[Federal Register Volume 80, Number 140 (Wednesday, July 22, 2015)]
[Rules and Regulations]
[Pages 43560-43612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17480]



[[Page 43559]]

Vol. 80

Wednesday,

No. 140

July 22, 2015

Part II





Department of Defense





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32 CFR Part 232





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

  Federal Register / Vol. 80 , No. 140 / Wednesday, July 22, 2015 / 
Rules and Regulations  

[[Page 43560]]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 232

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


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

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

ACTION: Final rule.

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SUMMARY: The Department of Defense (``Department'') amends its 
regulation that implements the Military Lending Act, herein referred to 
as the ``MLA.'' Among other protections for Service members and their 
families, the MLA limits the amount of interest that a creditor may 
charge on ``consumer credit'' to a maximum annual percentage rate of 36 
percent. The Department amends its regulation primarily for the purpose 
of extending the protections of the MLA to a broader range of closed-
end and open-end credit products. Among other amendments, the 
Department modifies the provisions relating to the optional mechanism a 
creditor could use when assessing whether a consumer is a ``covered 
borrower,'' modifies the disclosures that a creditor must provide to a 
covered borrower, and implements the enforcement provisions of the MLA.

DATES: Effective Date: October 1, 2015. Compliance required by October 
3, 2016.

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

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose of the Regulatory Action

    In September 2014, the Department published a proposal to amend its 
regulation implementing the MLA \1\ primarily for the purpose of 
extending the protections of 10 U.S.C. 987 to a broader range of 
closed-end and open-end credit products (``Proposed Rule''),\2\ rather 
than the limited credit products that had been defined as ``consumer 
credit.'' \3\ After reviewing comments submitted on the Proposed Rule 
and in light of its experience administering the existing regulation 
for over seven years, the Department amends its regulation so that, in 
general, consumer credit covered under the MLA \4\ would be defined 
consistently with credit that for decades has been subject to the 
disclosure requirements of the Truth in Lending Act (TILA), codified in 
Regulation Z, namely: Credit offered or extended to a covered borrower 
primarily for personal, family, or household purposes, and that is (i) 
subject to a finance charge or (ii) payable by a written agreement in 
more than four installments.\5\
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    \1\ 32 CFR part 232.
    \2\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents (Proposed Rule), 79 FR 58602 (Sept. 29, 
2014). The Department extended the period for submitting comments on 
the Proposed Rule, to December 26, 2014. 79 FR 70137 (Nov. 25, 
2014).
    \3\ 32 CFR 232.3(b) (2008).
    \4\ The forms of ``consumer credit'' that may be covered by the 
MLA are subject to certain exceptions, notably for a residential 
mortgage or auto-secured purchase loan. 10 U.S.C. 987(i)(6)(A) and 
987(i)(6)(B).
    \5\ See 12 CFR 1026.1(c)(1)(iii) (2015) (limiting the coverage 
of the regulation, in relevant part, to credit that is subject to a 
finance charge or is payable by a written agreement in more than 
four installments).
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    The Department believes that this final rule is appropriate in 
order to address a wider range of credit products that currently fall 
outside the scope of the Department's existing regulation that, until 
now, had implemented the MLA (``existing rule''). In addition, the 
final rule streamlines the information that a creditor must provide to 
a covered borrower when consummating a transaction involving consumer 
credit and provides a more straightforward mechanism for a creditor to 
conclusively determine--via a safe harbor--whether a consumer-applicant 
is a covered borrower. In this regard, the Department is aware of 
misuses of the covered borrower identification statement whereby a 
Service member (or covered dependent) falsely declares that he or she 
is not a covered borrower. The Department believes that, if a creditor 
elects to (but is not required to) unilaterally conduct a covered-
borrower check by obtaining information from the Department's online 
database (``MLA Database''),\6\ a Service member or his or her 
dependent would be relieved from making any statement regarding his or 
her status as a covered borrower.
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    \6\ The MLA Database is available at https://www.dmdc.osd.mil/mla/welcome.xhtml.
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    The Department is provided authority in 10 U.S.C. 987(h) to 
establish regulations to implement the MLA. As described in 10 U.S.C. 
987(h)(3) the Department, at a minimum, must consult with other Federal 
agencies ``not less often than once every two years'' with a view 
towards revising the regulation implementing the MLA. In developing 
this final rule the Department has consulted with the Board of 
Governors of the Federal Reserve System (``Board''), the Consumer 
Financial Protection Bureau (``Bureau''), the Department of the 
Treasury, the Federal Deposit Insurance Corporation (``FDIC''), the 
Federal Trade Commission (``FTC''), the National Credit Union 
Administration (``NCUA''), and the Office of the Comptroller of the 
Currency (collectively, ``Federal Agencies''). The Department will 
continue to consult with the Federal Agencies, as appropriate, as the 
Department continues to assess the measures implementing the 
protections of the MLA.

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

    The MLA, as implemented by the Department's regulation, provides 
two broad classes of requirements applicable to a creditor: First, the 
creditor may not impose a Military Annual Percentage Rate (``MAPR'') 
greater than 36 percent in connection with an extension of consumer 
credit to a covered borrower (``interest-rate limit''); second, when 
extending consumer credit, the creditor must satisfy certain other 
terms and conditions, such as providing certain information (e.g., a 
statement of the MAPR), both orally and in a form the borrower can 
keep, before or at the time the borrower becomes obligated on the 
transaction or establishes the account, refraining from requiring the 
borrower to submit to arbitration in the case of a dispute involving 
the consumer credit, and refraining from charging a penalty fee if the 
borrower prepays all or part of the consumer credit (collectively, 
``other MLA conditions'').
    Key elements of the Department's rule, particularly relative to the 
Proposed Rule, include:
     Providing a temporary exemption for credit extended in a 
credit card account under an open-end (not home-secured) consumer 
credit plan. The exemption for a credit card account expires, at 
minimum, in October 2017, and the rule permits that exemption to be 
extended for up to one year;
     Providing a qualified exclusion from the requirements 
relating to the computation of the MAPR for a credit card account for a 
``bona fide'' fee, but eliminating the proposed condition that the bona 
fide fee be ``customary.'' Under the final rule, an application fee, 
participation fee, transaction-based fee, or similar fee (other than a 
periodic rate) for a charge may be excluded from the MAPR to the extent 
that the fee is (i) a bona fide fee and (ii) reasonable for that type 
of fee; and

[[Page 43561]]

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

C. Timetable for Implementing the Department's Final Rule

1. Twelve-month Period for Compliance
    Many comments on the Proposed Rule state that, if the Department 
were to adopt a final rule along the lines of the Proposed Rule, 
creditors would need a substantial period of time to modify their 
operations in order to comply with the rule. For example, in a joint 
letter, the American Bankers Association, the Association of Military 
Banks of America, the Consumer Bankers Association, the Independent 
Community Bankers of America, and the National Association of Federal 
Credit Unions (the ``Associations'') state: ``Given the breadth, 
complexity, and broad reach of the proposal, the necessary legal 
analysis operations, systems changes, staff training, [and] the 
draconian consequences for violations, . . . the Department should 
allow [creditors] at least 18 months to comply'' with a final rule.\7\ 
Similarly, another comment states that ``[the Department] should allow 
as long an implementation period as reasonable to provide adequate time 
for credit unions and others to implement necessary changes.'' \8\
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    \7\ Associations, Dec. 18, 2014, at 58.
    \8\ Missouri Credit Union Assoc., Nov. 25, 2014, at 3.
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    Because the protections of the MLA will apply to a wider range of 
credit products--and thus the requirements of the final rule will apply 
to broader classes of creditors--the Department believes that a 
creditor should be afforded a reasonable period of time to adjust its 
operations and, if necessary, the terms and conditions of its loan 
product(s) offered to covered borrowers in order to comply with the 
final rule. Accordingly, under Sec.  232.13(a), a creditor must comply 
with the requirements of the rule with respect to a consumer credit 
transaction or account for consumer credit consummated or established 
on or after October 3, 2016.\9\
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    \9\ The Department has determined that the final rule shall be 
effective on October 1, 2015.
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2. Creditor May Use Existing Safe Harbor for Covered-Borrower 
Determination Prior to Compliance Date
    Consistent with the Department's determination that a creditor 
should be afforded a 12-month period to adjust its operations and loan 
product(s) to comply with the rule, a creditor also is permitted to use 
the existing safe harbor when assessing whether a consumer-applicant is 
a covered borrower. If a creditor uses the safe harbor set forth in 
Sec.  232.5(a) of the Department's existing rule, the creditor would be 
subject to the existing interpretation regarding the treatment of a 
covered borrower which is designed to prevent the creditor from using 
the borrower's declaration to allow the borrower to waive his or her 
rights to the protections provided under the MLA.\10\
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    \10\ See 72 FR 50588.
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    Upon the compliance date, the rule permits--and does not require--a 
creditor to use information obtained from the MLA Database or 
information contained in a consumer report obtained from a nationwide 
consumer reporting agency in order to conclusively determine whether a 
consumer-applicant is a covered borrower. A creditor who uses one (or 
both) of the methods set forth in, and complies with the recordkeeping 
requirements of, Sec.  232.5(b) when conducting a covered-borrower 
check will be afforded the new safe harbor.
3. Two-Year Exemption for Credit Card Accounts
    The Department concludes that consumer credit should not include 
credit extended in a credit card account under an open-end (not home-
secured) consumer credit plan until October 3, 2017. Section 
232.13(c)(2) allows the Secretary (or an official of the Department 
duly authorized by the Secretary) to extend, up to an additional year, 
the expiration of the exemption for a credit card account. Thus, until 
October 3, 2017 (or potentially a longer period of time), the 
requirements relating to the computation of the MAPR for a credit card 
account, as set forth in Sec.  232.4, would not apply. When the 
exemption expires, the conditional exemption for any ``bona fide'' fee 
charged to a credit card account, as set forth in Sec.  232.4(d) would 
apply.

D. Overview of Comments on the Proposed Rule

    Several hundred comments from a wide range of persons--including 
thousands of individuals--have submitted comments on the Proposed Rule. 
Including comments on form letters and petitions, over 21,000 
individuals express views on the Proposed Rule,\11\ and the vast 
majority of individuals support the proposal to extend the protections 
of the MLA to a wider range of closed-end and open-end credit products.
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    \11\ In this regard, the comment from U.S. PIRG includes 
thousands of letters from consumers who support the Proposed Rule 
(U.S. PIRG, Dec. 23, 2014), and Public Citizen provides the names of 
12,000 consumers supporting the Proposed Rule. Public Citizen, Dec. 
24, 2014.
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    Nearly two hundred consumer or civil rights organizations have 
submitted comments, and most express support for the reforms in the 
Proposed Rule. In addition, some organizations representing consumers 
believe that the Department should adopt a regulation that extends the 
protections of the MLA to credit extended in overdraft services, as 
well as to rent-to-own products.
    Forty U.S. Senators express support for the Department to adopt the 
proposed definition of ``consumer credit,'' particularly in order to 
close what they find to be ``loopholes'' in the existing rule that 
preclude Service members and their families from effectively receiving 
the protections of the MLA.\12\ Likewise, the Attorneys General of 22 
states (``Attorneys General'') support the Proposed Rule, and urge the 
Department to adopt more aggressive provisions to regulate some 
financial products under the MLA.\13\ Several other state officials 
have submitted comments generally supporting the Proposed Rule,\14\ 
and, in particular, applauding the proposed expansion of the definition 
of ``consumer credit.'' \15\
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    \12\ Sen. Jack Reed, et al., Nov. 25, 2014.
    \13\ Attorneys General, Dec. 22, 2014.
    \14\ See, e.g., Hon. Kate Marshall, State Treasurer, State of 
Nevada, Dec. 23, 2014.
    \15\ Hon. Benjamin M. Lawsky, Superintendent, N.Y. Dep't of 
Financial Services, Dec. 24, 2014.
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    Over 350 groups, trade associations, and businesses have submitted 
comments, and many of these businesses and their representatives 
express concerns with--as well as outright opposition to--the Proposed 
Rule.
    Most financial institutions, through approximately 50 comments, 
urge the Department to adopt in the final rule an exemption for certain 
types of creditors or, more narrowly, one or more exemptions for 
certain types of credit products. In particular, insured depository 
institutions and insured credit unions believe that, if the Department 
extends the scope of ``consumer credit,'' then the Department also 
should craft that definition so that an extension of credit from an 
insured depository institution or insured credit

[[Page 43562]]

union should be exempt from the requirements of the MLA. In addition, 
banks and credit unions, as well as others, raise concerns that Service 
members and their families should continue to have access to voluntary 
credit insurance products, unrestricted from the interest-rate limit of 
the MLA. Financial institutions request that the Department, at a 
minimum, delay the date(s) on which a creditor must comply with the 
final rule, seeking time periods ranging from 90 days to three years 
after the effective date of the rule.\16\
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    \16\ See, e.g., Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 21 
(urging the Department to delay the date for compliance with the 
final rule for at least 90 days); GECU-Greater El Paso's Credit 
Union, Dec. 12, 2014, at 1 (recommending that, for credit unions, 
the compliance date should be delayed for a minimum of three years).
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    Apart from banks and credit unions, several finance companies and 
their representatives express the view that the Proposed Rule, if 
adopted, would reduce access to a wide range of installment loans, 
which these commenters contend are valuable resources for Service 
members and their families. Some of these comments state that the four 
relief societies for the military services (Army Emergency Relief, 
Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard 
Mutual Assistance) (collectively, the ``Relief Societies'') currently 
have limited scope of service and resources, insufficient to handle the 
range and volume of loans needed by Service members and their families; 
extending the Department's rule to cover a wider range of installment 
loans, these comments contend, would restrict access to these products 
for covered borrowers.\17\ Installment lenders, including payday loan 
companies, also raise concerns about the potential burdens of using the 
MLA Database to conduct covered-borrower checks. Nonetheless, the 
Community Financial Services Association of America, which represents 
certain payday loan companies operating in more than 30 states, stated 
that it ``believes that extending MLA protections to a broader range of 
consumer credit products will provide more consistent consumer 
protections.'' \18\
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    \17\ See, e.g., Nat'l Installment Lenders Assoc., Dec. 9, 2014.
    \18\ Community Financial Services Assoc. of America, Dec. 24, 
2014, at 2.
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    Pawnbrokers and their representatives explain that traditional pawn 
transactions are different in kind from other types of credit 
transactions, principally because a pawn transaction typically is a 
non-recourse loan,\19\ and should be exempt from the scope of 
``consumer credit'' regulated under the MLA.\20\
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    \19\ See, e.g., Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 3.
    \20\ See, e.g., American-Gold Mine, Inc., Nov. 25, 2014.
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E. Costs and Benefits

    In its proposal, the Department posed a series of questions in 
order to facilitate comments and, in particular, encourage interested 
persons to provide detailed information about the potential effects if 
the Department were to adopt the Proposed Rule. Some commenters offer 
certain data regarding the potential costs and benefits that might 
emerge if the Proposed Rule were to be implemented; in assessing the 
potential effects of the final rule, the Department has incorporated 
that data, as appropriate.
    The Department has quantified three effects of the regulation. With 
respect to costs, the Department anticipates that, absent any relief 
under Sec.  232.13(c), its regulation might impose costs of 
approximately $106 million during the first year, as creditors adapt 
their systems to comply with the requirements of the MLA and the 
Department's regulation. When the relief afforded to creditors for the 
general exemption for credit card accounts is included, then the 
anticipated approximate costs would be significantly lower during the 
first year. After the first year and on an ongoing basis, in a 
sensitivity analysis, the annual benefits to the Department may be 
between approximately $14 to $133 million. The Department estimates the 
potential savings that could result if the rule reduces the involuntary 
separations of Service members where financial distress is a 
contributing factor in sensitivity analyses; at some points in the 
range of estimates the Department has used to assess the proposal, 
these savings are estimated to exceed the compliance costs that would 
be borne by creditors. The Department also has developed a transfer 
payment analysis that estimates between $100 and $119 in transfer 
payments per year from creditors to service members and their 
dependents. In addition to these quantified effects, the Department 
examined some effects qualitatively including those effects listed in 
figure 2 within section V.A.

                              Figure 1--Summary of Estimated Effects of Final Rule
                                           [2015 dollars in millions]
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                                                    First Year,       Annual,
                                                   set-up costs       ongoing
                                                  (Oct. 1, 2015-    (October 1,   PV 10-year, 7%  PV 10-year, 3%
                                                     Sept. 30,       2016 and      discount rate   discount rate
                                                       2016)        thereafter)
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Sensitivity Analysis: Benefits  Low.............              $0             $14             $96            $129
 to the Department.
                                High............              $0            $133            $940          $1,263
Primary Analysis: Costs to      ................          ($106)           ($30)          ($185)          ($259)
 Creditors of Compliance.
Sensitivity Analysis: Transfer  Low.............             n/a            $100            $616            $856
 Payments.
                                High............             n/a            $119            $740          $1,022
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II. Background

A. Overview of the Final Rule

    The Department is amending its regulation that implements 10 U.S.C. 
987, which was enacted in section 670 of the John Warner National 
Defense Authorization Act for Fiscal Year 2007 (``2006 Act''),\21\ and 
amended by sections 661-663 of the National Defense Authorization Act 
for Fiscal Year 2013 (``2013 Act'').\22\
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    \21\ Public Law 109-364, 120 Stat. 2266.
    \22\ 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

[[Page 43563]]

the MLA,\23\ 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.'' 
\24\ 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.\25\ In addition, 
section 661 of the 2013 Act amended the MLA to require the Department 
to consult--``not less often than once every two years''--with the 
Federal Agencies with a view towards revising the regulation 
implementing the MLA.
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    \23\ Id. See section 662(a) of the 2013 Act.
    \24\ 126 Stat. 1786. See section 662(b) of the 2013 Act.
    \25\ 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.\26\ At that time, the Department elected to define 
the scope of ``consumer credit'' as a narrow band of products within 
three categories of credit; for example, the existing rule had defined 
a ``payday loan,'' in relevant part, as ``[c]losed-end credit with a 
term of 91 days or fewer in which the amount financed does not exceed 
$2,000.'' \27\
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    \26\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents, 72 FR 50580 (Aug. 31, 2007).
    \27\ 32 CFR 232.3(b)(1)(i) (definition of ``consumer credit'').
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    In September 2014, the Department published a proposal to amend the 
existing rule primarily for the purpose of extending the protections of 
10 U.S.C. 987 to a broader range of closed-end and open-end credit 
products. In describing the Proposed Rule, the Department explained, in 
relevant part, that ``the narrowly defined parameters of the credit 
products regulated as `consumer credit' under [the then-existing rule] 
do not effectively provide the protections intended to be afforded to 
Service members and their families under the MLA.'' \28\
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    \28\ 79 FR 58610.
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    Many persons and entities believe that the Department should not 
amend its regulation as proposed because the expansion of the 
definition of ``consumer credit'' and the attendant requirements under 
the MLA would impair the ability of many types of creditors, 
particularly insured depository institutions and insured credit unions, 
to provide short-term credit to Service members and their families. 
However, some commenters argue that the Department should amend its 
regulation to apply to a broader range of credit products, including 
open-end credit, provided that the regulation also includes an 
exemption for insured depository institutions and insured credit 
unions.\29\ Still other commenters urge the Department to amend its 
regulation to apply to a broader range of credit products, including 
open-end credit, without any exemptions or conditions.\30\
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    \29\ See, e.g., Associations, Dec. 18, 2014, at 8.
    \30\ See, e.g., Attorneys General, Dec. 22, 2014, at 3 (urging 
the Department to adopt ``a more inclusive calculation of the 
MAPR,'' without the conditional exclusion for ``bona fide'' fees 
charged for a credit card account).
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    In the process of adopting this final rule, the Department has 
reviewed the comments on the Proposed Rule and consulted with the 
Federal Agencies on a wide range of issues implicated by the Proposed 
Rule. In light of its assessment of the comments, its experience 
observing the effects of its existing regulation, and the scope and 
purposes of the provisions of 10 U.S.C. 987, the Department has 
determined that a wider range of credit products offered or extended to 
covered borrowers should be subject to the protections of the MLA. As 
proposed, the Department is amending its regulation so that, in 
general, consumer credit covered under the MLA \31\ would be defined 
consistently with credit that for decades has been subject to TILA, 
namely: Credit offered or extended to a covered borrower primarily for 
personal, family, or household purposes, and that is (i) subject to a 
finance charge or (ii) payable by a written agreement in more than four 
installments.\32\ In general, any charge that is a ``finance charge'' 
under Regulation Z,\33\ 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.
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    \31\ 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).
    \32\ 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).
    \33\ 12 CFR part 1026 (2013).
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    The Department has considered whether unqualified exclusions from 
the MAPR for certain types of fees, such as an application fee or 
participation fee, should be adopted for credit card accounts in order 
to preserve current levels of access to those products for Service 
members and their dependents; however, the Department believes that 
unqualified exclusions from the MAPR for certain fees, or all non-
periodic fees, could be exploited by a creditor who would be allowed to 
preserve a high-cost, open-end credit product by offering a relatively 
lower periodic rate coupled with an application fee, participation fee, 
or other fee (as described in the exclusion), subject to the 
restrictions under the amendments to TILA enacted in the Credit Card 
Accountability Responsibility and Disclosure Act of 2009 (``CARD 
Act'').
    However, the Department also adopts the provisions in the Proposed 
Rule, with certain modifications, that provide a broad exclusion to 
allow a creditor who offers consumer credit through a credit card 
account to exclude from the MAPR any ``bona fide'' fee (other than a 
periodic rate). Under the final rule, that creditor would need to 
confirm that its fees are bona fide and reasonable, and if so, the 
Department believes that the creditor should be able to continue to 
offer the same credit card product(s) to covered borrowers by making 
certain adjustments to the terms and conditions for the product(s) by, 
for example, including the ``statement of the MAPR'' (which would be 
permitted simply to be added to its credit card agreement(s), and which 
is not required to be provided in any advertisement),\34\ and modifying 
any provision (if any) that requires a covered borrower to ``submit to 
arbitration.'' \35\
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    \34\ See Sec.  232.6.
    \35\ See Sec.  232.8(c).
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    The Department has considered whether to provide a complete 
exemption from the definition of consumer credit for certain types of 
loans, such as a ``payday alternative loan'' (``PAL'') offered by a 
federal credit union and regulated under the NCUA's regulation \36\ or 
similar credit product; likewise, the Department has considered whether 
to provide an exclusion from the requirements for computing the MAPR 
for an application fee or participation fee imposed on certain types of 
credit transactions or credit accounts. The Department has determined 
that an application fee or participation fee is an element generally 
required to be included when computing the MAPR (subject to a limited 
exception for a qualifying closed-end loan and the conditional 
exclusion for a bona fide fee charged to a credit card account).
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    \36\ 12 CFR 701.21(c)(7)(iii) (2015).
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    As discussed in section III.D., the Department declines to provide 
a complete exemption for a PAL and,

[[Page 43564]]

instead, has determined that an application fee may be excluded from 
the computation of the MAPR for a short-term, small amount loan, 
subject to certain conditions.
    The Department adopts in the final rule provisions designed to 
provide a creditor with a more straightforward mechanism to assist in 
assessing the status of a consumer as a covered borrower so that the 
creditor may have ``some degree of certainty in determining that the 
loans [the creditor makes] are in compliance with [the MLA] as 
implemented by Part 232.'' \37\ The Department continues to believe 
that a covered-borrower check could be conducted unilaterally by a 
creditor who uses information obtained from the MLA Database and 
without relying on the borrower (as currently required), akin to the 
process a creditor currently uses to obtain a consumer report when 
assessing the creditworthiness of a consumer. Accordingly, the 
Department amends the existing rule to allow a creditor to use 
information obtained from the MLA Database or information contained in 
a consumer report from a nationwide consumer reporting agency to assess 
the status of a consumer-applicant for consumer credit and thereby 
providing a clearer mechanism for a creditor to obtain the protection 
of a safe harbor when determining whether a consumer is a covered 
borrower.
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    \37\ 72 FR 50588.
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B. Financial Stability and Readiness

    As the Department stated when issuing the Proposed Rule, the 
Department makes a significant investment in recruiting, training and 
retaining highly qualified Service members. The Department expects 
these Service members to maintain personal readiness standards, 
including paying their debts and maintaining their ability to attend to 
the financial needs of their families.\38\ Losing qualified Service 
members due to personal issues, such as financial instability, causes 
loss of mission capability and drives significant replacement costs. 
The Department estimates that each separation costs the Department 
$58,250.\39\ Losing an experienced mid-grade noncommissioned officer 
(NCO), who may be in a leadership position or key technical position, 
may be considerably more expensive in terms of replacement costs and in 
terms of the degradation of mission effectiveness resulting from a loss 
of personal reliability for deployment and availability for duty. A 
study of the potential impact of the access to payday loans on enlisted 
members in the Air Force found ``[a]irmen job performance and retention 
declines with payday loan access, and severely poor readiness 
increases.'' \40\ Additionally, financial concerns detract from mission 
focus and often require attention from commanding officers and senior 
NCOs to resolve outstanding debts and other credit issues.
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    \38\ U.S. Dep't of Defense, Instruction 1344.09, Indebtedness of 
Military Personnel (2008) (``Members of the Military Services are 
expected to pay their just financial obligations in a proper and 
timely manner [to include alimony and child support]. A Service 
member's failure to pay a just financial obligation may result in 
disciplinary action under the Uniform Code of Military Justice [10 
U.S.C. 801-940] or a claim pursuant to [Article 139 of Uniform Code 
of Military Justice (10 U.S.C. 939)].'').
    \39\ U.S. Gov't Accountability Office, GAO-11-170, Military 
Personnel: Personnel and Cost Data Associated with Implementing 
DOD's Homosexual Conduct Policy (January 20, 2011) (estimating that 
each separation costs the Department $52,800 in 2009 dollars). The 
cost of $58,250 is calculated in 2015 dollars (through December 
2014), using the DOL, Bureau of Labor Statistics, Consumer Price 
Index, All Urban Consumers (CPI-U), available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
    \40\ Scott Carrell and Jonathan Zinman, ``In Harm's Way? Payday 
Lending and Military Personnel Performance,'' August 2014, Abstract, 
available at http://www.econ.ucdavis.edu/faculty/scarrell/payday.pdf.
---------------------------------------------------------------------------

