would the elimination of 
the clear-and-conspicuous requirement affect the presentation of the 
categories of information required under 10 U.S.C. 987(c)(1)(A) and 
987(c)(1)(C)?
2. Statement of the MAPR
    Proposed Sec.  232.6(a)(1) would require a creditor to provide a 
``statement'' of the MAPR, instead of ``[t]he MAPR applicable to the 
extension of consumer credit, and the total dollar amount of all 
charges included in the MAPR,'' as required under Sec.  232.6(a)(1) of 
the existing regulation. When adopting this requirement in 2007, the 
Department recognized that the disclosure of the figures relating to 
the MAPR would apply only to the discrete forms of closed-end credit 
defined as ``consumer credit,'' and therefore interpreted the language 
of 10 U.S.C. 987(c)(1)(A) to require an annual percentage rate of 
interest. Nonetheless, the Department then recognized ``the potential 
confusion inherent in mandating the disclosure of two differing annual 
percentage rates (the MAPR required by [its] regulation and the APR 
required by TILA).'' \150\ The Department now believes that this same 
``potential confusion'' would be significantly magnified in the context 
of a wider range of closed-end and open-end credit products that, under 
this proposal, would be covered under the MLA.
---------------------------------------------------------------------------

    \150\ 72 FR at 50589.
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    Section 987(c)(1)(A) of the MLA does not, by its terms, require the 
disclosure of a particular annual percentage rate or the ``amount of 
all charges'' applicable to the extension of consumer credit. Rather, 
10 U.S.C. 987(c)(1)(A) requires a ``statement of the annual percent 
rate of interest applicable to the extension of credit'' (emphasis 
added), and 10 U.S.C. 987(c)(2) independently requires ``[s]uch 
disclosures [to] be presented in accordance with terms prescribed by 
the regulations . . . to implement the [TILA].'' \151\ Taken singly and 
in

[[Page 58621]]

conjunction with each other, these provisions of Sec.  987(c) 
reasonably should be interpreted as requiring a ``statement'' regarding 
the MAPR and, separately, disclosures regarding the particular costs of 
credit relating to a transaction of or account established for consumer 
credit that are ``in accordance with the terms'' of Regulation Z.
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    \151\ 10 U.S.C. 987(c)(2). As enacted, the MLA refers in this 
section to regulations ``issued by the Board of Governors of the 
Federal Reserve System'' (Board) to implement TILA. Subject to 
certain exceptions, notably under section 1029(c) of the Consumer 
Financial Protection Act of 2010, 12 U.S.C. 5519(c), the Board's 
authorities to prescribe rules implementing the federal consumer 
financial laws have been transferred to the Bureau. 12 U.S.C. 5581. 
Accordingly, the Department now generally looks to the rules 
prescribed by the Bureau implementing TILA, except with respect to 
certain creditors. See proposed Sec.  232.3(p) (describing the 
application of the Board's Regulation Z, 12 CFR part 226, to certain 
creditors).
---------------------------------------------------------------------------

    In addition, section 987(i)(4) of the MLA provides that the term `` 
`annual percentage rate' has the same meaning as in section 107 of 
[TILA], as implemented by regulations of the [Bureau].'' That term also 
includes ``all fees and charges,'' including certain charges that may 
be exempt from the term ``finance charge'' under Regulation Z.\152\ The 
Department believes that, in light of section 987(i)(4) (```annual 
percentage rate' has the same meaning as in section 107 of [TILA], as 
implemented by the [Bureau]''), section 987(c)(1)(A) of the MLA (``A 
statement of the annual percentage rate of interest'') should not be 
interpreted to require a creditor to calculate and disclose to a 
covered borrower a definitive figure for the ``annual percentage rate'' 
of interest applicable to the consumer credit that could include 
additional charges that must be counted as ``interest,'' and thereby 
would be materially different from the figure the creditor is required 
(under section 987(c)(1)(B) of the MLA) to compute and disclose under 
TILA. Instead, the Department believes that the appropriate approach to 
interpret the tension between sections 987(i)(4), 987(c)(1)(A), and 
987(c)(1)(B) is to subject a creditor to one set of requirements for 
calculating and disclosing the costs of the extension of credit, 
namely, the requirements under TILA. One clear and beneficial 
consequence of interpreting these ambiguous provisions of the MLA under 
this approach is that a creditor would not be required to provide to a 
covered borrower two different numerical disclosures, which inevitably 
would lead to confusion.\153\
---------------------------------------------------------------------------

    \152\ See 12 U.S.C. 1026(c).
    \153\ In this regard, the Department also recognizes that many 
creditors likely would adopt disclosures and contract documents that 
would be designed to be provided to both consumers who are not 
entitled to the protections under the MLA and to covered borrowers. 
The Department's proposed interpretation of sections 987(i)(4), 
987(c)(1)(A), and 987(c)(1)(B) of the MLA, which would require a 
creditor to provide the cost disclosures only required by TILA, 
would reduce the general confusion to non-covered borrowers 
assessing the costs of credit products that are not covered by the 
MLA.
---------------------------------------------------------------------------

    In light of the scope of the proposed definition of consumer 
credit, which would encompass open-end credit products, the Department 
proposes to exercise its discretion under the MLA \154\ to interpret 10 
U.S.C. 987(c)(1)(A) more straightforwardly to require, in Sec.  
232.6(c), a creditor to provide a description of ``the charges the 
creditor may impose, in accordance with this part and subject to the 
terms and conditions of the agreement relating to the consumer credit 
to calculate the MAPR.'' This proposed section also would clarify that 
a creditor would not be required to ``describe the MAPR as a numerical 
value or to describe the total dollar amount of all charges in the MAPR 
that apply to the extension of consumer credit.'' The Department 
believes that the disclosure of the items relating to the costs of 
consumer credit (e.g., a periodic rate and other finance charges) that 
apply to a particular transaction or account, including the format of 
those items, should be governed under Regulation Z, consistent with the 
provisions of 10 U.S.C. 987(c)(1)(B) and 987(c)(2). Accordingly, under 
the Department's proposal, a creditor should be able to streamline its 
compliance with these requirements under 10 U.S.C. 987(c) by providing 
to a covered borrower the same disclosures the creditor must (in any 
event) provide to a consumer under Regulation Z, plus a statement of 
the MAPR. In order to facilitate compliance with that latter 
requirement, proposed Sec.  232.6(c)(3) provides a model statement that 
a creditor could use.
---------------------------------------------------------------------------

    \154\ 10 U.S.C. 987(h)(1) (authorizing the Department to 
prescribe regulations to carry out the MLA); 10 U.S.C. 987(h)(2)(A) 
(authorizing the Department to prescribe regulations establishing 
``[d]isclosures required of any creditor that extends consumer 
credit to a [covered borrower]'').
---------------------------------------------------------------------------

    Proposed Sec.  232.6(c)(2) provides that a creditor may include a 
statement of the MAPR in its agreement with the covered borrower for 
the transaction of or account established for consumer credit. 
Consistent with the Department's interpretation of its existing 
regulation,\155\ proposed Sec.  232.6(c)(2) would expressly provide 
that the statement of the MAPR is not required in any advertisement 
relating to consumer credit.
---------------------------------------------------------------------------

    \155\ 72 at 50589.
---------------------------------------------------------------------------

    QUESTION 21: If the Department were to adopt a regulation as 
proposed, to what extent, and in what manner, would the requirement to 
provide a description of ``the charges the creditor may impose, in 
accordance with this part and subject to the terms and conditions of 
the agreement relating to the consumer credit to calculate the MAPR,'' 
instead of a definitive figure for the ``annual percentage rate'' of 
interest applicable to the consumer credit, affect the offering or 
provision of that credit to a covered borrower?
3. One-Time Delivery of Information; Methods of Delivery; Refinancing a 
Covered Loan
    Proposed Sec.  232.6(b) would establish rules relating to 
transactions involving a creditor and assignee or multiple creditors. 
More specifically, proposed Sec.  232.6(b)(1) would provide that the 
information required under the MLA is ``not required to be provided to 
a covered borrower more than once for the transaction or the account 
established for consumer credit with respect to that borrower.'' 
(However, the disclosures required by Regulation Z, described in 
proposed Sec.  232.6(a)(2), would remain subject to Regulation Z, and 
not the one-time delivery provision in proposed Sec.  232.6(b)(1).) 
Proposed Sec.  232.6(b)(2) would require multiple creditors to agree 
among themselves as to how to provide the information required under 
the MLA.
    Proposed Sec.  232.6(d) would establish rules relating to the 
methods of delivery, which are substantively similar to the rules under 
the existing regulation. Under proposed Sec.  232.6(d)(1), a creditor 
would be required to provide the information required under the MLA 
``in writing in a form the covered borrower can keep.'' And under 
proposed Sec.  232.6(d)(2), consistent with the structure and intent of 
the existing regulation,\156\ a creditor would be required to orally 
provide the information required under the MLA, or provide a method for 
the covered borrower to obtain oral disclosures when the borrower 
engages in a mail transaction, an internet transaction, or a credit 
transaction conducted at the point-of-sale in connection with the sale 
of a nonfinancial product or service. In this regard, the Department 
recognizes that its proposal to extend the scope of consumer credit to 
apply to a broader range of closed-end and open-end credit products 
would encompass credit offered at retail locations for nonfinancial 
products or services; similar to the treatment of a mail or internet 
transaction under the existing

[[Page 58622]]

regulation, the Department believes that, because a creditor is not 
present to interact orally with a covered borrower, the creditor should 
be permitted to provide a toll-free telephone number on or with the 
written disclosures so that the borrower may obtain the oral 
disclosures when obtaining consumer credit at the point-of-sale for a 
nonfinancial product or service.
---------------------------------------------------------------------------

    \156\ See 10 U.S.C. 987(c)(1) (requiring information to be 
provided ``orally'').
---------------------------------------------------------------------------

    Proposed Sec.  232.6(e) would keep intact the current provision, 
currently found in Sec.  232.6(c) of the Department's regulation, that 
requires ``a new statement''--to correspond with the statement of the 
MAPR under proposed Sec.  232.6(a)(1)--and ``disclosures under this 
section only when the transaction for that credit would be considered a 
new transaction that requires disclosures under Regulation Z.''
4. Proposal To Eliminate Disclosure Under Sec.  232.6(a)(4)
    Under the Department's existing regulation (as well as this 
proposed regulation), Sec.  232.6(a)(4) requires a creditor to provide 
to a covered borrower a specific statement regarding protections for 
Service members and their dependents under Federal law and resources 
that may be available to assist them with financial matters 
(``Statement of Federal Protections''). Consistent with the 
Department's stance when proposing its initial regulation in 2007,\157\ 
the Department intends to develop this regulation so that its 
provisions are true to the intent of the MLA without creating a system 
that is so burdensome that the creditor cannot comply. If the 
Department were to adopt in the final rule the provisions relating to 
the statement of the MAPR, including the model statement set forth in 
proposed Sec.  232.6(c)(3), and maintain the general statement 
regarding the protections under the MLA, under Sec.  232.6(a)(4), a 
creditor effectively would be required to provide two, potentially 
overlapping items of information before or at the time the covered 
borrower becomes obligated on the transaction or establishes an account 
for the consumer credit. The Department recognizes that, whereas a 
``statement'' of the MAPR is required by 10 U.S.C. 987(c)(1)(A), the 
Statement of Federal Protections under Sec.  232.6(a)(4) is solely a 
function of the Department's discretion to require a creditor to 
provide certain disclosures.\158\ In light of other aspects of the 
Department's proposal, the Department is concerned that these two, 
potentially duplicative disclosure requirements could create a system 
that would be relatively burdensome for a creditor to comply with. The 
Department recognizes the need to consider balancing Service members' 
and their dependents' interests in receiving useful information with 
creditors' compliance burdens; thus, the Department could take certain 
steps to reduce the overall amount of and simplify the information 
relating to extensions of consumer credit. Accordingly, the Department 
is considering whether to eliminate Sec.  232.6(a)(4) that requires a 
creditor to provide the Statement of Federal Protections.
---------------------------------------------------------------------------

    \157\ When proposing its initial regulation in April 2007, the 
Department addressed the disclosure requirements under Sec.  
232.6(a) and stated: ``As with other aspects of the statute, the 
Department's intention has been to develop a regulation that is true 
to the intent of the statute without creating a system that is so 
burdensome that the creditor cannot comply.'' 72 FR at 18165.
    \158\ 10 U.S.C. 987(h)(2)(A).
---------------------------------------------------------------------------

    QUESTION 22: Please specifically describe the benefits currently 
provided to a covered borrower by requiring a creditor to provide a 
specific statement describing the protections afforded to Service 
members and their dependents under the MLA, as set forth in Sec.  
232.6(a)(4). What would be the likely costs or benefits of eliminating 
the requirement in Sec.  232.6(a)(4) to provide this specific 
statement?
    QUESTION 23: The Department solicits comment on whether the 
proposal adequately addresses compliance challenges involving the 
provision of oral disclosures required by the MLA. The Department 
invites comment on alternatives that would balance the informational 
needs of covered borrowers with the compliance burden of creditors.

Section 232.7 Preemption

    Proposed Sec.  232.7 would revise the corresponding section of the 
Department's existing regulation to reflect amendments to 10 U.S.C. 
987(d)(2) enacted in section 661(a)(1) of the 2013 Act. In particular, 
Sec.  232.7(b)(1) would be amended to reflect the prohibition against a 
state to authorize creditors to charge covered borrowers rates of 
interest for ``any consumer credit or loans'' that are higher than the 
legal limit for residents of the state (emphasis added). To mirror the 
language in 10 U.S.C. 987(d)(2), proposed Sec.  232.7(b)(1) also would 
revise the term ``rates of interest'' to ``annual percentage rates of 
interest.'' Additionally, Sec.  232.7(b)(2) would be amended to clarify 
that the prohibition against a state to permit a violation or waiver of 
any state law protections on the basis of a covered borrower's 
nonresident or military status to protections ``covering consumer 
credit,'' consistent with the amendment in section 661(a)(2) of the 
2013 Act.

Section 232.8 Limitations

    When the Department adopted its initial regulation in 2007, Sec.  
232.8(a) provided an exception from the prohibition, set forth in 10 
U.S.C. 987(e)(1), against rolling over, renewing, or refinancing 
consumer credit that had been extended to a covered borrower by the 
same creditor. The exception allows the same creditor to renew or 
refinance consumer credit to the covered borrower if ``the new 
transaction results in more favorable terms to the covered borrower, 
such as a lower MAPR.'' \159\ Commenters on the Department's initial 
proposal expressed concerns that the more-favorable-terms standard was 
``too subjective and would create uncertainty about what terms are 
`more beneficial,' '' and ``suggested that financial institutions might 
err on the side of caution and forego entering transactions that could 
benefit the borrower in order to avoid any potential liability.'' \160\ 
Whereas the existing exception had been adopted in the context of a 
narrow band of products within the three categories initially defined 
as consumer credit, this proposal to extend the scope of consumer 
credit increases the potential risks associated with any perceived 
ambiguity in the more-favorable-terms standard.
---------------------------------------------------------------------------

    \159\ 32 CFR 232.8(a)(1).
    \160\ 72 FR at 50589.
---------------------------------------------------------------------------

    Proposed Sec.  232.8(a) would track the language of the refinancing 
prohibition of 10 U.S.C. 987(e)(1),\161\ but would limit the 
application of that prohibition to a relatively narrow group of 
creditors. More specifically, the Department would exercise its 
discretion to define a creditor for the purposes of 10 U.S.C. 987 \162\ 
by defining--only for the purposes of Sec.  232.8(a)--the term 
``creditor'' to mean ``a person engaged in the business of extending 
consumer credit subject to applicable law to engage in deferred 
presentment transactions or similar payday loan transactions (as 
described in the

[[Page 58623]]

relevant law), provided however, that the term does not include a 
person that is chartered or licensed under Federal or State law as a 
bank, savings association, or credit union.'' Restricting the 
application of the refinancing prohibition to creditors who are engaged 
in the business of ``deferred presentment transactions or similar 
payday loan transactions (as described in the relevant law)'' would be 
consistent with the structure, language, and intent of the prohibition, 
which is designed to apply to a creditor who rolls over, renews, 
repays, refinances, or consolidates consumer credit that the creditor 
itself already extended to a covered borrower, thereby ensnaring the 
borrower in the debt trap that the Department described in its 2006 
Report.\163\ The Department believes that payday lenders commonly 
engage in these transactions. Moreover, the Department believes that 
restricting the application of the refinancing prohibition to that 
specified class of creditors would permit most creditors, including a 
wide range of banks, thrifts, and credit unions, to offer beneficial 
forms of consumer credit, such as workout loans and other favorable 
refinancing transactions, to their covered-borrower customers.
---------------------------------------------------------------------------