C. Financial Readiness Program

    As young people with steady pay checks and personal 
responsibilities which emerge earlier than their contemporaries, junior 
enlisted Service members need to have a commensurate level of financial 
acumen and maturity to succeed. Junior enlisted Service members are 
generally high school graduates who may have started college.\41\ 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.\42\ 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.\43\ 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.\44\
---------------------------------------------------------------------------

    \41\ Defense Manpower Data Center (DMDC) QuickCompass of 
Financial Issues, (2013), question 20: 39% of E1-E4s have a high 
school diploma, 22% have less than one year of college, 24% have one 
or more years of college, but no degree.
    \42\ See Lewis Mandell, The Financial Literacy of Young American 
Adults, (2008), at 8, available at www.jumpstart.org/assets/files/2008SurveyBook.pdf (reporting that average score for high school 
seniors was 48.3% and 62.2% for college students on a financial 
literacy test measuring: (1) Income; (2) money management; (3) 
saving and investing; and (4) spending and credit).
    \43\ Consumer Federation of America, Military Saves Week 2013 
Report, at 2, available at http://www.militarysaves.org/in-the-newsroom/military-saves-week-reports.
    \44\ ``Military Financial Readiness Program--Accomplishments To 
Date,'' SaveandInvest.org, About the Program, available at http://www.saveandinvest.org/MilitaryCenter/About/P124822.
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    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.\45\ 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.\46\ In addition, the National Guard 
and Reserve Commands conducted 8,912 sessions, hosted at unit

[[Page 43565]]

events lasting one-to-three days, attended by 13,480 participants.\47\
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    \45\ See DoD Instruction 1342.22, Family Readiness Program, July 
3, 2012, at 12, available at http://www.dtic.mil/whs/directives/corres/pdf/134222p.pdf.
    \46\ Fiscal Year 2012 Annual Report on Family Readiness Programs 
(internal Department report), which reflects activities of 
installation-based Military and Family Support Centers/Reserve 
Family Program Sites.
    \47\ Military OneSource internal report for Fiscal Year 2012.
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    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.\48\ To 
supplement the counseling services provided by the military services, 
the Department employs contract counselors through Military One Source 
to conduct over-the-phone counseling (available 24 hours a day and 7 
days each week) and 12 in-person sessions for each military client (in 
a 12 month period). These counselors provided 32,000 in-person sessions 
for 35,000 Service members and spouses in Fiscal Year 2012.\49\
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    \48\ Fiscal Year 2012 Annual Report on Family Readiness Programs 
(internal Department report), which reflects activities of 
installation-based Military and Family Support Centers/Reserve 
Family Program Sites.
    \49\ Military OneSource internal report for Fiscal Year 2012.
---------------------------------------------------------------------------

    To provide monetary support to Service members and their families 
with financial hardships, the military services have partnered with 
nonprofit charitable organizations chartered to provide relief services 
to Service members and their families. The four Relief Societies 
provide no-interest loans, grants, and scholarships, and fund other 
support programs for active-duty military communities. Each of these 
Relief Societies traditionally has provided no-interest loans and 
grants for shortfalls in household expenses (e.g., rent, mortgage, or 
utilities) and for unforeseen emergencies (e.g., auto repair, funeral, 
or family emergency). Since 2007, each of the Relief Societies also has 
offered small-dollar loans, which can be drawn without counseling.\50\ 
In total for 2012, the Relief Societies provided $142.2 million in no-
interest loans and grants to 159,745 clients.\51\
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    \50\ 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).
    \51\ 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).
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D. Regulation in Support of Financial Readiness

    The Department continues to believe that, consistent with the MLA, 
there may be a need to limit access to high-cost borrowing, even with 
the Department's emphasis on delivering messages to save and control 
debt, education to support managing finances wisely, counseling 
resources to aid Service members, and financial resources to help 
Service members cover unforeseen shortfalls and emergencies. 
Additionally, as messaging and education programs make clear, the 
Department expects Service members to seek out assistance rather than 
continue attempting by themselves to manage high-cost debt.
    The majority of Service members have access to reasonably priced 
(as well as low-cost) credit, and, as long as they wisely use those 
resources, they are likely not to need high-cost loans to fulfill their 
credit needs. In particular, the military services have partnered with 
nonprofit charitable organizations chartered to provide relief services 
to Service members and their families so that Service members and their 
families can obtain monetary support for their financial hardships. The 
Relief Societies provide no-interest loans and grants for shortfalls in 
household expenses (e.g., rent, mortgage, or utilities) and for 
unforeseen emergencies (e.g., auto repair, funeral, or family 
emergency), as well as scholarships; the Relief Societies also fund 
other support programs for active-duty military communities. In the 
event that a Service member overwhelms his or her credit, or has not 
established credit for an emergency, the Department and the Relief 
Societies are prepared to assist that person in order that he or she 
might resolve the immediate difficulties and continue to manage his or 
her income and expenses to a point where he or she can develop a sound 
financial basis. In circumstances where Service members have taken 
high-cost loans because no other alternatives appeared to be available, 
Department counselors and the Relief Societies have found that the 
existing high-cost debt makes intervention more difficult; these 
service providers would rather have had the opportunity to have helped 
resolve issues sooner.
    Section 661 of the 2013 Act amended the MLA to require the 
Department to consult--``not less often than once every two years''--
with the Federal Agencies. Consistent with this provision of the MLA 
and with Executive Order 13563 (``EO 13563''),\52\ the Department 
intends to conduct periodic reviews of this rule and may, as 
appropriate, modify certain provisions of the rule after notice and 
comment. The Department is mindful that the changes to credit made 
pursuant to this rule warrant continued evaluation of access to and the 
impact on credit extended to service members and their families, and 
that there may be relevant distinctions between military and civilian 
populations. During the periodic review and the required consultations, 
the Department will review its need to collect data as well as 
information provided by the Federal Agencies. The Department intends to 
synthesize and review available data on new and historical information 
to evaluate the effectiveness of this rule, including incorporation of 
fees in calculating MAPR, affected open-ended credit products, and 
availability of credit to covered borrowers with an eye toward striking 
an appropriate ongoing balance between covered borrower protection and 
industry compliance burden. These results of this data gathering will 
form the basis for ongoing reviews of the rule and assessments of 
various aspects of the rule. Any modifications, including those based 
on the results of studies currently ongoing and underway, would be 
subject to further analysis. This rule, as well as any proposed 
revisions to this rule, are part of the Department's retrospective 
review plan under EO 13563 completed in August 2011. The Department's 
full plan and retrospective review reports is available at: http://www.regulations.gov/#!docketDetail;D=DOD-2011-OS-0036.
---------------------------------------------------------------------------

    \52\ Improving Regulation and Regulatory Review, 76 FR 3821 
(Jan. 21, 2011).
---------------------------------------------------------------------------

III. Key Aspects of the Final Rule

A. Scope of ``Consumer Credit''

1. In General
    As proposed, the Department has determined to revise the scope of 
the definition of ``consumer credit'' to be generally consistent with 
the credit

[[Page 43566]]

products that for decades have been subject to the requirements of the 
Bureau's Regulation Z. Accordingly, the Department has revised Sec.  
232.3(e) so that, in general, consumer credit is defined consistently 
with certain credit that long has been subject to TILA, namely: Credit 
offered or extended to a covered borrower primarily for personal, 
family, or household purposes, and that is (i) subject to a finance 
charge or (ii) payable by a written agreement in more than four 
installments.\53\
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    \53\ 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 believes that the narrow parameters of the credit 
products defined as ``consumer credit'' under the existing rule do not 
effectively provide the protections intended to be afforded to Service 
members and their families under the MLA. As forty U.S. Senators 
observe, extending the scope of ``consumer credit'' to track the credit 
regulated under Regulation Z closes ``existing MLA loopholes'' and 
``[t]his comprehensive approach is essential to preventing future 
evasions'' of the requirements of the MLA.\54\ Subject to certain 
exceptions, under the final rule when extending consumer credit to a 
covered borrower, a creditor should be permitted to rely on the 
provisions and jurisprudence of the Bureau's Regulation Z because that 
regulation substantially regulates the central components of the 
framework of the MLA, particularly the types of charges that should be 
included as ``interest'' \55\ and the methods for calculating the 
annual percentage rate of interest for consumer credit.\56\ In general, 
in Sec. Sec.  232.3(n) and 232.4(c), any charge that is a ``finance 
charge'' under Regulation Z, as well as certain other charges that 
would be covered as ``interest'' under 10 U.S.C. 987(i)(3), must be 
included in the calculation of the MAPR (as applicable to the 
transaction), and would be subject to the interest-rate limit.
---------------------------------------------------------------------------

    \54\ Sen. Jack Reed, et al., Nov. 25, 2014.
    \55\ See 10 U.S.C. 987(i)(3) (broadly defining ``interest'').
    \56\ See 10 U.S.C. 987(h)(2) (granting discretion to the 
Department to prescribe rules regarding ``[t]he method for 
calculating the applicable annual percentage rate of interest on 
[consumer credit] obligations'').
---------------------------------------------------------------------------

    Commenters urge the Department to modify certain aspects of the 
Proposed Rule in light of certain provisions relating to the scope of 
consumer credit and the charges included in the MAPR that do not track 
the terms and conditions of Regulation Z. As discussed in section IV., 
the Department declines to adopt provisions that would allow any fee 
for a voluntarily agreed to credit insurance product, debt cancellation 
contract, or debt suspension agreement to be excluded from the MAPR.
2. Need to Address Risks Posed by High-Cost Consumer Credit
    Many persons and entities urge the Department not to revise the 
scope of ``consumer credit'' as described in the Proposed Rule. For 
example, one commenter that generally ``applaud[s] the proposal and 
support[s] the expansion of the definitions of the credit products that 
fall under the [Proposed Rule]'' nonetheless cautions that ``the 
proposed changes [to the regulation] would mean that the cost of 
providing small dollar loans will be more than can be recovered in fees 
and interest.'' \57\ The Associations likewise appear to argue that the 
Department should not adopt the definition of consumer credit set forth 
in the Proposed Rule: ``we recommend a more focused approach and urge 
the Department to address particular problems of the current regulation 
by modifying coverage in a targeted fashion, consistent with its 
previous approach.'' \58\ However, the Associations also specifically 
recommend that the Department ``broaden coverage of the regulation by 
eliminating the current parameters in the definition of covered 
consumer credit related to loan terms and amount, expand coverage to 
open-end credit, and exempt insured depository institutions.'' \59\
---------------------------------------------------------------------------

    \57\ Nat'l Military Family Assoc., Dec. 18, 2014, at 1. However, 
the National Military Family Association declines to explain how the 
changes to the regulation could be a source for increasing the costs 
of providing small-dollar loans and does not provide data to support 
its assertion that ``the proposed changes to the [regulation], if 
implemented as drafted, could eliminate an important category of 
products proven to be beneficial to [Service] members and their 
families.'' Id.
    \58\ Associations, Dec. 18, 2014, at 8. In this regard, the 
Associations argue that the MLA is intended ``to target specific 
loans considered under the legislation to be ``predatory:'' Payday 
loans, vehicle title loans, rent-to-own programs, refund 
anticipation loans, and military installment loans.'' Id. at 2 
(emphasis in original). But see Associations at 11 (explaining that 
Congress rejected an ``original payday lending amendment'' offered 
in the Senate, which was ``narrower than the legislation ultimately 
[enacted]'').
    \59\ Associations, Dec. 18, 2014, at 8 (emphasis in original).
---------------------------------------------------------------------------

    Other persons and entities similarly urge the Department not to 
adopt the approach of the Proposed Rule because, they contend, 10 
U.S.C. 987 is intended solely to address so-called ``predatory'' loan 
products. For example, a comment on behalf of certain credit card 
issuers asserts that the ``regulatory framework [under the MLA] . . . 
was developed by the [Department] for application only to specific 
types of closed-end products,'' and the comment contends that, in 
adopting the rule in 2007, the Department had established or endorsed 
certain ``criteria for evaluating whether credit products pose risks to 
[Service] members.'' \60\ These credit card issuers argue that the 
Department should not abandon a product-based approach to a regulation 
that implements the protections of the MLA,\61\ and further argue that 
certain aspects of the Proposed Rule ``clearly demonstrate the 
significant problems that would arise by abandoning a more targeted and 
tailored approach to coverage under the MLA.'' \62\
---------------------------------------------------------------------------

    \60\ L. Chanin, Dec. 23, 2014, at 7.
    \61\ Id.
    \62\ L. Chanin, Dec. 23, 2014, at 7-8. Nevertheless, these 
credit card issuers do not provide any proposal to improve the 
``product-based approach.'' In this regard, the Department 
specifically sought comment on ways to ``refin[e] the Department's 
current rule for payday loans, vehicle title loans, and refund 
anticipation loans--and the associated benefits and costs.'' 79 FR 
58604. These credit card issuers decline to take up the Department's 
invitation; their silence regarding one or more ways to establish a 
``more targeted and tailored approach to coverage under the MLA'' 
evinces support solely for the very narrowly defined scope of 
consumer credit adopted in 2007.
    Compare New York Credit Union Assoc., Dec. 26, 2014, at 3 
(arguing that the Department should amend 32 CFR 232.3(b)(1) by 
adding a new subparagraph (iv) that would clarify that consumer 
credit includes `` `similarly structured loans' in which a lender 
has engaged in a pattern of offering loans in which a paycheck, 
vehicle's title, or an anticipated tax refund is used as collateral 
for the [underlying] loan'').
---------------------------------------------------------------------------

    Even though the Department's initial proposal, issued in April 
2007,\63\ referred to various studies and reports (including reports 
and other initiatives by the Department) that describe ``predatory'' 
lending ``practices,'' the Department broadly described its overarching 
aim, namely, to promote readiness by taking steps to reduce the risk 
that a Service member or his or her family could get caught in a ``debt 
trap.'' \64\ In the context of describing its own report to Congress in 
2006, for example, the Department observed that ``some forms of 
credit'' could pose risks for Service members and their families: ``The 
combination of little to no regard for the borrower's ability to repay 
the loan, unrealistic payment schedule, high fees and interest and the 
opportunity to rollover the loan instead of repaying it can create a 
cycle of debt for financially overburdened Service

[[Page 43567]]

members and their families.'' \65\ When implementing the regulation in 
2007, the Department acted in light of the short timetable for the 
effective date of 10 U.S.C. 987 \66\ and the instruction to act 
swiftly, as evidenced in authority to prescribe interim regulations 
without regard to the notice-and-comment requirements of the 
Administrative Procedure Act.\67\ Still, the Department elected to act 
judiciously by initially regulating only certain credit products that, 
at that time, the Department believed posed the most severe risks to 
Service members and their families.\68\ Moreover, in proposing and 
adopting the regulation in 2007, the Department eschewed any reliance 
on certain criteria as a predicate to define the scope of consumer 
credit.\69\
---------------------------------------------------------------------------

    \63\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents, 72 FR 18157 (Apr. 11, 2007).
    \64\ 72 FR 18159.
    \65\ Id.
    \66\ The 2006 Act, enacted on October 17, 2006, was scheduled to 
take effect in less than one year, and under 10 U.S.C. 987(c)(3) the 
Department was authorized to establish an earlier effective date. 10 
U.S.C. 987 note.
    \67\ 10 U.S.C. 987(d).
    \68\ 72 FR 50584 (observing the need to act ``judiciously'' when 
initially defining the scope of ``creditor'' and ``consumer 
credit''). See also 72 FR 18162 (``the statute allows the Department 
to focus [the limitation imposed under the MLA] on areas that create 
the most concern'') and 72 FR 50585 (``the final rule focuses on 
three problematic credit products that the Department identified in 
its August 2006 [report to Congress]'').
    \69\ In this regard, comments urging the Department to 
``continue'' to define the scope of the regulation to address only 
credit products with ``predatory characteristics'' miss the mark. 
See, e.g., L. Chanin, Dec. 23, 2014, at 2; Assoc. of Military Banks 
of America, Dec. 18, 2014, at 2; Independent Bank, Dec. 24, 2014, at 
1.
---------------------------------------------------------------------------

    In explaining the bases and rationale for redefining consumer 
credit in the Proposed Rule, the Department observed that ``certain 
payday loans, vehicle title loans, and refund anticipation loans 
present the most severe risks to Service members and their families'' 
\70\--not the only risks. Some comments \71\ have seized on the 
Department's characterization of the risks posed by those three 
narrowly defined products in the context of that aspect of the Proposed 
Rule to conclude that the status quo must be maintained because either: 
(i) The Department's countervailing consideration--to guard against 
unintended adverse consequences \72\--is a relatively more important 
objective; or (ii) expanding the scope of consumer credit to track the 
scope of credit that is subject to Regulation Z would eliminate access 
to credit products that are benign or beneficial to Service members and 
their families.\73\ The Department finds that the conclusion many 
comments support--avoid expanding the scope of consumer credit--is 
based on false absolutes, say, between preserving access to ``much 
needed, good, small-dollar credit'' \74\ and affording the protections 
of the MLA to Service members and their families when they choose to 
obtain a wider range of loan products. As the Department explained when 
issuing the Proposed Rule, ``a broader range of closed-end and open-end 
credit products carry high costs, many of which far exceed the interest 
rate limit established in 10 U.S.C. 987(b), and thereby [pose risks] to 
Service members and their families. . . .'' \75\ The Department 
believes, and comments amply support the view,\76\ that the scope of 
consumer credit reasonably could apply to credit products that are 
subject to the requirements of Regulation Z in order to reduce the 
risks to covered borrowers posed by high-cost loans, and still preserve 
access to a wide range of products, including ``much needed, good, 
small-dollar credit options,'' \77\ for those borrowers.\78\
---------------------------------------------------------------------------

    \70\ 79 FR 58607 (emphasis added). Likewise, the Department 
finds no occasion to concur with the view expressed by many comments 
asserting that the (primary or sole) purpose of the MLA is to ``curb 
predatory lending practices.'' See Attorneys General, Dec. 22, 2014, 
at 2.
    \71\ See, e.g., American Financial Services Assoc. (``AFSA''), 
Dec. 22, 2014, at 8-9 (In particular, AFSA states:
     ``[T]he Department recognizes that there is a need for small-
dollar credit, while at the same time being concerned that the 
current regulation implementing the MLA does not protect covered 
borrowers from high-cost credit products.
     ``AFSA agrees with the Department that Service members and 
their families should have access to safe and responsible credit. We 
understand the Department's concern that high-cost loans can pose 
risks to Service members and their families.
     ``The Department's proposed approach, though, does not meet 
these two goals. It seems that the Department is willing to prevent 
covered borrowers from accessing much needed, good, small-dollar 
credit options by rewriting the rules with a broad brush stroke that 
assumes that all products are undesirable.'').
    \72\ Avoidance of unintended adverse consequences is one of the 
Department's longstanding objectives, and the one of the principal 
bases for the Department's election to incrementally implement the 
protections of the MLA. See 72 FR 50584-50585 (explaining that a 
``narrow definition'' of consumer credit in the existing regulation 
``will prevent unintended consequences'').
    \73\ See 79 FR 58610 (explaining the Department's view that the 
MLA should be interpreted to provide ``important protections to 
Service members and their families . . . without unduly impeding the 
availability of credit that is benign or beneficial to [them]'').
    \74\ AFSA, Dec. 22, 2014, at 9.
    \75\ 79 FR 58607.
    \76\ See, e.g., Navy Federal Credit Union, Dec. 15, 2014, at 1-2 
(stating that ``Navy Federal supports the Department's proposal to 
expand the scope of the rule to include additional credit products'' 
and not raising any objection to the cost elements, other than 
``voluntary debt cancellation fees,'' that must be included in the 
MAPR) (emphasis in original); Consumer Finance team at the Pew 
Charitable Trusts (``Pew''), Dec. 23, 2014, at 1-3 (stating that 
``comprehensive definitions that include all small-dollar loans will 
give lenders clear guidance to foster innovation,'' and that 
``[t]horough assessment of income and expenses is the best way to 
ensure that loans are affordable for borrowers''); Consumer 
Federation of America et al., Aug. 1, 2013, at 12-14 (describing 
dozens of financial institutions that offer to consumers credit 
products that would satisfy the interest-rate limit imposed by the 
MLA).
    \77\ AFSA, Dec. 22, 2014, at 9.
    \78\ Moreover, the Department continues to believe that the 
extremely narrow definition of ``consumer credit'' in the existing 
rule permits a creditor to structure its credit products in order to 
reduce or avoid altogether the obligations of the MLA. For example, 
if a creditor wishes to market a ``payday loan'' to a covered 
borrower without regard to the 36-percent interest-rate limit under 
the MLA, the creditor simply needs to adjust the terms or conditions 
so that the loan is (i) not closed-end credit, (ii) for a term 
longer than 91 days, 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 covered borrower would obtain the credit without the 
protections afforded under the MLA. Many persons and entities 
commenting on the Proposed Rule share the view that ``consumer 
credit'' in the existing rule is unduly narrow and permits a 
creditor to avoid the obligations of the MLA. See, e.g., Texas 
Appleseed, Dec. 2, 2014 (describing products offered by various 
lenders and observing that ``the [Proposed Rule] will help close the 
loopholes Texas' payday and auto title businesses have been able to 
exploit''); see also U.S. PIRG, Dec. 23, 2014, at 2; Americans for 
Financial Reform et al., Dec. 26, 2014, at 1-2.
---------------------------------------------------------------------------

B. Department's Authorities To Establish Key Terms, Conditions, and 
Criteria

    The MLA grants the Department various authorities to prescribe 
regulations to carry out the law and broad latitude to determine the 
scope, terms, and conditions of the regulations. The Department is 
empowered to define the scope of the regulations through, first, a 
broad grant of authority to define ``consumer credit'' and the type(s) 
of ``creditor'' \79\ that is subject to the requirements of the MLA, 
and, second, authority to prescribe ``[s]uch other criteria or 
limitations as the [Department] determines appropriate, consistent with 
the provisions of [10 U.S.C. 987].'' Within those general grants of 
authority, the law further grants the Department powers to prescribe 
terms and conditions relating to ``[t]he method for calculating the 
applicable annual percentage rate of interest on [consumer credit], in 
accordance with the limit established

[[Page 43568]]

under [10 U.S.C. 987]'' \80\ and ``[a] maximum allowable amount of all 
fees, and the types of fees, associated with any such extension of 
credit. . . .'' \81\ Moreover, several parts of these core provisions 
relating to the charges to be accounted for in order to implement the 
interest-rate limit of 10 U.S.C. 987(b) are ambiguous,\82\ and the law 
contemplates that the Department prescribe regulations to carry out the 
law through a process that involves the Department exercising its 
discretion to establish other appropriate ``criteria or limitations'' 
that are consistent with the law.\83\
---------------------------------------------------------------------------

    \79\ 10 U.S.C. 987(h)(2)(D). See also 10 U.S.C. 987(i)(5) (in 
relation to the term ``creditor,'' permitting the Department to 
prescribe ``such additional criteria as are specified for such 
purpose in regulations prescribed under [10 U.S.C. 987]'' and 
987(i)(6) (providing that ``[t]he term `consumer credit' has the 
meaning provided for such term in regulations prescribed [by the 
Department],'' subject to the exceptions for a residential loan or a 
loan procured in the course of purchasing a car or personal 
property).
    \80\ 10 U.S.C. 987(h)(2)(B).
    \81\ 10 U.S.C. 987(h)(2)(C). The grant of authority under this 
subparagraph also relates to the disclosures that a creditor must 
provide to a covered borrower, which is addressed in subsection 2 of 
the relevant part of section IV (Section 232.6 Mandatory loan 
disclosures).
    \82\ For example, 10 U.S.C. 987(i)(4) first provides that the 
term ``annual percentage rate'' has the same meaning as implemented 
in Regulation Z, but, second, provides that the term ``includes all 
fees and charges,'' including specified charges, even though 
Regulation Z for years has excluded from the disclosures of APR many 
types of fees and charges, particularly some of the fees specified 
in 987(i)(4).
    \83\ In addition, as discussed in section II.A., the Department 
is directed to periodically consult with the Federal Agencies.
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C. Consideration of Exemptions for Certain Classes of Creditors