    \161\ In addition, the Department proposes to substantially 
preserve the provision which currently states: ``This part shall not 
apply to a transaction permitted by this paragraph when the same 
creditor extends consumer credit to a covered borrower to refinance 
or renew an extension of credit that was not covered by this part 
because the consumer was not a covered borrower at the time of the 
original transaction.''
    \162\ 10 U.S.C. 987(h)(1) (authorizing the Department to 
prescribe regulations to carry out the MLA); 10 U.S.C. 
987(i)(5)(A)(ii) (authorizing the Department to establish 
``additional criteria [for the definition of creditor] as are 
specified for such purpose in regulations prescribed under [the 
MLA]'').
    \163\ See 2006 Report, at 14. See also Consumer Financial 
Protection Bureau, Payday Loans and Deposit Advance Products 24-25 
(April 2013), available at http://files.consumerfinance.gov/f/
201304cfpbpayday-dap-whitepaper.pdf (discussing 
the sustained use of payday loans, and stating that for consumers 
who conducted at least seven payday loan transactions in a year, the 
majority of those transactions ``were taken on a nearly continuous 
basis.'').
---------------------------------------------------------------------------

    Proposed Sec.  232.8(e) generally would track the language of Sec.  
232.8(a)(5) of the existing regulation.
    Proposed Sec.  232.8(f) would track the language of the prohibition 
of 10 U.S.C. 987(e)(6), but would provide an exemption for a unique 
class of creditors. More specifically, the Department would exercise 
its discretion to define a creditor for the purposes of 10 U.S.C. 987 
\164\ by excluding--only for the purposes of Sec.  232.8(f)--from the 
term ``creditor'' military welfare societies and the service relief 
societies, as described in 10 U.S.C. 1033(b)(2) and 37 U.S.C. 
1007(h)(4) and: Army Emergency Relief, the Air Force Aid Society, the 
Navy-Marine Corps Relief Society, and the Coast Guard Mutual 
Assistance. Federal law provides that a loan to a Service member from 
one of these specified Relief Societies may be repaid through 
deductions from the pay of the borrowing Service member.\165\
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    \164\ 10 U.S.C. 987(h)(1) (authorizing the Department to 
prescribe regulations to carry out the MLA); 10 U.S.C. 
987(i)(5)(A)(ii) (authorizing the Department to establish 
``additional criteria [for the definition of creditor] as are 
specified for such purpose in regulations prescribed under [the 
MLA]'').
    \165\ 37 U.S.C. 1007(h).
---------------------------------------------------------------------------

    In the Department's experience, the specified Relief Societies 
provide essential emergency financial assistance to Service members. 
The specified Relief Societies make low- and no-cost loans, as well as 
grants, to Service members repayable through an allotment of military 
pay.\166\ Recognizing the unique and important role of the specified 
Relief Societies, and the long history of the specified Relief 
Societies in supporting the welfare of Service members and their 
families, the Department encourages Service members facing financial 
need to utilize the services provided by the specified Relief 
Societies.
---------------------------------------------------------------------------

    \166\ See Army Emergency Relief: http://www.aerhq.org/dnn563/Portals/0/AERAnnualReport2012.pdf, ``[i]n 2012, AER provided more 
than $68.6 million in no-interest loans and grants to 55,342 
Soldiers and Families and their Families;'' Air Force Aid Society: 
http://www.afas.org/file/documents/2012-Annual-Report.pdf, ``2012 
direct assistance totaled nearly $18 million, and includes more than 
40,000 assists to Airmen and their families;'' Navy-Marine Corps 
Relief Society http://b.3cdn.net/nmcrs/
45f955f5204f8ca1dfmlbruu7ib.pdf, ``FY12 63,392 Clients 
received financial assistance, $41.8 million;'' Coast Guard Mutual 
Aid: http://www.cgmahq.org/Financial/AnnualReports/2012.pdf, 
``[o]verall in 2012, CGMA distributed more than $4.27 million in 
direct financial assistance to over 5,900 Coast Guard individuals 
and their families.''
---------------------------------------------------------------------------

    In light of the specialized operations of each of the specified 
Relief Societies, which currently depend crucially on the use of an 
allotment from a Service-member borrower's pay, and consistent with the 
Department's regulations on deductions from pay under 37 U.S.C. 1007, 
the Department proposes to exclude the Relief Societies specified in 10 
U.S.C. 1033(b)(2) and 37 U.S.C. 1007(h)(4) from the definition of 
``creditor'' only for the purposes of the prohibition in Sec.  
232.8(f).
    In all other respects, proposed Sec.  232.8 would substantially 
preserve the language of the existing provisions of Sec.  232.8. 
However, the Department proposes to amend the structure of Sec.  232.8 
by eliminating subsection Sec.  232.8(b) (and make other conforming 
amendments) because the definition of ``creditor,'' in proposed Sec.  
232.3(i)(2), would include an assignee of a covered creditor.
    QUESTION 24: What would be the likely costs or benefits of revising 
the refinancing prohibition in 10 U.S.C. 987(e)(1) to apply only to a 
specific type of creditor who is ``engaged in the business of extending 
consumer credit subject to applicable law to engage in deferred 
presentment transactions or similar payday loan transactions (as 
described in the relevant law),'' and to not include a creditor that is 
``chartered or licensed under Federal or State law as a bank, savings 
association, or credit union?''
    QUESTION 25: What would be the likely costs or benefits of amending 
the prohibition in 10 U.S.C. 987(e)(5) to apply to creditors other than 
a creditor who is ``chartered or licensed under Federal or State law as 
a bank, savings association, or credit union?''
    QUESTION 26: Should the Department consider a broader exemption 
from the term ``creditor'' for the military welfare societies and the 
service Relief Societies specified in 10 U.S.C. 1033(b)(2) and 37 
U.S.C. 1007(h)(4)?

Section 232.9 Penalties and Remedies

    Proposed Sec.  232.9(a)-(d) would preserve the language of those 
provisions of the existing regulation. The Department proposes to add a 
new Sec.  232.9(e) to reflect (with conforming changes to the language) 
the civil-liability provisions of the MLA enacted in section 662(a) of 
the 2013 Act.

Section 232.10 Administrative Enforcement

    The Department proposes to add a new Sec.  232.10 to reflect (with 
conforming changes to the language) the administrative-enforcement 
provisions of the MLA enacted in section 662(b) of the 2013 Act.

Section 232.11 Servicemembers Civil Relief Act Provisions Unaffected

    As a consequence of adding a new section for the administrative-
enforcement provisions, the existing Sec.  232.10 would be re-numbered 
to Sec.  232.11, without any change to the language of that section.

Section 232.12 Effective Dates

    The Department proposes to amend the section relating to the 
effective dates of the regulation, now Sec.  232.12, particularly to 
reflect the effective dates of amendments to the MLA enacted in the 
2013 Act.
    Proposed Sec.  232.12(a) would amend the language of Sec.  232.11 
of the existing regulation to reflect the amendments that would be 
adopted in the Department's forthcoming final rule. Consistent with the 
current Sec.  232.11, consumer credit extended to a covered borrower 
any time on or after October 1, 2007, and up to the effective date of 
the Department's forthcoming final rule

[[Page 58624]]

would be subject to the requirements of the Department's existing rule.
    Proposed Sec.  232.12(b) generally would apply the requirements of 
the Department's forthcoming final rule only to new transactions or 
accounts involving consumer credit that are consummated or established 
after the effective date of the final rule. The Department believes 
that this provision would be equitable, particularly to avoid the 
potential injustice and operational difficulties that could arise if 
new requirements under the amended regulation were to apply to pre-
existing transactions or accounts involving consumer credit to covered 
borrowers. However, proposed Sec.  232.12(b) would provide exceptions 
to allow certain provisions of Sec.  232.7(b) and Sec.  232.9(e), as 
discussed below, to become effective prior to the effective date of the 
Department's forthcoming final rule.
    Proposed Sec.  232.12(c) would provide that ``the amendments to 10 
U.S.C. 987(d)(2) enacted in section 661(a) of the National Defense 
Authorization Act for Fiscal Year 2013 (Pub. L. 112-239, 126 Stat. 
1785), as reflected in Sec.  232.7(b), shall take effect on January 2, 
2014.'' Section 661(c)(2)(A) of the 2013 Act provides, in relevant 
part, that the amendments enacted in section 661(a) of that Act shall 
take effect on ``the date that is one year after the date of enactment 
of this Act.'' \167\ As a result, only the amendments made in Sec.  
232.7(b)(1)--adding the phrase ``any consumer credit'' before 
``loans''--and Sec.  232.7(b)(2)--adding the phrase ``covering consumer 
credit'' after ``State consumer lending protections''--would be 
effective on January 2, 2014.
---------------------------------------------------------------------------

    \167\ 10 U.S.C. 987 note.
---------------------------------------------------------------------------

    Proposed Sec.  232.12(d) would provide that civil-liability 
provisions adopted in Sec.  232.9(e) ``shall apply with respect to 
consumer credit extended on or after January 2, 2013.'' This subsection 
reflects the effective date, established in section 662(c) of the 2013 
Act, of the civil-liability provisions enacted in section 662(a) of 
that Act.

V. Regulatory Analyses

A. Analysis Under Executive Orders 12866 and 13563

    In accordance with the requirements of Executive Orders 12866 \168\ 
and 13563 \169\ (``EO 12866'' and ``EO 13563''), the Department has 
assessed the expected costs associated with the proposal to amend its 
regulation to extend the protections of 10 U.S.C. 987 to a broader 
range of closed-end and open-end credit products offered or extended to 
covered borrowers. In addition, the Department has provided a 
sensitivity analysis that examines potential benefits.
---------------------------------------------------------------------------

    \168\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 
1993).
    \169\ Improving Regulation and Regulatory Review, 76 FR 3821 
(Jan. 21, 2011).
---------------------------------------------------------------------------

1. Executive Summary
    EO 12866 and EO 13563 direct executive agencies, including the 
Department, to assess the anticipated present and future benefits and 
costs of available regulatory alternatives--including both quantitative 
measures and qualitative measures--using the best available techniques. 
A determination has been made that this proposed regulation is a 
significant regulatory action, as defined in EO 12866 and as 
supplemented by EO 13563, in that this regulation, if adopted as 
proposed, might have an annual effect on the economy of $100 million or 
more. Accordingly, this proposed regulation has been reviewed by the 
Office of Management and Budget (``OMB''). The regulatory impact 
assessment prepared by the Department for this proposed regulation is 
provided below.
    The Department anticipates that its regulation, if adopted as 
proposed, might impose costs of approximately $96 million during the 
first year, as creditors adapt their systems to comply with the 
requirements of the MLA and the Department's regulation. After the 
first year and on an ongoing basis, the annual cost to the economy is 
expected to be approximately $20 million. The Department provides a 
sensitivity analysis examining scenarios in which the proposed rule 
would, if adopted, reduce the incidence of involuntary separation of 
Service members due to financial distress; the benefits under these 
scenarios range from $13 million to $137 million annually.
    The MLA, as implemented by the Department's regulation as well as 
under this proposed regulation, provides two broad classes of 
requirements applicable to a creditor: first, the creditor may not 
impose an MAPR greater than 36 percent in connection with an extension 
of consumer credit to a covered borrower (``interest-rate limit''); 
second, when extending consumer credit, the creditor must satisfy 
certain other terms and conditions, such as providing certain 
information (e.g., a statement of the MAPR), both orally and in a form 
the borrower can keep, before or at the time the borrower becomes 
obligated on the transaction or establishes the account, by refraining 
from requiring the borrower to submit to arbitration in the case of a 
dispute involving the consumer credit, and by refraining from charging 
a penalty fee if the borrower prepays all or part of the consumer 
credit (collectively, ``other MLA conditions'').
    The interest-rate limit results in a transfer payment because the 
amount of interest revenue to be foregone by a creditor--that is, the 
amount of interest revenue that a creditor otherwise could receive by 
imposing an MAPR of greater than 36 percent--necessarily corresponds to 
the amount saved by the covered borrower.
    The Department recognizes that the other MLA conditions of the 
proposed regulation could lead to various types of compliance costs for 
creditors, and the estimated cumulative amount of those quantified 
costs on an ongoing, annual basis is approximately $20 million. The 
other MLA conditions are anticipated to impose direct financial costs 
on a creditor that are not reasonably expected to be offset by any 
quantifiable, financial benefit to a covered borrower. For example, the 
Department believes that, for the purposes of conducting this 
assessment under EO 12866 and EO 13563, the estimated costs on 
creditors associated with the requirement to provide to covered 
borrowers a statement of the MAPR is not offset by any financial 
benefit to the borrowers, even though borrowers generally do obtain 
some non-quantifiable benefits from receiving the statement. Similarly, 
the Department expects that creditors will face compliance costs when 
using the Department's MLA Database to assess whether consumer-
applicants are covered borrowers and maintaining records of that 
information, as provided in proposed Sec.  232.5(b), and consumers 
reasonably can be assumed to be indifferent to the functions associated 
with conducting covered-borrower checks through the MLA Database and 
not receive any readily quantifiable, financial benefits thereof. The 
Department believes, as discussed above in section III.C., there are 
benefits to a system for conducting a covered-borrower check that 
minimizes, or eliminates, the opportunity for a covered borrower to 
make a false statement regarding his or her status when applying for 
consumer credit. Likewise, the Department recognizes that the proposal 
could impose certain types of costs on covered borrowers, including a 
potential reduction in access to available credit. Nevertheless, as 
discussed above in section II.E., 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

[[Page 58625]]

likely not to need high-cost loans to fulfill their credit needs.
    The scenario analysis that examines the potential benefit of the 
Department's proposal are the savings attributable to lower recruiting 
and training expenses associated with the reduction in involuntary 
separation of Service members due to financial distress. Each 
separation of a Service member is estimated to cost the Department 
$57,333, and the Department estimates that each year approximately 
4,703 to 7,957 Service members are involuntarily separated due to 
financial distress. If the Department's proposed regulation could 
reduce the annual number of involuntary separations due to financial 
distress from between five to 30 percent, the savings to the Department 
are expected to be in the range of approximately $13.47 million to 
$136.85 million each year.
    Figure 1 (which also appears in the Executive Summary, in section 
I.C.) provides a summary of the anticipated benefits and (costs) of the 
Department's proposed regulation,\170\ and the estimates are provided 
for the first year, on an annual (ongoing basis), and for a ten-year 
period, applying discount rates of both 7 percent and 3 percent, 
consistent with guidance issued by OMB.\171\ Nevertheless, the 
Department has assessed the amounts of value that potentially may be 
involved in the transfer payments due to the interest-rate limit, and 
those amounts are summarized in Figure 2.
---------------------------------------------------------------------------

    \170\ For the sake of brevity and clarity, the estimated savings 
to creditors, as discussed below, are not included in the 
computations represented in Figure 1.
    \171\ See OMB Circular A-4 (Regulatory Planning and Review), at 
31-34 (recommending, for regulatory analysis, providing estimates of 
net benefits using discount rates of both 3 percent and 7 percent), 
available at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf.

                             Figure 1--Summary of Estimated Effects of Proposed Rule
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                      Annual,     PV 10-year, 7%  PV 10-year, 3%
                                                    First year        ongoing      discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Sensitivity Analysis:
    Benefits to the Department  Low.............              $0             $13             $96            $128
                                High............               0             137             970           1,304
Primary Analysis:
    Costs to Creditors of       ................              96              20             144             194
     Compliance.
Primary Analysis:
    Transfer Payments.........  Low.............              NA             101             717             958
                                High............              NA             120             856           1,139
----------------------------------------------------------------------------------------------------------------


                     Figure 2--Estimated Value of Transfer Payments Under the Proposed Rule
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                      Annual,       10-year, 7%     10-year, 3%
                                                                      ongoing      discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Transfer Payments:
    Low.........................................................            $101            $716            $957
    High........................................................             120             856           1,139
----------------------------------------------------------------------------------------------------------------

2. Need for the Regulation and Consideration of Alternatives
    The Department is proposing to amend its existing regulation 
primarily for the purpose of extending the protections of 10 U.S.C. 987 
to a broader range of closed-end and open-end credit products, rather 
than the limited credit products currently defined as consumer credit. 
More specifically, as discussed above, the Department proposes to amend 
its regulation so that, in general, consumer credit covered under the 
MLA \172\ would be defined consistently with credit that for decades 
has been subject to the protections under TILA, namely: credit offered 
or extended to a covered borrower primarily for personal, family, or 
household purposes, and that is (i) subject to a finance charge or (ii) 
payable by a written agreement in more than four installments.\173\
---------------------------------------------------------------------------

    \172\ The forms of ``consumer credit'' that may be covered by 
the MLA are subject to certain exceptions, notably for a residential 
mortgage. 10 U.S.C. 987(i)(6)(A) and 987(i)(6)(B).
    \173\ See 12 CFR 1026.1(c)(1)(iii) (limiting the coverage of the 
regulation, in relevant part, to credit that is subject to a finance 
charge or is payable by a written agreement in more than four 
installments).
---------------------------------------------------------------------------

    In developing this proposal, the Department has consulted with the 
Federal Agencies (pursuant to 10 U.S.C. 987(h)(3)), and in the course 
of that process has considered a range of alternatives to the 
provisions contained in this proposal. For example, as discussed above 
in section III.B., in developing the provisions for the conditional 
exclusion for credit card accounts, the Department has considered 
proposing a complete exemption from the definition of ``consumer 
credit'' for credit extended to a covered borrower under a credit card 
account. The Department similarly has considered whether exclusions 
from the MAPR for certain types of fees, such as an application fee or 
participation fee, should be proposed for credit card accounts in order 
to preserve current levels of access to those products for Service 
members and their dependents. The Department also has considered 
alternative mechanisms and thresholds for the provision in proposed 
Sec.  232.4(d)(3)(ii) would set a threshold of $3 billion in 
outstanding credit card loans on U.S. credit card accounts held by a 
credit card issuer in order for that issuer's fees to be eligible for 
inclusion in an average calculated for the purposes of compliance with 
the ``reasonable'' condition of Sec.  232.4(d)(1).
    Similarly, in developing the provisions relating to a creditor's 
assessment of a covered borrower, the Department has considered 
alternatives to the creditor's use of the MLA Database in order to 
obtain the benefit

[[Page 58626]]

of a safe harbor under proposed Sec.  232.5(b)(2). In this regard, the 
Department has considered whether to retain a safe harbor for a 
creditor's use of the covered borrower identification statement, and 
explicitly seeks comment on that alternative.\174\ Likewise, the 
Department has considered alternative provisions relating to a 
creditor's use of the MLA Database via commercial information-services 
providers, such as consumer reporting agencies, and seeks comment on 
that approach.\175\
---------------------------------------------------------------------------

    \174\ See section III.C., question 13.
    \175\ See section III.C., question 11.
---------------------------------------------------------------------------

    In light of the data and other information available to the 
Department at this time, the Department has considered alternative 
approaches to the provisions of the proposal and, as appropriate, 
explicitly solicits comments on the alternatives the Department should 
consider.\176\
---------------------------------------------------------------------------

    \176\ See, e.g., section III.B., question 10.
---------------------------------------------------------------------------

    After observing the effects of its existing regulation during the 
past six years and based on its review of information provided by a 
wide variety of persons and entities, the Department believes that this 
proposal to amend the regulation is appropriate in order to address a 
wider range of credit products that currently fall outside the scope of 
the MLA, streamline the information that a creditor would be required 
to provide to a covered borrower when consummating a transaction 
involving consumer credit, and provide a more straightforward mechanism 
for a creditor to conclusively assess whether a consumer-applicant is a 
covered borrower. In this regard, as discussed above in section III.C., 
the Department is aware of misuses of the covered borrower 
identification statement whereby a Service member (or covered 
dependent) falsely declares that he or she is not a covered borrower. 
The Department believes that, if a creditor unilaterally conducts a 
covered-borrower check by using the MLA Database, a Service member or 
his or her dependent would be relieved from making any statement 
regarding his or her status as a covered borrower.
3. Estimate of Anticipated Costs Associated With Other MLA Conditions
    The other MLA conditions that would apply to creditors who offer 
consumer credit products that would be subject to the proposed 
regulation might present several types of compliance costs to those 
creditors. For example, if a creditor extends consumer credit to a 
covered borrower only in the form of a credit card product (and who 
thus currently is not subject to the MLA), the creditor might encounter 
various costs associated with complying with requirements for: 
adjustment of computer systems and software to provide for calculation 
of the MAPR (pursuant to Sec.  232.4(b)); the use of the MLA Database 
and the retention of records relating to its covered-borrower 
determinations (under proposed Sec.  232.5(b)); the mandatory loan 
disclosures (under proposed Sec.  232.6); and each of the statutory 
limitations applicable to consumer credit (under proposed Sec.  232.8).
    The Department believes that some of the compliance costs due to 
the other MLA conditions are not material to the quantifiable aspects 
of this regulatory impact assessment because some costs are minimal 
(relative to the creditor's other compliance costs or the creditor's 
overall costs of operations when providing consumer credit) or not 
amenable to measurement.\177\ Accordingly, for the purposes of this 
regulatory impact assessment, the Department has focused its 
quantitative assessment of costs on two areas that, based on the 
Department's experience, are reasonably likely to impose costs: First, 
the disclosures required by the MLA to be provided by a creditor to a 
covered borrower (under proposed Sec.  232.6); and, second, the use of 
the MLA Database and the retention of records for covered-borrower 
determinations (under proposed Sec.  232.5(b)). In addition, for the 
purposes of this regulatory impact assessment, the Department addresses 
the potential costs associated with the prohibition against requiring a 
covered borrower to submit to arbitration in the case of a dispute 
involving an extension of consumer credit (under proposed Sec.  
232.8(c)).
---------------------------------------------------------------------------

    \177\ For example, the Department believes that the costs 
associated with the prohibition against requiring a covered borrower 
to waive his or her rights under any otherwise applicable provision 
of law (as provided in proposed Sec.  232.8(b)) is not material to 
this regulatory impact assessment because the potential costs of 
this prohibition are negligible. Moreover, there is no reasonable 
basis for the Department to estimate the potential costs associated 
with this prohibition, in part because the Department believes so 
few--if any--creditors currently require, as part of their standard 
agreements in credit products, a consumer to waive rights under 
applicable provisions of State or Federal law.
---------------------------------------------------------------------------

    The Department recognizes that this assessment does not capture all 
possible compliance costs associated with the proposed regulation. 
Indeed, the Department anticipates that a creditor who chooses to 
extend credit with a cost that may exceed the interest-rate limit or 
implicate the limitations in proposed Sec.  232.8 might need to adjust 
its computer and software systems to calculate the MAPR, develop new 
policies and procedures, and train staff on new procedures for 
identifying covered borrowers and taking advantage of the proposed safe 
harbor under proposed Sec.  232.5. Further, creditors likely would 
select different techniques for meeting compliance obligations under 
the proposal. The cost burden on each creditor could vary depending on 
the business decisions made by that creditor. Acknowledging the limits 
of the assessment and pursuant to the directive of EO 12866 and EO 
13563, the Department has sought to quantify the important potential 
costs of the proposal and to identify important non-quantified 
potential costs and benefits.\178\
---------------------------------------------------------------------------

    \178\ In considering the costs associated with updating computer 
programs, the Department relies on analysis from the Government 
Accountability Office (GAO) examining the costs of implementing 
changes to minimum payment disclosures for credit card accounts. 
There, GAO found that credit card issuers were unable to provide 
precise estimates of, among others, the cost of computer programming 
to provide the revised disclosures. GAO found that estimates of the 
computer programming cost varied widely, from $5,000 to $1 million. 
For large issuers, GAO concluded that these one-time costs would be 
very small when compared with large issuers' net income. For smaller 
issuers, GAO concluded that work to implement changes would be done 
largely by third-party processors, accustomed to reprogramming 
required to managing cardholder data and processing billing 
statements. U.S. Gov't Accountability Office, GAO-06-434, Credit 
Cards: Customized Minimum Payment Disclosures Would Provide More 
Information to Consumers, but Impact Could Vary (April 2006).
---------------------------------------------------------------------------

    As the Department assesses whether to amend its regulation, as 
proposed, the Department will further consider the potential benefits 
and costs of extending the protections of the MLA to a broader range of 
closed-end and open-end credit products. There are several areas where 
additional information could assist the Department in better estimating 
the potential benefits, costs, and effects of amending its regulation. 
The Department requests interested parties to provide specific data 
relating to the benefits and costs of amending the regulation, as 
proposed, including costs to implement measures to adjust computer 
systems and to train personnel. The Department seeks comments on 
whether all anticipated costs have been adequately captured in the 
analysis. Please provide information on the type of costs and the 
magnitude of costs by providing relevant data and studies.
    Disclosures. Under the Department's existing regulation (``status 
quo alternative''), a creditor who extends to a covered borrower one or 
more of the three consumer credit products covered by the regulation 
must ``clearly and conspicuously'' disclose: (i) A

[[Page 58627]]

numerical value for the MAPR applicable to the extension of credit, 
including the total dollar amount of all charges included in the MAPR; 
(ii) any disclosures required by Regulation Z; (iii) a clear 
description of the payment obligation (which may be satisfied by a 
payment schedule provided pursuant to Regulation Z); and (iv) a 
Statement of Federal Protections. A creditor must provide the 
information orally and in writing prior to consummation of the credit 
transactions. For mail and internet transactions, the creditor may 
provide, with the written disclosures, a toll-free telephone number 
that the borrower may use to obtain the oral disclosures.
    Section 232.6 of the proposed rule would amend the provisions 
relating to the information required by the MLA to simplify the 
information that a creditor must provide to a covered borrower when 
extending consumer credit. The proposal would relieve a creditor of the 
obligation to disclose ``clearly and conspicuously'' the information 
required by the MLA. Additionally, the Department would eliminate the 
requirement that a creditor disclose a numerical value for the MAPR or 
``the total dollar amount of all charges,'' and instead would require a 
creditor to provide a description of the charges that the creditor may 
impose. Thus, in general, the proposal would permit a creditor to 
streamline compliance with the disclosure requirements under 10 U.S.C. 
987(c) by providing to a covered borrower the same information the 
creditor must provide to a consumer under Regulation Z, plus a 
statement of the MAPR. In order to facilitate compliance, the proposed 
regulation provides a model statement that a creditor could use. 
Consistent with the Department's interpretation of its existing 
regulation, the proposal expressly provides that the statement of the 
MAPR would not be required in any advertisement relating to consumer 
credit.
    The Department estimates that there are approximately 191 million 
transactions each year in which creditors would provide the required 
information,\179\ generally included as part of their standard credit 
agreements. The Department assumes that all creditors, other than 
creditors who offer only residential mortgage loans or loans expressly 
to finance the purchase of personal property (neither of which loans is 
consumer credit), will provide these disclosures, and believes that, 
based on these assumptions, approximately 40,000 creditors would be 
subject to the proposed regulation.\180\ The Department seeks comments 
on whether the estimate of 40,000 creditors is reasonable. Please 
provide data and studies that support the comment.
---------------------------------------------------------------------------

    \179\ To estimate the number of consumer credit transactions 
each year, the Department relies on data from the Federal Reserve 
Bank of New York's Consumer Credit Panel. See Federal Reserve Bank 
of New York, Quarterly Report on Household Debt and Credit (August 
2013). For the six months prior to the second quarter of 2013, there 
were approximately 159 million credit inquiries. The Department 
assumes that 60 percent of these inquiries were for credit accounts 
that would be consumer credit under proposed Sec.  232.3(f). This 
estimate does not differentiate between credit applications and 
credit accounts opened. If most creditors only supply the required 
information as part of their account agreements which are provided 
at the time of account opening, then the overall number of 
transactions involving the provision of that information would be 
lower than is estimated here.
    \180\ The Department bases this estimate on relevant numbers of 
establishments published by the Bureau of Labor Statistics, the 
FDIC, and NCUA. See BLS, Quarterly Census of Employment and Wages, 
NAICS 522291 Consumer Lending, NAICS 522298 All Other Nondepository 
Credit Intermediation (2012) (the annual average number of 
establishments for consumer lending is 14,544; the annual average 
number of all other nondepository establishments for credit 
intermediation is 8,963); FDIC Institution Directory, available at 
http://www2.fdic.gov/IDASP/ (reporting 6,812 insured institutions) 
(accessed January 2014); and NCUA Annual Report 145 (2012), 
available at http://www.ncua.gov/Legal/Documents/Reports/AR2012.pdf 
(reporting 9,369 credit unions) (accessed January 2014).
---------------------------------------------------------------------------

(a) Statement of the MAPR
    For creditors who currently provide disclosures to covered 
borrowers (under the status quo alternative), the proposed rule is 
expected to reduce some of their compliance costs by eliminating the 
requirement to disclose a numerical value for the MAPR. The Department 
estimates that eliminating the requirement under the status quo to 
disclose a numerical value for the MAPR would reduce the compliance 
costs for creditors who currently offer forms of consumer credit by 
$71,900 per year. Over ten years, the Department estimates that the 
total savings to this class of creditors would be between $0.58 million 
(at a 7 percent discount rate) and $0.69 million (at a 3 percent 
discount rate).
    The proposal to require the provision of a statement of the MAPR, 
which may be satisfied through the use of a model statement, is 
anticipated to cost all creditors approximately $19 million during the 
first year, principally due to the costs of modifying the documents 
given to covered borrowers (such as a contract for consumer 
credit).\181\ The Department estimates that, on an ongoing basis, 
providing the statement of the MAPR would add approximately 50 seconds 
to each transaction when provided orally and require one-quarter of a 
printed page when included in standard account disclosures. To estimate 
the cost of providing the statement of the MAPR orally, the Department 
assumes that this statement is provided by a creditor's teller or sales 
person, provided only to covered borrowers, and that there are 
approximately 2 million covered borrowers, each opening two credit 
accounts per year.\182\ The Department estimates that the ongoing cost 
to creditors for the additional transaction time in orally providing 
the statement of MAPR will be approximately $0.69 million per 
year.\183\ Over ten years, the total costs to creditors of providing a 
statement of the MAPR orally during in-person transactions would be 
between $4.88 million (at a 7 percent discount rate) and $6.57 million 
(at a 3 percent discount rate).
---------------------------------------------------------------------------

    \181\ The Department estimates that set-up for the statement of 
the MAPR will take 20 hours, and that staff time for the set-up of 
the proposed disclosure will be 50 percent data entry and 
information processing workers, 40 percent supervisors of office and 
administrative support workers, and 10 percent legal counsel. U.S. 
Dep't of Labor, Bureau of Labor and Statistics, Occupational 
Employment and Wages 2012, Table 1 (mean hourly wage for data entry 
and information processing workers is $15.11; mean hourly wage for 
supervisors of office and administrative support workers is $25.40; 
mean hourly wage for legal counsel is $62.93), available at http://www.bls.gov/news.release/ocwage.t01.htm. The Department calculates 
the total estimated cost by multiplying the mean hourly wage by the 
portion of time for each classification of worker expected to be 
involved in modifying the documents.
    \182\ In this regard, the Department has estimated the potential 
costs only for in-person transactions. These figures do not relate 
to applications involving the use of the creditor-supplied telephone 
number for the oral delivery of the required information.
    \183\ The Department reaches this estimate by computing the cost 
of the additional transaction time, calculated by multiplying the 
number of transactions (4 million) by the mean hourly wage for 
financial tellers ($12.40) and the portion of hour that the 
disclosure will take in a typical transaction (1/72nd of an hour). 
U.S. Dep't of Labor, Bureau of Labor and Statistics, Occupational 
Employment and Wage Table 1 (May 2012) (mean hourly wage for 
financial tellers is $12.40).
---------------------------------------------------------------------------

    The Department further assumes that creditors will update standard 
account disclosures for all consumer credit accounts and that the 
printing and paper costs are five cents per page.\184\ The Department 
estimates that the ongoing costs for additional printing would be 
approximately $2.39 million per year.\185\ Over ten years, the total

[[Page 58628]]

costs to creditors of providing a printed statement of the MAPR would 
be between $16.93 million (at a 7 percent discount rate) and $22.75 
million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \184\ The Department relies on estimates of paper and printing 
costs recently published by the Department of Labor. Reasonable 
Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure,77 
FR 5632, 5654 (Feb. 3, 2012).
    \185\ The Department reaches this estimate by computing the cost 
of the additional printing and paper for the disclosure, calculated 
by multiplying the number of transactions (191 million) by the cost 
per page ($.05) and the portion of the page used for the disclosure 
(0.25 page).
---------------------------------------------------------------------------