    In light of the scope of the Proposed Rule, the Department asked 
whether consideration should be given for a limited or complete 
exemption for an insured depository institution or insured credit 
union.\84\ Many comments argue in favor of providing a complete 
exemption for a supervised financial institution.\85\ Indeed, the 
Associations appear to tie their support for broadening the scope of 
the definition of consumer credit with an exemption for insured 
depository institutions.\86\ One association representing credit unions 
cautions against the ``unintended consequences [of the Proposed Rule] 
for credit unions,'' which that association contends ``could jeopardize 
extension of some consumer credit to [Service] members and their 
families.'' \87\ This association urges the Department to provide a 
blanket exemption for ``credit unions and other depository 
institutions.'' \88\ Likewise, other associations representing credit 
unions argue that credit unions should be exempt from the regulation 
because (i) ``credit unions are not predatory lenders,'' (ii) ``already 
have very high compliance burdens'' under other laws and regulations 
(implemented and enforceable by other agencies), and (iii) of ``the 
highly regulated and relatively limited nature of their operations.'' 
\89\
---------------------------------------------------------------------------

    \84\ 79 FR 58610 (QUESTION 4).
    \85\ See, e.g., Iowa Credit Union League, Nov. 28, 2014, at 1; 
L. Chanin, Dec. 23, 2014, at 2 (supporting an exemption for 
``federally-supervised depository institutions''); Bellco Credit 
Union, Dec. 19, 2014, at 2-3 (supporting an exemption for 
``federally-insured credit unions''). However, other comments argue 
that the regulation should not distinguish between types of 
creditors; instead, the regulation should distinguish between types 
of loans or between certain features of loan products. See, e.g., 
Nat'l Installment Lenders Assoc., Dec. 9, 2014, at 6.
    \86\ Associations, Dec. 18, 2014, at 8.
    \87\ Missouri Credit Union Assoc., Nov. 25, 2014, at 1.
    \88\ Missouri Credit Union Assoc., Nov. 25, 2014, at 2-3. See 
also The Wisconsin Credit Union League, Dec. 4, 2014, at 1-2.
    \89\ African-American Credit Union Coalition, Credit Union 
National Assoc., Defense Credit Union Council, Nat'l Assoc. of 
Federal Credit Unions, and the Nat'l Assoc. of State Credit Union 
Supervisors (the ``Credit Union Associations''), Dec. 22, 2014, at 
1-3.
---------------------------------------------------------------------------

    One credit union argues:

    Simply stated, there is a critical and growing need for short-
term credit among our military and the working class families that 
make up the majority of [the credit union's] constituents. . . . 
[T]he reality is that over 40% of [the credit union's] military 
members survive on less than $30,000 per year. They have financial 
emergencies. An unexpected illness, an emergency vehicle repair, or 
a loss of income in the family often strikes at the worst possible 
time. Yet, most have no ability to qualify for a traditional loan or 
credit card due to poor and insufficient credit history. In order to 
make ends meet, short term credit is the only option. And when there 
is demand the market will provide an outlet to satisfy that demand. 
The question for the [Department] then is what market is most 
appropriate to address this demand. Payday lenders that have shown 
time and again the ability to circumvent any regulatory attempt to 
control their lending practices and cap excessive finance charges? 
Or highly regulated not-for-profit cooperatives that are controlled 
by the very same members we serve? The [Proposed Rule] makes no 
distinction between the various players in the market and therefore 
must not be enacted.\90\

    \90\ Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 1.
---------------------------------------------------------------------------

    This credit union argues that if the Proposed Rule were to be 
implemented, covered borrowers who ``require short term credit . . . 
will lose access to the one sector of the financial industry that 
places consumer fairness at the core of its mission: credit unions.'' 
\91\ Another credit union states that ``[b]ecause we strongly believe 
our military members should have continued access to the same types of 
fair credit we offer to all of our members, we respectfully encourage 
the [Department] to reconsider its [Proposed Rule] in several important 
ways,'' and urges the Department to provide an exemption for ``credit 
unions and other insured depository institutions.'' \92\
---------------------------------------------------------------------------

    \91\ Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 3. 
Similarly, Bellco Credit Union asserts that, unlike for-profit 
financial institutions, ``[a]s not-for-profit, cooperatives, credit 
unions have no incentive to extort money from Service members, or 
any members.'' Bellco Credit Union, Dec. 19, 2014, at 3.
    \92\ Randolph-Brooks Federal Credit Union, Dec. 23, 2014, at 1.
---------------------------------------------------------------------------

    The Department rejects the view that in considering whether to 
extend the scope of consumer credit to generally track the credit that 
is subject to Regulation Z the Department must choose between allowing 
Service members and their families to obtain credit products and 
services from insured depository institutions and insured credit unions 
or shutting them out from access to those institutions. The Department 
is confident that an insured depository institution or insured credit 
union that places the fair treatment of its consumers at the core of 
its mission still could find appropriate methods to provide to covered 
borrowers credit products that comply with the interest-rate limit and 
other requirements of 10 U.S.C. 987.
    Other comments support providing an exemption for an insured 
depository institution or insured credit union based on the current 
framework of regulating these entities. A comment on behalf of certain 
credit card issuers, for example, contends that ``the existing robust 
regulatory and supervisory framework that applies to federally-
supervised depository institutions provides a strong basis for 
exempting such institutions from the scope of the MLA regulations.'' 
\93\ Commerce Bancshares, Inc. similarly states that the Department 
should ``craft a specific exclusion for insured depository 
institutions, such as Commerce, because they are highly regulated by 
their prudential regulators, and already prohibited from engaging in 
abusive practices.'' \94\
---------------------------------------------------------------------------

    \93\ L. Chanin, Dec. 23, 2014, at 9.
    \94\ Commerce Bancshares, Inc., Dec. 24, 2014, at 2.
---------------------------------------------------------------------------

    The Department recognizes that the regulation and supervision of an 
insured depository institution or insured credit union could be among 
the criteria that the Department, in its discretion, may apply in 
defining a ``creditor'' \95\ that would be subject to the MLA. Various 
provisions of 10 U.S.C. 987 would permit the Department to determine 
that a partial or complete exemption is justified because, for example, 
supervision of an bank, thrift, or credit union could effectively limit 
or prohibit one or more of the activities that are the object of the 
restrictions under the MLA.

[[Page 43569]]

The Department had recognized, both in 2007 and when issuing the 
Proposed Rule, that in the course of implementing the protections of 
the MLA the Department should strive towards comity with other federal 
laws, including considering whether a partial or complete exemption for 
one or more types of federally regulated financial institutions should 
be established in deference to the federal laws that may provide 
protections that are consonant with those of the MLA.\96\ 
Alternatively, an exemption based on the regulation and supervision of 
an insured depository institution or insured credit union might 
reasonably be based, at least in part, on the interest in avoiding 
unduly duplicative regulatory requirements.
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    \95\ 10 U.S.C. 987(i)(5)(A)(ii).
    \96\ As discussed in section III.B., the Department is 
authorized to establish one or more appropriate exemptions for 
specific types of creditors under several provisions of 10 U.S.C. 
987, such as 987(h) or 987(i).
---------------------------------------------------------------------------

    The 2013 Act amended 10 U.S.C. 987 to grant enforcement authority 
to certain agencies (as specified in section 108 of TILA),\97\ 
indicating that an insured depository institution and insured credit 
union should be subject to the requirements of the MLA, enforceable by 
the appropriate supervisory agency. Moreover, as staff of the FTC 
observe, ``[e]xempting some [types of] entities could have unintended 
consequences, including limiting the protections afforded to [covered 
borrowers] under the MLA, and placing covered entities that comply with 
the MLA at a competitive disadvantage.'' \98\
---------------------------------------------------------------------------

    \97\ 126 Stat. 1786. See section 662(b) of the 2013 Act.
    \98\ Staff of the FTC, Dec. 22, 2014, at 5.
---------------------------------------------------------------------------

    Supervision to assess whether a financial institution complies with 
safety-and-soundness principles or mandates, or even with consumer 
protection requirements, is designed largely for other purposes, and 
not directly aimed to lower the costs of credit to covered borrowers in 
the manner that 10 U.S.C. 987 is expressly designed to do. In light of 
the terms and structure of 10 U.S.C. 987, as well as the Department's 
review of the comments submitted on the Proposed Rule, the Department 
finds, at this time, that there is no adequately strong connection 
between the supervision of an insured depository institution or insured 
credit union and restrictions on costs of consumer credit to warrant an 
exemption from the definition of ``creditor'' for either type of 
institution.\99\
---------------------------------------------------------------------------

    \99\ In the course of periodically consulting with the Federal 
Agencies and, as the Department may find to be appropriate, 
periodically reviewing the scope and effects its regulation, the 
Department could revisit the factors that could justify a limited or 
complete exemption in favor of a supervised or federally regulated 
financial institution.
---------------------------------------------------------------------------

    Nevertheless, supervision to assess compliance by an insured 
depository institution or insured credit union with safety-and-
soundness principles or requirements (or other applicable laws) could 
provide meaningful benefits to borrowers that are the object of the 
protections of the MLA.\100\ And supervision by the Bureau of covered 
persons who extend credit for compliance with requirements of 
applicable federal consumer financial laws is conducted with a view 
towards providing meaningful benefits to borrowers. Accordingly, as 
discussed in section III.D.2., the Department concludes that 
supervision of an insured depository institution or insured credit 
union under applicable federal law is an important element in support 
of a targeted exclusion from the requirements for computing the MAPR to 
allow a charge by that type of entity for an application fee for a 
qualifying closed-end loan.
---------------------------------------------------------------------------

    \100\ Similarly, supervision of financial-institution licensees 
by one or more state regulatory agencies for compliance with state 
laws, including safety-and-soundness requirements and consumer 
protection laws, could provide benefits to borrowers.
---------------------------------------------------------------------------

D. Application or Participation Fees

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

    The ability to offer small-dollar loans, open or closed-end, 
most often requires assessing a fixed fee in conjunction with higher 
interest rates to recover costs. As an example, an application fee 
is charged to offset underwriting requirements, which include 
accessing credit bureaus, decision processing (automated or manual), 
and regulatory notifications, for an approved or denied loan. . . . 
This balance between fixed fee and reduced interest earnings allows 
a banking institution to recover its costs and continue its small-
dollar lending. It must be noted that the above example is 
illustrative of how banking institutions recover costs, not generate 
significant income, from small-dollar lending.\101\
---------------------------------------------------------------------------

    \101\ Assoc. of Military Banks of America, Dec. 18, 2014, at 2.

    The Department has no occasion to dispute this account of how 
financial institutions could structure credit products, particularly 
small-dollar loans, to borrowers. Similarly to the way that a saver 
uses separate envelopes to allocate cash for different purposes (e.g., 
groceries, fuel), a bank or credit union could split its revenue 
between fixed fees, periodic interest, and other charges, nominally 
associated with different phases of a credit transaction or account 
(e.g., origination, servicing, regulatory compliance). But from the 
perspective of the covered borrower who is the focus of protection 
under 10 U.S.C. 987, the financial institution's own apportioning of 
revenue among the various `fees' and `interest' does not change the key 
fact that it is all part of an aggregate bundle of costs ``associated 
with the extension of credit.'' \102\
---------------------------------------------------------------------------

    \102\ 10 U.S.C. 987(i)(3) (defining the term ``interest,'' in 
relevant part, to ``include[ ] all cost elements associated with the 
extension of credit'').
---------------------------------------------------------------------------

    The Department remains concerned that if an application fee or 
participation fee were to be excluded from the elements that must be 
included in the calculation of the MAPR (under Sec.  232.4(c))--the 
principal basis of the NCUA's argument to provide an exclusion for a 
PAL made in accordance with its regulation \103\--a creditor would have 
a strong incentive to evade the interest-rate limit by shifting the 
costs of a credit product by offering an interest rate below that limit 
and imposing (or increasing) one or more of those fees. Moreover, the 
Department believes that a creditor could attempt to impose an 
application or processing fee--regardless of whether formally tied to 
or nominally associated with the costs of processing the application--
in order to obtain revenue that replaces (or pre-funds) periodic 
interest revenue, particularly for a covered borrower whose 
creditworthiness is low (and who thus has a higher risk of defaulting 
on periodic interest).\104\ One credit union, for example, explains 
that its own small-dollar credit product includes an ``annual fee'' 
that ``replaces traditional underwriting and is used to offset the 
historical default rate of nearly 10%, thereby making the product 
financially sustainable''--for the credit union.\105\
---------------------------------------------------------------------------

    \103\ NCUA, Dec. 16, 2014, at 6.
    \104\ The Department does not mean to imply that, when providing 
a PAL, a credit union would not conform to its underwriting 
standards. See 12 CFR 701.21(c)(2)-(3) (requiring a Federal credit 
union to establish written policies for making loans or establishing 
lines of credit and to keep a credit application on file for each 
borrower supporting the credit union's decision to make the loan or 
establish the line of credit); 701.21(c)(8) (requiring a Federal 
credit union to implement appropriate underwriting guidelines for 
minimizing risk, including when making PALs, by, for example, 
``requiring a borrower to verify employment by producing at least 
two recent pay stubs'').
    \105\ Wright-Patt Credit Union, Inc., Dec. 23, 2014, at 2. See 
also Assoc. of Military Banks of America, Dec. 18, 2014, at 2 
(stating that the ``fixed cost [relating to origination] may be much 
higher on a small-dollar loan amount'' and that small-dollar loans 
have ``higher delinquency rates'').

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

[[Page 43570]]

    The Department observes that 10 U.S.C. 987(b) and the provisions 
that define ``annual percentage rate'' and ``interest'' which are 
integral to that interest-rate limit, taken together, are designed to 
thwart high cost lending to Service members and their families--not 
solely loan products that carry the very highest costs. Accordingly, 
and consistent with its authorities to prescribe ``consumer credit'' 
and the method for computing the MAPR of ``interest,'' the Department 
concludes that, in general, an application fee charged to a covered 
borrower must be accounted for when computing the MAPR.
2. Exclusion for Application Fee Charged by a Federal Credit Union or 
Insured Depository Institution When Making a Qualifying Closed-End Loan
    The NCUA states (and many credit unions share the NCUA's view) that 
a PAL structured in accordance with the NCUA's regulation \106\ for 
that product likely could not be provided by a credit union to a 
covered-borrower member in many cases in which such loans would 
otherwise be made, because, given the short duration of such loans, the 
total charge for the PAL, which is a function of the periodic interest 
charged plus the application fee, would exceed the interest-rate limit 
of the MLA.\107\ The NCUA notes that, under its regulation, a credit 
union may charge an application fee that ``reflects the actual costs 
associated with processing the application, not to exceed $20,'' \108\ 
and that the NCUA interprets the relevant provision of the Federal 
Credit Union Act (``FCU Act'') so that the term ``finance charge'' does 
not include an application fee, consistent with the interpretation of 
finance charge under Regulation Z.\109\ Because of the treatment of an 
application fee under the Proposed Rule, which is at variance with the 
treatment of that fee under the NCUA's regulation for a PAL, the NCUA 
urges the Department to adopt a final rule that contains an exemption 
for a PAL. Similarly, an association representing credit unions argues 
that credit unions are different from other types of financial 
institutions, in part, because the FCU Act imposes a statutory limit on 
the interest rate that a credit union may charge for a loan,\110\ and 
(if adopted) the Proposed Rule ``could provide a challenge for credit 
unions to provide small-dollar loans because of the change in 
definition of finance charge and how it relates to how the MAPR is 
calculated.'' \111\ The NCUA ``respectfully submits that a PAL with a 
military APR exceeding 36 percent is still a responsible credit product 
and that PALs should not be subject to the [interest-rate limit of the 
MLA].'' \112\
---------------------------------------------------------------------------

    \106\ 12 CFR 701.21(c)(7)(iii).
    \107\ NCUA, Dec. 16, 2014, at 6.
    \108\ NCUA, Dec. 16, 2014, at 4.
    \109\ NCUA, Dec. 16, 2014, at 6.
    \110\ Nat'l Assoc. of Federal Credit Unions, Dec. 23, 2014, at 
2.
    \111\ Nat'l Assoc. of Federal Credit Unions, Dec. 23, 2014, at 
3.
    \112\ NCUA, Dec. 16, 2014, at 6.
---------------------------------------------------------------------------

    Even though the Department has determined that an application fee 
fits within the (ambiguous, but broad) definitions of ``interest'' and 
``annual percentage rate'' in the MLA, the Department also recognizes 
that the FCU Act establishes an express restriction on the amount of 
interest that a federal credit union may charge to a member-
consumer,\113\ which is comparable to the interest-rate limit of the 
MLA. The Department concludes that this federal law warrants a measure 
of respect or comity. More broadly, there is an appropriate federal 
interest in implementing the requirements of the MLA, to the extent 
practicable, in a manner designed to promote due comity with, as well 
as to avoid direct conflict with, other federal laws or federal 
regulations which are expressly intended to regulate the cost of credit 
extended to consumers.\114\ The Department concludes that in the case 
of a short-duration loan, which squarely presents arithmetic obstacles 
for any creditor who must simultaneously comply with the MLA and an 
annual interest-rate limit set by another federal law or a comparable 
federal regulation addressing the cost of credit, the express 
restriction on the amount of interest that may be charged to a borrower 
under that other federal law or federal regulation should not be 
disregarded in the course of the Department's implementation of the 
MLA.
---------------------------------------------------------------------------

    \113\ 12 U.S.C. 1757(5)(A)(vi).
    \114\ Under Executive Order 12866, the Department must, to the 
extent permitted by law and where applicable, take care to avoid 
prescribing a rule that is ``inconsistent, incompatible, or 
duplicative with its other regulations or those of other Federal 
Agencies.'' Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 
1993), Sec.  1(b)(10).
---------------------------------------------------------------------------

    After review of comments on the Proposed Rule--including those 
contending that PALs are necessary forms of short-term, small-dollar 
loans (complete with the charge of an application fee) for covered 
borrowers \115\--the Department expresses no view on the potential 
benefits for a covered borrower from a short-term loan provided by a 
federal credit union or insured depository institution. Still, the 
Department is mindful that the charge of an application fee, though 
permissible under other law, poses a cost to a covered borrower, and 
when combined with the interest rate the overall cost to the borrower 
from a loan extended by a federally supervised bank or credit union 
still could exceed the interest-rate limit of the MLA. Nonetheless, the 
Department elects to exercise its discretion under 10 U.S.C. 987(h) and 
987(i)(6) to implement the requirements of the MLA in a manner that 
affords comity with other federal laws that expressly limit the costs 
of credit products that may be provided to covered borrowers. 
Accordingly, the Department determines to modify Sec.  232.4(c)(1) to 
contain an exception that allows a ``Federal credit union'' or an 
``insured depository institution''--as those terms are defined in Sec.  
232.3--to exclude from the computation of the MAPR an application fee 
charged when making a ``short-term, small amount loan,'' which is 
defined in Sec.  232.3(t).
---------------------------------------------------------------------------

    \115\ See, e.g., Nat'l Assoc. of Federal Credit Unions, Dec. 23, 
2014, at 3 (``Many of these types of loans are loss-leaders in 
credit unions and are offered strictly for the benefit of their 
members who are in need of short-term [,] small-dollar alternatives 
to payday lenders. . . . Also, these types of loans give credit 
unions another opportunity to work with members to get them back 
into the traditional banking system and away from unregulated or 
under-regulated predatory actors.'').
---------------------------------------------------------------------------

    Consistent with the Department's policy to implement the 
requirements of the MLA in a manner that affords comity with other 
federal laws that expressly limit the interest rate of credit products 
that may be provided to covered borrowers, the Department adopts the 
exclusion in Sec.  232.4(c)(1)(iii)(B) to apply to the FCU Act and to 
other similar federal laws that apply to insured depository 
institutions. In particular, the exclusion would apply to a closed-end 
loan that is ``[s]ubject to and made in accordance with a Federal law 
(other than the [MLA]) that expressly limits the interest rate or cost 
that a Federal credit union or an insured depository institution may 
charge on an extension of credit.'' \116\ In defining that closed-end 
loan, the Department has established the further condition that the 
limitation ``in that law is comparable to a limitation of an annual 
percentage rate of interest of 36 percent.'' \117\ The language in

[[Page 43571]]

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

    \116\ 12 CFR 232.3(t)(1) (prescribing a new definition for a 
``[s]hort-term, small amount loan'').
    \117\ Id.
---------------------------------------------------------------------------

    At this time, the Department has crafted the exclusion in Sec.  
232.4(c)(1)(iii)(B) only with respect to a closed-end loan subject to a 
``Federal law (other than 10 U.S.C. 987) that expressly limits the rate 
of interest'' \118\ that a qualifying creditor may charge for the loan. 
The Department recognizes that, over time, the landscape of federal 
requirements designed to limit finance charges or other costs of credit 
to consumers could be altered, particularly by the adoption of new 
regulations applicable to creditors, notably federal credit unions and 
insured depository institutions. If new regulations that sanction types 
of short-term or small-dollar loans involving application fees (or 
similar charges) are implemented by one or more federal agencies, the 
Department could reevaluate the contours of the exclusion for an 
application fee for a short-term, small amount loan.
---------------------------------------------------------------------------

    \118\ 32 CFR 232.3(t)(1).
---------------------------------------------------------------------------

    The exclusion from the elements required to be included when 
computing the MAPR applies to an application fee charged when making a 
``short-term, small amount loan,'' defined in Sec.  232.3(t). As a 
matter of deference to FCU Act and the NCUA's authorities under that 
Act, this new term is designed to contain certain elements of the 
short-duration, closed-end loan product prescribed by the NCUA's 
regulation \119\ that the Department finds are integral for protecting 
a covered borrower and, at the same time, may be stated generally so 
that insured depository institutions also could be eligible for the 
exclusion.
---------------------------------------------------------------------------

    \119\ 12 CFR 701.21(c)(7)(iii).
---------------------------------------------------------------------------

    First, Sec.  232.3(t)(2)(i) provides that the relevant law or rule 
must contain ``[a] fixed numerical limit on the maximum maturity term, 
which term shall not exceed 9 months.'' The short duration of the loan 
is the key arithmetic predicate for the exclusion for the application 
fee, and the Department has arrived at the upper boundary by selecting 
a maximum term which is fifty percent greater than the maximum term 
permitted under the NCUA's regulation.\120\ This subparagraph sets the 
maximum term of the closed-end loan to the lesser of (i) the fixed 
numerical limit established by the federal law or rule that the 
creditor must comply with or (ii) 9 months.
---------------------------------------------------------------------------

    \120\ 12 CFR 701.21(c)(7)(iii)(2).
---------------------------------------------------------------------------

    Second, the condition in Sec.  232.3(t)(2)(ii), namely, that the 
``law or rule contains a fixed numerical limit on any application fee 
that may be charged to a consumer who applies for such closed-end 
loan,'' is consistent with one of the key conditions in the NCUA's 
regulation.\121\ The limitation on the amount of the application fee 
that a federal credit union may charge to a covered borrower flows from 
the NCUA's considered judgment regarding how to implement the 
provisions of the FCU Act. The Department's determination to 
accommodate, to this extent, the structure of a PAL, and similar 
federal laws that may be adopted, does not require a broader scope of 
exception from the general MAPR approach.\122\
---------------------------------------------------------------------------

    \121\ 12 CFR 701.21(c)(7)(iii)(7).
    \122\ In the process of assessing whether to provide an 
exclusion from the elements that must be included when computing the 
MAPR for an application fee, the Department has considered whether 
to establish (e.g., in Sec.  232.3(t)) a fixed numerical limit or a 
percentage-based limitation (e.g., a limit based on a percentage of 
the credit to be extended or the amount of available credit for an 
open-end credit account) for that fee. The Department believes that 
there are benefits associated with directly establishing a fixed 
limit on the amount of the application fee that a creditor could 
charge, and the Department retains the discretion to adjust this 
aspect (as well as related aspects) of the rule, as may be 
appropriate. However, at this time, the Department concludes that 
the language in Sec.  232.3(t) stating that the ``law or rule [must 
contain] a fixed numerical limit on any application fee that may be 
charged'' accomplishes the central purpose of the desired limit and, 
equally importantly, is designed so that these particular 
requirements under the MLA afford comity with that other federal law 
or rule which imposes the same type of limit.
---------------------------------------------------------------------------

    In addition to defining the ``short-term, small amount loan'' so 
that the creditor making the qualifying closed-end loan product must 
adhere to certain conditions integral for protecting a covered 
borrower, the Department has established a restriction on the number of 
times that a creditor may impose an application fee without being 
required to include that fee when computing the MAPR. Under Sec.  
232.4(c)(1)(iii)(B), a creditor who is a federal credit union or 
insured depository institution is not required to include in the MAPR 
an application fee charged for the qualifying closed-end loan product 
if the creditor charges the fee only once ``in any rolling 12-month 
period.'' \123\ The fee is, after all, an ``application fee,'' and if a 
covered borrower seeks to obtain a second or third of these short-
duration loans during one year, the creditor already knows who the 
borrower is and reasonably could be expected to have on file 
information bearing on the covered borrower's creditworthiness. In the 
Department's judgement, there is no adequate basis--consistent with the 
interest-rate limit of 10 U.S.C. 987(b) and the other terms of the MLA 
relating to that limit--for allowing a creditor to repeatedly exclude 
an application fee from the computation of the MAPR for multiple 
closed-end loans, each of which is structured to be repaid within a 
matter of months. If a creditor charges a second application fee to a 
covered borrower who applies for a second short-term, small amount loan 
within that same 12-month period, then that second fee (and any 
subsequent application fee charged during that period) is not eligible 
for the exclusion and must be included when computing the MAPR for that 
loan.
---------------------------------------------------------------------------