    Taking the additional transaction time for oral disclosure and the 
additional printing and paper expenses for written disclosure together, 
the Department estimates that the total costs to all creditors of 
providing the statement of the MAPR would be $3.08 million each year. 
Over ten years, the Department estimates that the total costs to all 
creditors of providing the statement of the MAPR would be between 
$21.81 million (at a 7 percent discount rate) and $29.32 million (at a 
3 percent discount rate).
    Additionally, creditors may experience some increase in call volume 
and costs associated with providing oral disclosures if borrowers 
engage in consumer credit transactions by mail, internet, or at the 
point of sale in association with the sale of a nonfinancial product or 
service. The Department seeks comment, as well as data (as may be 
appropriate), on its supposition regarding the costs associated with 
these sales channels. Due to the lack of readily available data, the 
Department has not quantified the potential costs of any increase in 
this call volume; however, the Department has sought to streamline and 
minimize the compliance burden associated with all disclosures, 
including the requirement to orally provide the required information. 
Proposed Sec.  232.6(d)(2) reflects the Department's effort to minimize 
the burden on creditors while retaining the structure and intent of the 
current regulation. The Department seeks comment on the assumptions 
invoked in this section. Please provide comment on the reasonableness 
of the assumptions and likelihood of the associated costs. Please 
provide data and studies that support the comment.
(b) Statement of Federal Protections
    Under the proposal, like the status quo alternative, a creditor 
still must provide to a covered borrower the Statement of Federal 
Protections. However, because the proposal would apply the protections 
of 10 U.S.C. 987 to a broader scope of credit transactions, an 
additional 20,000 creditors would provide the Statement of Federal 
Protections, as required by proposed Sec.  232.6(a)(4). The Department 
estimates that incorporating the 111 words in the required Statement of 
Federal Protections into existing disclosures or contract documents 
would cost newly obligated creditors approximately $9.60 million in 
set-up costs during the first year.\186\
---------------------------------------------------------------------------

    \186\ The Department estimates that set-up for the Statement 
will take 20 hours and that staff time for the set-up of proposed 
disclosures will be 50 percent data entry and information processing 
workers, 40 percent supervisors of office and administrative support 
workers, and 10 percent legal counsel. U.S. Dep't of Labor, Bureau 
of Labor and Statistics, Occupational Employment and Wages Table 1 
(2012) (mean hourly wage for data entry and information processing 
workers is $15.11; mean hourly wage for supervisors of office and 
administrative support workers is $25.40; mean hourly wage for legal 
counsel is $62.93). http://www.bls.gov/news.release/ocwage.t01.htm. 
The Department calculates the total estimated cost by multiplying 
the mean hourly wage by the portion of time for each classification 
of worker expected to be involved in modifying the documents.
---------------------------------------------------------------------------

    On an ongoing basis, the Department estimates that providing the 
Statement of Federal Protections would add approximately 50 seconds to 
each transaction when the disclosure is provided orally and require 
one-quarter of a printed page when included in standard account 
disclosures. To estimate the cost of orally providing the Statement of 
Federal Protections, the Department assumes that this statement is 
provided by a creditor's teller or sales person, provided only to 
covered borrowers, and that there are approximately 2 million covered 
borrowers, each opening two credit accounts per year. The Department 
estimates that the cost to creditors of providing the Statement of 
Federal Protections orally will be approximately $0.69 million per 
year.\187\ Over ten years, the total costs to creditors of providing 
the Statement of Federal Protections orally during in-person 
transactions would be between $4.88 million (at a 7 percent discount 
rate) and $6.57 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \187\ The Department reaches this estimate by computing the cost 
of the additional transaction time, calculated by multiplying the 
number of transactions (4 million) by the mean hourly wage for 
financial tellers ($12.40) and the portion of hour that the 
disclosure will take in a typical transaction (1/72nd of an hour). 
U.S. Dep't of Labor, Bureau of Labor and Statistics, Occupational 
Employment and Wage Table 1 (May 2012) (mean hourly wage for 
financial tellers is $12.40).
---------------------------------------------------------------------------

    The Department further assumes that creditors will update standard 
account disclosures for all credit accounts and that the printing and 
paper costs are five cents per page.\188\ The Department estimates that 
the ongoing costs for additional printing would be approximately $2.39 
million per year.\189\ Over ten years, the total costs to creditors of 
providing the Statement of Federal Protections in account agreements 
would be between $16.93 million (at a 7 percent discount rate) and 
$22.75 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \188\ U.S. Dep't of Labor, Bureau of Labor and Statistics, 
Occupational Employment and Wages Table 1 (May 2012). See also 
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee 
Disclosure, 77 FR 5632, 5654 (Feb. 3, 2012) (estimating costs of 
printing and paper).
    \189\ The Department reaches this estimate by computing the cost 
of the additional printing and paper for the disclosure, calculated 
by multiplying the number of transactions (191 million) by the cost 
per page ($.05) and the portion of the page used for the disclosure 
(0.25 page).
---------------------------------------------------------------------------

    Taking the additional transaction time for oral disclosure and the 
additional printing and paper expenses for written disclosure together, 
the Department estimates that the total costs to all creditors of 
providing the Statement of Federal Protections would be $3.08 million 
each year. Over ten years, the Department estimates that the total 
costs to all creditors of providing the Statement of Federal 
Protections would be between $21.81 million (at a 7 percent discount 
rate) and $29.32 million (at a 3 percent discount rate). Because some 
creditors obligated under the current rule may provide the Statement of 
Federal Protections to covered borrowers, the actual additional cost of 
the proposal over the status quo alternative could be lower than the 
Department's estimate.
    Additionally, as with the statement of the MAPR, the Department 
realizes that creditors might experience some increase in call volume 
and costs associated with providing oral disclosures if borrowers 
engage in consumer credit transactions by mail, internet, or at the 
point of sale in association with the sale of a nonfinancial product or 
service. The Department has not quantified the potential costs of any 
increase in this call volume; however, the Department has sought to 
streamline and minimize the compliance burden associated with all 
disclosures, including the MLA's oral disclosure requirement. Proposed 
Sec.  232.6(d)(2) reflects the Department's effort to minimize the 
burden on creditors while retaining the structure and intent of the 
current regulation.
    Figure 3a provides a summary of the anticipated benefits and 
(costs) associated with the disclosures under the Department's proposed 
regulation.

[[Page 58629]]



                 Figure 3a--Estimated Benefits and Costs of Disclosures Under the Proposed Rule
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                      Annual,     PV 10-year, 7%  PV 10-year, 3%
                                                    First year        ongoing      discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Benefits of eliminating requirement to disclose            $0.00           $0.07           $0.58           $0.69
 numerical MAPR.................................
Set up costs of Proposed Statement of the MAPR..              19             n/a             n/a             n/a
Ongoing costs of Proposed Statement of the MAPR             0.00               3              22              29
 (oral and printed).............................
Set up costs of Statement of Federal Protections              10             n/a             n/a             n/a
 (additional creditors).........................
Ongoing costs of Statement of Federal                       0.00               3              22              29
 Protections (oral and printed).................
                                                 ---------------------------------------------------------------
    Total Net Costs.............................              29               6              43              58
----------------------------------------------------------------------------------------------------------------

    Department seeks comment on the assumptions invoked in this 
section. Please provide comment on the reasonableness of these 
assumptions and likelihood of the associated costs. Please provide data 
and studies that support the comment.
    Identification of Covered Borrowers. Under the status quo, the 
Department believes that a creditor who offers a covered payday loan, 
vehicle title loan, or refund anticipation loan typically assesses the 
status of a consumer-applicant by providing a self-certification form 
which is completed by the applicant, as provided in Sec.  232.5.
    The Department proposes to modify the process for conducting a 
covered-borrower check so that a creditor may unilaterally assess the 
status of a consumer-applicant, rather than relying on the applicant to 
complete a self-declaration form. Proposed Sec.  232.5(b), if adopted, 
would allow a creditor to access the MLA Database to assess the status 
of a consumer-applicant for consumer credit, and would provide a safe 
harbor from liability under the MLA for a creditor who uses the MLA 
Database (except when a creditor has actual knowledge about the status 
of the consumer-applicant), finds that the consumer is not a covered 
borrower, and maintains a record of the information obtained from the 
database.
    The Department assumes that all creditors, other than creditors who 
offer only residential mortgage loans or loans expressly to finance the 
purchase of personal property (neither of which loans is consumer 
credit), will establish processes for querying the MLA Database and 
retaining records of covered-borrower checks. As described above, the 
Department believes that, based on these assumptions, approximately 
40,000 creditors would be subject to the proposed regulation. The 
Department believes that setting up the process to use the MLA Database 
and retain records of queries will take each creditor 70 hours of labor 
time. Based on these assumptions, the Department estimates that the 
total costs relating to setting up the processes to use the MLA 
Database and take advantage of the safe harbor in proposed Sec.  
232.5(b) would be $67.22 million.\190\
---------------------------------------------------------------------------

    \190\ The Department estimates that staff time to set up access 
to the MLA Database and the processes to record and retain 
information will be 50 percent data entry and information processing 
workers, 40 percent supervisors of office and administrative support 
workers, and 10 percent legal counsel. U.S. Dep't of Labor, Bureau 
of Labor and Statistics, Occupational Employment and Wages Table 1 
(2012) (mean hourly wage for data entry and information processing 
workers is $15.11; mean hourly wage for supervisors of office and 
administrative support workers is $25.40; mean hourly wage for legal 
counsel is $62.93).
---------------------------------------------------------------------------

    The Department has observed that, in general, creditors who 
currently offer consumer credit products, as defined by the 
Department's existing regulation, require all consumer-applicants to 
complete the self-declaration form. For the purposes of this analysis, 
the Department assumes that a creditor requests the consumer-applicant 
to complete the self-declaration form only once. For a creditor who 
currently offers a form of consumer credit, as defined by the 
Department's existing rule, replacing the self-declaration form with a 
process to use the MLA Database is estimated to result in a savings 
from transaction time, printing and paper costs, as well as a reduction 
in legal risks. Further, the Department assumes that creditors choosing 
to avail themselves of the MLA Database and the safe harbor in proposed 
Sec.  232.5(b) will retain a record of the result of the database query 
in electronic form.
    According to the FDIC, approximately 2 million households report 
using a payday loan, and 1.45 million households report using a refund 
anticipation loan in the past year.\191\ In a comment letter submitted 
to the Bureau, the auto title lending industry association reports 
having 1 million customers.\192\ The Department assumes that there is 
one transaction per household, and further assumes that processing each 
self-certification form costs five cents (conservatively assuming only 
the costs per page for printing and paper). Given these assumptions of 
volume and cost--4.45 million transactions involving a printed self-
declaration form--the Department estimates that for those creditors who 
currently offer consumer credit products, the savings on printing and 
paper will be $222,500 per year; over ten years, the Department 
estimates a savings of between $1.58 million (at a 7 percent discount 
rate) and $2.12 million (at a 3 percent discount rate). The Department 
has not quantified the expected savings for creditors with respect to 
the potential reduction in transaction time or legal risk.
---------------------------------------------------------------------------

    \191\ Federal Deposit Insurance Corp., Addendum to the FDIC 
National Survey of Unbanked and Underbanked Households (June 2013).
    \192\ American Association of Responsible Auto Lenders (AARAL), 
Comment letter to Consumer Financial Protection Bureau (CFPB Docket 
No. CFPB-HQ-2011-2) (2011).
---------------------------------------------------------------------------

    The Department expects that proposed Sec.  232.5(b), if adopted, 
would prompt all creditors who offer consumer credit with an MAPR of 
more than 36 percent (which would include some creditors who offer 
credit products with credit insurance premiums or fees for credit-
related ancillary products sold in connection with the consumer credit) 
to assess the status of consumer-applicants as potential covered 
borrowers. Depository institutions or credit unions that offer open-end 
lines of credit, such as deposit advance loans, might choose to use the 
MLA Database before offering or extending those types of loans, and 
thereby take advantage of the safe harbor in the proposed Sec.  
232.5(b), to identify potential covered borrowers within their 
respective account portfolios. In addition, other creditors may choose 
to query the database, regardless of the terms of their credit 
products, particularly through batch processing of their customer 
accounts.
    The Department estimates that of the estimated 191 million covered 
credit

[[Page 58630]]

applications each year,\193\ there will be approximately 70 million 
applications when creditors choose to query the MLA Database as a 
single-record check. For each of these single-record checks, the 
inquiry and record retention is expected to add approximately 60 
seconds to each new consumer credit transaction. The Department 
estimates that the total cost to creditors for using the database and 
retaining records relating to consumer-applicants would be 
approximately $14.47 million per year; \194\ over ten years, the total 
cost of using the MLA Database would be between $102.56 million (at a 7 
percent discount rate) and $137.87 million (at a 3 percent discount 
rate).
---------------------------------------------------------------------------

    \193\ The Department estimates 191 million relying on data from 
the Federal Reserve Bank of New York's Consumer Credit Panel. See, 
Federal Reserve Bank of New Year, Quarterly Report on Household Debt 
and Credit (August 2013). For the six months prior to the second 
quarter of 2013, there were about 159 million credit inquiries. The 
Department assumes that 60 percent of these inquiries were for 
credit accounts that would be consumer credit under proposed Sec.  
232.3(f).
    \194\ The Department calculates the estimated cost by 
multiplying the expected number of transactions involving a covered 
borrower check (70 million) by the mean hourly wage for financial 
tellers ($12.40) and the additional transaction time expected (1/
60th of an hour).
---------------------------------------------------------------------------

    Because modern credit applications, whether conducted online or in 
person, involve highly automated systems for underwriting, the 
Department expects that many creditors who issue credit cards and other 
creditors will choose to develop systems that make the marginal 
increase in time for querying the MLA Database negligible. The 
Department has not sought to estimate the potential costs associated 
with computer programming or including a covered-borrower check in 
automated underwriting.\195\
---------------------------------------------------------------------------

    \195\ In considering the costs associated with updating computer 
programs, the Department relies on analysis from GAO examining the 
costs of implementing changes to minimum payment disclosures for 
credit card accounts. There, GAO found that credit card issuers were 
unable to provide precise estimates of, among others, the cost of 
computer programming to provide the revised disclosures. GAO found 
that estimates of the computer programming cost varied widely, from 
$5,000 to $1 million. For large issuers, GAO concluded that these 
one-time costs would be very small when compared with large issuers' 
net income. For smaller issuers, GAO concluded that work to 
implement changes would be done largely by third-party processors, 
accustomed to reprogramming required to managing cardholder data and 
processing billing statements. U.S. Gov't Accountability Office, 
GAO-06-434, Credit Cards: Customized Minimum Payment Disclosures 
Would Provide More Information to Consumers, but Impact Could Vary 
(April 2006).
---------------------------------------------------------------------------

    Figure 3b provides a summary of the anticipated benefits and 
(costs) associated with the covered-borrower checks under the 
Department's proposed regulation.

           Figure 3b--Estimated Benefits and Costs of Covered-Borrower Checks Under the Proposed Rule
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                  PV 10-year, 7%  PV 10-year, 3%
                                                    First year        Annual       discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Benefits of Eliminating Printing and Paper Costs           $0.00           $0.22              $2              $2
 for Self-Certification.........................
Set-up Costs to Use MLA Database................              67             n/a             n/a             n/a
Covered-Borrower Checks.........................            0.00              14             103             138
                                                 ---------------------------------------------------------------
    Total.......................................              67              14             101             136
----------------------------------------------------------------------------------------------------------------

    Department seeks comment on the assumptions invoked in this 
section. Please provide comment on the reasonableness of these 
assumptions and the likelihood of the associated costs. Please provide 
data and studies that support the comment.
    Prohibition on Requiring Arbitration. The MLA prohibits a creditor 
from ``requir[ing] a covered borrower to submit to arbitration or 
impos[ing] onerous legal notice provisions in the case of a dispute'' 
relating to an extension of consumer credit,\196\ and this restriction 
is reflected in proposed Sec.  232.8(c). Under the status quo, the 
prohibition against requiring a covered borrower to submit to 
arbitration applies only to certain payday loans, vehicle title loans, 
and refund anticipation loans. If the Department adopts the regulation 
as proposed, then the prohibition against requiring arbitration (in 
proposed Sec.  232.8(c)) would apply to agreements for a significantly 
broader range of credit products, such as credit cards and deposit 
advance loans. The Department recognizes that extending the application 
of the prohibition in proposed Sec.  232.8(c) likely would lead to 
costs, primarily as a result of the significantly broader range of 
creditors affected by that prohibition. Nevertheless, the Department 
has not endeavored to quantify the costs of the restriction itself, 
such as the costs that might be associated with making modifications to 
standard agreements or potentially increased exposures to disputes 
litigated in courts.
---------------------------------------------------------------------------

    \196\ 10 U.S.C. 987(e)(3).
---------------------------------------------------------------------------

    The Department seeks comment on the potential costs to creditors, 
across a variety of contracts implicated by the prohibition in proposed 
Sec.  232.8(c), who offer forms of consumer credit that could be 
affected by the prohibition against requiring arbitration.
4. Sensitivity Analysis on Potential Benefits
    Each year, thousands of well-trained Service members are compelled 
to leave military service because they experience financial distress 
that leads to the revocation of their security clearances. The 
Department has direct experience with this process of involuntary 
separation, which generally involves a Service member becoming over-
extended in debt--which occurs due to a wide range of factors--
defaulting on one or more credit agreements (either by making late 
payments or by failing to make payments), and experiencing a 
deterioration in the credit score or credit history prepared by a 
consumer reporting agency for that individual. The individual's 
deteriorating creditworthiness presents an exposure to the Department 
that the individual poses a security risk, which ultimately warrants 
separation.
    As discussed in sections II.C and II.D, the Department makes a 
significant investment in recruiting, training, and progressing each 
qualified Service member. Losing a qualified soldier, sailor, airman, 
or Marine can cause a loss of mission capability, and there are 
substantial costs associated with replacing that Service member. Even 
though, for the purposes of this regulatory impact assessment under EO 
12866 and EO 13563, the most direct effect of the interest-rate limit 
is a transfer payment, a secondary--yet no less direct--effect is the 
reduction in the

[[Page 58631]]

overall amount of debt owed to creditors by covered borrowers. The 
Department believes if the interest-rate limit were to apply to a 
broader range of credit products, the overall amount of debt owed to 
creditors would be reduced; as a result, regardless of the original 
occasions for incurring debts, Service members reasonably may be 
expected to have a lower incidence of financial distress, and a 
correspondingly lower incidence of involuntary separation. Thus, the 
Department believes that the savings of the Department's costs 
associated with replacing Service members who are involuntarily 
separated constitute benefits for the purposes of this regulatory 
impact assessment--entirely independently of the transfer payment 
flowing from the interest-rate limit--and are amenable to being 
quantified. More generally, the anticipated improvements in military 
readiness and Service-member retention lie at the core of 10 U.S.C. 
987.
    Military Readiness and Service Member Retention. The most 
substantial--as well as meaningfully quantifiable--benefit of the 
Department's proposed regulation, if adopted, would be the reduction in 
involuntary separations among Service members due to financial 
distress. The Department also anticipates that the proposed regulation 
would entail non-quantifiable benefits, reducing stress for Service 
members or their families, which currently affects approximately two-
thirds of military families who report experiencing stress related to 
their financial condition.\197\
---------------------------------------------------------------------------

    \197\ Blue Star Families, The 2013 Military Family Lifestyle 
Survey 11 (May 2013).
---------------------------------------------------------------------------

    The Department estimates that each separation costs the Department 
$57,333.\198\ The Department estimates the potential impact of adopting 
the proposed regulation by using two alternative approximations of the 
current number of separations attributable to financial distress.
---------------------------------------------------------------------------

    \198\ U.S. Gov't Accountability Office, GAO-11-170, Military 
Personnel: Personnel and Cost Data Associated with Implementing 
DOD's Homosexual Conduct Policy (January 20, 2011) (estimating that 
each separation costs the Department $52,800 in 2009 dollars). The 
cost of $57,333 is calculated in 2013 dollars (through December 
2013), using the U.S. Dep't of Labor, Bureau of Labor Statistics, 
Consumer Price Index, All Urban Consumers (CPI-U), available at 
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
---------------------------------------------------------------------------

(a) Estimate One
    For the years 2003 through 2011, there was an average of 55,036 
involuntary separations per year. Of those involuntary separations that 
were due to legal or standard-of-conduct issues--an average of 19,893 
per year--the Department estimates that approximately half are 
attributable to a loss of security clearance, and, of these, 80 percent 
are due to financial distress.\199\ Based on this data and these 
assumptions, the Department estimates that, going forward, there would 
be approximately 7,957 separations each year due to financial distress.
---------------------------------------------------------------------------

    \199\ U.S. Dep't of Defense, Report on Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents 39 (August 9, 2006), available at http://www.defense.gov/
pubs/pdfs/ReporttoCongressfinal.pdf.
---------------------------------------------------------------------------

(b) Estimate Two
    In 2005, there were 1,999 revocations of security clearances in the 
Navy and Marine Corps, representing 8.5 percent of involuntary 
separations.\200\ Approximately 80 percent of the revocations of 
security clearances are due to financial distress.\201\ The Department 
conservatively estimates the number of separations due to financial 
distress at 25 percent, rather than attempt to identify separations not 
triggered by a loss of security clearance.\202\ Based on this data and 
these assumptions, the Department estimates that, going forward, there 
would be approximately 4,703 separations each year due to financial 
distress.\203\
---------------------------------------------------------------------------

    \200\ Amy Klamper, ``Breakthrough,'' Navy League of the United 
States (October 2006).
    \201\ U.S. Dep't of Defense, Report on Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents 9 (August 9, 2006), available at http://www.defense.gov/
pubs/pdfs/ReporttoCongressfinal.pdf.
    \202\ Service members also could be separated in a number of 
other ways; for example, this number does not attempt to account for 
separations where a Service member is court-marshaled for failure to 
pay debts.
    \203\ Thus, in estimate two, the Department computes the total 
number of separations per year as follows: the approximate total 
number of revocations per year [(1,999)/(0.0850)] multiplied by 
0.80, yields the revocations due to financial distress of 18,814; 
and 25 percent of that figure is 4,703.
---------------------------------------------------------------------------

    The Department estimates that the 10-year cost of involuntary 
separations due to financial distress is between $1.912 billion and 
$4.348 billion. However, the Department believes that these 
calculations significantly underestimate the impact of involuntary 
separations due to financial distress on Service-member retention and 
military readiness, primarily because the loss of security clearance is 
only one way that financial distress leads to separation from military 
service. Furthermore, involuntary separation is only one of the ways to 
detect the impact of financial distress on military readiness; 
excessive debt--which is less manageable at higher rates of interest--
likewise can impair a Service member's eligibility to deploy or to 
reenlist.
    The Department acknowledges that the proposed regulation, if 
adopted as proposed, would not entirely eliminate financial distress 
among Service members. However, the Department expects that extending 
the protections of 10 U.S.C. 987 to a broader range of credit products 
would significantly reduce the incidence of derogatory items in the 
credit files of Service members (maintained by consumer reporting 
agencies), and thereby improve the Service members' respective 
capacities to manage and pay debts.
    The Department estimates that the proposal, if adopted, would 
reduce the separations associated with financial distress. To assess 
the anticipated savings reasonably attributable to a reduction in 
involuntary separations, the Department has used three estimates of the 
possible reduction in involuntary separations: 5 percent,\204\ 17.5 
percent,\205\ and 30 percent.\206\ The Department believes that 
estimating between 5 percent and 30 percent reduction in the total 
number of these separations is reasonable in light of the conservative 
assumptions relating to the separations due to financial distress. The 
Department seeks comment on the reasonableness of these estimates. 
Please provide data and studies that support the comment.
---------------------------------------------------------------------------

    \204\ See, generally, Scott Carrell & Jonathan Zinman, In Harm's 
Way? Payday Loan Access and Military Personnel Performance (January 
2013) (estimating a 5 percent increase in negative personnel 
outcomes for Service members with access to high-cost payday loans). 
The Department uses this study to estimate a low-end of the possible 
reduction in separations. This estimate likely is less reliable than 
other estimates of separations included in this analysis because the 
study does not directly measure the impact of high-cost loans on 
borrower personnel outcomes.
    \205\ See, generally, Department of Navy, Personnel Security 
Appeals Board, CY 2011 Activity Report at 7 (in 2011, 47 percent of 
denied appeals of revoked security clearances were due to financial 
problems) available at www.ncis.navy.mil/securitypolicy/PSAB/PSAB%20Activity%20Reports/CY11%20PSAB%20Activity%20Report.pdf); 
Consumer Federation of America, et al, DOD-2013-OS-0133-0030, at 3 
(noting that for the Department of Navy the portion of denied 
appeals of revoked security clearances due to financial distress 
declined from 57 percent in 2006 to 47 percent in 2011). The 
Department uses the percentage of the decline (17.5) as a midpoint 
estimate.
    \206\ See, generally, Jean Ann Fox, The Military Lending Act 
Five Years Later, Consumer Federation of America (2012) at 16-17 
(for the Department of the Navy, overall denied appeals of revoked 
security clearances declined by 30 percent from 2006 to 2010).
---------------------------------------------------------------------------

    The Department estimates that the proposed regulation, if adopted, 
would result in savings from involuntary separations due to financial 
distress of between $13.47 million and $136.85

[[Page 58632]]

million per year. Over ten years, the proposal would save the 
Department between $95.52 million and $1.304 billion. Figure 4 provides 
a summary of the anticipated savings that reasonably could be 
attributable to reduction in involuntary separations due to financial 
distress.

                   Figure 4--Scenario Analysis of Costs Savings From Reductions in Separations
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                    10-year, 7%     10-year, 3%
                                                                      Annual       discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Estimate One: 7,957 separations per year
----------------------------------------------------------------------------------------------------------------
Separations Reduced by 30%......................................            $137            $970          $1,304
Separations Reduced by 17.5%....................................              80             567             763
Separations Reduced by 5%.......................................              23             162             217
----------------------------------------------------------------------------------------------------------------
Estimate Two: 4,703 separations per year
----------------------------------------------------------------------------------------------------------------
Separations Reduced by 30%......................................              81             574             771
Separations Reduced by 17.5%....................................              47             335             451
Separations Reduced by 5%.......................................              13              96             128
----------------------------------------------------------------------------------------------------------------

    In addition to reducing the quantifiable costs associated with 
separations due to financial distress, the Department believes that the 
proposed regulation, if adopted, would reduce non-quantifiable costs 
associated with financial strains on Service members. High-cost debt 
can detract from mission focus, reduce productivity, and require the 
attention of supervisors and commanders. Additionally, if the 
Department's proposed regulation is adopted, the protections afforded 
to covered borrowers under the MLA might, over time, improve the 
Department's capabilities to retain Service members. In this regard, 
one study found that access to extremely high-cost debt decreases 
military readiness by increasing the presence of unfavorable credit 
information in the files of consumer reporting agencies, and by 
producing a significant decline in job performance, reducing the 
overall eligibility of Service members for reenlistment.\207\
---------------------------------------------------------------------------

    \207\ Scott Carrell & Jonathan Zinman, In Harm's Way? Payday 
Loan Access and Military Personnel Performance (January 2013) at 23, 
available at http://www.econ.ucdavis.edu/faculty/scarrell/payday.pdf 
(``Overall the results provide ammunition for the Pentagon's concern 
that payday borrowing has adverse effects on military readiness. We 
find that payday loan access produces a significant decline in 
overall job performance (as measured by a 3.9% increase in 
reenlistment ineligibility), and a concomitant decline in retention. 
We also find that a measure of severely poor readiness (the presence 
of an Unfavorable Information File) increases by 5.3%.'').
---------------------------------------------------------------------------

5. Estimate of Amount of Transfer Payments
    The Department believes that the interest-rate limit and the 
corresponding provisions governing computation of the MAPR could entail 
some costs, particularly for creditors who might need to adjust their 
systems to compute the MAPR in accordance with the standards of the 
proposed regulation. The Department anticipates that the great majority 
of creditors should be able to compute the MAPR for their credit 
products without significantly redesigning their computing or 
accounting systems. However, there might be a relatively small number 
of creditors who offer credit insurance products or credit-related 
ancillary products with loans who might encounter costs to adjust their 
computing or accounting systems to comply with the new standards, if 
adopted as proposed. For example, credit card issuers whose fees fit 
within the bona fide fee safe harbor would not be required to calculate 
an effective APR cost element of the MAPR, provided that the periodic 
rate falls below 36 percent APR. The Department anticipates that only a 
small number of creditors would offer credit products requiring 
calculation of an effective APR cost element of the MAPR. For this 
limited class of creditors, the Department recognizes that adjustments 
to computing or accounting systems could entail some costs, however, 
there are no reliable data on how many creditors would pursue such 
product offerings nor data that would allow the Department to develop a 
quantifiable estimate of the potential costs associated with compliance 
with the interest-rate limit and the provisions governing computation 
of the MAPR. Thus, for the purposes of this analysis under EO 12866 and 
EO 13563, the Department has assessed the potential effects of the 
interest-rate limit only in terms of the amount of the transfer 
payments relating to certain consumer credit products.
    Even though the interest-rate limit of 10 U.S.C. 987(b) results in 
transfer payments from various creditors to covered borrowers, and thus 
does not affect the benefits-cost analysis under EO 12866 and EO 13563, 
the Department has estimated the amounts involved in these payments. 
For the purposes of assessing the amounts involved in the transfer 
payments, the Department has considered estimates of the current cost 
of credit and usage rates for four types of consumer credit, namely: 
(i) Credit card products, (ii) payday loans, (iii) auto title loans, 
and (iv) installment loans.
    In the credit card market, the Department believes that most 
creditors should be able to comply with the limitation on the MAPR by 
continuing to offer credit card products with minimal or no 
alternations to their current pricing practices. In this regard, few, 
if any, creditors who offer credit card products charge periodic rates 
that exceed the interest-rate limit of 10 U.S.C. 987(b) and proposed 
Sec.  232.4(b). Taking into account the exclusion for bona fide fees 
under proposed Sec.  232.4(d), the Department expects that nearly all 
of the amount of the transfer payments in credit card products will be 
due to revenues that would be foregone from credit insurance, debt 
cancellation, and credit-related ancillary products sold to covered 
borrowers.
    The Department estimates the amount of the transfer payments by 
taking the difference of the cost of credit for a typical credit card 
with a credit insurance or debt cancellation product and 36 percent 
MAPR, less the payout rate on a credit insurance or debt protection 
product. To calculate the range of possible transfer payments 
associated with credit card products, the Department estimates an 
amount per account, and then makes a high- and low-end estimate of the 
number of Service members with credit cards who

[[Page 58633]]

also carry a credit insurance or debt cancellation product that would 
cause the MAPR to exceed the 36-percent threshold. In this regard, the 
Department's estimate is conservative because the data relate only to 
consumer credit obtained by Service members, and not to other 
categories of individuals who could be covered borrowers.
    The Department is aware that there are other credit-related 
ancillary products that may be sold in connection with, and either at 
or before, the account opening. The Department has not estimated the 
amount of the transfer payments that might be associated with those 
credit-related ancillary products.
    To estimate the amount of the transfer payment for each credit card 
account, the Department assumes that 78 percent of Service members have 
a credit card,\208\ revolving an average balance of $5,000.\209\ The 
Department further assumes that a typical debt-cancellation product 
costs $1.10 per $100 of balance and has a payout rate of 21 
percent.\210\ Assuming that a borrower makes only the minimum payment 
each month on this card while paying 28 percent APR, under the 
proposal, a creditor who offers a credit card with these terms could 
charge a fee for a credit insurance or debt cancellation product of no 
more than $0.67 per $100 of balance per month, a price of 8 percent 
interest per year. For a credit card with a credit insurance or debt 
cancellation product carrying standard prices, the amount transferred 
from a creditor to a covered borrower--that is, when the creditor 
complies with the 36-percent MAPR limit and foregoes revenue that the 
borrower thereby saves--would be $886 per card over ten years.\211\
---------------------------------------------------------------------------

    \208\ Blue Star Families, The 2013 Military Family Lifestyle 
Survey 34 (May 2013).
    \209\ FINRA Investor Education Foundation, Financial Capability 
in the United States, Military Survey (October 2010).
    \210\ U.S. Gov't Accountability Office, GAO-11-311, Credit 
Cards: Consumer Costs for Debt Protection Can be Substantial 
Relative to Benefits but Are Not a Focus of Regulatory Oversight 9, 
21 (March 2011).
    \211\ This calculation assumes a beginning balance of $5,000 and 
that the borrower pays only the minimum payment, calculated as 4 
percent of the monthly balance. Under the status quo, the APR is 28 
percent and the debt cancellation is $1.10 per $1,000 of outstanding 
balance, and the sum of payments over ten years is $12,696. Under 
the proposal, the APR is 28 percent and the debt cancellation is 
$.67 per $1,000 of outstanding balance, and the sum of payments over 
ten years is $11,810.
---------------------------------------------------------------------------

    Second, from an examination of credit card offers, the Department 
estimates that between 44 and 100 percent of the 78 percent of Service 
members who have a credit card account have a card with an APR 
sufficiently high that if the creditor also sells a credit insurance or 
debt cancellation product, the cost of credit could exceed the limit in 
10 U.S.C. 987(b). The Department assumes that 7 percent of these 
accounts actually use credit insurance or debt cancellation; therefore 
the estimates are based on the assumption that between 3 percent and 7 
percent of the 78 percent of Service members holding credit cards have 
a credit insurance or debt cancellation product.\212\
---------------------------------------------------------------------------