    \123\ The Department has considered whether to establish (e.g., 
in Sec.  232.3(t) or in Sec.  232.4(c)(1)(iii)(B)) a more 
restrictive limit on the number of times a creditor may charge an 
``application fee.'' For example, the Department has considered 
whether to adopt a condition on the exclusion that would restrict a 
creditor from charging an application fee not more than once in any 
two calendar years or not more than once for any covered borrower. 
The Department believes that there could be benefits associated with 
a more restrictive limit on the exclusion from this required element 
of the MAPR, and the Department retains the discretion to adjust 
this aspect (as well as related aspects) of the rule, as may be 
appropriate.
---------------------------------------------------------------------------

    The upshot is that even though at this time the Department declines 
to adopt a general exemption for a federal credit union or an insured 
depository institution, the Department adopts new terms (notably, in 
Sec. Sec.  232.3(t) and 232.4(c)(1)(iii)(B)) that allow either type of 
entity to exclude an application fee from the computation of the MAPR 
for a qualifying closed-end loan. By crafting this targeted exclusion, 
the Department affords comity to the FCU Act and similar federal laws, 
and nonetheless adopts a final rule that requires a federal credit 
union (or insured depository institution, as the case may be) to comply 
with the other MLA conditions when making a short-term, small amount 
loan.
    The Department has considered other approaches that would afford 
comity with the FCU Act or other similar federal laws. For example, the 
Department has considered whether, as the NCUA and other comments 
argue, a PAL should be wholly excluded from the scope of ``consumer 
credit,'' and the Department concludes that that would be a step too 
far. In the Department's judgment, the Department may exercise

[[Page 43572]]

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

E. Conditional Exclusion for Credit Card Accounts

1. In General
    Even though the Department believes that the consumer credit 
regulated under the MLA generally should track the scope of credit 
regulated under Regulation Z, the Department recognizes that imposing 
the interest-rate limit of 10 U.S.C. 987(b) on credit card products 
likely would result in dramatic changes to the terms, conditions, and 
availability of those products to Service members and their families. 
Many commenters echo the Department's own recognition and underscore 
that a typical creditor that issues a credit card would be required to 
revamp the fee, terms, and other conditions for that credit product 
when offering it to a covered borrower or, more drastically, disqualify 
a covered borrower from opening that credit card account. One 
commenter, for example, offers the view that the Proposed Rule would, 
if adopted, ``have a material and substantial impact on thousands of 
credit card issuers who must redesign technology, sales processes, and 
business strategies while incurring significant legal risk to comply 
with a proposal that affords Service members no increased 
protections.'' \124\
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    \124\ Schwartz & Ballen LLP, Dec. 24, 2014, at 4. See also 
Associations, Dec. 18, 2014, at 56-57 (describing some examples of 
types of costs that could be incurred when a creditor provides a 
credit card account to a covered borrower, and stating that 
``[w]hile we do not have exact costs, implementing, running and 
maintaining a shadow control process for MAPR compliance''--
including for credit card accounts whose transaction fees could be 
subject to an exemption under Sec.  232.4(d)--``will be in the 
millions of dollars for the larger banks and a comparably expensive 
redundancy for community banks'').
     In this regard, when issuing the Proposed Rule the Department 
requested that interested parties ``provide specific data relating 
to the benefits and costs of amending the regulation, including 
costs to implement measures to adjust computer systems and to train 
personnel. . . . Please provide information on the type of costs and 
the magnitude of costs by providing relevant data and studies.'' 79 
FR 58626. The Department does not dispute the views (as expressed in 
these two, as well as in other, comments) that creditors will 
encounter certain costs to adjust their business operations in order 
to comply with the interest-rate limit and other requirements of the 
MLA. Nonetheless, the comment from Schwartz & Ballen LLP offers no 
data in support of its view, and the Associations offer scant data.
---------------------------------------------------------------------------

    As the Department explained when issuing the Proposed Rule, unlike 
the vast majority of credit products that are amenable to 
straightforward pricing mechanisms relating to the cost of the funds 
borrowed (such as solely on the basis of a fixed or variable interest 
rate applied for a term or on a periodic basis or, as discussed above, 
a combination of an `application' fee and a periodic rate), credit 
provided through a credit card account can be provided subject to 
pricing mechanisms that, in part, account for the value of products or 
services delivered through the cardholder's use of the card itself. In 
this regard, many creditors offer credit card products that, from a 
consumer's perspective, generally are subject to periodic interest-rate 
charges (i.e., the cost of the funds borrowed), plus participation fees 
and transaction-based fees that may vary, depending on the consumer's 
use of the card.
    Comments on the Proposed Rule do not dispute that the cost of the 
funds borrowed in a credit card account can be segregated from the fees 
that a creditor expressly ties to specific products or services for 
using the credit card itself. For example, a foreign transaction fee 
that applies when the cardholder tenders the card for a purchase made 
outside of the United States can be segregated from the interest charge 
that the creditor may impose for the funds loaned to make that 
purchase. Even though some of these fees might appear to be relatively 
high under certain circumstances, the Department believes that the 
costs of bona fide fees expressly tied to specific products or services 
which may be imposed upon the covered borrower's own choices regarding 
the use of the card can meaningfully be distinguished from the cost of 
borrowing itself. Flatly applying the interest-rate limit of 10 U.S.C. 
987(b) to credit card products could result in unusually adverse 
consequences to both creditors and covered borrowers, especially 
because creditors likely would be required to significantly re-
structure their current products, services, and pricing mechanisms when 
providing credit cards to Service members and their families--without a 
corresponding benefit to those covered borrowers.\125\
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    \125\ See, e.g., Associations, Dec. 18, 2014, at 37 (In the 
context of addressing the application of the Proposed Rule to open-
end credit, particularly credit cards, the Associations state: 
``Given the challenges, complexities, and costs of creating a system 
to segregate a small minority of customers, calculate the MAPR, and 
waive fees, especially when coupled with all of the other provisions 
in the [Proposed Rule] and the accompanying risk, a rational choice 
for individual lenders or the market as a whole might be simply not 
to make those products available to covered borrowers or not offer 
covered consumer credit to anyone.'').
---------------------------------------------------------------------------

    The Department also continues to believe that credit card products 
warrant special consideration under the MLA because comparable 
protections for consumers who use these products separately apply under 
the CARD Act. For example, the CARD Act, as implemented by the Bureau's 
Regulation Z, generally prohibits a card issuer from opening a credit 
card account or increasing the credit limit on an existing account 
without considering the consumer's ability to repay the amount borrowed 
on the account.\126\ The CARD Act limits penalty fees on credit cards, 
including late-payment and over-the-limit fees, to those fees that are 
``reasonable and proportional'' to the omission or violation that 
triggered the fee.\127\ Regulation Z provides safe harbor fee ranges 
designed to facilitate compliance with these requirements of the CARD 
Act. The CARD Act also limits the total amount of fees that may be 
charged on an account in its first year: in general, a creditor may not 
impose fees for a credit card account during the first year that exceed 
25 percent of the available line of credit in effect when the account 
is opened.\128\
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    \126\ 15 U.S.C. 1665e; 12 CFR 1026.51(a) (effectively requiring 
a card issuer to consider whether a consumer can ``make the required 
minimum periodic payments under the terms of the account based on 
the consumer's current income or assets and the consumer's current 
obligations'').
    \127\ 15 U.S.C. 1665d; 12 CFR 1026.52.
    \128\ 15 U.S.C. 1637(n)(1); 12 CFR 1026.52(a).
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    Several comments state that the CARD Act provides substantial 
protections to consumer-cardholders and that the protections under that 
law are sufficient to justify a wholesale exclusion from the definition 
of consumer credit for credit card accounts. One commenter, for 
example, explains that the prohibition against opening a credit card 
account or increasing the credit limit on an existing account without 
considering the consumer's ability to repay ``helps prevent [covered 
borrowers] from obtaining credit that they may find difficult to 
repay.\129\ A comment on behalf of certain credit card issuers 
concludes that ``[b]alancing these costs against the benefits should 
lead to the conclusion that imposition of special rules for credit card 
lending to active duty service members is not justified or appropriate 
in light of the significant consumer protections already in place as a 
result of the CARD Act.'' \130\ The Associations even go so far to 
state:

[[Page 43573]]

``Though Congress created these broad consumer protections when it 
passed the CARD Act in 2009, what it did not do was expand application 
of MLA to credit cards, even though they were exempt from the MLA at 
that time.\131\ If Congress had felt it necessary to apply MLA to 
credit cards, it could and would have done so in 2009.'' \132\
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    \129\ Schwartz & Ballen LLP, Dec. 24, 2014, at 3.
    \130\ L. Chanin, Dec. 23, 2014, at 12.
    \131\ Associations, Dec. 18, 2014, at 19. On this claim, the 
Associations do not cite the provision of 10 U.S.C. 987 (or other 
law) that had provided an ``exempt[ion]'' for credit card accounts.
    \132\ Associations, Dec. 18, 2014, at 19. The Association's 
argument is curious because the contrary inference appears to be 
more compelling. When Congress enacted the CARD Act (and again when 
Congress enacted the 2013 Act), Congress declined to amend 10 U.S.C. 
987 in order to provide a partial or complete exemption from the 
scope of ``consumer credit'' for a credit card account that is 
subject to the CARD Act; thus, a reasonable interpretation of 10 
U.S.C. 987 in light of the enactment of the CARD Act is that a 
credit card account appropriately should be regulated as ``consumer 
credit,'' subject to the Department's authorities to prescribe 
regulations that may include conditions or criteria applicable to a 
credit card account. See, e.g., 10 U.S.C. 987(h)(2)(D)-(E).
---------------------------------------------------------------------------

    Even though the CARD Act provides certain protections for all 
consumers that are not inconsistent with overarching objectives evident 
under the MLA, the Department has determined, at this time, that the 
interest-rate limit and other requirements of the MLA should not be 
completely set aside in reliance on the CARD Act for covered borrowers. 
The Department continues to believe that certain creditors could take 
advantage of an opportunity to exploit a complete exemption for credit 
cards by transforming high-cost, open-end credit products (which 
otherwise would be covered as ``consumer credit'') into credit card 
products.\133\ In this regard, forty U.S. Senators support the 
Department's ``comprehensive approach'' because, they believe, this 
approach ``is essential to preventing future evasions.'' \134\ 
Nevertheless, the Department recognizes the benefits of implementing 
the protections of the MLA in a manner that balances the interests of 
limiting credit practices that have an adverse impact on covered 
borrowers without unduly impeding the availability of credit that is 
benign or beneficial to those borrowers. Accordingly, the Department is 
adopting a final rule that: (1) Contains a qualified exclusion from the 
requirements relating to the computation of the MAPR for a credit card 
account for a fee that is both ``bona fide'' and ``reasonable'' for 
that type of fee; and (2) temporarily provides a complete exemption 
from the definition of ``consumer credit'' for credit extended to a 
covered borrower under a credit card account.
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    \133\ In this regard, the New York State Department of Financial 
Services (NY Dep't Financial Services) argues that the Proposed Rule 
``falls short'' of providing appropriate consumer protections 
intended by the MLA, in part, because ``undefined `bona fide' fess 
[would not be] included in the calculation of the [MAPR], which 
could allow lenders to charge exorbitant interest rates under the 
guise of permissible fees.'' NY Dep't Financial Services, Dec. 24, 
2014, at 3.
    \134\ Sen. Jack Reed et al., Nov. 25, 2014, at 1.
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    Even though the Department's general policy is to avoid, when 
possible, creating regulatory gaps in the framework for 10 U.S.C. 987, 
the Department believes that, for a definite period of time as set 
forth in the rule, consumer credit under the MLA should not include 
credit extended to a covered borrower under a credit card account under 
an open-end (not home-secured) consumer credit plan. However, when the 
exemption for a credit card account expires, this form of consumer 
credit would be subject to a qualified exclusion for bona fide 
application fees, participation fees, transaction-based fees, and 
similar fees connected to the use of the credit card under Sec.  
232.4(d).\135\
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    \135\ The Department maintains that 10 U.S.C. 987(i)(6) grants 
broad latitude to the Department to ``define which types of consumer 
credit transactions shall be covered by the law, provided that they 
do not include the two listed exemptions.'' 72 FR 50585. 
Furthermore, 10 U.S.C. 987(h) grants to the Department discretion to 
``prescribe regulations to carry out [the MLA],'' and, in 
particular, to prescribe rules relating to ``[t]he method for 
calculating the applicable annual percentage rate of interest'' and 
the ``types of fees'' that are subject to the restrictions of the 
MLA. 10 U.S.C. 987(h)(2)(B) and (h)(2)(C).
---------------------------------------------------------------------------

2. Standards for Exclusion for Bona Fide Fees
    Section 232.4(d) of the final rule allows a creditor to exclude 
from the MAPR a bona fide fee--other than a periodic rate--only to the 
extent that the charge by the creditor is (i) a bona fide fee and (ii) 
reasonable for that type of fee.
    Among other comments on the proposed exclusion for a bona fide fee, 
many focus on the provision that would have required the fee to be 
``customary'' in order to be excluded from the MAPR. In criticizing 
this aspect of the Proposed Rule, commenters believe that this 
condition could thwart innovation because a creditor would not be able 
to show that a fee for a newly-designed product or service for a credit 
card is ``customary.'' \136\ Even though the Department believes that 
this type of criticism is misplaced,\137\ the Department has determined 
to omit this condition from the final rule.
---------------------------------------------------------------------------

    \136\ See, e.g., Associations Dec. 18, 2014, at 38 (``First, a 
fee that few or no other creditors charge is tautologically `not 
customary' and consequently will be deemed ineligible for the 
exception.'').
    \137\ The Associations, for example, fail to recognize that the 
Department's rule does not affect the extent to which a creditor 
could charge fees on consumers who are not covered borrowers. Under 
the Proposed Rule, if creditors would have succeeded in the huge 
marketplace of non-covered borrower cardholders in making a fee for 
a novel or innovative service ``customary'' (or in making the fee 
itself ``customary'')--that is, commonly used or encountered--then a 
creditor would have been permitted to claim that that type of fee 
would qualify as ``customary'' in a credit card account for a 
covered borrower. This dimension of the conditional exemption 
remains relevant because, under Sec.  232.4(d)(3)(ii)-(iv), a 
creditor is permitted to rely on practices and amounts used by other 
creditors in the huge marketplace of non-covered borrower 
cardholders when assessing whether a fee charged by that creditor to 
a covered borrower is ``reasonable.''
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    The Department believes that the conditions for excluding a bona 
fide fee from the MAPR--namely, that the fee must be bona fide and 
``reasonable''--fairly allows Service members and their families to 
continue to have access to credit card products and limit the 
opportunity for a creditor to exploit the exclusion for those products. 
A conditional exclusion is designed to bar a creditor from transforming 
high-cost, open-end credit products into credit card accounts by 
offering a relatively lower periodic rate coupled with a high 
application fee, participation fee, or other fee. Under the final rule, 
a creditor who imposes a fee that is not bona fide or unreasonable in a 
credit card account for a covered borrower must include the total 
amount of the fees--including any fee(s) that otherwise may be eligible 
for the exclusion--in the MAPR. The ``reasonable '' condition for a 
bona fide fee should be applied flexibly so that, in general, creditors 
may continue to offer a wide range of credit card products that carry 
reasonable costs expressly tied to bona fide, specific products or 
services and which vary depending upon the Service member's own choices 
regarding the use of the card.
    Sections 232.4(d)(3) provides standards to guide determinations 
regarding whether a bona fide fee--other than a periodic rate--for a 
credit card account may be excluded from the calculation of the MAPR as 
``reasonable.''
3. Like-Kind Fees
    Section 232.4(d)(3)(i) provides that the bona fide fee must be 
compared to ``fees typically imposed by other creditors for the same or 
a substantially similar product or service.'' The Department believes 
that this elementary like-kind standard is appropriate because a 
creditor should not be permitted to assess the

[[Page 43574]]

reasonableness of a fee for, say, a balance-transfer service based on 
the fees that other creditors charge for cash-advance services.
    A comment on behalf of certain credit card issuers contends that 
the like-kind standard is ``not workable in practice because it 
disregards the fact that there can be significant differences between 
issuers' credit cards and fails to provide a clear basis for 
determining what constitutes a comparable product or service.'' \138\ 
On this point, the comment for these credit card issuers presents two 
principal arguments.\139\ First, the comment raises a series of 
rhetorical questions relating to potentially different features of 
``rewards programs,'' and asks ``[h]ow will a [creditor] determine 
whether a fee imposed in connection with its rewards program is 
substantially similar to, or the same as, another issuer's rewards 
program?'' The like-kind standard does not require a creditor to 
compare its rewards program to other rewards programs, per se; rather, 
the like-kind standard requires a creditor to assess the reasonableness 
of the fee charged for its rewards program to the fees charged by other 
creditors for their rewards programs, respectively. In this way, the 
like-kind standard does not allow a creditor to compare a ``rewards 
program fee'' (an amount other than zero) to the ``foreign transaction 
fee'' charged by another creditor (which could be, say, three percent 
of the amount of the purchase) in order to assess whether its reward 
program fee is reasonable under Sec.  232.4(d)(1). Moreover, in the 
case of a creditor that imposes a fee for participation in a credit 
card account that includes a ``rewards program,'' the creditor is 
permitted under Sec.  232.4(d)(3)(iv) to assess the reasonableness of 
the participation fee by taking into account the potential value of any 
`rewards points' that may be awarded to a covered borrower.
---------------------------------------------------------------------------

    \138\ L. Chanin, Dec. 23, 2014, at 16.
    \139\ L. Chanin, Dec. 23, 2014, at 16-17. The comment also 
raises a question regarding whether a creditor (say, Bank A) that 
issues its credit card on one payment network (e.g., MasterCard) is 
``the same as'' a card that another creditor (Bank B) issues on 
another payment network (e.g., American Express). However, the 
comment fails to describe (or is at least incomplete as to) whether 
either creditor charges a fee to the cardholder that is connected to 
the bona fide service of processing payments over a given network. 
Nevertheless, assuming that the comment's example is pertinent, if 
Bank A charges a ``payment network fee'' to a covered borrower for 
the use of the MasterCard network to process payments on that card, 
then Bank A must compare the amount of that fee to the ``payment 
network fees'' charged by other creditors in order to assess whether 
that fee is reasonable under Sec.  232.4(d)(1).
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    Second, the comment on behalf of these credit card issuers observes 
that creditors ``treat specific types of transactions differently and 
the imposition of a fee for a particular type of transaction is not the 
same across all [creditors].'' The like-kind standard does not contain 
a presumption that a creditor's assessment of a fee for a product or 
service must be relative to the product or service that is identical 
across all creditors; rather, the like-kind standard is designed to 
guard against the possibility that a creditor could improperly assess 
its (high) fee for one service (or type of transaction) relative to the 
(lower) fees charged by other creditors for a service (or type of 
transaction) that is different in kind. By describing the comparison to 
be made as between ``the same or substantially similar product[s] or 
service[s]'' (emphasis added), the Department expects creditors in the 
marketplace of credit card accounts to charge certain fees tied to 
products or services that, despite variances, can be classified in a 
manner that would allow a creditor to fairly assess the reasonableness 
of its bona fide fees. In order to illustrate their apparent confusion 
regarding the application of the like-kind standard under Sec.  
232.4(d)(3)(i), the comment on behalf of these credit card issuers 
offers this example:

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

    Of course they could. More precisely, Sec.  232.4(d)(3)(i) would 
allow Creditor A to assess the reasonableness of the `cash advance' fee 
that applies to all four types of transactions by comparing its fee to 
the fee charged by another group of creditors who cover fewer than 
those transactions within their own structures of fees. Sections 
232.4(d)(1) and 232.4(d)(3)(i) do not require a strict correlation 
among comparators. Even though each transaction that Creditor A 
classifies in its cardholder agreement as subject to a `cash advance' 
fee has distinctive features bearing on a payment (e.g., a traveler's 
check provides for a countersignature by the consumer-purchaser of the 
check when he or she negotiates the check), all of the transactions fit 
within the same class because each allows the cardholder to tender an 
item or instrument as if it were cash (and instead of the credit card 
itself). In this way, Creditor A would be permitted to assess the fee 
it charges for selling a traveler's check as a bona fide `cash advance' 
fee and compare the amount of that fee to the amount that Creditor B 
charges for the sale of a gift card--even if Creditor B does not use 
the same label of `cash advance' fee for that transaction.
    To provide additional clarity on the application of the like-kind 
standard, the Department has modified Sec.  232.4(d)(3)(i) by adding 
the statement: ``Conversely, when assessing a foreign transaction fee, 
that fee may not be compared to a cash advance fee because the foreign 
transaction fee involves the service of exchanging the consumer's 
currency (e.g., a reserve currency) for the local currency demanded by 
a merchant for a good or service, and does not involve the provision of 
cash to the consumer.''
4. Safe Harbor
    Section 232.4(d)(3)(ii) provides a firm, yet flexibly adaptable 
standard for a ``reasonable'' amount of a bona fide fee. Under this 
provision, a creditor may compare the amount of the bona fide fee to 
``an average amount for a substantially similar fee charged by 5 or 
more creditors each of whose U.S. credit cards in force is at least $3 
billion in an outstanding balance (or at least $3 billion in loans on 
U.S. credit card accounts initially extended by the creditor) at any 
time during the 3-year period preceding the time such average is 
computed.'' In this regard, the Department has modified Sec.  
232.4(d)(3)(ii) to clarify that a creditor may meet the $3-billion 
threshold even if the creditor has sold the credit card loans to a 
special-purpose vehicle or entered into another arrangement so that 
securities backed by the loans may be issued. The standard for a 
``reasonable'' amount of a bona fide fee should be sufficiently 
flexible to allow for changing conditions in the marketplace for 
products and services provided through credit card accounts, and thus, 
as proposed, the Department has adopted language in the provision (``an 
average'' of an amount charged by ``5 or more creditors'') that allows 
a creditor to select any group of 5 or more credit card issuers who 
each have the qualifying amount of credit card loans in order to make a 
determination. The Department believes that using a pool of 5 or more 
of these qualifying creditors is reasonable because these creditors, 
taken together, would represent a

[[Page 43575]]

significant portion of the market for credit card products.\140\
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    \140\ The Department is aware of at least 16 creditors who hold 
loans above the proposed asset threshold. See The Nilson Report, 
Issue 1,025 (Sept. 2013) at 10 (listing 14 MasterCard and Visa 
issuers with above $3 billion in outstanding loans mid-year 2013); 
Discover Bank, Consolidated Reports on Condition and Income for A 
Bank with Domestic Offices Only-- FFEIC 041 (July 30, 2013) at 17 
(indicating that Discover held more than $49 billion in such loans); 
and American Express Company, Consolidated Statements of Income 
(July 17, 2013) at 13 (indicating that American Express held $54.6 
billion in cardmember loans. These 16 creditors (who are not the 
only creditors above the $3 billion threshold) hold over $582 
billion in credit card loans or greater than 87 percent of the 
market in 2013.
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    In order for a creditor to use the fee(s) charged by a credit card 
issuer when computing an average, the credit card issuer must have met 
the $3-billion threshold at any time during the 3-year period preceding 
the date when the creditor computes the average. If the amount of the 
creditor's own bona fide fee is less than or equal to the average of 
the amount charged by those 5 or more credit card issuers who each 
meets the $3-billion threshold, then the creditor's bona fide fee is 
reasonable for the purposes of the exclusion.
    Section 232.4(d)(3)(ii) sets a threshold of $3 billion in 
outstanding credit card loans on U.S. credit card accounts held by a 
credit card issuer (or at least $3 billion in loans on U.S. credit card 
accounts initially extended by the creditor) in order for that issuer's 
fees to be eligible for inclusion in an average calculated for the 
purposes of compliance with the ``reasonable'' condition of Sec.  
232.4(d)(1). The Department has adopted the use of a minimum of 5 
credit card issuers, each of whom meet the $3-billion threshold, in 
order to facilitate a creditor's ability to compute an average under 
the safe-harbor provision in light of a very manageable, yet fairly 
representative, sample of fees in the marketplace for credit card 
products. The Department has concluded that a $3 billion threshold of 
credit card loans is reasonable because that threshold would include a 
significant number of credit card issuers, whose credit card products 
make up the majority of the products in the current credit card market. 
Moreover, the credit card issuers who hold more than $3 billion in 
outstanding credit card loans (or had initially had originated more 
than $3 billion of credit card loans) on U.S. credit card accounts 
offer credit card products that are typical in that marketplace. The 
Department is aware that many credit card issuers who do not meet the 
$3-billion threshold may offer credit card products with lower or 
similar fees (relative to issuers who hold more than $3 billion in 
outstanding credit card loans); these issuers would benefit in a 
straightforward manner from the proposed method of computing an average 
for the purposes of the safe-harbor proposed in 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 representative sample of the marketplace.
    The Department also has adopted, as proposed, a rolling 3-year 
look-back period to facilitate a creditor's ability to establish that a 
credit card issuer meets the asset-size standard. This 3-year period is 
designed to facilitate the process for calculating, and relying on, an 
average amount for one or more relevant fees because, for example, when 
a creditor uses information from the past year to establish that a 
credit card issuer meets the asset-size threshold, the creditor could 
rely on the fee information relating to that credit card issuer's 
credit card products for the next two years. At the same time, the 3-
year period is expected to provide stability to the safe-harbor 
determination, particularly if credit card loan holdings of credit card 
issuers shift significantly in response to market conditions or 
otherwise. Furthermore, a 3-year period is expected to provide adequate 
time for the Department to amend the threshold or safe harbor, as may 
be necessary.\141\
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    \141\ In this regard, 10 U.S.C. 987(h)(3) requires the 
Department, at a minimum, to consult with other Federal agencies 
``not less often than once every two years'' with a view towards 
revising the regulation implementing the MLA.
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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.\142\ Indeed, subject to certain conditions, TILA, as amended 
by the CARD Act, requires a creditor to maintain an internet site on 
which the creditor must post its written agreement with a cardholder, 
and must provide that agreement to the Bureau to be made publicly 
available on the Bureau's site.\143\
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    \142\ See, e.g., the solicitations available at https://creditcards.chase.com.
    \143\ 15 U.S.C. 1632(d).
---------------------------------------------------------------------------

    With regard to the amount of outstanding credit card loans held by 
a credit card issuer, issuers provide this information in both filings 
to the Securities and Exchange Commission (SEC filings) and 
Consolidated Reports of Condition and Income (Call Reports). Both SEC 
filings \144\ and Call Reports \145\ are available online without 
charge. In addition, the Department recognizes that data collected from 
these and other information sources is compiled in commercially 
available databases regularly used by financial institutions to track 
the marketplace for credit card products and services, and the 
Department believes that creditors should be permitted to reasonably 
rely upon those industry-specific databases when computing an average 
fee under Sec.  232.4(d)(3)(ii).
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    \144\ The SEC makes public filings available through its 
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. 
Information on this system is available at http://www.sec.gov/edgar/aboutedgar.htm.
    \145\ Call Reports for institutions insured by the FDIC can be 
found on the Federal Financial Institutions Examination Council's 
Web site, available at https://cdr.ffiec.gov/public/. Call Reports 
for credit unions are available online through the NCUA's Web site, 
available at http://researchcu.ncua.gov/Views/FindCreditUnions.aspx.
---------------------------------------------------------------------------

    For example, a creditor seeking to determine whether another credit 
card issuer could qualify as one of the 5 creditors for determining the 
average fee under 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 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.
5. Reasonable Fee
    Section 232.4(d)(3)(iii) provides that a bona fide fee still may be 
``reasonable'' for the purposes of the exclusion even if that fee is 
higher than an average amount as calculated under proposed Sec.  
232.4(d)(3)(ii). In particular, the Department recognizes that, due to

[[Page 43576]]

several factors in the marketplace for credit cards, the prices of 
certain fees could drop from current levels, including to zero, and yet 
the Department believes that a creditor who charges a reasonable fee 
still should be permitted to avail itself of the exclusion in paragraph 
(d)(1) of this section. Accordingly, the Department has adopted a 
provision that expressly states that ``[a] bona fide fee charged by a 
creditor is not unreasonable solely because other creditors do not 
charge a fee for the same or a substantially similar product or 
service.''
6. Reasonableness for a Participation Fee
    Consistent with the Department's policy that the ``reasonable'' 
amount of a bona fide fee is a standard designed to be applied 
flexibly, Sec.  232.4(d)(3)(v) provides a standard in the particular 
case of a participation fee. The Department recognizes that creditors 
who issue credit cards provide a range of benefits and services to 
Service members and their dependents who are cardholders, and some 
cards may charge a participation fee in lieu of (or in light of lower) 
transaction-based fees. For example, a creditor may offer a credit card 
that carries a relatively higher participation fee, yet does not charge 
a foreign transaction fee. Accordingly, Sec.  232.4(d)(3)(v) provides a 
standard stating that ``[a]n amount of a bona fide fee for 
participation in a credit card account may be reasonable . . . if that 
amount reasonably corresponds to the credit limit in effect or credit 
made available when the fee is imposed, to the services offered under 
the credit card account, or to other factors relating to the credit 
card account.''

F. Assessment of a Covered Borrower

1. In General
    Many comments on the Proposed Rule focus on the transition in the 
method that a creditor could use to determine whether an applicant is a 
covered borrower. The Department continues to be keenly aware of the 
practical implications of offering a safe harbor relating to a 
creditor's assessment of an applicant to determine whether a credit 
transaction or account is subject to the Department's rule implementing 
the protections of the MLA. Nonetheless, nothing in 10 U.S.C. 987 
mandates the provision of any safe harbor for a ``covered-borrower 
check;'' the Department elects to maintain the existence of a safe 
harbor in Sec.  232.5 in the exercise of the authorities granted to it 
in the law.
    In their comment on Sec.  232.5 of the Proposed Rule, the 
Associations incorrectly state that there would be a ``requirement for 
lenders to query the Department's [MLA Database]. . . .'' \146\ Many 
other commenters similarly err: \147\ Neither the Department's existing 
rule nor the Proposed Rule would have required a creditor to take any 
action to assess whether any consumer-applicant is a covered borrower. 
And nothing in the Department's final rule requires a creditor to 
conduct a covered-borrower check. Moreover (if the creditor elects to 
conduct that check), the final rule does not prescribe any method for a 
covered-borrower check.
---------------------------------------------------------------------------

    \146\ Associations, Dec. 18, 2014, at 27. The thrust of the 
Associations' criticism in this sentence is that the use of the MLA 
Database would ``overtax an already unreliable system and 
inconvenience all consumer credit applicants.'' The Department 
addresses this criticism by allowing a creditor to use the existing 
safe harbor for up to one year after the effective date of the final 
rule. See 12 CFR 232.13(b).
    \147\ See, e.g., Penn State Federal Credit Union, Dec. 12, 2014, 
at 1 (``The method of identifying servicemembers and dependents to 
comply with the rule should be changed. Instead of forcing lenders 
to check the [MLA Database] for every extension of consumer credit 
to any individual, servicemembers and dependents could self-
identify.''); Small Business Administration (``SBA'') Office of 
Advocacy, Dec. 18, 2014, at 4 (``Requiring small entities to check 
every customer to determine if he or she is a military member or a 
military dependent could become burdensome. The business may need to 
train its staff on how to use the [MLA Database]. If the [MLA 
Database] is not operating, the small entity may lose a non-military 
customer while it is trying to ascertain whether the customer is a 
covered borrower.'')
---------------------------------------------------------------------------

    To underscore the Department's consistent policy regarding a 
covered-borrower check, the Department has modified Sec.  232.5 to 
state, at the outset: ``A creditor is permitted to apply its own method 
to assess whether a consumer is a covered borrower.'' \148\ Under the 
Department's final rule, as under the existing rule and the Proposed 
Rule, a creditor who seeks to ascertain whether consumer-applicants are 
covered borrowers may use a ``simple check box on credit 
applications,'' as one commenter suggests,\149\ or any other method 
that suits its business operations.
---------------------------------------------------------------------------

    \148\ 32 CFR 232.5(a).
    \149\ Penn State Federal Credit Union, Dec. 12, 2014, at 1.
---------------------------------------------------------------------------

    Nevertheless, the Department still believes that a creditor should 
be afforded a degree of certainty regarding whether an extension of 
consumer credit is being made to a covered borrower, and to accomplish 
that purpose adopts new safe-harbor consistent with the provision 
contained in the Proposed Rule. The Department continues to believe 
that the dynamic between creditors and borrowers in actual transactions 
has led to widespread misuses of the individual's self-certification 
statement,\150\ which also have resulted in adverse effects on Service 
members or their dependents who make false statements. Accordingly, the 
Department has adopted a safe-harbor provision designed to relieve a 
Service member or his or her dependent from making any statement 
regarding his or her status as a covered borrower \151\ in the course 
of a transaction involving consumer credit. Only if a creditor chooses 
to have a legally conclusive--but not the only factually conclusive--
mechanism to determine whether a consumer seeking to obtain consumer 
credit is a covered borrower would the creditor need to use one or both 
of the methods set forth in Sec.  232.5(b)(2), and maintain a record of 
the information so obtained, as set forth in Sec.  232.5(b)(3).\152\
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    \150\ As the Department observed when issuing the Proposed Rule, 
some spouses of active duty Service members may not understand that 
they are ``dependents'' covered under the MLA and might unwittingly 
incorrectly complete the covered borrower identification statement. 
79 FR 58614.
    \151\ In this regard, the Department notes that even under the 
elective verification method, an activated member of the National 
Guard or Reserves is required to provide a copy of the military 
orders calling the covered member to military service, upon request 
of the creditor. 32 CFR 232.5(b).
    \152\ In this regard, a creditor would not need to use the MLA 
Database when processing a consumer's application for a loan that is 
not consumer credit, such as a residential mortgage loan.
---------------------------------------------------------------------------

    The Department also recognizes the reasonable concerns, raised in 
many comments on the Proposed Rule, regarding the various interests of 
creditors in using the MLA Database and the potential costs associated 
with changing systems for processing consumer credit applications to do 
so. For example, one commenter expresses the view that a small entity 
might not have the ``financial resources'' to use the MLA Database and 
thus ``recommend[s] that small entities be allowed to continue to 
operate under a safe harbor that requires military members and their 
dependents to self-identify.'' \153\ Consistent with the general 
provision that affords a creditor one year to comply with the 
requirements of the final rule, Sec.  232.13(b) provides that a 
creditor may continue to operate under the existing safe harbor for 
identifying a

[[Page 43577]]

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

    \153\ SBA Office of Advocacy, Dec. 18, 2014, at 4. Similarly, 
the Associations contend (though without offering any data that 
could support their views) that Sec.  232.5 of the Proposed Rule 
``will impose significant costs on all depository institutions, 
especially small institutions, related to the necessary changes to 
operating systems, security, procedures, and staff training, and the 
continuing costs associated with compliance monitoring and 
examination.'' Associations, Dec. 18, 2014, at 27.
---------------------------------------------------------------------------

2. Use of MLA Database or Consumer Report Obtained From a Nationwide 
Consumer Reporting Agency Permitted
    The Department adopts a new safe harbor in Sec.  232.5(b) that 
permits a creditor to legally conclusively determine whether a consumer 
is a covered borrower by using information obtained either: (i) 
Directly or indirectly from the MLA Database or (ii) in a consumer 
report from a nationwide consumer reporting agency or a reseller who 
provides such a consumer report. If the creditor uses one of these two 
methods (or both, as the creditor may elect), the creditor's 
determination would be conclusive with respect to that transaction or 
account involving consumer credit, so long as the creditor maintains a 
record of the information so obtained.
    As the Department stated when issuing the Proposed Rule, commercial 
information-services providers reasonably might be anticipated to 
supply information products to financial institutions that would 
include covered-borrower checks as part of the products used to process 
loan applications. Nothing in Sec.  232.5(b)(2)(i) prohibits or 
restricts a creditor from using a commercially-provided product 
containing information obtained from the MLA Database to conduct a 
covered-borrower check.\154\ To make this aspect of the rule more 
clear, the Department adopts Sec.  232.5(b)(2)(i) to state that ``a 
creditor may verify the status of a consumer by accessing information 
relating to that consumer, if any, obtained directly or indirectly from 
the database maintained by the Department'' (emphasis added).\155\
---------------------------------------------------------------------------

    \154\ However, even if the Department's rule implementing the 
MLA does not restrict a creditor from using a commercially provided 
information product to conduct a covered-borrower check, a 
commercial entity seeking to use the MLA Database and to re-sell 
data obtained from the MLA Database must comply with the terms and 
conditions for use of the database.
    \155\ Moreover, nothing in Sec.  232.5(b)(2)(i) restricts a 
consumer reporting agency (including a nationwide consumer reporting 
agency) from providing information obtained exclusively from the MLA 
Database.
---------------------------------------------------------------------------

    Nevertheless, several commenters encourage the Department to 
provide greater flexibility to creditors that may wish to use 
commercially provided information with underlying data supported by the 
Department's database. For example, the American Financial Services 
Association suggests that ``[i]f the Department proceeds with the 
proposed safe harbor, the Department should clarify that a creditor may 
take advantage of the safe harbor by conducting a covered borrower 
check using a commercially provided information product whose 
underlying data is derived from the MLA Database.'' \156\ In addition 
to permitting the use of information obtained from the MLA Database, 
the Department should provide a second method for verifying the status 
of covered borrowers. In Sec.  232.5(b)(2)(ii), the Department allows a 
creditor to use information relating to a consumer contained in a 
consumer report obtained from a nationwide consumer reporting agency, 
or a reseller of such a consumer report (i.e., a reseller who obtains 
the underlying report from a nationwide consumer reporting agency). The 
Department believes that information contained in a consumer report 
should be permitted to be used for the purposes of the safe harbor in 
Sec.  232.5(b) because the Fair Credit Reporting Act (``FCRA'') \157\ 
imposes stringent requirements on the assembly of information for, 
disclosure of, and use of a consumer report; the Department believes 
that, taken together, these requirements should be sufficient to 
provide the degree of accuracy necessary for a creditor to make a 
legally conclusive determination regarding the status of a consumer for 
purposes of compliance with the MLA. In particular, the Department 
believes that a covered borrower would not face a material risk of 
being mis-identified as not having that status by a creditor's use of a 
consumer report because, under the FCRA, a consumer reporting agency 
must ``follow reasonable procedures to assure the maximum possible 
accuracy of the information concerning the individual about whom the 
report relates.'' \158\ The Department has crafted Sec.  
232.5(b)(2)(ii) broadly to allow a creditor to ``[use] information 
relating to that consumer, if any, contained in a consumer report.'' 
Although the MLA Database may be one source of information nationwide 
credit reporting agencies might draw upon, nothing in this subparagraph 
requires the information contained in the consumer report bearing on 
the covered-borrower check to be derived solely from the MLA 
Database.\159\ A creditor may use information contained in a consumer 
report obtained from a nationwide consumer reporting agency, or from a 
reseller who obtains the underlying consumer report from a nationwide 
consumer reporting agency, even if the nationwide consumer reporting 
agency has developed data from sources other than the MLA Database that 
bears on the status of the consumer vis-[agrave]-vis a covered 
borrower.
---------------------------------------------------------------------------

    \156\ American Financial Services Association (``AFSA''), 
Comment, Dec. 22, 2014, at 16-17. See also, Equifax, Dec. 26, 2014, 
at 4 (``Companies like Equifax have decades of experience running 
and maintaining data bases, and would be a superior choice to having 
the Department attempt to expand, run and maintain a database . . . 
.''); Nat'l Assoc. of Consumer Credit Administrators, Dec. 12, 2014 
at 5 (``Our Association supports the creation of a safe harbor for 
creditors which conduct covered-borrower checks using a product 
supported by the MLA Database.'')
    \157\ 15 U.S.C. 1681-1681x.
    \158\ 15 U.S.C. 1681e(b).
    \159\ In this regard, the Department notes that a nationwide 
consumer reporting agency that provides to its client-creditors 
consumer reports containing covered-borrower data derived solely 
from the MLA Database may enable those creditors to use either of 
the two methods for the safe harbor in Sec.  232.5(b).
---------------------------------------------------------------------------

    Nevertheless, at this time the Department is concerned that, 
despite the requirements of (and enforcement mechanisms that apply 
under) the FCRA, all consumer reporting agencies might not have 
sufficiently robust systems in place that would provide the degree of 
accuracy for covered-borrower checks that would warrant granting a safe 
harbor to their client-creditors. The Department observes that certain 
supervisory and regulatory mechanisms currently apply primarily (or 
exclusively) to nationwide consumer reporting agencies that reasonably 
can be expected to lead those entities to maintain sufficiently robust 
systems that would provide the degree of accuracy for covered-borrower 
checks. Consistent with the Department's approach to incrementally 
adopt and, as appropriate, amend its regulation to implement the 
protections of the MLA, the Department at this time is restricting the 
source of the consumer report that is eligible for the safe harbor in 
Sec.  232.5(b)(2)(ii) to a nationwide consumer reporting agency or a 
reseller who obtains such a report (from a nationwide consumer 
reporting agency). As the Department gains more experience observing 
the effects of its regulation and continues to consult with the Federal 
Agencies, the Department may, as appropriate, review and consider 
whether to amend this provision of the regulation.
3. Modification To Use Information Solely at the Time of Processing an 
Application
    Several entities contend that under the safe-harbor provisions 
proposed in Sec.  232.5, in conjunction with the definition of 
``covered borrower,'' in Sec.  232.3(g), a creditor would have needed 
to conduct ``at least two checks of the

[[Page 43578]]

[MLA Database] per applicant, one upon receiving the application, and 
the other at the point the applicant `becomes obligated' on a 
transaction or establishes an account.'' \160\ In Sec.  232.3(g) of the 
Proposed Rule, the Department proposed to define the term ``covered 
borrower,'' in part, as a consumer who, at the time the consumer 
becomes obligated on a consumer credit transaction or establishes an 
account for consumer credit, [meets other criteria]'' (emphasis added); 
and in proposed Sec.  232.5(b)(2) of the Proposed Rule, the Department 
described the process of obtaining information from the MLA Database 
``when a creditor enters into a transaction or establishes an account 
for consumer credit.'' The likelihood that a creditor seeking to use 
the safe harbor under Sec.  232.5(b) would need to check the MLA 
Database or use a consumer report more than once--that is, at the time 
of processing the application for consumer credit and at least once 
thereafter--is heightened for credit card accounts because, as the 
Associations observe, ``[c]onsumers typically do not become `obligated' 
on credit cards . . . until the first transaction or a certain period 
after delivery of the card, as recognized under [Regulation Z].'' \161\
---------------------------------------------------------------------------

    \160\ Schwartz & Ballen LLP, Dec. 23, 2014, at 5. See also, 
e.g., Associations, Dec. 18, 2014, at 28 (``[A] depository 
institution will have to query the database multiple times with 
regard to open-end credit, such as credit cards.'')
    \161\ Associations, Dec. 18, 2014, at 28.
---------------------------------------------------------------------------

    As the Department stated when issuing the Proposed Rule, the safe-
harbor provisions of Sec.  232.5(b) were designed to allow a creditor 
to 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.'' \162\ In the context of 
explaining how the safe-harbor provisions would apply in the case of a 
consumer who opens multiple accounts for consumer credit, the 
Department stated that ``[i]n 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 consumer credit.'' \163\ The Department 
recognizes the potential ambiguity that could arise, particularly for 
consumer credit that is established--that is, when the consumer 
``becomes obligated'' for the loan, as described in the definition of 
``covered borrower'' (Sec.  232.3(g))--at a time weeks or months after 
the consumer applies for the loan--that is, when the Department 
contemplates that a creditor likely would use information from the MLA 
Database or information contained in a consumer report.
---------------------------------------------------------------------------

    \162\ 79 FR 58615.
    \163\ 79 FR 58615.
---------------------------------------------------------------------------

    The Department concludes that the final rule should be clarified to 
allow a creditor to have a legally conclusive mechanism to determine 
whether a consumer is a covered borrower at the time that the consumer 
is seeking to obtain consumer credit or when the creditor develops or 
processes a firm offer of credit, subject to a 60-day expiration period 
(in the event the consumer delays responding to that offer). Consistent 
with the Department's authorities to prescribe a rule to implement 10 
U.S.C. 987, the Department clarifies this aspect of the potential 
application of Sec.  232.5(b), first by modifying the scope of the 
definition of ``consumer credit'' in Sec.  232.3(f)(2)(v), and second 
by modifying the timing provisions of Sec.  232.5(b)(3).
4. Actual-Knowledge Clawback From Safe-Harbor in Proposed Sec.  
232.5(c)
    Apart from the reliance on information from the MLA Database as a 
safe harbor, several entities raised concerns about the Department's 
proposal to provide an exception (in proposed Sec.  232.5(c)) from that 
safe-harbor provision based on the creditor's actual knowledge that the 
consumer is a covered borrower. One credit union, for example, states: 
``Reviewing multiple record systems to comply with the `actual 
knowledge' requirement is impractical; it would likely entail manual 
review by credit union staff to ensure records are thoroughly and 
accurately searched. This would cause significant delays to the loan 
application and underwriting processes, and increased costs for 
financial products and services--both undesirable consequences for 
consumers.'' \164\ Similarly, the Associations believe that the 
presence of the exception for a creditor's actual knowledge would lead 
``all credit unions and banks . . . to create an independent internal 
system to capture and centralize any documentation that might suggest 
that the customer is in the service or the spouse or dependent of a 
servicemember.'' \165\
---------------------------------------------------------------------------

    \164\ Navy Federal Credit Union, Dec. 15, 2014, at 2. See also 
Michigan Credit Union League & Affiliates, Dec. 26, 2014, at 3 
(``Depending on the complexity of the institution, the credit union 
may have to review multiple record systems to comply with the 
`actual knowledge' requirement and will likely entail manual reviews 
by credit union staff to ensure records are thoroughly and 
accurately searched.'').
    \165\ Associations, Dec. 18, 2014, at 28.
---------------------------------------------------------------------------

    After considering the potential benefits of affording protections 
under the MLA to a covered borrower who is mis-identified through the 
creditor's use of the MLA Database or through some other method, the 
Department concludes that a creditor who conducts a covered-borrower 
check in reliance on information obtained from the MLA Database or from 
a consumer report obtained from a nationwide consumer reporting agency, 
and determines at the outset that a consumer-applicant is not a covered 
borrower should be provided a safe harbor from liability under the 
MLA--even if, in fact, that consumer is a covered borrower. If a 
creditor were to use either or both of the methods in Sec.  232.5(b)(2) 
to ascertain the status of a consumer who applies for consumer credit, 
that creditor would demonstrate its best efforts under the 
circumstances to comply with the MLA, as implemented by the 
Department's regulation, and should receive, therefore, protection from 
liability if the database contains incorrect information about that 
consumer. Accordingly, the Department has determined that Sec.  
232.5(c) of the Proposed Rule should not be retained in the final rule.
    Under Sec.  232.5 of the final rule, no inference may be drawn 
concerning the validity of a creditor's own method--that is, a method 
other than one of the methods in Sec.  232.5(b)(2)--to assess whether a 
consumer is a covered borrower. If a dispute regarding the requirements 
of the MLA were to arise in a case when the creditor had used its own 
method to assess the status of a consumer, then the issue of whether 
the consumer is or had been a covered borrower is a question of fact, 
and the parties would be subject to the rules of evidence, including 
the burdens of production, that apply to that case. More specifically, 
the absence of the actual-knowledge exception to the safe-harbor 
provision (as had been proposed Sec.  232.5(c)) in light of the absence 
of any requirement to use any method to identify a consumer as a 
covered borrower (see Sec.  232.5(a) of the final rule) shall not be 
construed to create any presumption in favor of a creditor that elects 
to use its own method to ascertain whether a consumer is a covered 
borrower.
    A comment on behalf of certain credit card issuers seeks 
clarification regarding the potential effects of certain ``customer 
management actions, such as credit line increases.'' \166\ The 
Department believes that an action by a creditor within an existing 
account, such as to increase the available credit that a consumer may 
draw upon in an account, does not alter the status of the

[[Page 43579]]

creditor's prior determination for that account. The Department has 
adopted a new provision, in Sec.  232.5(b)(3), to clarify this aspect 
of the operation of the safe harbor. However, the Department maintains 
that, in order to benefit from the safe-harbor provision under Sec.  
232.5(b), a creditor must use a method in Sec.  232.5(b)(2) whenever 
extending a new consumer credit product or newly establishing an 
account for consumer credit, including a new line of consumer credit 
that might be associated with a pre-existing transactional account held 
by the borrower. For example, if a consumer initially opens a checking 
account with a bank, and then, later, applies for an overdraft line of 
credit associated with that checking account and which carries a cost 
in excess of the interest-rate limit, in order to receive the benefit 
of the safe harbor for purposes of that new line of consumer credit, 
the bank must, for example, use information obtained from the MLA 
Database when processing the consumer's application for (or at the time 
of establishing) the overdraft line of credit, even if the bank 
previously had used information from the MLA Database at the time the 
consumer established the checking account and did not find the consumer 
in the database.
---------------------------------------------------------------------------

    \166\ L. Chanin, Dec. 23, 2014, at 20.
---------------------------------------------------------------------------

IV. Section-by-Section Description of the Regulation

Section 232.1 Authority, purpose, and coverage

    The Department adopts this section as proposed.