    \212\ U.S. Gov't Accountability Office, GAO-11-311, Credit 
Cards: Consumer Costs for Debt Protection Can be Substantial 
Relative to Benefits but Are Not a Focus of Regulatory Oversight 7 
(March 2011).
---------------------------------------------------------------------------

    At the high-end, assuming that 78 percent of Service members have a 
credit card that, given typical costs, might exceed the interest-rate 
limit if the borrower purchases credit insurance or debt cancellation 
and pays a penalty APR, and that 7 percent of these borrowers actually 
do purchase such a product, the amount that would be transferred is 
estimated to be $6.75 million per year.\213\ Over ten years, the 
discounted amount that would be transferred would be between $54.13 
million (at a 7 percent discount rate) and $61.17 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \213\ The Department calculates the estimated transfer amount by 
multiplying the number of active duty service members (1.4 million) 
by the percentage with a credit card account (78 percent), the 
percentage of accounts with costs that might exceed the interest 
rate limit if the borrower purchases add-on products (100 percent), 
the percentage of accounts where the borrower actually purchases 
add-on products (7 percent), and the amount transferred per card 
($886).
---------------------------------------------------------------------------

    At the low-end, assuming that 44 percent of Service members have a 
credit card that, given typical fees, might exceed the interest-rate 
limit if the borrower purchases credit insurance or debt cancellation 
and pays a penalty APR, and that 7 percent of these borrowers actually 
do purchase such a product, the amount that would be transferred is 
estimated to be $2.97 million per year.\214\ Over ten years, the 
discounted amount that would be transferred would be between $23.82 
million (at a 7 percent discount rate) and $26.91 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \214\ The Department calculates the estimated transfer amount by 
multiplying the number of active duty service members (1.4 million) 
by the percentage with a credit card account (78 percent), the 
percentage of accounts with costs that might exceed the interest 
rate limit if the borrower purchases add-on products (44 percent), 
the percentage of accounts where the borrower actually purchases 
add-on products (7 percent), and the amount transferred per card 
($886).
---------------------------------------------------------------------------

    For non-credit card credit products that would be subject to the 
proposed regulation, the Department estimates the amount that would be 
transferred due to the interest-rate limit by considering three 
segments of that market for consumer credit: Payday loans, auto title 
loans, and non-purchase money installment loans. The Department assumes 
that approximately 12 percent of Service members use non-credit card 
credit products that would be covered under the Department's 
regulation, if adopted as proposed.\215\ The prices associated with 
these credit products vary widely; for any given creditor, the amount 
that would be transferred as a result of compliance with the interest-
rate limit depends on how much that creditor charges for credit 
extended under the status quo.
---------------------------------------------------------------------------

    \215\ See Department of Defense, Report On Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents (August 9, 2006), available at http://www.defense.gov/
pubs/pdfs/ReporttoCongressfinal.pdf; Jean 
Ann Fox, The Military Lending Act Five Years Later, Consumer 
Federation of America (2012); U.S. Gov't Accountability Office, GAO-
05-349, Military Personnel: DOD's Tools for Curbing the Use and 
Effects of Predatory Lending Not Fully Utilized (April 2005); The 
Pew Charitable Trusts, Payday Lending in America: Who Borrowers, 
Where They Borrow, and Why 4 (July 2012).
---------------------------------------------------------------------------

    In order to estimate the amount that would be transferred, the 
Department assumes that between 7 percent and 4.9 percent of Service 
members use payday loans with a median APR of 391 percent and a median 
ten transactions per year, each borrowed for 14 days,\216\ 0.3 percent 
of Service members use auto title loans with a median APR of 300 
percent,\217\ and 7 percent of Service members use installment loans 
with a median APR of 80 percent.\218\
---------------------------------------------------------------------------

    \216\ See Department of Defense, Report On Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents (August 9, 2006), available at http://www.defense.gov/
pubs/pdfs/ReporttoCongressfinal.pdf; Jean 
Ann Fox, The Military Lending Act Five Years Later, Consumer 
Federation of America (2012); Consumer Financial Protection Bureau, 
Payday Loans and Deposit Advance Products 8 (April 2013). The 
Department further assumes that borrowers take a median of 10 loans 
per year, those loans are for $392 and carry an average 14-day term. 
See Consumer Financial Protection Bureau, Payday Loans and Deposit 
Advance Products (April 2013). Some, though not all, transactions 
involving these products are subject to the protections of 10 U.S.C. 
987 under the current rule. See, e.g., section II.A.
    \217\ Consumer Federation of America and Center for Responsible 
Lending, Driven to Disaster: Car-Title Lending and Its Impact on 
Consumers 3 (2013); U.S. Gov't Accountability Office, GAO-05-349, 
Military Personnel: DOD's Tools for Curbing the Use and Effects of 
Predatory Lending Not Fully Utilized (April 2005); Jean Ann Fox, The 
Military Lending Act Five Years Later, Consumer Federation of 
America (2012).
    \218\ See Jean Ann Fox, The Military Lending Act Five Years 
Later, Consumer Federation of America (2012).
---------------------------------------------------------------------------

    Given typical prices of payday loans and borrowing patterns, the 
Department estimates that the value that would be

[[Page 58634]]

transferred is $534 per borrower per year for payday loans.\219\ 
Assuming that 4.9 percent of Service members use payday loans each 
year, the Department estimates that the proposed regulation would 
result in transfer payments of $36.74 million per year relating to the 
domestic payday lending industry.\220\ Over ten years, the Department 
estimates that the amount of the transfer payments relating to the 
domestic payday lending industry would be between $260.45 million (at a 
7 percent discount rate) and $350.11 million (at a 3 percent discount 
rate). Alternatively, assuming that 7 percent of Service members use 
payday loans each year, the Department estimates that the amount of 
transfer payments on the domestic payday lending industry would be 
$52.16 million per year.\221\ Over ten years, the Department estimates 
that the transfer payments under the proposed regulation would be 
between $369.80 million (at a 7 percent discount rate) and $497.11 
million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \219\ The Department assumes that the average loan amount is 
$392, ten loans of 14 days each are taken in a year, and the average 
APR is 391 percent. The Department calculates the transfer amount 
per borrower by finding the difference between the cost of a typical 
loan under the status quo, assuming that the loan falls outside the 
scope of the current rule ($588), and the permissible cost of a loan 
complying with the 36 percent interest rate limitation ($54).
    \220\ The Department calculates the estimated transfer amount by 
multiplying the number of active duty service members (1.4 million) 
by the percentage with a payday loan (4.9 percent), and the amount 
transferred per account ($534).
    \221\ The Department calculates the estimated transfer amount by 
multiplying the number of active duty service members (1.4 million) 
by the percentage with a payday loan (7 percent), and the amount 
transferred per account ($534).
---------------------------------------------------------------------------

    Approximately 7 percent of volume in payday loans is done by online 
lenders based offshore.\222\ The Department estimates that the transfer 
payments relating to these offshore creditors would be between $2.57 
million and $3.65 million per year. Over ten years, the Department 
estimates that the total amount of the transfer payments relating to 
these offshore creditors would be between $18.23 million (at a 7 
percent discount rate, assuming 4.9 percent usage) and $34.80 million 
(at a 3 percent discount rate, assuming 7 percent usage).
---------------------------------------------------------------------------

    \222\ See Stephens Inc., Forging Ahead: Growth, Opportunity and 
the Direction of the Alternative Financial Services Sector, 
presentation to the Community Financial Services Association of 
America, March 7, 2013 (estimating that one-third of lending volume 
is online and that 20 percent of the online market is offshore).
---------------------------------------------------------------------------

    Assuming that 0.3 percent of Service members use auto title loans 
each year and that the average auto title loan carries an APR of 300 
percent, the Department estimates that the interest-rate limit would 
lead to transfer payments relating to the auto title lending industry 
of $0.87 million per year.\223\ Over ten years, the Department 
estimates that the total amount of the transfer payments relating to 
auto title lenders would be between $6.14 million (at a 7 percent 
discount rate) and $8.26 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \223\ The Department assumes that the average principal borrowed 
is $951, average APR is 300 percent, and the average loan term is 30 
days. The Department calculates the transfer amount per borrower by 
finding the difference between the cost of a typical loan under the 
status quo, assuming that the loan falls outside the scope of the 
current rule ($235), and the permissible cost of a loan complying 
with the 36 percent interest rate limitation ($28). See Susanna 
Montezemolo, Car-Title Lending, Center for Responsible Lending, July 
2013, available at http://www.responsiblelending.org/state-of-lending/reports/7-Car-Title-Loans.pdf. See Consumer Federation of 
America, Policy Brief: Gaps in the Military Lending Act Leave Many 
Service Members Vulnerable to Abusive Lending Practices, July 2013, 
available at http://www.consumerfed.org/pdfs/130725-policybrief-mla-cfa.pdf (finding that a typical auto title loan has a 300 percent 
APR). The Department does not have data regarding auto-title 
creditors located offshore.
---------------------------------------------------------------------------

    Assuming that 7 percent of Service members use high-cost 
installment loans each year and that the average installment loan 
carries an APR of 80 percent, the Department estimates that the 
interest-rate limit would result in transfer payments relating to the 
domestic installment lending industry of $60.06 million per year.\224\ 
Over ten years, the Department estimates that the total amount of 
transfer payments from installment-loan creditors would be between 
$425.77 million (at a 7 percent discount rate) and $572.35 million (at 
a 3 percent discount rate).
---------------------------------------------------------------------------

    \224\ The Department assumes that a typical loan is $1,000 and 
borrowed for two years. Under the status quo with an APR of 80 
percent, the monthly payment is $85 per month, for a sum of payments 
of $2,032. Under the proposal with an APR of 36 percent, the monthly 
payment is $59, for a sum of payments of $1,417, a difference of 
$615. For information on typical military installment loans, see 
Jean Ann Fox, The Military Lending Act Five Years Later, Consumer 
Federation of America, May 2012.
---------------------------------------------------------------------------

    Approximately 7 percent of volume in the high-cost installment 
lending market is done by online lenders based offshore.\225\ The 
Department estimates the proposed regulation would result in transfer 
payments relating to these offshore creditors of approximately $4.20 
million per year. Over ten years, the total amount of transfer payments 
from these offshore creditors are estimated to be between $29.80 
million (at a 7 percent discount rate) and $40.06 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \225\ See Stephens Inc., Forging Ahead: Growth, Opportunity and 
the Direction of the Alternative Financial Services Sector, 
presentation to the Community Financial Services Association of 
America, March 7, 2013 (estimating that one-third of lending volume 
is online and that 20 percent of the online market is offshore).
---------------------------------------------------------------------------

    Overall, the Department estimates that the total amount of transfer 
payments relating to these four categories of consumer credit products 
would be between $100.64 million and $119.84 million per year; over ten 
years, the overall amount of these transfer payments would be between 
$716.18 million (assuming lower usage rates and a 7 percent discount 
rate) and $1.139 billion (assuming higher usage rates and a 3 percent 
discount rate). Of these overall amounts, between $6.77 million and 
$7.85 million of the transfer payments would relate to offshore 
creditors, and between $48.03 million and $74.86 million over ten 
years. The transfer payments from domestic creditors would be between 
$93.87 million and $111.99 million per year; over ten years, these 
transfer payments would be between $668.15 million (assuming lower 
usage rates and a 7 percent discount rate) and $1.064 billion (assuming 
higher usage rates and a 3 percent discount rate). Figure 5 provides a 
summary of all of these figures for the transfer payments.

                    Figure 5--Amount of Transfer Payments Relating to the Interest-Rate Limit
                                           [2013 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                  PV 10-year, 7%  PV 10-year, 3%
                                                                      Annual       discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Payday:
    (1) At 4.9% usage...........................................             $37            $260            $350
    (2) At 7% usage.............................................              52             370             497
Auto title......................................................            0.87               6               8
Installment.....................................................              60             426             572

[[Page 58635]]

 
Credit Cards:
    (1) At 3% of cards..........................................               3              24              27
    (2) At 7% of cards..........................................               7              54              61
TOTAL
    Low (4.9% payday, 3% cards).................................             101             716             958
    High (7% payday, 7% cards)..................................             120             856           1,139
----------------------------------------------------------------------------------------------------------------

    Apart from the MLA, for active duty Service members who are 
materially affected by virtue of his or her military service, the 
Servicemembers Civil Relief Act (SCRA) limits the permissible rate of 
interest on outstanding pre-service balances at 6 percent APR.\226\ To 
avail himself or herself of the protections of the SCRA, a Service 
member must make a written request to the creditor. Because data is 
unavailable on the extent to which creditors are reducing pre-service 
obligations for Service members, the Department is unable to adjust the 
estimated amount of the transfer payments relating to the interest-rate 
limit of the proposed regulation to account for the potential effects 
of the SCRA.
---------------------------------------------------------------------------

    \226\ 50 App. USC 527(a).
---------------------------------------------------------------------------

    Furthermore, the Department does not expect that the interest rate 
limitation will have undesirable side-effects for Service members. The 
Department observes that numerous creditors currently supply credit to 
Service members in a manner that already should comply with the 
interest-rate limit. In the Department's experience, covered borrowers 
enjoy access to low- and no-cost credit. For example, to provide 
monetary support to Service members and their families with financial 
hardships, the Military Services have partnered with nonprofit 
charitable organizations chartered to provide relief services to 
Service members and their families. The four Relief Societies for the 
Military Services provide no-interest loans and grants for shortfalls 
in household expenses and unforeseen emergencies.

B. Unfunded Mandates Reform Act (Sec. 202, Pub. L. 104-4)

    The Department certifies that this proposed regulation does not 
contain a Federal mandate that may result in the expenditure by State, 
local, and tribal governments, in aggregate, or by the private sector 
of $100 million or more in any one year.\227\
---------------------------------------------------------------------------

    \227\ See analysis in section IV.A. for calculations. The 
Department expects expenditure by the private sector of 
approximately $96.03 million in the implementation year for setting 
up the required disclosures and optional database inquiry and record 
retention process. On an ongoing basis, the Department expects 
expenditure by the private sector of $20.34 million to comply with 
the required disclosures and optional database inquiry and record 
retention procedures during the course of credit transactions.
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    The Department certifies that this proposed regulation is not 
subject to the Regulatory Flexibility Act (``RFA'') \228\ because the 
regulation, if adopted as proposed, would not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \228\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    The North American Industrial Classification (NAIC) codes for the 
affected businesses are the following:

(a) 522110--Commercial Banking
(b) 522130--Credit Unions
(c) 522210--Credit Card Issuing
(d) 522291--Consumer Lending

    Pursuant to the Small Business Administration (SBA) Small Business 
Size Standards, a consumer lending business is a ``small business 
entity'' if it has less than $35.5 million in receipts. According to 
the 2007 Economic Census (the last year for which data is available), 
approximately 96 percent of firms in NAIC code 522291 are small 
business entities. For the other three potentially affected businesses, 
the SBA Small Business Size Standards considers any business with less 
than $500 million in assets to be a small business entity.
    Approximately 81 percent of firms in NAIC code 522110 and 94 
percent of firms in NAIC code 522130 are small business entities. 
Overwhelmingly, credit card products are issued by insured depository 
institutions and, therefore, small business entities issuing credit 
cards (included within NAIC code 522210) are covered by the previously 
described codes.
    While a substantial portion of firms in each affected market are 
``small business entities,'' Service members and their dependents make 
up only a small portion of the consumers for those businesses. Because 
only approximately 2.5 percent of households in the United States 
include an active duty Service member, the interest-rate limit and 
other MLA conditions of the proposed regulation would affect a small 
percentage of the consumers served by entities that could be creditors 
covered by this regulation. Thus, the Department concludes that--even 
though there appears to be a large percentage of small business 
entities in each affected class of business--the proposed regulation 
would not (for the purposes of the RFA) have a significant economic 
impact on a substantial number of small businesses because those 
businesses nonetheless have very few customers who are covered 
borrowers. The Department seeks comment, particularly from potentially 
affected small businesses themselves, on the possible impact of the 
proposed rule on small businesses. Please provide data and studies that 
support the comment.

D. Paperwork Reduction Act

    Proposed Sec. Sec.  232.5 and 232.6 contain information-collection 
requirements. The Department has submitted the following proposal to 
OMB under the provisions of the Paperwork Reduction Act.\229\ Comments 
are invited on: (a) Whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Department, including whether the information will have practical 
utility; (b) the accuracy of the estimate of the burden of the proposed 
information collection; (c) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (d) ways to minimize 
the burden of the information collection on respondents.
---------------------------------------------------------------------------

    \229\ 44 U.S.C. 3502, 3506-07.
---------------------------------------------------------------------------

    Title: Database Inquiry and Mandatory Loan Disclosures as Part of 
Limitations on Terms of Consumer Credit Extended to Service Members and 
Their Dependents.