Section 232.2 Applicability

    The Department adopts this section as proposed, with a few 
amendments, including an example, to clarify that the protections of 10 
U.S.C. 987 apply only when the consumer continues to hold the status as 
a covered borrower.
    The Department proposed to add new subsection (a), stating: 
``Nothing in this part applies to a credit transaction or account 
relating to a consumer who is not a covered borrower at the time he or 
she becomes obligated on a credit transaction or establishes an account 
for credit.'' The Department continues to believe that defining the 
scope of the regulation to apply only to a covered borrower when he or 
she enters into a transaction or establishes an account for consumer 
credit is consistent with the language and structure of 10 U.S.C. 
987.\167\ Interpreting 10 U.S.C. 987 as applying only to a covered 
borrower who holds that status when he or she agrees to obtain the 
consumer credit is fair to the creditor who, at the outset of the 
transaction, should be in a position to know the status of its 
counterparty to the agreement.\168\ Correspondingly, 10 U.S.C. 987 
should apply only when the consumer (who is a covered borrower at the 
outset of the transaction, or when establishing an account, for 
consumer credit) continues to be a covered borrower. A comment on 
behalf of certain credit card issuers observes that the Proposed Rule 
``does not address account `roll-off'--i.e., whether the MLA 
protections continue to apply once the service member is no longer on 
active duty or exits the military.'' \169\ The Department has modified 
Sec.  232.2(a)--as well as the definition of ``covered borrower'' in 
Sec.  232.3(g), as discussed below--to clarify that the regulation does 
not apply to a transaction or account for credit relating to a consumer 
(which otherwise would be consumer credit) when the consumer no longer 
is a covered borrower.
---------------------------------------------------------------------------

    \167\ See, e.g., 10 U.S.C. 987(a) (imposing conditions on ``[a] 
creditor who extends consumer credit''); 10 U.S.C. 987(c) (requiring 
certain information to be provided to a covered borrower ``before 
the issuance of credit''); 10 U.S.C. 987(e) (declaring that ``[i]t 
shall be unlawful for any creditor to extend consumer credit to a 
[covered borrower]'' that involves certain restrictions or conduct) 
(emphases added).
    \168\ In this regard, the Department explained that its 
longstanding policy regarding this aspect of the scope of 10 U.S.C. 
987 is consistent with the provision set forth in Sec.  987(f)(3). 
(``Any credit agreement, promissory note, or other contract 
prohibited under this section is void from the inception of such 
contract.''). In proposing Sec.  232.2(a), the Department explained 
that ``10 U.S.C. 987 should not be interpreted so as to impose 
restrictions on an existing agreement between a creditor and a 
consumer involving a credit transaction primarily for personal, 
family, or household purposes that spring to life when the consumer 
becomes a covered borrower when he or she begins active duty service 
in the military.'' 79 FR 58616.
    \169\ L. Chanin, Dec. 23, 2014, at 20.
---------------------------------------------------------------------------

    The Department adopts corresponding revisions to certain other 
provisions of the regulation, notably Sec. Sec.  232.3(f) and 
232.5(b)(2), for the sake of clarity and consistency with this policy.
    The Department adopts Sec.  232.2(b) as proposed.

Section 232.3 Definitions

    (a) Affiliate. The Department adopts the term ``affiliate'' as 
proposed. As previously explained, this definition is designed to 
prevent evasion of the rule, specifically with respect to an entity 
that would not, when considered alone, qualify as a creditor, but, when 
considered together with its affiliates, would be engaged in extending 
credit, as described in Sec.  232.3(i)(3).
    (b) Billing cycle. The Department adopts the term ``billing cycle'' 
as proposed.
    (c) Bureau. The Department adopts the term ``Bureau'' as proposed.
    (d) Closed-end credit. The Department adopts the term ``closed-end 
credit'' as proposed.
    (e) Consumer. The Department adopts the term ``consumer'' as 
proposed.
    (f) Consumer credit. As discussed above, the Department defines 
``consumer credit'' consistent with the relevant provisions of the 
Bureau's Regulation Z.
    Sections 232.3(f)(2)(i)-(iii) provide exceptions to ``consumer 
credit'' that track the exceptions to that term in the MLA.
    The Department's existing rule, as well as the Proposed Rule, 
interpreted 10 U.S.C. 987(i)(6)(A) to exclude from consumer credit 
``any credit transaction secured by an interest in the covered 
borrower's dwelling,'' \170\ whereas the statutory provision flatly 
excludes ``a residential mortgage.'' A few comments ask the Department 
to modify Sec.  232.3(f)(2)(i) in order that other types of 
transactions secured by property, such as the dwelling of another 
person, would be eligible for the exclusion.\171\ The Department 
concludes that subparagraph (f)(2)(i) should reflect the language and 
the scope of the exclusion in the MLA--``a residential mortgage''--and 
amends that provision accordingly.
---------------------------------------------------------------------------

    \170\ See proposed 12 CFR 232.3(f)(2)(i), 79 FR 58637 (emphasis 
added).
    \171\ See, e.g., Wolters Kluwer Financial Services, Dec. 23, at 
1 (asking the Department to ``consider whether these transactions 
pose the type of `debt trap' to [covered borrowers], and if not, 
amend the restriction ``in order to limit unnecessary regulatory 
burden'').
---------------------------------------------------------------------------

    Certain credit products may, or may not, be covered under the 
Department's definition of ``consumer credit,'' depending, for example, 
on whether the particular credit product is subject to a ``finance 
charge,'' which the Department likewise defines 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,\172\ an overdraft line of credit with a finance 
charge would (when offered to a covered borrower) be covered as 
consumer credit to the extent

[[Page 43580]]

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.\173\
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    \172\ 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'').
    \173\ See 12 CFR 1026.4(c)(3).
---------------------------------------------------------------------------

    Consistent with the Department's existing rule, Sec.  
232.3(f)(2)(iv) excludes 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) 
\174\ or otherwise is not subject to disclosure requirements under 
Regulation Z. The Department continues to believe that the exclusions 
in Sec.  232.3(f)(2)(iv) are appropriate 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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    \174\ See 12 CFR 1026.29, regarding state application for Bureau 
exemption of a class of transactions within the state.
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    As discussed when issuing the Proposed Rule,\175\ the Department 
has removed the provision in the existing rule that had provided an 
exclusion for ``credit secured by a qualified retirement account as 
defined in the Internal Revenue Code.'' \176\
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    \175\ See 79 FR 58616-58617.
    \176\ 32 CFR 232.3(b)(2)(iv) (2014).
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    As discussed in section III.D., the Department adopts Sec.  
232.5(b) in order to afford a creditor a degree of certainty regarding 
whether an extension of consumer credit is being made to a covered 
borrower. Accordingly, and pursuant to the Department's authorities to 
prescribe regulations defining the scope of ``consumer credit,'' \177\ 
the Department adopts an exclusion in Sec.  232.3(f)(2)(v) that gives 
effect to a creditor's election to use the method of conducting a 
covered-borrower check, and by complying with the recordkeeping 
requirement, under Sec.  232.5(b).
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    \177\ 10 U.S.C. 987(h)(2)(D)-(E); 987(i)(6).
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    (g) Covered borrower. In general, the Department has adopted the 
definition of ``covered borrower'' as proposed. The Department proposed 
to revise the definition of ``dependent'' to reflect the language of 10 
U.S.C. 987(i), as amended by Sec.  663 of the 2013 Act and, with 
respect to this provision, one commenter states that the definition of 
``dependent'' should include surviving spouses, as described in 
subparagraphs (B) and (C) of 10 U.S.C. 1072(2).\178\ The Department has 
no discretion to expand the scope of the term ``dependent'' to include 
surviving spouses, and believes that the definition of ``dependent'' 
hereby adopted in the final rule appropriately carries out the intent 
to simplify the process for determining which family members are 
covered under 10 U.S.C. 987.
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    \178\ Nat'l Military Family Assoc., Dec. 18, 2014, at 2. 10 
U.S.C. 1072(2)(B)-(C) (defining ``dependent'' to mean ``the 
unremarried widow'' of a member or the ``unremarried widower'' of a 
member, respectively).
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    For the reasons discussed in connection with the modification to 
Sec.  232.2(a), the Department has modified the definition of ``covered 
borrower,'' by adding a new subparagraph (4), to clarify that a 
consumer who had been a covered borrower ceases to hold that status 
when the consumer no longer is a covered member or a dependent of a 
covered member.
    (h) Credit. The Department adopts the term ``credit'' as proposed.
    (i) Creditor. The Department adopts the term ``creditor'' as 
proposed. As stated in the Proposed Rule, the Department interprets the 
statutory provision of ``engaged in the business of extending consumer 
credit'' \179\ consistent with the corresponding provision of the 
Department's existing rule, which refers to the definition of 
``creditor'' in Regulation Z.\180\
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    \179\ 10 U.S.C. 987(i)(5)(A)(i).
    \180\ 32 CFR 232.3(e) (``Creditor means a person who . . . and 
who otherwise meets the definition of `creditor' for purposes of 
Regulation Z.'').
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    (j) Department. The Department adopts the definition for the 
Department of Defense as proposed.
    (k) Dwelling. The definition of ``dwelling'' is not changed from 
the Department's existing rule.\181\
---------------------------------------------------------------------------

    \181\ 32 CFR 232.3(f).
---------------------------------------------------------------------------

    (l) Electronic fund transfer. The Department adopts the term 
``electronic fund transfer'' as proposed.
    (m) Federal credit union. The Department adopts the term ``Federal 
credit union'' to have the same meaning as in the FCU Act. As discussed 
in section III.D., this term is part of the exclusion from the MAPR for 
an application fee charged by a Federal credit union (or insured 
depository institution).
    (n) Finance charge. The Department adopts the term ``finance 
charge'' as proposed.
    (o) Insured depository institution. The Department adopts the term 
``insured depository institution'' to have same meaning as in the 
Federal Deposit Insurance Act. As discussed in section III.D., this 
term is part of the exclusion from the MAPR for an application fee 
charged by an insured depository institution (or Federal credit union).
    (p) Military annual percentage rate (MAPR). The Department adopts 
the definition of the term ``MAPR'' as proposed, which requires the 
cost of credit to be expressed as an annual rate and requires the MAPR 
to be calculated in accordance with Sec.  232.4(c).
    (q) Open-end credit. The Department adopts the term ``open-end-
credit'' as proposed.
    (r) Person. The Department adopts the term ``person'' as proposed.
    (s) Regulation Z. The Department adopts the term ``Regulation Z'' 
as proposed.
    (t) Short-term, small amount loan. For the reasons described in 
section III.D., the Department adopts a new term, ``short-term, small 
amount loan,'' to define the qualifying closed-end loan for the 
exclusion from the MAPR for an application fee charged by a Federal 
credit union or insured depository institution.

Section 232.4 Terms of Consumer Credit Extended to Covered Borrowers

1. Sections 232.4(a)-(c): In General
    As proposed, the Department adopts Sec.  232.4(a), which tracks the 
restrictions under 10 U.S.C. 987(a).
    Section 232.4(a)(2) tracks 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.'' As stated in the 
Proposed Rule,\182\ 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

[[Page 43581]]

other] State.'' The Department believes that, other than the limit 
imposed in Sec.  232.4(b), 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.\183\
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    \182\ 79 FR 58617.
    \183\ In the case of a national bank, for example, see 12 U.S.C. 
85; 12 CFR 7.4001 (2015).
---------------------------------------------------------------------------

    Section 232.4(b) tracks the interest-rate limit of 10 U.S.C. 
987(b).
    Section 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.
    Relative to the corresponding provisions of the Department's 
existing rule,\184\ the Department amends the language of Sec.  
232.4(b) and Sec.  232.4(c)(1)(ii), to reflect the broader scope of 
consumer credit subject to the regulation, such as by referring to the 
sale of credit-related ancillary products in connection with ``the 
credit transaction for closed-end credit or an account for open-end 
credit'' (emphasis added).
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    \184\ 32 CFR 232.3(h)(1)(ii)-(iii) (2013).
---------------------------------------------------------------------------

    As stated in the Proposed Rule,\185\ the Department has crafted 
Sec.  232.4(c)(1)(i)-(ii) to generally reflect the charges that must be 
included as ``interest'' under 10 U.S.C. 987(i)(3), and subject to the 
conditional exclusion for bona fide fees, as explained further below. 
Several comments raised concerns regarding the Department's proposal to 
modify the treatment of fees for credit insurance products, debt 
cancellation contracts, or debt suspension agreements that are 
voluntarily entered into by covered borrowers.\186\ The Debt 
Cancellation Coalition, for example, acknowledges that 10 U.S.C. 987(h) 
and 987(i) grants discretion to the Department to prescribe regulations 
regarding the elements of, and method of computing the ``annual 
percentage rate'' of ``interest'' that is subject to the interest-rate 
limit in 10 U.S.C. 987(b), and urges the Department to exclude fees for 
voluntary debt cancellation contracts or debt suspension agreements 
from the ``calculation of MAPR as long as the requirements under TILA 
and Regulation Z are satisfied.'' \187\ Alternatively, the Debt 
Cancellation Coalition argues that the Department should, ``[a]t the 
very least,'' modify the rule to clarify that any fee for a debt 
cancellation contract or debt suspension agreement must be included in 
the MAPR only when that product is ``sold at or before consummation of 
the credit transaction for closed-end credit or upon account opening 
for open-end credit.'' \188\ The Debt Cancellation Coalition explains 
that, unless a charge for debt cancellation or debt suspension 
agreement that must be included in the MAPR is limited to an initial 
charge, a creditor would face a ``near impossible'' condition when 
attempting to compute the MAPR because the fee(s) for those products 
would vary from month to month.\189\
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    \185\ 79 FR 58617.
    \186\ See, e.g., Aon Integramark, Nov. 11, 2014; Debt 
Cancellation Coalition, Dec. 15, 2014; Navy Federal Credit Union, 
Dec. 15, 2014.
    \187\ Debt Cancellation Coalition, Dec. 15, 2014, at 5. The Debt 
Cancellation Coalition explains that Regulation Z requires a 
creditor to meet certain requirements in order for a charge or 
premium for one of these products to satisfy the relevant exclusion 
from the finance charge, and these requirements generally aim to 
allow the consumer to voluntarily purchase the product.
    \188\ Debt Cancellation Coalition, Dec. 15, 2014, at 6.
    \189\ Debt Cancellation Coalition, Dec. 15, 2014, at 6.
---------------------------------------------------------------------------

    Aon Integramark similarly argues that under the Department's 
existing rule a fee for a debt cancellation contract is not included in 
the MAPR unless one of three conditions is met, consistent with the 
treatment of that type of fee under Regulation Z. In this regard, Aon 
Integramark observes that in Sec.  232.3(h)(1) of the existing 
rule,\190\ the cost elements set forth in subparagraphs (i)-(iii) must 
be included in the MAPR only ``if they are financed, deducted from the 
proceeds of the consumer credit, or otherwise required to be paid as a 
condition of the credit.'' \191\ This commenter explains that the 
existing rule ``strikes the proper balance by allowing members of the 
military to purchase debt cancellation on a voluntary basis without 
including the cost in the MAPR.'' \192\ Aon Integramark urges the 
Department to align the treatment of debt cancellation contracts in the 
final rule with the treatment of those products in the existing rule by 
amending Sec.  232.4(c)(1)(i)--but not Sec.  232.4(c)(1)(ii) (which 
relates to credit-related ancillary products)--by adding at the end of 
that subparagraph (i) the words `` `if they are financed, deducted from 
the proceeds of the consumer credit, or otherwise required as a 
condition of the credit.' ''\193\ If this amendment were to be adopted, 
a fee for a credit insurance product, debt cancellation contract, or 
debt suspension agreement would be excluded from the computation of the 
MAPR if the covered borrower voluntarily agrees to obtain that product, 
contract, or agreement.\194\
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    \190\ 32 CFR 232.3(h)(1) (2013).
    \191\ Aon Integramark, Nov. 11, 2014, at 2. See also Debt 
Cancellation Coalition, Dec. 15, 2014, at 3 (``The MAPR includes 
fees for [debt cancellation contracts], but only `if they are 
financed, deducted from the proceeds of the consumer credit, or 
otherwise required to be paid as a condition of credit.'')
    \192\ Aon Integramark, Nov. 11, 2014, at 3.
    \193\ Aon Integramark, Nov. 11, 2014, at 3.
    \194\ The Department observes that there is a near-absence of 
support in the comments for an exclusion from the elements that must 
be included in the MAPR for voluntarily agreed to credit-related 
ancillary products.
---------------------------------------------------------------------------

    The Department recognizes that, by eliminating the condition that 
certain charges be included in the computation of the MAPR ``if [those 
charges] are financed, deducted from the proceeds of the consumer 
credit, or otherwise required as a condition of the credit,'' \195\ the 
Department is expanding the scope of the elements that must be included 
in the MAPR. The Department believes that eliminating this condition in 
Sec.  232.4(c)(1)--thereby requiring voluntary credit insurance 
products to be included--reasonably interprets the definition of 
``interest'' in the MLA, which generally (and subject to the 
Department's rulemaking authorities) must include ``all cost elements 
associated with the extension of credit, including fees, service 
charges, renewal charges, credit insurance premiums, any ancillary 
product sold with any of extension of credit. . . .\196\ 
Correspondingly, the MLA defines the ``annual percentage rate'' of 
interest--another term integral to the law's interest-rate limit--as 
``all fees and charges, including charges for single premium credit 
insurance and other ancillary products sold in connection with the 
credit transaction. . . .\197\ The Department recognizes, and 
commenters acknowledge, that the MLA grants discretion to the 
Department to prescribe regulations regarding the method for 
calculating the applicable MAPR, including the ``maximum allowable 
amount of all fees, and the types of fees, associated with any such 
extension of credit,'' \198\ as well as ``other criteria or limitations 
as the Secretary of Defense determines appropriate, consistent with the 
provisions of [the MLA.] \199\ Upon review of the comments submitted on 
the Proposed Rule and in light of its experience administering the 
existing rule, the Department has elected to exercise its discretion by 
generally requiring any fees for credit insurance

[[Page 43582]]

products or for credit-related ancillary products to be included in the 
MAPR.
---------------------------------------------------------------------------

    \195\ 32 CFR 232.3(h)(1) (2013).
    \196\ 10 U.S.C. 987(i)(3) (emphasis added).
    \197\ 10 U.S.C. 987(i)(4) (emphasis added).
    \198\ 10 U.S.C. 987(h)(2)(B)-(C).
    \199\ 10 U.S.C. 987(h)(2)(E).
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    As stated when issuing the existing rule, the Department remains 
concerned that covered borrowers are sold credit insurance products 
``without having these credit insurance products placed in the context 
of the Service member's employment status or his or her current level 
of insurance coverage.'' \200\ By eliminating the condition in Sec.  
232.3(h)(1) of the existing rule (``if [those charges] are financed, 
deducted from the proceeds of the consumer credit, or otherwise 
required as a condition of the credit''), as set forth in Sec.  
232.4(c)(1) of the Proposed Rule, the Department is more fully carrying 
out its existing policy.
---------------------------------------------------------------------------

    \200\ 72 FR 50587.
---------------------------------------------------------------------------

    Insofar as some commenters urge the Department to align its 
treatment of credit insurance, debt cancellation, or debt suspension 
products vis-[agrave]-vis the computation of the MAPR with the 
treatment of those products under Regulation Z, that regulation 
provides for exclusions from the scope of the finance charges that must 
be disclosed for voluntarily agreed to ``credit life, accident, health, 
or loss-of-income insurance,'' \201\ as well for ``debt cancellation or 
debt suspension coverage in the event of the loss of life, health, or 
income or in the case of accident'' \202\--all conditions that a 
covered borrower already is substantially insured for, or otherwise 
substantially provided benefits for, by the military services. The 
Department believes that most, if not all, of the credit insurance 
products, debt cancellation contracts, or debt suspension agreements 
customarily offered to consumers are not suitable for a covered 
borrower because the military services already provide insurance or 
other benefits to a Service member that would adequately provide 
financial resources even if an event of coverage (e.g., disability) 
were to occur to the borrower. For example, a Service member currently 
holds health insurance as part of his or her benefits in the Service 
and, if that Service member were to become ill, the Service member 
still would be employed, thereby allowing him or her (or the relevant 
dependent who relies on the Service member's income) to continue to 
make payments on the debts incurred without triggering a condition of 
the credit insurance. Accordingly, the Department adopts Sec.  
232.4(c)(1)(i) to require all fees for credit insurance products, debt 
cancellation contracts, or debt suspension agreements to be included in 
the MAPR, consistent with the scope of 10 U.S.C. 987(i)(3)-(4).\203\
---------------------------------------------------------------------------

    \201\ See 12 CFR 1026.4(d)(1).
    \202\ See 12 CFR 1026.4(d)(3).
    \203\ Moreover, the Department is permitted to establish the 
elements that must be included in the MAPR under 10 U.S.C. 
987(h)(2)(E), which directs the Department to establish ``[s]uch 
other criteria or limitations as the Secretary of Defense determines 
appropriate, consistent with the provisions of this section.''
---------------------------------------------------------------------------

    The Department has determined to modify Sec.  232.4(c)(1)(ii), 
relative to that provision of the Proposed Rule and Sec.  
232.3(h)(1)(iii) of the existing rule, to require 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].'' As the Department explained when issuing the Proposed Rule, 
when Sec.  232.3(h)(1)(iii) was adopted in 2007, including in the MAPR 
only the ``credit-related ancillary products'' sold ``either at or 
before consummation of the credit transaction'' \204\ 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 now encompasses open-end credit 
products, the Department has concluded that the MLA should 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 is ``associated with the 
extension of credit'' \205\--which could arise at any time in an 
ongoing, open-end account for consumer credit. Accordingly, the 
Department has determined to amend Sec.  232.4(c)(1)(ii) so as to 
require the inclusion in the MAPR of any fee for a credit-related 
ancillary product sold in connection with the credit transaction for 
closed-end credit or (at any time in connection with) an account for 
open-end credit, so long as the consumer was a covered borrower at the 
time the account was established.\206\
---------------------------------------------------------------------------

    \204\ 32 CFR 232.3(h)(1)(iii) (2013).
    \205\ 10 U.S.C. 987(i)(3) (defining `` `interest' '' generally 
as including ``all cost elements associated with the extension of 
credit'').
    \206\ Moreover, amending the scope of Sec.  232.4(c)(1)(ii) by 
eliminating the timing condition is 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.
---------------------------------------------------------------------------

    Section 232.4(c)(1)(iii) describes 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 rule had provided exclusions from the MAPR 
for late payment fees \207\ and taxes required to be paid,\208\ Sec.  
232.4(c) omits these provisions because these charges (as well as other 
charges) are not finance charges under Regulation Z.\209\
---------------------------------------------------------------------------

    \207\ 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'').
    \208\ 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'').
    \209\ 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.\210\ 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 specifically has 
included any application fee and any participation fee as charges that 
generally must be included in the MAPR.\211\ The exception for a bona 
fide fee (other than a periodic rate) charged to a credit card account 
apply to the charges set forth in Sec.  232.4(c)(1)(iii).
---------------------------------------------------------------------------

    \210\ See 12 CFR 1026.4(c)(1) and (c)(4).
    \211\ See also 72 FR 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'').
---------------------------------------------------------------------------

    Section 232.4(c)(1)(iv) clarifies 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.
2. Elements of the MAPR and Treatment of Items Under the Conditional 
Exclusion for Bona Fide Fees
    One commenter observes, for example, that ``if a voluntary debt 
cancellation fee is charged to a credit

[[Page 43583]]

card account one month, other bona fide fees such as a reasonable 
annual fee or an ATM fee must also be included in the MAPR 
calculation.'' \212\
---------------------------------------------------------------------------

    \212\ Navy Federal Credit Union, Dec. 15, 2014, at 2-3.
---------------------------------------------------------------------------

    The Department now recognizes that the Proposed Rule left ambiguous 
the treatment of the charges set forth in Sec.  232.4(c)(1)(i)-(ii) 
under the exclusion for bona fide fees. The Department intends for the 
charges set forth in Sec.  232.4(c)(1)(i)-(ii) to be included in the 
MAPR irrespective of whether any other fee may be a bona fide fee 
eligible for the exclusion in Sec.  232.4(d). Thus, the charges set 
forth in Sec.  232.4(c)(1)(i)-(ii) must be treated separately from any 
fees excluded under Sec.  232.4(d). Correspondingly, even if a creditor 
imposes one or more charges described in Sec.  232.4(c)(1)(i)-(ii)--
which always must be included in the MAPR--the creditor still would be 
able to exclude other, bona fide fees that meet the conditions in Sec.  
232.4(d). The Department has included, in Sec.  232.4(d)(iii), examples 
to illustrate the interaction between certain charges that always must 
be included in the MAPR (e.g., a fee for a credit insurance premium) 
and the availability of the conditional exclusion for bona fide fees.
3. Computing the MAPR
    The final rule contains two provisions for computing the MAPR,\213\ 
both of which track the methods already established in Regulation Z.
---------------------------------------------------------------------------

    \213\ 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]'').
---------------------------------------------------------------------------

    First, for closed-end credit, the rule requires 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 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 Sec.  232.4(b) of the regulation.
    Second, for open-end credit, a creditor generally must calculate 
the MAPR using the methods prescribed in Sec.  1026.14(c)-(d) of 
Regulation Z, which relates to the ``effective annual percentage rate'' 
(``effective APR'').\214\ 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.
---------------------------------------------------------------------------

    \214\ 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 rule when computing a MAPR for open-end credit, any 
creditor subject to the Department's regulation must comply with 
that Sec.  1026.14(c), subject to Sec.  232.4(c)(2)(ii)(B) (in the 
event that there is no balance during a billing cycle).
---------------------------------------------------------------------------

    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 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 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 Sec.  232.4(c)(1)(iii) and Sec.  232.4(d), any bona fide fee 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 Sec.  232.4(d), then that charge would not be 
included when computing the MAPR for that billing cycle.
    In general, a creditor reasonably could be expected to estimate at 
the outset of a billing cycle whether charges to a covered borrower can 
produce an MAPR in excess of the limit in Sec.  232.4(b), particularly 
because the creditor already would know the periodic rate and whether 
the non-periodic fees are covered by the exclusion for a bona fide fee 
under Sec.  232.4(d). Nevertheless, 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).
    Several comments contend that the requirement in Sec.  
232.4(c)(2)(ii) of the Proposed Rule, to apply the standards prescribed 
in Sec.  1026.14(c)-(d) of Regulation Z, as the method to compute the 
MAPR for open-end credit is

[[Page 43584]]

inappropriate. A comment on behalf of certain credit card issuers, for 
example, argues that ``[u]se of the historical, or effective, APR was 
originally intended as a disclosure tool to enhance consumer 
understanding of the cost of credit,'' not as a method to calculate 
fees on open-end credit transactions.\215\ These credit card issuers 
state:
---------------------------------------------------------------------------

    \215\ L. Chanin, Dec. 23, 2014, at 18.

    After years of study, the [Board] published a final rule in 2009 
that eliminated the requirement in Regulation Z for card issuers to 
calculate and disclose the APR for each billing cycle. The [Board's] 
decision to eliminate the historical APR was based on several 
factors, including extensive consumer testing which found that the 
effective APR is not helpful to consumers because it does not enable 
consumers to meaningfully compare costs from month to month or for 
different products. \216\
---------------------------------------------------------------------------

    \216\ L. Chanin, Dec. 23, 2014, at 18.

    These credit card issuers further state that ``[t]he fact that the 
MAPR rate cap would be reached in some [billing] cycles and not in 
others depending, in part, on when a service member engages in a 
transaction would create a rule that bans the identical fee in one 
cycle and permits it in another cycle.'' \217\ ``This approach would,'' 
these credit card issuers allege, ``be very confusing to service 
members who clearly would not understand when a fee is or is not 
assessed for a service such as a cash advance.'' \218\
---------------------------------------------------------------------------

    \217\ L. Chanin, Dec. 23, 2014, at 19.
    \218\ L. Chanin, Dec. 23, 2014, at 19.
---------------------------------------------------------------------------

    The Associations likewise assert:

    The proposed MAPR [calculation] simply does not work for the 
same reasons that the `effective APR' did not work and was discarded 
by the Federal Reserve. The MAPR will have the same distortions, 
creating a flawed measurement of the cost of credit. . . . To 
illustrate, assume a $4 transaction fee and a $100 draw made at the 
beginning of the month on an overdraft line of credit. This would 
translate to a minimum 48 percent MAPR--before interest is included. 
The MAPR could be much higher, depending on when the line was used 
and when the balance paid.\219\
---------------------------------------------------------------------------

    \219\ Associations, Dec. 18, 2014, at 34-35. See also Schwartz & 
Ballen LLP, Dec. 24, 2014, at 6 and Attachment.

    When in 2009 the Board amended Regulation Z to create an exemption 
from the requirement in TILA, thereby relieving a creditor from 
disclosing the effective APR, the Board interpreted TILA as follows: 
``The statutory requirement of [disclosing] an effective APR is 
intended to provide the consumer with an annual rate that reflects the 
total finance charge, including both the finance charge due to 
application of a periodic rate (interest) and finance charges that take 
the form of fees. This rate, like other APRs required by TILA,'' the 
Board explained, ``presumably was intended to provide consumers 
information about the costs of credit that would help consumers compare 
credit costs and make informed credit decisions and, more broadly, 
strengthen competition in the market for consumer credit.'' \220\ The 
Board found, in part, that ``[d]isclosure of the effective APR on 
periodic statements does not significantly assist consumers in credit 
shopping, because the effective APR disclosed on a statement on one 
credit card account cannot be compared to the nominal APR disclosed on 
a solicitation or application for another credit card account.'' \221\ 
The Board also stated--again from the perspective of assessing whether 
a disclosure required to be provided under Regulation Z could assist a 
consumer in comparing the costs of credit card programs or compare the 
costs of an existing credit card account across billing cycles--that 
``the effective APR for a given cycle is unlikely to accurately 
indicate the cost of credit in a future cycle, because if any of 
several factors (such as the timing of transactions and payments and 
the amount carried over from the prior cycle) is different in the 
future cycle, the effective APR will be different even if the amounts 
of the transaction and the fee are the same in both cycles.'' \222\ 
Significantly, the Board did not create an exemption from the 
requirement in TILA that a creditor disclose the effective APR because 
the creditor could not compute that figure from one billing cycle to 
the next or because the prescribed method of computation had been 
demonstrated to be susceptible to error. Rather, the Board's action 
fundamentally rested on its assessment of the balance of costs and 
benefits associated with requiring the use of the effective APR to 
communicate the costs of open-end credit to consumers so that they 
could, for example, ``meaningfully compare costs from month to month or 
for different products.'' \223\
---------------------------------------------------------------------------

    \220\ Truth in Lending, 74 FR 5,244, 5,316-17 (Jan. 29, 2009).
    \221\ 74 FR at 5319.
    \222\ 74 FR at 5319.
    \223\ 74 FR at 5319.
---------------------------------------------------------------------------

    That the standards for computing the effective APR still stand in 
Regulation Z (albeit as an optional, not required, form of disclosure 
to a consumer) is a testament to their value for computing the cost of 
open-end credit during a given billing cycle on an annualized basis. 
The Department's reliance, in Sec.  232.4(c)(2)(ii), on the standards 
set forth in Regulation Z \224\ is solely for the purpose of 
calculating the MAPR for open-end credit so that the costs of credit 
can be determined vis-[agrave]-vis the interest-rate limit of the MLA--
not for communicating that figure to a covered borrower. None of the 
comments disparaging the Department's reliance on these standards in 
Regulation Z dispute the accuracy of those standards. Instead, these 
comments take issue with the implications of applying those standards, 
together with the constituent elements (e.g., the definition of 
``interest'' in 10 U.S.C. 987(i)(3) and the charges that must be 
included in the MAPR under Sec.  232.4(c)(1)), to certain open-end 
credit products that some creditors currently provide: ``a small 
foreign transaction fee,'' for example, ``depending on the existing 
balance and repayment date, could easily cause the MAPR on a credit 
card to exceed 36 percent;'' \225\ or ``a card issuer may not be able 
to assess [a cash advance fee] in the case of [a given] billing 
cycle.'' \226\ Those implications flow from the hard truth of the 
mathematics under the interest-rate limit established by 10 U.S.C. 
987(b).
---------------------------------------------------------------------------

    \224\ 12 CFR 1026.14(c)-(d).
    \225\ Associations, Dec. 18, 2014, at 35. But see Sec.  
232.4(d), which provides a conditional exclusion that is designed to 
apply to the ``small foreign transaction fee'' the Associations 
describe in this scenario.
    \226\ L. Chanin, Dec. 23, 2014, at 19.
---------------------------------------------------------------------------

    Section 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 includes an 
exception for a participation fee (which otherwise would be required to 
be included under Sec.  232.4(c)(1)(iii)(B)) because the Department 
concludes 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 has adopted a provision that limits 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, Sec.  232.4(c)(2)(ii)(B) contains a provision to clarify 
that the $100-per annum limitation on the amount of the participation 
fee does not apply to a

[[Page 43585]]

bona fide participation fee charged to a credit card account that would 
be eligible for the exclusion under Sec.  232.4(d).
4. Conditional Exclusion From the MAPR for Bona Fide Fees Charged to a 
Credit Card Account
    The Department believes that credit card products warrant special 
consideration under the MLA. As discussed above, Sec.  232.4(d) 
provides 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 
condition for excluding a bona fide fee from the MAPR--namely, that the 
fee must be ``reasonable''--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 Sec.  232.4(d)(4)(ii) (and apart from the 
fees described in Sec.  232.4(c)(1)(i)-(ii), as discussed in part (2) 
(``Elements of the MAPR and Treatment of Items Under the Conditional 
Exclusion for Bona Fide Fees'')), a creditor who imposes any fee that 
is not a bona fide fee or that fails to meet the condition of being 
reasonable must include the total amount of those fees, including any 
bona fide fees, in the MAPR. Thus, if a creditor charges one 
unreasonable fee 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'' condition for a bona fide fee, 
as proposed, is 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.
    One comment states that the Department should further restrict the 
scope of the bona fide fees that may be excluded under Sec.  
232.4(d)(1) in order to exclude ``transaction fees for cash advances.'' 
\227\ This comment explains that a cash advance fee should be 
identified as an ineligible bona fide fee (in Sec.  232.4(d)(2)) 
because cash advance services ``provide no benefit other than accessing 
a credit line'' and, thus, ``do not meet the rationale that the 
[Department] has laid out for exempting certain credit card fees from 
the general rule (i.e., that certain credit card costs are related to 
benefits of the use of the card that are not related to the use of the 
credit).'' \228\ The Department recognizes that when a covered borrower 
obtains a cash advance drawn against a credit card account, the 
borrower appears to be solely borrowing funds; however, on closer 
inspection, when a bona fide cash advance fee is imposed, the 
transaction crucially involves the use of the card for the delivery of 
cash, and in many cases the cardholder-covered borrower conducts that 
transaction at a location not operated by the creditor (e.g., a so-
called ``foreign ATM''). Accordingly, at this time,\229\ the Department 
concludes that a bona fide cash advance fee is eligible for the 
conditional exclusion under Sec.  232.4(d).
---------------------------------------------------------------------------

    \227\ Pew, Dec. 23, 2014, at 7.
    \228\ Id.
    \229\ As the Department states in section III, in the course of 
periodically consulting with the Federal Agencies and in light of 
other factors the Department may find, as appropriate, the 
Department may review the scope and effects of its regulation; when 
undertaking that process, the Department may revisit the factors 
that could warrant specifically restricting (or otherwise 
specifically including) certain types of fees that would be eligible 
for the conditional exclusion provided in Sec.  232.4(d).
---------------------------------------------------------------------------

Section 232.5 Identification of Covered Borrowers

    The Department has modified Sec.  232.5(a) to more clearly provide 
that a creditor is permitted to apply its own method, as the creditor 
may elect, to assess whether a consumer is a covered borrower.
    As discussed above, Sec.  232.5 provides two mechanisms for a 
creditor to unilaterally assess the status of a consumer who applies 
for consumer credit in order to make a legally conclusive determination 
that a consumer is not a covered borrower: The creditor may use 
information from the MLA Database or from a consumer report obtained 
from a nationwide consumer reporting agency. For either mechanism, the 
creditor may make a determination regarding a consumer-applicant's 
status generally when the creditor enters into a transaction or 
establishes an account that is (or could be) consumer credit. Under 
either mechanism, a creditor must timely create and thereafter maintain 
a record of the information so obtained. Due to this timing constraint 
in Sec.  232.5(b), a creditor who is an assignee has no occasion to 
avail itself of the safe harbor afforded in this section by separately 
assessing the status of an existing borrower for the purpose of 
determining that the borrower is not a covered borrower.
    The Department realizes that several purposes would be served by 
preserving the use of the MLA Database for bona fide inquiries 
regarding the status of a consumer as a covered borrower in respect of 
an upcoming or pending application for credit--that is for the purposes 
of complying, ex ante, with this rule. In particular, the Department 
has an interest in appropriately conserving the Department's resources 
for the MLA Database, which would facilitate access for many different 
creditors, as the circumstances for upcoming or pending applications 
dictate. Accordingly, the Department adopts a prohibition in Sec.  
232.5(b)(2)(i)(A) against using any database maintained by the 
Department to ascertain the status of a consumer as a covered borrower 
with respect to a pre-existing transaction or account involving an 
extension of credit, and that prohibition applies to any creditor, 
including an assignee.
    Section 232.5(b)(3) clarifies that a creditor is permitted to 
conduct a covered-borrower check by using one or both of the methods 
set forth in Sec.  232.5(b)(2), and, if so, must timely create and keep 
the record of that information obtained. The creditor needs to 
undertake this covered-borrower check only once--namely, only at the 
time that (i) a consumer initiates the transaction, (ii) a consumer 
applies to establish the account, or (iii) the creditor develops or 
processes, with respect to a consumer, a firm offer of credit that 
(among the specific criteria used by the creditor for the offer) 
includes the status of the consumer as a covered borrower. In order to 
facilitate a creditor's process for responding to a consumer's inquiry 
about a loan--which could occur days or a few weeks before the 
consumer's application for that loan--as well as to reduce the traffic 
on the MLA Database, Sec.  232.5(b)(3)(i)-(ii) permit the creditor to 
make a determination and keep a record of the information so obtained 
30 days prior to the date of the transaction or the date the consumer 
applies to establish an account. Many commenters observe that a 
creditor who, for example, issues a credit card could conduct a 
covered-borrower check at the time that the consumer applies for the 
card, but that under the Proposed Rule a creditor would need to conduct 
another covered-borrower check at or around the time that the consumer 
becomes obligated on the credit (by using the card), which typically 
occurs later.
    The Department has designed Sec.  232.5(b)(3) in order to enable a

[[Page 43586]]

creditor to conduct only one covered-borrower check within the 
permitted safe harbor at an early stage of the transaction or the 
relationship with the consumer, including at the time that the creditor 
develops a firm offer of credit to be provided to the consumer. 
However, in the scenario which describes what is commonly referred to 
as a ``prescreened'' offer of credit (set forth in Sec.  
232.5(b)(3)(iii)), the Department has placed a limitation on the amount 
of time that may lapse between the creditor's delivery of the 
prescreened offer and the creditor's reliance on its covered-borrower 
check that formed part of the basis of the offer. The Department 
believes that there will be many cases when a consumer who is not a 
covered borrower at the time that a creditor delivers its prescreened 
offer (which offer is predicated, in part, on that criterion) later 
responds to that offer, including after becoming a covered borrower. 
The Department has crafted a limitation in Sec.  232.5(b)(3)(iii) in 
the interests of balancing the need to provide reasonable certainty to 
a creditor in using the safe harbor in Sec.  232.5(b) and providing a 
bright-line standard to that effect,\230\ and affording the protections 
of the MLA to the consumer who (still prior to the onset of the 
transaction or account but much later than that creditor's offer) 
becomes a covered borrower. Accordingly, Sec.  232.5(b)(3)(iii) 
provides that creditor may rely on its initial covered-borrower check 
so long as the consumer responds to that offer not later than 60 days 
after the date that the creditor had provided that offer to the 
consumer. If the consumer responds to the creditor's offer later than 
60 days after the date that the creditor had provided that offer to the 
consumer, then the creditor may not rely upon its initial determination 
in developing that offer; instead, the creditor may (but still is not 
required to) act on the consumer's response as if the consumer is 
initiating the transaction or applying to establish the account (as 
described in subparagraph (i) or (ii) of Sec.  232.5(b)(3)).
---------------------------------------------------------------------------

    \230\ See, e.g., L. Chanin, Dec. 23, 2014, at 19 (urging the 
Department to establish a ``bright-line'' standard for the timing 
dimensions relevant to the use of the safe harbor).
---------------------------------------------------------------------------

Section 232.6 Mandatory Loan Disclosures

    The Department amends Sec.  232.6 of the regulation to simplify the 
information that a creditor must provide to a covered borrower when 
issuing consumer credit and to facilitate a creditor's oral delivery of 
the required disclosures, consistent with the requirements of 10 U.S.C. 
987(c). In particular, the Department has determined: first, to 
eliminate the requirement in the existing rule for information to be 
provided ``clearly and conspicuously;'' 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 dollar amount of all charges included in the MAPR,'' as 
the existing rule requires; third, to modify the Proposed Rule so that, 
for any transaction or account involving consumer credit, a creditor 
may elect to orally provide the required disclosures to the covered 
borrower either in person or by providing a toll-free telephone number 
that the borrower can use for that purpose; and, fourth, to eliminate 
the requirement in the existing rule that a creditor provide a specific 
statement regarding protections available to covered borrowers under 
federal law.
    Section 232.6(a) requires a creditor to provide three 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; and
     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.''
    Section 232.6(d) requires a creditor to provide to a covered 
borrower the disclosures required under Sec.  232.6(a)(1) and (a)(3) 
(which correspond to the items numbered above) both (i) in writing and 
in a form the borrower can keep and (ii) orally. When orally providing 
the required disclosures, a creditor may elect to provide the 
disclosures in person, as the circumstances surrounding the 
establishment of the transaction or account involving consumer credit 
may permit, or to provide a toll-free telephone number that the 
borrower can use for that purpose.
1. Clear and Conspicuous Requirement
    The Department's existing rule requires each of these categories of 
information to be provided ``clearly and conspicuously'' to a covered 
borrower.\231\ When issuing the Proposed Rule, the Department stated 
that, even though the MLA does not require any information to be 
provided ``clearly and conspicuously,'' 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.\232\ In light of the scope of the Proposed Rule, 
the Department proposed that 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. Staff of the FTC urge the Department to retain the 
requirement that information be delivered to a covered borrower in a 
manner that is clear and conspicuous.\233\ According to the staff of 
the FTC, if the existing clear-and-conspicuous requirement is 
eliminated, information required by the MLA to be provided to a covered 
borrower could be buried in fine print or hidden in one or more 
documents, among unrelated terms and conditions.\234\
---------------------------------------------------------------------------

    \231\ 32 CFR 232.6(a).
    \232\ When adopting its rule in 2007, the Department addressed 
the disclosure requirements of Regulation Z, see, e.g., 72 FR 50588, 
but did not address the purposes of imposing a clear-and-conspicuous 
requirement under 10 U.S.C. 987(c).
    \233\ Staff of the FTC, Dec. 22, 2014, at 8-9. But see Bellco 
Credit Union, Dec. 19, 2014, at 6 (``removing the clear and 
conspicuous requirement for the disclosure would not affect the 
presentation of the disclosure'').
    \234\ Staff of the FTC, Dec. 22, 2014, at 9.
---------------------------------------------------------------------------

    The Department realizes that by eliminating the requirement to 
provide certain information in a manner that is clear and conspicuous 
there is a risk that a creditor might minimize the prominence of the 
statement of the MAPR or the clear description of the covered 
borrower's payment obligations amidst other disclosures, contract 
documents, statements, or marketing materials; in that circumstance, an 
ordinary covered borrower might not appreciate those items that, under 
the MLA, are intended to assist the borrower. Nonetheless, the 
Department has determined that, under the final rule, the interests of 
an ordinary covered borrower still would be served because: (i) Insofar 
as Sec.  232.6(a)(3) permits a creditor to provide the relevant 
disclosure pursuant to Regulation Z as a mechanism for providing the 
``clear description of the payment obligation of the borrower,'' the 
disclosure could be delivered in a manner which is clear and 
conspicuous; and (ii) even if the borrower is provided a description of

[[Page 43587]]

the charges that the creditor may impose to calculate the MAPR that is 
not clear and conspicuous, the creditor separately must adhere to the 
requirements of the rule when computing the MAPR. In this regard, a 
covered borrower could overlook the statement of the MAPR, yet remain 
protected by the substantive requirements that limit the costs 
associated with the borrower's transaction or account involving 
consumer credit.
2. Statement of the MAPR
    Section 232.6(a)(1) requires 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 rule. 
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).'' 
\235\ As stated in the Proposed Rule, 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 final rule, would be covered under the MLA.
---------------------------------------------------------------------------

    \235\ 72 FR 50589.
---------------------------------------------------------------------------

    Section 987(c)(1)(A) of the MLA does not 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].'' \236\ Taken singly and in conjunction with 
each other, these provisions of section 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.
---------------------------------------------------------------------------

    \236\ 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.\237\ 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 be 
interpreted so as not 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 is not required to provide to a 
covered borrower two different numerical disclosures, which inevitably 
would lead to confusion.\238\
---------------------------------------------------------------------------

    \237\ See 12 U.S.C. 1026(c).
    \238\ 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 definition of consumer credit, which 
encompasses open-end credit products, the Department exercises its 
discretion under the MLA \239\ to interpret 10 U.S.C. 987(c)(1)(A) more 
straightforwardly to require, in Sec.  232.6(a)(1), a creditor to 
provide ``statement of the MAPR'' which may be satisfied (under Sec.  
232.6(c)) by 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.'' 
Section 232.6(c)(1) also clarifies that a creditor is not 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 concludes 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 final rule, 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, Sec.  232.6(c)(3) provides a model statement 
that a creditor could use.
---------------------------------------------------------------------------

    \239\ 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]'').
---------------------------------------------------------------------------

    Section 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,\240\ Sec.  232.6(c)(2) expressly provides that the 
statement of the MAPR is not required in any advertisement relating to 
consumer credit.
---------------------------------------------------------------------------

    \240\ 72 at 50589.
---------------------------------------------------------------------------

3. One-Time Delivery of Information
    Section 232.6(b) establishes rules relating to transactions 
involving a creditor and assignee or multiple creditors. More 
specifically, Sec.  232.6(b)(1) provides that the information required 
under the MLA is ``not required to be provided to a

[[Page 43588]]

covered borrower more than once for the transaction or the account 
established for consumer credit with respect to that borrower.'' 
Accordingly--and particularly in light of the general timing 
requirement for providing disclosures when the transaction occurs or 
the account originally is established \241\--a creditor who is an 
assignee is not required to provide the information described in 
paragraphs (a)(1) and (a)(3) of Sec.  232.6. (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).) Relative to the Proposed 
Rule, Sec.  232.6(b)(2) has been modified to clarify that only one of 
two or more creditors involved in a transaction for consumer credit 
must provide the disclosures, and the multiple creditors are permitted 
to agree among themselves as to which creditor may provide the 
information required under the MLA.
---------------------------------------------------------------------------

    \241\ 12 CFR 232.6(a) (``before or at the time the borrower 
becomes obligated on the transaction or establishes an account for 
the consumer credit'').
---------------------------------------------------------------------------

4. Methods of Delivery
    Section 232.6(d) establishes rules relating to the methods of 
delivery, which are substantively similar to the provisions of the 
existing rule and, yet, allow for greater flexibility. Under Sec.  
232.6(d)(1), a creditor must provide the information required under the 
MLA ``in writing in a form the covered borrower can keep.'' And under 
Sec.  232.6(d)(2), consistent with the structure of the existing 
rule,\242\ a creditor must orally provide the information required by 
paragraphs (a)(1) and (a)(3) of Sec.  232.6(a). However, in order to 
satisfy the requirement to orally provide certain disclosures, a 
creditor may provide the information in person or provide a toll-free 
telephone number that a covered borrower can use to obtain the 
information. Thus, whereas the Proposed Rule would have permitted the 
provision of a toll-free telephone number only in the context of 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, the final rule allows a creditor to use that method 
for any transaction or account involving consumer credit.
---------------------------------------------------------------------------

    \242\ See 10 U.S.C. 987(c)(1) (requiring information to be 
provided ``orally'').
---------------------------------------------------------------------------

    Under 10 U.S.C. 987(c)(1), a creditor must provide to a covered 
borrower certain information ``orally and in writing,'' but 10 U.S.C. 
987(c)(2) provides that ``[s]uch disclosures shall be presented in 
accordance with terms prescribed [in Regulation Z].'' By requiring the 
disclosures to be ``presented in accordance with'' Regulation Z, the 
MLA is ambiguous as to the nature of the requirement to ``orally'' 
provide the disclosures because, in general, Regulation Z requires the 
disclosures required by TILA only to be presented to a consumer ``in 
writing, in a form that the consumer may keep.'' \243\ Regulation Z 
contains certain provisions that allow for disclosures to be made 
orally, but only in the context of ``an oral response to a consumer's 
inquiry.'' \244\ More generally, even though the MLA provides that a 
creditor must ``orally'' provide certain information ``before the 
issuance of the credit,'' the law applies that requirement to ``any 
extension of consumer credit (including any consumer credit originated 
or extended through the internet).'' Thus, the law is conspicuously 
vague as to precisely when (or even whether) the creditor must orally 
deliver the information to a covered borrower (say, in person or over 
the telephone), since the technological constraints of conducting a 
credit transaction ``through the internet'' make oral delivery of 
disclosures an impossibility.
---------------------------------------------------------------------------

    \243\ 12 CFR 1026.5(a)(1)(i) (open-end credit); see also 12 CFR 
1026.17(a)(1) (closed-end credit).
    \244\ 12 CFR 1026.
---------------------------------------------------------------------------

    In light of the ambiguities in 10 U.S.C. 987(c), and particularly 
in the context of conducting transactions involving consumer credit 
``through the internet,'' the Proposed Rule had tracked the existing 
rule by allowing a creditor who is conducting a mail or internet 
transaction to provide to a covered borrower a toll-free telephone 
number that the borrower could use to obtain the oral disclosures.\245\ 
The Department recognized that when a creditor is not present to 
interact orally with a covered borrower--including when obtaining 
consumer credit at the point-of-sale for a nonfinancial product or 
service--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.
---------------------------------------------------------------------------

    \245\ See 79 FR 58639 (Sec.  232.6(d)(2)).
---------------------------------------------------------------------------