[[Page 58636]]

    Type of Request: Reinstatement with change.
    Number of Respondents: 40,000.
    Responses per Respondent: Varies by type of respondent.
    Annual Responses: 191 million.
    Average Burden per Response: Varies by type of response. On an 
ongoing basis, respondents likely will spend 1 minute (0.02 hours) for 
single-record borrower inquiry (70 million); 1.67 minutes (0.03 hours) 
for orally providing the required information to covered borrowers (4 
million responses); and 0 minutes for printed disclosures included in 
all consumer credit contracts (191 million). In the first year, there 
is expected to be a one-time burden of 110 labor hours to set up the 
mandatory oral and printed disclosures, as well as a process for 
conducting covered-borrower checks and retaining records.
    Annual Burden Hours: 4,000,000 set-up burden hours in the first 
year; 1,266,747 ongoing burden hours each year.
    Needs and Uses: With respect to any extension of consumer credit to 
a covered borrower, a creditor would be required to provide to the 
borrower (a) a statement of the MAPR and (b) a Statement of Federal 
Protections. In approximately 4 million transactions, the required 
information would be provided orally as well as in a printed document; 
in approximately 191 million transactions, the required information 
would be included in standard account agreements. Additionally, a 
creditor may, at its discretion, identify the status of a consumer-
applicant by querying the MLA Database and, in the event that the 
inquiry indicates that consumer-applicant is not a covered borrower, 
take advantage of a safe harbor from liability under 10 U.S.C. 987 by 
retaining a record of the information obtained from the database.
    Affected Public: Creditors making loans that are subject to a 
finance charge or payable by a written agreement in more than four 
installments, except for loans that are mortgage loans and purchase-
money financing for vehicles or other personal property.
    Frequency: One set of disclosures for each transaction involving 
consumer credit; one database inquiry for each transaction involving 
consumer credit.
    Respondents' Obligation: Mandatory loan disclosures; optional 
database inquiry and subsequent record retention.
OMB Desk Officer
    Written comments and recommendations on the proposed information 
collection should be sent to Ms. Jasmeet Seehra at the Office of 
Management and Budget, DoD Desk Officer, Room 10102, New Executive 
Office Building, Washington, DC 20503, with a copy to the Office of the 
Deputy Assistant Secretary of Defense (Military Community and Family 
Policy), 4000 Defense Pentagon, Washington, DC 20301-4000. Comments can 
be received from 30 to 60 days after the date of this document, but 
comments to OMB will be most useful if received by OMB within 30 days 
after the date of this document.
    You may also submit comments, identified by docket number and 
title, by the following method:
    * Federal eRulemaking Portal: http://www.regulations.gov. Follow 
the instructions for submitting comments.
    Instructions: All submissions received must include the agency 
name, docket number and title for this Federal Register document. The 
general policy for comments and other submissions from members of the 
public is to make these submissions available for public viewing on the 
Internet at http://www.regulations.gov as they are received without 
change, including any personal identifiers or contact information.
    To request more information on this proposed information collection 
or to obtain a copy of the proposal and associated collection 
instruments, please write to Office of the Deputy Assistant Secretary 
of Defense (Military Community and Family Policy), 4000 Defense 
Pentagon, Washington, DC 20301-4000, Marcus Beauregard, 571-372-5357.

E. Executive Order 13132 Federalism

    Executive Order 13132 (``EO 13132'') requires Executive departments 
and agencies, including the Department, to identify regulatory actions 
that have significant federalism implications. A regulation has 
federalism implications if it has substantial direct effects on the 
States, on the relationship or distribution of power between the 
Federal Government and the States, or on the distribution of power and 
responsibilities among various levels of government.
    The provisions of this part, as required by 10 U.S.C. 987, override 
state statutes inconsistent with this part to the extent that these 
provisions provide different protections for covered borrowers than 
those provided to residents of that State. As discussed in the section-
by-section description of the proposed regulation, in section III, the 
proposal would revise the corresponding section of the Department's 
existing regulation to reflect amendments to 10 U.S.C. 987(d)(2) 
enacted in section 661(a)(1) of the 2013 Act. This amendment clarifies 
the scope of state laws subject to preemption by 10 U.S.C. 987.
    The proposed regulation, if adopted as proposed, would not affect 
in any manner the powers and authorities that any State may have or 
affect the distribution of power and responsibilities between Federal 
and State levels of government. Therefore, the Department has 
determined that the proposed regulation has no federalism implications 
that warrant the preparation of a Federalism Assessment in accordance 
with EO 13132.

List of Subjects in 32 CFR Part 232

    Loan programs, Reporting and recordkeeping requirements, Service 
members.

    For the reasons set forth in the preamble, chapter I of title 32, 
Code of Federal Regulations is proposed to be amended by revising part 
232 to read as follows:

PART 232--LIMITATIONS ON TERMS OF CONSUMER CREDIT EXTENDED TO 
SERVICE MEMBERS AND DEPENDENTS

Sec.
232.1 Authority, purpose, and coverage.
232.2 Applicability; examples.
232.3 Definitions.
232.4 Terms of consumer credit extended to covered borrowers.
232.5 Identification of covered borrower.
232.6 Mandatory loan disclosures.
232.7 Preemption.
232.8 Limitations.
232.9 Penalties and remedies.
232.10 Administrative enforcement.
232.11 Servicemembers Civil Relief Act provisions unaffected.
232.12 Effective dates.

    Authority: 10 U.S.C. 987.


Sec.  232.1  Authority, purpose, and coverage.

    (a) Authority. This part is issued by the Department of Defense to 
implement 10 U.S.C. 987.
    (b) Purpose. The purpose of this part is to impose limitations on 
the cost and terms of certain extensions of credit to Service members 
and their dependents, and to provide additional protections relating to 
such transactions in accordance with 10 U.S.C. 987.
    (c) Coverage. This part defines the types of transactions involving 
``consumer credit,'' a ``creditor,'' and a ``covered borrower'' that 
are subject to the regulation, consistent with the provisions of 10 
U.S.C. 987. In addition, this part:
    (1) Provides the maximum allowable amount of all charges, and the 
types of

[[Page 58637]]

charges, that may be associated with a covered extension of consumer 
credit;
    (2) Requires a creditor to provide to a covered borrower a 
statement of the Military Annual Percentage Rate, or MAPR, before or at 
the time the borrower becomes obligated on the transaction or 
establishes an account for the consumer credit. The statement required 
by this part differs from and is in addition to the disclosures that 
must be provided to consumers under the Truth in Lending Act;
    (3) Provides for the method a creditor must use in calculating the 
MAPR; and
    (4) Contains such other criteria and limitations as the Secretary 
of Defense has determined appropriate, consistent with the provisions 
of 10 U.S.C. 987.


Sec.  232.2  Applicability; examples.

    (a) Applicability. This part applies to consumer credit extended by 
a creditor to a covered borrower, as those terms are defined in this 
part. Nothing in this part applies to a credit transaction or account 
relating to a consumer who is not a covered borrower at the time he or 
she becomes obligated on a credit transaction or establishes an account 
for credit.
    (b) Examples. The examples in this part are not exclusive. To the 
extent that an example in this part implicates a term or provision of 
Regulation Z (12 CFR part 1026), issued by the Consumer Financial 
Protection Bureau to implement the Truth in Lending Act, Regulation Z 
shall control the meaning of that term or provision.


Sec.  232.3  Definitions.

    (a) Affiliate means any person that controls, is controlled by, or 
is under common control with another person.
    (b) Billing cycle has the same meaning as ``billing cycle'' in 
Regulation Z.
    (c) Bureau means the Consumer Financial Protection Bureau.
    (d) Closed-end credit means consumer credit (but for the conditions 
applicable to consumer credit under this part) other than consumer 
credit that is ``open-end credit'' as that term is defined in 
Regulation Z.
    (e) Consumer means a natural person.
    (f)(1) Consumer credit means credit offered or extended to a 
covered borrower primarily for personal, family, or household purposes, 
and that is:
    (i) Subject to a finance charge; or
    (ii) Payable by a written agreement in more than four installments.
    (2) Exceptions. Notwithstanding paragraph (f)(1) of this section, 
consumer credit does not mean:
    (i) A residential mortgage, which is any credit transaction secured 
by an interest in the covered borrower's dwelling, including a 
transaction to finance the purchase or initial construction of a 
dwelling, any refinance transaction, home equity loan or line of 
credit, or reverse mortgage;
    (ii) Any credit transaction that is expressly intended to finance 
the purchase of a motor vehicle when the credit is secured by the 
vehicle being purchased;
    (iii) Any credit transaction that is expressly intended to finance 
the purchase of personal property when the credit is secured by the 
property being purchased; and
    (iv) Any credit transaction that is an exempt transaction for the 
purposes of Regulation Z (other than a transaction exempt under 12 CFR 
1026.29) or otherwise is not subject to disclosure requirements under 
Regulation Z.
    (g) Covered borrower means a consumer who, at the time the consumer 
becomes obligated on a consumer credit transaction or establishes an 
account for consumer credit, is a covered member (as defined in this 
paragraph) or a dependent (as defined in this paragraph) of a covered 
member.
    (1) The term ``covered member'' means a member of the armed forces 
who is serving on--
    (i) Active duty pursuant to title 10, title 14, or title 32, United 
States Code, under a call or order that does not specify a period of 30 
days or fewer, or
    (ii) Active Guard and Reserve duty, as that term is defined in 10 
U.S.C. 101(d)(6).
    (2) The term ``dependent'' with respect to a covered member means a 
person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 
1072(2).
    (h) Credit means the right granted to a consumer by a creditor to 
defer payment of debt or to incur debt and defer its payment.
    (i) Creditor, except as provided in Sec.  232.8(a) and Sec.  
232.8(f), means a person who is:
    (1) Engaged in the business of extending consumer credit; or
    (2) An assignee of a person described in paragraph (i)(1) of this 
section with respect to any consumer credit extended.
    (3) For the purposes of this definition, a creditor is engaged in 
the business of extending consumer credit if the creditor considered by 
itself and together with its affiliates meets the transaction standard 
for a ``creditor'' under Regulation Z with respect to extensions of 
consumer credit to covered borrowers.
    (j) Department means the Department of Defense.
    (k) Dwelling means a residential structure that contains one to 
four units, whether or not the structure is attached to real property. 
The term includes an individual condominium unit, cooperative unit, 
mobile home, and manufactured home.
    (l) Electronic fund transfer has the same meaning as in the 
regulation issued by the Bureau to implement the Electronic Fund 
Transfer Act, as amended from time to time (12 CFR part 1005).
    (m) Finance charge has the same meaning as ``finance charge'' in 
Regulation Z.
    (n) Military annual percentage rate (MAPR). The MAPR is the cost of 
the consumer credit expressed as an annual rate, and shall be 
calculated in accordance with Sec.  232.4(c).
    (o) Open-end credit means consumer credit that (but for the 
conditions applicable to consumer credit under this part) is ``open-end 
credit'' under Regulation Z.
    (p) Person means a natural person or organization, including any 
corporation, partnership, proprietorship, association, cooperative, 
estate, trust, or government unit.
    (q) Regulation Z means any rules, or interpretations thereof, 
issued by the Bureau to implement the Truth in Lending Act, as amended 
from time to time, including any interpretation or approval issued by 
an official or employee duly authorized by the Bureau to issue such 
interpretations or approvals. However, for any provision of this part 
requiring a creditor to comply with Regulation Z, a creditor who is 
subject to Regulation Z (12 CFR part 226) issued by the Board of 
Governors of the Federal Reserve System must continue to comply with 12 
CFR part 226. Words that are not defined in this rule have the same 
meanings given to them in Regulation Z (12 CFR part 1026) issued by the 
Bureau, as amended from time to time, including any interpretation 
thereof by the Bureau or an official or employee of the Bureau duly 
authorized by the Bureau to issue such interpretations. Words that are 
not defined in this part or Regulation Z, or any interpretation 
thereof, have the meanings given to them by State or Federal law.


Sec.  232.4  Terms of consumer credit extended to covered borrowers.

    (a) General conditions. A creditor who extends consumer credit to a 
covered borrower may not require the covered borrower to pay an MAPR 
for the credit with respect to such extension of credit, except as:

[[Page 58638]]

    (1) Agreed to under the terms of the credit agreement or promissory 
note;
    (2) Authorized by applicable State or Federal law; and
    (3) Not specifically prohibited by this part.
    (b) Limit on cost of consumer credit. A creditor may not impose an 
MAPR greater than 36 percent in connection with an extension of 
consumer credit that is closed-end credit or in any billing cycle for 
open-end credit.
    (c) Calculation of the MAPR.
    (1) Charges included in the MAPR. The charges for the MAPR shall 
include, as applicable to the extension of consumer credit:
    (i) Credit insurance premiums, including charges for single premium 
credit insurance, fees for debt cancellation or debt suspension 
agreements;
    (ii) Fees for credit-related ancillary products sold in connection 
with and either at or before consummation of the credit transaction for 
closed-end credit or upon account opening for open-end credit; and
    (iii) Except for a bona fide fee (other than a periodic rate) which 
may be excluded under paragraph (d) of this section:
    (A) Finance charges associated with the consumer credit;
    (B) Any application fee charged to a covered borrower who applies 
for consumer credit; and
    (C) Any fee imposed for participation in any plan or arrangement 
for consumer credit, subject to paragraph (c)(2)(ii)(B) of this 
section.
    (iv) Certain exclusions of Regulation Z inapplicable. Any charge 
set forth in paragraphs (c)(1)(i)-(iii) of this section shall be 
included in the calculation of the MAPR even if that charge would be 
excluded from the finance charge under Regulation Z.
    (2) Computing the MAPR--(i) Closed-end credit. For closed-end 
credit, the MAPR shall be calculated following the rules for 
calculating and disclosing the ``Annual Percentage Rate (APR)'' for 
credit transactions under Regulation Z based on the charges set forth 
in paragraph (c)(1) of this section.
    (ii) Open-end credit--(A) In general. Except as provided in 
paragraph (c)(2)(ii)(B) of this section, for open-end credit, the MAPR 
shall be calculated following the rules for calculating the effective 
annual percentage rate for a billing cycle as set forth in Sec.  
1026.14(c)-(d) of Regulation Z (as if a creditor must comply with that 
section) based on the charges set forth in paragraph (c)(1) of this 
section. Notwithstanding Sec.  1026.14(c)-(d) of Regulation Z, the 
amount of charges related to opening, renewing, or continuing an 
account must be included in the calculation of the MAPR to the extent 
those charges are set forth in paragraph (c)(1) of this section.
    (B) No balance during a billing cycle. For open-end credit, if the 
MAPR cannot be calculated in a billing cycle because there is no 
balance in the billing cycle, a creditor may not impose any fee or 
charge during that billing cycle, except that the creditor may impose a 
fee for participation in any plan or arrangement for that open-end 
credit so long as the participation fee does not exceed $100 per annum, 
regardless of the billing cycle in which the participation fee is 
imposed; provided, however, that the $100-per annum limitation on the 
amount of the participation fee does not apply to a bona fide 
participation fee imposed in accordance with paragraph (d) of this 
section.
    (d) Bona fide fee charged to a credit card account--(1) In general. 
For consumer credit extended in a credit card account under an open-end 
(not home-secured) consumer credit plan, a bona fide fee, other than a 
periodic rate, is not a charge required to be included in the MAPR 
pursuant to paragraph (c)(1) of this section. The exclusion provided 
for any bona fide fee under this paragraph applies only to the extent 
that the charge by the creditor is a bona fide fee, and must be 
reasonable and customary for that type of fee.
    (2) Ineligible items. The exclusion for bona fide fees in paragraph 
(d)(1) of this section does not apply to any credit insurance premium, 
including charges for single premium credit insurance, fees for debt 
cancellation or debt suspension agreements, or to any fees for credit-
related ancillary products sold in connection with and either at or 
before consummation of the credit transaction or upon account opening.
    (3) Standards relating to bona fide fees--(i) Like-kind fees. To 
assess whether a bona fide fee is reasonable and customary under 
paragraph (d)(1) of this section, the fee must be compared to fees 
typically imposed by other creditors for the same or a substantially 
similar product or service. For example, when assessing a bona fide 
cash advance fee, that fee must be compared to fees charged by other 
creditors for transactions in which consumers receive extensions of 
credit in the form of cash or its equivalent.
    (ii) Safe harbor. A bona fide fee is reasonable under paragraph 
(d)(1) of this section if the amount of the fee is less than or equal 
to an average amount of a fee for the same or a substantially similar 
product or service charged by 5 or more creditors each with at least $3 
billion in outstanding loans on U.S. credit card accounts at any time 
during the 3-year period preceding the time such average is computed.
    (iii) Reasonable fee. A bona fide fee that is higher than an 
average amount, as calculated under paragraph (d)(3)(ii) of this 
section, also may be reasonable under paragraph (d)(1) of this section 
depending on other factors relating to the credit card account. A bona 
fide fee charged by a creditor is not unreasonable solely because other 
creditors do not charge a fee for the same or a substantially similar 
product or service.
    (iv) Customary. A bona fide fee computed as a percentage of the 
amount of a transaction is customary under paragraph (d)(1) of this 
section so long as other creditors typically compute, or customarily 
have computed, that fee for the same or a substantially similar product 
or service on a percentage basis. Nothing in this paragraph (d)(3)(iv) 
shall prohibit a bona fide fee that is a fixed amount from being 
customary for the purpose of meeting the condition set forth in 
paragraph (d)(1) of this section, even if substantially all other 
creditors currently compute that fee on a percentage basis. Nothing in 
this paragraph (d)(3)(iv) shall prohibit a bona fide fee that is 
charged on a percentage basis from being customary for the purpose of 
meeting the condition set forth in paragraph (d)(1) of this section, 
even if substantially all other creditors currently charge a fixed 
amount.
    (v) Indicia of reasonableness for a participation fee. An amount of 
a bona fide fee for participation in a credit card account may be 
reasonable and customary under paragraph (d)(1) of this section if that 
amount reasonably and customarily corresponds to the credit limit in 
effect or credit made available when the fee is imposed, to the 
services offered under the credit card account, or to other factors 
relating to the credit card account. For example, even if other 
creditors typically charge $100 per annum for participation in credit 
card accounts, a $400 fee nevertheless may be reasonable and customary 
if (relative to other accounts carrying participation fees) the credit 
made available to the covered borrower is significantly higher or 
additional services or other benefits are offered under that account.
    (4) If a creditor imposes any fee (other than a periodic rate) that 
is not a bona fide fee and imposes a finance charge to a covered 
borrower, the total amount of those fees, including any bona fide fees, 
and other finance charges shall be

[[Page 58639]]

included in the MAPR pursuant to paragraph (c) of this section.
    (5) Rule of construction. Nothing in paragraph (d)(1) of this 
section authorizes the imposition of fees or charges otherwise 
prohibited by this part or by other applicable State or Federal law.


Sec.  232.5  Identification of covered borrower.

    (a) In general. A creditor may conclusively determine whether 
credit is offered or extended to a covered borrower, and thus may be 
subject to 10 U.S.C. 987 and the requirements of this part, by 
assessing the status of a consumer in accordance with this section. A 
creditor also is permitted to assess whether a consumer is a covered 
borrower by using other methods, as the creditor may elect.
    (b) Safe harbor--(1) Department database. To determine whether a 
consumer is a covered borrower, a creditor may verify the status of a 
consumer by accessing the information relating to that consumer, if 
any, in the database maintained by the Department, available at http://www.dmdc.osd.mil/mla/owa/home. A search of the Department's database 
requires the entry of the consumer's last name, date of birth, and 
Social Security number.
    (2) Determination and recordkeeping. Except as provided in 
paragraph (c) of this section, when a creditor enters into a 
transaction or establishes an account for consumer credit, a 
determination by a creditor regarding the status of a consumer based on 
information obtained from the Department's database shall be deemed to 
be conclusive with respect to that transaction or account involving 
consumer credit between the creditor and that consumer, so long as that 
creditor maintains a record of the information so obtained.
    (c) Actual knowledge. (1) If at the time a creditor enters into a 
transaction or establishes an account for consumer credit the creditor 
has actual knowledge that a consumer is a covered borrower, the 
creditor shall treat the consumer as a covered borrower notwithstanding 
any determination by that creditor based on information obtained from 
the Department's database. Actual knowledge that a consumer is a 
covered borrower obtained after a creditor has entered into a 
transaction or established an account for consumer credit shall not 
affect that transaction or account if the prior determination by that 
creditor was based solely on information obtained from the Department's 
database.
    (2) For the purposes of this section, actual knowledge of the 
status of a consumer as a covered borrower may be established only on 
the basis of a record (including any electronic record) collected by 
the creditor prior to entering into a transaction or establishing an 
account for consumer credit and maintained in any system used by the 
creditor that relates to the consumer credit involving that consumer.


Sec.  232.6  Mandatory loan disclosures.

    (a) Required information. With respect to any extension of consumer 
credit (including any consumer credit originated or extended through 
the internet) to a covered borrower, a creditor shall provide to the 
covered borrower the following information before or at the time the 
borrower becomes obligated on the transaction or establishes an account 
for the consumer credit:
    (1) A statement of the MAPR applicable to the extension of consumer 
credit;
    (2) Any disclosure required by Regulation Z, which shall be 
provided only in accordance with the requirements of Regulation Z that 
apply to that disclosure;
    (3) A clear description of the payment obligation of the covered 
borrower, as applicable. A payment schedule (in the case of closed-end 
credit) or account-opening disclosure (in the case of open-end credit) 
provided pursuant to paragraph (a)(2) of this section satisfies this 
requirement; and
    (4) A statement that ``Federal law provides important protections 
to regular or reserve members of the Army, Navy, Marine Corps, Air 
Force, or Coast Guard, serving on active duty under a call or order 
that does not specify a period of 30 days or fewer, and their 
dependents. Members of the Armed Forces and their dependents may be 
able to obtain financial assistance from Army Emergency Relief, Navy 
and Marine Corps Relief Society, the Air Force Aid Society, or Coast 
Guard Mutual Aid. Members of the Armed Forces and their dependents may 
request free legal advice regarding an application for credit from a 
service legal assistance office or financial counseling from a consumer 
credit counselor.''
    (b) One-time delivery; multiple creditors. (1) The information 
described in paragraphs (a)(1), (a)(3), and (a)(4) of this section are 
not required to be provided to a covered borrower more than once for 
the transaction or the account established for consumer credit with 
respect to that borrower.
    (2) Multiple creditors. If a transaction involves more than one 
creditor, the creditors shall agree among themselves which creditor 
must provide the information described in paragraphs (a)(1), (a)(3), 
and (a)(4) of this section.
    (c) Statement of the MAPR--(1) In general. A creditor may satisfy 
the requirement of paragraph (a)(1) of this section by describing the 
charges the creditor may impose, in accordance with this part and 
subject to the terms and conditions of the agreement relating to the 
consumer credit to calculate the MAPR. Paragraph (a)(1) of this section 
shall not be construed as requiring a creditor to describe the MAPR as 
a numerical value or to describe the total dollar amount of all charges 
in the MAPR that apply to the extension of consumer credit.
    (2) Method of providing a statement regarding the MAPR. A creditor 
may include a statement of the MAPR applicable to the consumer credit 
in the agreement with the covered borrower involving the consumer 
credit transaction. Paragraph (a)(1) of this section shall not be 
construed as requiring a creditor to include a statement of the MAPR 
applicable to an extension of consumer credit in any advertisement 
relating to the credit.
    (3) Model statement. A statement substantially similar to the 
following statement may be used for the purpose of paragraph (a)(1) of 
this section: ``Federal law provides important protections to members 
of the Armed Forces and their dependents relating to extensions of 
consumer credit. In general, the cost of consumer credit to a member of 
the Armed Forces and his or her dependent may not exceed an annual 
percentage rate of 36 percent. This rate must include, as applicable to 
the credit transaction or account: the costs associated with credit 
insurance premiums; fees for ancillary products sold in connection with 
the credit transaction; any application fee charged (other than certain 
application fees for a credit card account); and any participation fee 
charged (other than certain participation fees for a credit card 
account).''
    (d) Methods of delivery--(1) Written disclosures. The creditor 
shall provide the information required by paragraphs (a)(1), (a)(3), 
and (a)(4) of this section in writing in a form the covered borrower 
can keep.
    (2) Oral disclosures. The creditor also shall orally provide the 
information required by paragraphs (a)(1), (a)(3), and (a)(4) of this 
section. In mail transactions, internet transactions, and transactions 
conducted at the point-of-sale in connection with the sale of a 
nonfinancial product or service, the creditor satisfies this 
requirement if it provides a toll-free telephone number

[[Page 58640]]

on or with the written disclosures that a covered borrower may use to 
obtain oral disclosures and the creditor provides oral disclosures when 
the covered borrower contacts the creditor for this purpose.
    (e) When disclosures are required for refinancing or renewal of 
covered loan. The refinancing or renewal of consumer credit requires 
new disclosures under this section only when the transaction for that 
credit would be considered a new transaction that requires disclosures 
under Regulation Z.


Sec.  232.7  Preemption.

    (a) Inconsistent laws. 10 U.S.C. 987 as implemented by this part 
preempts any State or Federal law, rule or regulation, including any 
State usury law, to the extent such law, rule or regulation is 
inconsistent with this part, except that any such law, rule or 
regulation is not preempted by this part to the extent that it provides 
protection to a covered borrower greater than those protections 
provided by 10 U.S.C. 987 and this part.
    (b) Different treatment under State law of covered borrowers is 
prohibited. A State may not:
    (1) Authorize creditors to charge covered borrowers rates of 
interest for any consumer credit or loans that are higher than the 
legal limit for residents of the State, or
    (2) Permit the violation or waiver of any State consumer lending 
protection covering consumer credit that is for the benefit of 
residents of the State on the basis of the covered borrower's 
nonresident or military status, regardless of the covered borrower's 
domicile or permanent home of record, provided that the protection 
would otherwise apply to the covered borrower.


Sec.  232.8  Limitations.

    Title 10 U.S.C. 987 makes it unlawful for any creditor to extend 
consumer credit to a covered borrower with respect to which:
    (a) The creditor rolls over, renews, repays, refinances, or 
consolidates any consumer credit extended to the covered borrower by 
the same creditor with the proceeds of other consumer credit extended 
by that creditor to the same covered borrower. This paragraph shall not 
apply to a transaction when the same creditor extends consumer credit 
to a covered borrower to refinance or renew an extension of credit that 
was not covered by this paragraph because the consumer was not a 
covered borrower at the time of the original transaction. For the 
purposes of this paragraph only, the term ``creditor'' means a person 
engaged in the business of extending consumer credit subject to 
applicable law to engage in deferred presentment transactions or 
similar payday loan transactions (as described in the relevant law), 
provided however, that the term does not include a person that is 
chartered or licensed under Federal or State law as a bank, savings 
association, or credit union.
    (b) The covered borrower is required to waive the covered 
borrower's right to legal recourse under any otherwise applicable 
provision of State or Federal law, including any provision of the 
Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.).
    (c) The creditor requires the covered borrower to submit to 
arbitration or imposes other onerous legal notice provisions in the 
case of a dispute.
    (d) The creditor demands unreasonable notice from the covered 
borrower as a condition for legal action.
    (e) The creditor uses a check or other method of access to a 
deposit, savings, or other financial account maintained by the covered 
borrower, except that, in connection with a consumer credit transaction 
with an MAPR consistent with Sec.  232.4(b), the creditor may:
    (1) Require an electronic fund transfer to repay a consumer credit 
transaction, unless otherwise prohibited by law;
    (2) Require direct deposit of the consumer's salary as a condition 
of eligibility for consumer credit, unless otherwise prohibited by law; 
or
    (3) If not otherwise prohibited by applicable law, take a security 
interest in funds deposited after the extension of credit in an account 
established in connection with the consumer credit transaction.
    (f) The creditor requires as a condition for the extension of 
consumer credit that the covered borrower establish an allotment to 
repay the obligation. For the purposes of this paragraph only, the term 
``creditor'' shall not include a ``military welfare society,'' as 
defined in 10 U.S.C. 1033(b)(2), or a ``service relief society,'' as 
defined in 37 U.S.C. 1007(h)(4).
    (g) The covered borrower is prohibited from prepaying the consumer 
credit or is charged a penalty fee for prepaying all or part of the 
consumer credit.


Sec.  232.9  Penalties and remedies.

    (a) Misdemeanor. A creditor who knowingly violates 10 U.S.C. 987 as 
implemented by this part shall be fined as provided in title 18, United 
States Code, or imprisoned for not more than one year, or both.
    (b) Preservation of other remedies. The remedies and rights 
provided under 10 U.S.C. 987 as implemented by this part are in 
addition to and do not preclude any remedy otherwise available under 
State or Federal law or regulation to the person claiming relief under 
the statute, including any award for consequential damages and punitive 
damages.
    (c) Contract void. Any credit agreement, promissory note, or other 
contract with a covered borrower that fails to comply with 10 U.S.C. 
987 as implemented by this part or which contains one or more 
provisions prohibited under 10 U.S.C. 987 as implemented by this part 
is void from the inception of the contract.
    (d) Arbitration. Notwithstanding 9 U.S.C. 2, or any other Federal 
or State law, rule, or regulation, no agreement to arbitrate any 
dispute involving the extension of consumer credit to a covered 
borrower pursuant to this part shall be enforceable against any covered 
borrower, or any person who was a covered borrower when the agreement 
was made.
    (e) Civil liability--(1) In general. A person who violates 10 
U.S.C. 987 as implemented by this part with respect to any person is 
civilly liable to such person for:
    (i) Any actual damage sustained as a result, but not less than $500 
for each violation;
    (ii) Appropriate punitive damages;
    (iii) Appropriate equitable or declaratory relief; and
    (iv) Any other relief provided by law.
    (2) Costs of the action. In any successful action to enforce the 
civil liability described in paragraph (e)(1) of this section, the 
person who violated 10 U.S.C. 987 as implemented by this part is also 
liable for the costs of the action, together with reasonable attorney 
fees as determined by the court.
    (3) Effect of finding of bad faith and harassment. In any 
successful action by a defendant under this section, if the court finds 
the action was brought in bad faith and for the purpose of harassment, 
the plaintiff is liable for the attorney fees of the defendant as 
determined by the court to be reasonable in relation to the work 
expended and costs incurred.
    (4) Defenses. A person may not be held liable for civil liability 
under paragraph (e) of this section if the person shows by a 
preponderance of evidence that the violation was not intentional and 
resulted from a bona fide error notwithstanding the maintenance of 
procedures reasonably adapted to avoid any such error. Examples of a 
bona fide error include clerical, calculation, computer malfunction and 
programming, and printing errors, except that an error of

[[Page 58641]]

legal judgment with respect to a person's obligations under 10 U.S.C. 
987 as implemented by this part is not a bona fide error.
    (5) Jurisdiction, venue, and statute of limitations. An action for 
civil liability under paragraph (e) of this section may be brought in 
any appropriate United States district court, without regard to the 
amount in controversy, or in any other court of competent jurisdiction, 
not later than the earlier of:
    (i) Two years after the date of discovery by the plaintiff of the 
violation that is the basis for such liability; or
    (ii) Five years after the date on which the violation that is the 
basis for such liability occurs.


Sec.  232.10  Administrative enforcement.

    The provisions of this part, other than Sec.  232.9(a), shall be 
enforced by the agencies specified in section 108 of the Truth in 
Lending Act (15 U.S.C. 1607) in the manner set forth in that section or 
under any other applicable authorities available to such agencies by 
law.


Sec.  232.11  Servicemembers Civil Relief Act protections unaffected.

    Nothing in this part may be construed to limit or otherwise affect 
the applicability of section 207 and any other provisions of the 
Servicemembers Civil Relief Act (50 U.S.C. App. 527).


Sec.  232.12  Effective dates.

    (a) Prior extensions of consumer credit. Consumer credit that is 
extended to a covered borrower and consummated any time between October 
1, 2007, and [EFFECTIVE DATE OF FINAL REGULATION, AS AMENDED], are 
subject to the requirements of this part as were established by the 
Department and effective on October 1, 2007.
    (b) New extensions of consumer credit. Except as provided in 
paragraphs (c) and (d) of this section, the requirements of this part, 
as amended by the Department and effective as of [EFFECTIVE DATE OF 
FINAL REGULATION], shall apply only to a consumer credit transaction or 
account for consumer credit consummated or established on or after 
[EFFECTIVE DATE OF FINAL REGULATION].
    (c) Provisions of 10 U.S.C. 987(d)(2). The amendments to 10 U.S.C. 
987(d)(2) enacted in section 661(a) of the National Defense 
Authorization Act for Fiscal Year 2013 (Pub. L. 112-239, 126 Stat. 
1785), as reflected in Sec.  232.7(b) of this part, shall take effect 
on January 2, 2014.
    (d) Civil liability remedies. The provisions set forth in Sec.  
232.9(e) shall apply with respect to consumer credit extended on or 
after January 2, 2013.

    Dated: September 22, 2014.
Aaron Siegel,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2014-22900 Filed 9-26-14; 8:45 am]
BILLING CODE 5001-06-P