    Several comments raise general concerns about the requirement to 
orally provide the disclosures required by the MLA. The Associations, 
for example, state that in many transactions, creditors will face 
difficulties ``persuad[ing] covered borrowers to listen to the oral 
disclosures at the time an account is opened, especially if they are 
not in a private setting. In addition, providing oral disclosures will 
require specialized training to ensure that the depository institution 
employee, at the right time, first identifies the customer as a covered 
borrower, and then, second, provides the oral disclosures.'' \246\ The 
Associations urge the Department to modify the requirement so that the 
use of the toll-free telephone to provide the required disclosures is 
permitted in any ``bank [or] credit union branch setting.'' \247\ 
Another commenter similarly argues that, if possible, the term 
``consumer credit'' should be defined ``so that oral disclosures are 
not required, unless requested by the Service member prior to the 
Service member becoming obligated on the transaction or [establishing] 
an account for the consumer credit.'' \248\ Still another comment 
states that ``at the very least, the Department should allow a toll-
free number to be provided in all transactions, not just mail 
transactions, internet transactions, and transaction conducted at the 
point of sale in connection with the sale of a nonfinancial product or 
service.'' \249\
---------------------------------------------------------------------------

    \246\ Associations, Dec. 18, 2014, at 53.
    \247\ Associations, Dec. 18, 2014, at 53.
    \248\ Bellco, Dec. 19, 2014, at 6-7.
    \249\ AFSA, Dec. 22, 2014, at 15.
---------------------------------------------------------------------------

    The Department concludes that the requirement in 10 U.S.C. 987(c) 
to deliver certain disclosures ``orally . . . before the issuance of 
the credit'' should be interpreted in a manner that provides a creditor 
straightforward mechanisms to do so at that time. Moreover, the 
Department has determined that a creditor should be afforded the 
latitude to develop the same (or consistent) systems to orally provide 
the required disclosures--regardless of the particular context of the 
transaction or account involving consumer credit (e.g., an in-person, 
mail, or internet transaction)--in order to promote reliability and 
economy of those systems so that covered borrowers can actually receive 
the disclosures. Accordingly, the Department adopts Sec.  232.6(d)(2) 
so that the essential mandate of 10 U.S.C. 987(c)(1)--orally provide 
the disclosures--remains intact, yet allows a creditor to fulfill that 
mandate either by (i) providing the information directly, ``in person'' 
or (ii) including a toll-free telephone number that a covered borrower 
can use to obtain the oral disclosures. Section 232.6(d)(2)(iii) 
clarifies that if a creditor elects to provide the toll-free number, 
then the creditor must include that number on either (i) the 
application form that the creditor has directed the consumer to use for 
that transaction or account

[[Page 43589]]

involving consumer credit or (ii) a written disclosure that the 
creditor provides in order to meet the requirement in Sec.  
232.6(d)(1).
5. Refinancing a Covered Loan
    Section 232.6(e) keeps intact the current provision, currently 
found in Sec.  232.6(c) of the existing rule, 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.''
6. Elimination of Disclosure Under Sec.  232.6(a)(4)
    Under the Proposed Rule, Sec.  232.6(a)(4) would have required 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,\250\ 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. 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.\251\ In light of other aspects of the Department's rule, 
the Department concludes 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 the interests of covered borrowers in 
receiving useful information with the interests of creditors in 
reducing compliance burdens; thus, the Department has taken certain 
steps to reduce the overall amount of and to simplify the information 
relating to extensions of consumer credit. Accordingly, the Department 
has determined to eliminate Sec.  232.6(a)(4) of the Proposed Rule, 
which would have required a creditor to provide the Statement of 
Federal Protections.
---------------------------------------------------------------------------

    \250\ 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 18165.
    \251\ 10 U.S.C. 987(h)(2)(A).
---------------------------------------------------------------------------

Section 232.7 Preemption

    Section 232.7 revises 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) is 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), Sec.  232.7(b)(1) also revises the term ``rates of 
interest'' to ``annual percentage rates of interest.'' Additionally, 
the Department amends Sec.  232.7(b)(2) 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

1. Rollover Restriction
    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), that applies to a creditor who rolls over, renews, or 
refinances consumer credit that had been extended to a covered borrower 
by the same creditor. The exception in the existing rule 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.'' \252\ Comments on the 
Department's initial proposal had 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.'' \253\ Whereas the exception adopted in the 
existing rule was made in the context of a narrow band of products 
within the three categories defined as consumer credit, this final rule 
extends the scope of consumer credit and thereby increases the 
potential risks associated with any perceived ambiguity in the more-
favorable-terms standard.
---------------------------------------------------------------------------

    \252\ 32 CFR 232.8(a)(1).
    \253\ 72 FR 50589.
---------------------------------------------------------------------------

    Section 232.8(a) tracks the language of the rollover restriction of 
10 U.S.C. 987(e)(1),\254\ and, consistent with this provision in the 
Proposed Rule, limits the application of that restriction to a 
relatively narrow group of creditors. More specifically, the Department 
is exercising its discretion to define a creditor for the purposes of 
10 U.S.C. 987 \255\ by defining the term ``creditor'' for the purposes 
of Sec.  232.8(a) 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 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 rollover restriction to creditors 
who are engaged in the business of ``deferred presentment transactions 
or similar payday loan transactions (as described in the relevant 
law)'' is consistent with the structure, language, and intent of the 
restriction, 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.\256\ The Department believes that payday lenders 
commonly engage in these rollover transactions. Moreover, the 
Department believes that restricting the application of the rollover 
restriction to that specified class of creditors would permit most 
creditors,

[[Page 43590]]

including a wide range of banks, thrifts, and credit unions, to extend 
other forms of consumer credit, such as workout loans and other 
refinancing transactions, to their covered-borrower customers, 
particularly when lower interest rates are available to those 
customers.
---------------------------------------------------------------------------

    \254\ 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.''
    \255\ 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]'').
    \256\ 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.'').
---------------------------------------------------------------------------

2. Vehicle Title Restriction
    In the course of reviewing various comments regarding the scope of 
the limitations in 10 U.S.C. 987(e),\257\ as would be implemented in 
the rule, the Department recognizes that neither the existing rule nor 
the Proposed Rule gives effect to the provision of the MLA that 
restricts a creditor from ``[using] . . . the title of a vehicle as 
security for the obligation.'' \258\ New Sec.  232.8(f) gives effect to 
that restriction of the MLA, but lifts the application of that 
limitation for certain classes of creditors. Upon review of the broad 
scope of the restriction in 10 U.S.C. 987(e)(5), the Department has 
determined that if the restriction against using the title of a vehicle 
as security for consumer credit were to apply to any creditor, without 
limitation, then many covered borrowers undoubtedly would be denied 
opportunities to favorably re-finance existing auto loans, particularly 
to take advantage of falling interest rates. The Department finds that 
a comprehensive restriction against using the title of a vehicle as 
security for consumer credit would operate too severely against covered 
borrowers and, accordingly, exercises its authorities under the MLA to 
establish a reasonable limitation on this provision.\259\ More 
specifically, the Department has determined that certain classes of 
lenders should remain available to conduct refinancing transactions for 
consumer credit that involve the use of the title of a vehicle as 
security, and that the appropriate classes of lenders for this purpose 
are banks, thrifts, and credit unions supervised by federal or state 
regulators.\260\ Accordingly, the Department retains the core element 
of the statutory restriction and exercises its discretion to define a 
``creditor'' for the purposes of 10 U.S.C. 987 \261\ by defining the 
creditor in Sec.  232.8(f) to not include ``a person that is chartered 
or licensed under Federal or State law as a bank, savings association, 
or credit union.''
---------------------------------------------------------------------------

    \257\ See, e.g., Associations, Dec. 18, at 44-51.
    \258\ 10 U.S.C. 987(e)(5).
    \259\ See 10 U.S.C. 987(h)(2)(E) (expressly authorizing the 
Department to prescribe regulations that include ``[s]uch other 
criteria or limitations as the Secretary of Defense determines 
appropriate, consistent with the provisions of this section'') and 
10 U.S.C. 987(i)(5)(ii) (expressly authorizing the Department to 
establish ``such additional criteria'' to define a ``creditor'' for 
``such purpose in [the Department's] regulations'').
    \260\ In this regard, the final rule contains a distinction 
between (i) a ``Federal credit union'' or insured depository 
institution'' that is eligible to apply the exclusion in Sec.  
232.4(c)(1) with respect to an application fee charged for a short-
term, small amount loan and (ii) a bank, savings association, or 
credit union described in Sec. Sec.  232.8(a) and 232.8(f). The 
Department has concluded that the purposes of Sec. Sec.  232.8(a) 
and 232.8(f) are different from scope and purpose of the exclusion 
in Sec.  232.4(c)(1), and correspondingly there should be a broader 
range of banks, thrifts, and credit unions designated in Sec. Sec.  
232.8(a) and 232.8(f).
    \261\ 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]'').
---------------------------------------------------------------------------

3. Other Restrictions of 10 U.S.C. 987(e)
    The Department adopts Sec.  232.8(e) as proposed.
    The Department adopts Sec.  232.8(f) as proposed (now re-designated 
as paragraph (g) in light of the new Sec.  232.8(f)), and notes that 
while this provision tracks the language of the prohibition of 10 
U.S.C. 987(e)(6), the provision also contains an exemption for a unique 
class of creditors. More specifically, the Department has concluded to 
exercise its discretion to define a creditor for the purposes of 10 
U.S.C. 987 \262\ by excluding--only for the purposes of Sec.  
232.8(f)--from the term ``creditor'' military welfare societies and the 
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.\263\
---------------------------------------------------------------------------

    \262\ 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]'').
    \263\ 37 U.S.C. 1007(h).
---------------------------------------------------------------------------

    As the Department explained when issuing the Proposed Rule, 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.\264\ 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.
---------------------------------------------------------------------------

    \264\ 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/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.''
---------------------------------------------------------------------------

    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 has determined 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, Sec.  232.8 substantially preserves the 
language of the existing provisions of Sec.  232.8. However, the 
Department amends the structure of Sec.  232.8 by eliminating 
subsection Sec.  232.8(b) (and making other conforming amendments) 
because the definition of ``creditor,'' in Sec.  232.3(i)(2), includes 
an assignee of a covered creditor.

Section 232.9 Penalties and Remedies

    The Department adopts Sec.  232.9 as proposed.

Section 232.10 Administrative Enforcement

    The Department adopts Sec.  232.10 as proposed.

Section 232.11 Servicemembers Civil Relief Act Provisions Unaffected

    The Department adopts Sec.  232.11 as proposed.

Section 232.12 Effective Dates

    In general, the Department adopts Sec.  232.12 as proposed, 
particularly to reflect the effective dates of amendments to the MLA 
enacted in the 2013 Act. The Department has modified the dates set 
forth in this section in order to clarify the relationships between the 
effective dates (including the effective date of this final rule) and

[[Page 43591]]

the compliance dates set forth in new Sec.  232.13.
    Section 232.12(a) amends the language of Sec.  232.11 of the 
existing rule to reflect the amendments adopted in the final rule.
    Section 232.12(b) provides a general rule that the definitions, 
conditions, and requirements of the existing rule apply to transactions 
involving consumer credit that are consummated or established prior to 
the compliance date. Relative to the Proposed Rule, the language in 
Sec.  232.12(b) has been revised to clarify that the ``definitions, 
conditions, and requirements'' of the existing rule apply. The 
Department believes that this provision is equitable, particularly to 
avoid the potential injustice and operational difficulties that could 
arise if new requirements under the final rule were to apply to pre-
existing transactions or accounts involving consumer credit to covered 
borrowers. Section 232.12(c) provides 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 final rule.
    Section 232.12(d) provides 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) of this part, 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.'' \265\ 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''--are effective as 
of January 2, 2014.
---------------------------------------------------------------------------

    \265\ 10 U.S.C. 987 note.
---------------------------------------------------------------------------

    Section 232.12(e) provides 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. The 
term ``consumer credit'' for purposes of this Sec.  232.12(e) applies 
to the definition of consumer credit in force as of the date that the 
consumer and the creditor enter into the transaction or establish the 
account for that credit.

Section 232.13 Compliance Dates

    As discussed in section I.C., many comments on the Proposed Rule 
state that, if the Department were to adopt a final rule along the 
lines of the Proposed Rule, creditors would need a substantial period 
of time to modify their operations in order to comply with the rule. 
For example, the Associations state that creditors generally would need 
18 months to comply with the rule, if adopted as proposed,\266\ and 
another comment states that ``[the Department] should allow as long an 
implementation period as reasonable to provide adequate time for credit 
unions and others to implement necessary changes.'' \267\
---------------------------------------------------------------------------

    \266\ Associations, Dec. 18, 2014, at 58.
    \267\ Missouri Credit Union Assoc., Nov. 25, 2014, at 3.
---------------------------------------------------------------------------

    The Department concludes that, particularly because the protections 
of the MLA will apply to a wider range of credit products, a creditor 
should be afforded a reasonable period of time to adjust its operations 
and, if necessary, the terms and conditions of its loan product(s) 
offered to covered borrowers in order to comply with the regulation. 
Accordingly, under Sec.  232.13(a), a creditor must comply with the 
requirements of the rule with respect to a consumer credit transaction 
or account for consumer credit consummated or established on or after 
October 3, 2016.\268\
---------------------------------------------------------------------------

    \268\ The Department has determined that the final rule shall be 
effective on October 1, 2015.
---------------------------------------------------------------------------

    Consistent with the Department's determination regarding the 12-
month period that allows a creditor to adjust its operations and loan 
product(s) to comply with the rule, a creditor also is permitted to use 
the existing safe harbor when assessing whether a consumer-applicant is 
a covered borrower.
    Upon the compliance date, the rule permits--and does not require--a 
creditor to use information obtained from the MLA Database or 
information contained in a consumer report obtained from a nationwide 
consumer reporting agency in order to conclusively determine whether a 
consumer-applicant is a covered borrower. A creditor who uses one (or 
both) of the methods set forth in, and complies with the recordkeeping 
requirements of, Sec.  232.5(b) when conducting a covered-borrower 
check will be afforded the new safe harbor.
    The Department concludes that consumer credit should not include 
credit extended in a credit card account under an open-end (not home-
secured) consumer credit plan until October 3, 2017. Section 
232.13(c)(2) allows the Secretary (or an official of the Department 
duly authorized by the Secretary) to extend, up to an additional year, 
the expiration of the exemption for a credit card account. Thus, until 
October 3, 2017 (or potentially a longer period of time), the 
requirements relating to the computation of the MAPR for a credit card 
account, as set forth in Sec.  232.4, would not apply. When the 
exemption expires, the conditional exemption for any ``bona fide'' fee 
charged to a credit card account, as set forth in Sec.  232.4(d) would 
apply.

V. Regulatory Analyses

A. Analysis Under Executive Orders 12866 and 13563

    In accordance with the requirements of Executive Orders 12866 \269\ 
and 13563 \270\ (``E.O. 12866'' and ``E.O. 13563''), the Department has 
assessed the expected costs associated with the amendments to its 
existing rule. This final rule extends 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 provides 
a sensitivity analysis that examines potential benefits of the final 
rule.
---------------------------------------------------------------------------

    \269\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 
1993).
    \270\ Improving Regulation and Regulatory Review, 76 FR 3,821 
(Jan. 21, 2011).
---------------------------------------------------------------------------

1. Executive Summary
    E.O. 12866 and E.O. 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 rule is a significant 
regulatory action, as defined in E.O. 12866 and as supplemented by E.O. 
13563, in that this final rule might have an annual effect on the 
economy of $100 million or more. Accordingly, this regulation has been 
reviewed by the Office of Management and Budget (``OMB''). This rule, 
as well as any proposed revisions to this rule, are part of the 
Department's retrospective review plan under E.O. 13563 completed in 
August 2011. The Department's full plan and retrospective review 
reports is available at: http://www.regulations.gov/#!docketDetail;D=DOD-2011-OS-0036. The regulatory impact assessment 
prepared by the Department for this regulation is provided below.
    The Department anticipates that the final rule might impose costs 
of

[[Page 43592]]

approximately $106 million during the first year--that is, during the 
first year after the rule is effective and prior to the general date on 
which a creditor must comply with the rule (pursuant to Sec.  
232.13(a)). The Department expects that, during this first-year, phase-
in period, creditors will take steps to adapt their systems to comply 
with the requirements of the MLA and the Department's final rule. After 
that first-year, phase-in period--that is, when a creditor generally 
must comply with the rule--and on an ongoing basis, the Department 
estimates the annual compliance cost would be approximately $30 
million. The Department provides a sensitivity analysis examining 
scenarios in which the rule is expected to reduce the incidence of 
involuntary separation of Service members where financial distress is a 
contributing factor; the benefits under these scenarios range from $14 
million to $133 million annually.
    The MLA, as implemented by the Department's existing rule as well 
as under this final rule, 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 voluntary mechanisms a creditor 
may use for identifying covered borrowers, as well as the requirements 
to provide certain disclosures, 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 $30 
million. These 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 E.O. 12866 and E.O. 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 
assessing whether consumer-applicants are covered borrowers and 
maintaining records of that information, as provided in Sec.  232.5(b), 
and consumers reasonably can be assumed to be indifferent to the 
functions associated with conducting covered-borrower checks and not 
receive any readily quantifiable, financial benefits thereof. The 
Department believes, as discussed in section III.F., 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 final rule could 
impose certain types of costs on covered borrowers, including a 
potential reduction in access to available credit. Nevertheless, as 
discussed in sections II.C. and II.D., 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.
    The annual ongoing estimates of the costs relate to each year 
following the first-year, phase-in period. This figure includes 
compliance costs for creditors that, with respect to credit card 
accounts under open-end (not home secured) credit plans would not be 
required to comply with the rule for an additional period of time, 
pursuant to Sec.  232.13(c). The Department elects to conservatively 
estimate the activities of all creditors because the costs associated 
with credit card accounts eventually would be accounted for in the 
annual costs of the final rule.
    Furthermore, the Department expects that creditors could adjust 
their systems on an incremental basis and makes no judgment about when 
creditors will undertake various activities and when the costs 
associated with this adjustment could accrue. The assessment provided 
here is designed solely for the purposes of evaluating the Department's 
action under E.O. 12866 and E.O. 13563, and is intended only to serve 
as an exposition of the regulatory costs of the amendments adopted in 
the final rule.
    The scenario analysis that examines the anticipated benefit of the 
Department's regulation are the savings attributable to lower 
recruiting and training expenses associated with the reduction in 
involuntary separation of Service members where financial distress is a 
contributing factor. Each separation of a Service member is estimated 
to cost the Department $58,250, and the Department estimates that each 
year approximately 4,640 to 7,580 Service members are involuntarily 
separated where financial distress is a contributing factor. If the 
Department's proposed regulation could reduce the annual number of 
involuntary separations where financial distress is a contributing 
factor from between 5 to 30 percent, the savings to the Department 
could be in the range of approximately $13.51 million to $132.52 
million each year.
    Figure 1 (which also appears in the Executive Summary, in section 
I.E.) provides a summary of the anticipated benefits and (costs) of the 
Department's amendments to the MLA regulation,\271\ 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.\272\ The Department 
also has assessed non-quantified effects of this regulation, and those 
effects are listed in Figure 2.
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    \271\ 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.
    \272\ 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.

[[Page 43593]]



                                                  Figure 1--Summary of Estimated Effects of Final Rule
                                                               [2015 dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           First year,  set-
                                                                           up costs (Oct. 1,    Annual, ongoing     PV 10-year,  7%     PV 10-year,  3%
                                                                            2015- Sept. 30,    (October 1, 2016      discount rate       discount rate
                                                                                 2016)          and thereafter)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sensitivity Analysis: Benefits to the        Low........................                  $0                 $14                 $96                $129
 Department.                                 High.......................                   0                 133                 940               1,263
Primary Analysis: Costs to Creditors of      ...........................               (106)                (30)               (185)               (259)
 Compliance.
Sensitivity Analysis: Transfer Payments....  Low........................                 n/a                 100                 616                 856
                                             High.......................                 n/a                 119                 740               1,022
--------------------------------------------------------------------------------------------------------------------------------------------------------


           Figure 2--Non-Quantified Effects of the Final Rule
------------------------------------------------------------------------
 
-------------------------------------------------------------------------
 Potential costs of increased telephone call volume for
 creditors that elect to provide oral disclosures by making a toll-free
 telephone number available to covered borrowers;
 Potential savings for creditors covered under the existing rule
 from reduction in transaction time for checking covered borrower status
 through batch processing instead of individual self-identification;
 Costs of creditors that elect to acquire new or to update
 existing technological capacity;
 Costs of implementing the prohibition against requiring waiver
 of otherwise applicable provisions of the MLA;
 Legal costs associated with defending alleged violations of the
 MLA;
 Marginal costs associated with adding MLA coverage to existing
 supervisory examinations;
 Marginal costs associated with modifying existing open-end
 credit existing open-end credit insurance, debt suspension plans, and
 credit related ancillary products to comply with the interest-rate
 limit;
 Costs associated with reviewing, adjusting, and implementing
 systems and control processes to calculate the MAPR and, if necessary,
 waive fees when the costs of the credit during a given billing cycle
 exceed the interest-rate limit for open-end credit products, other than
 credit card accounts;
 Costs associated with reviewing, adjusting, and implementing
 systems and control processes to calculate the MAPR and waive fees for
 credit card issuers that impose unreasonable or non-bona-fide non-
 periodic fees;
 Costs associated with a reduction in the availability of credit
 with MAPRs in excess of the interest-rate limit;
 Costs associated with complying with the prohibition against
 compelled arbitration; and
 Costs associated with the fact that financial institutions are,
 in general, subject to an array of state and federal laws, including
 the MLA.
------------------------------------------------------------------------

2. Need for the Regulation and Consideration of Alternatives
    The Department amends its existing rule primarily for the purpose 
of extending the protections of 10 U.S.C. 987 to a broader range of 
closed-end and open-end credit products. More specifically, as 
discussed above, the Department amends its rule so that, in general, 
consumer credit covered under the MLA \273\ is 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.\274\
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    \273\ 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).
    \274\ 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 final rule, 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 regulation. For example, in developing the 
provisions for the conditional exclusion for credit card accounts, the 
Department has considered 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 all non-periodic fees should be permitted 
for credit card accounts in order to preserve current levels of access 
to those products for covered borrowers.
    Similarly, in developing the provisions relating to a creditor's 
assessment of a covered borrower, the Department considered 
alternatives to the creditor's use of information obtained directly or 
indirectly from the MLA Database in order to obtain the benefit of a 
safe harbor under Sec.  232.5(b). In this regard, the Department 
considered alternative provisions relating to a creditor's use of 
information obtained from the MLA Database, and adopts an additional 
mechanism that a creditor may use to avail itself of the safe harbor in 
Sec.  232.5(b). The Department also considered whether to retain a safe 
harbor for a creditor's use of the covered borrower identification 
statement, but declines to retain that mechanism after the general 
compliance date.
    The Department believes that this final rule is appropriate in 
order to address a wider range of credit products that currently fall 
outside the scope of the existing rule, streamline the information that 
a creditor must provide to a covered borrower when consummating a 
transaction involving consumer credit, and provide a more 
straightforward mechanism for a creditor to conclusively determine--via 
a safe harbor--whether a consumer-applicant is a covered borrower. In 
this regard, as discussed in section III.F., the Department is aware of 
misuses of the covered borrower identification statement whereby a 
Service member (or covered dependent) falsely declares that he or she 
is not a covered borrower. The Department believes that, if a creditor 
elects to conduct a covered-borrower check by using information 
obtained from the MLA Database or information in a consumer report 
obtained from a nationwide consumer reporting agency, a Service member 
or his or her dependent would be relieved from making any statement 
regarding his or her status as a covered borrower.

[[Page 43594]]

3. Affected Entities and Baseline Conditions
    The Department estimates that approximately 37,500 creditors will 
fall within the parameters of this regulation.\275\ The Department 
arrives at this estimate through a combination of statistics compiled 
by the U.S. Department of Labor (``DOL''), the FDIC, and the NCUA. DOL 
estimates an annual average number of consumer lending establishments 
at 14,882.\276\ DOL also estimates annual average number of all other 
nondepository credit intermediation establishments at 9,609.\277\ The 
FDIC reports there are 6,444 insured depository institutions.\278\ The 
NCUA reports there are 6,554 credit unions.\279\ The Department does 
not have data on the number of creditors with financial products that 
fall within the parameters of the existing rule because available 
sources of information do not differentiate between lenders that offer 
loan products that fall within the three narrowly defined product 
categories and lenders that do not. Nevertheless, the Department's 
estimate of the number of affected entitles represents a significant 
increase in comparison to the likely baseline condition of entities 
affected under the existing rule.
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    \275\ At the time that the Department assessed the Proposed 
Rule, the Department estimated that approximately 40,000 creditors 
that would fall within the parameters of the proposal. The revised 
estimate of 37,500 reflects changes in the overall number of 
establishments within the same categories from the Bureau of Labor 
Statistics, the FDIC, and the NCUA.
    \276\ See DOL, Bureau of Labor and Statistics, Quarterly Census 
of Employment and Wages, NAICS 522291 Consumer Lending (Annual 
Average for 2013).
    \277\ DOL, Bureau of Labor and Statistics, Quarterly Census of 
Employment and Wages, NAICS 522291 Consumer Lending, NAICS 522298 
All Other Nondepository Credit Intermediation (Annual Average for 
2013).
    \278\ FDIC, DIC Institution Directory, available at http://www2.fdic.gov/IDASP/ (reporting 6,444 insured institutions as of 
March 26, 2015).
    \279\ NCUA, 2013 Annual Report, available at http://www.ncua.gov/Legal/Documents/Reports/AR2013.pdf.
---------------------------------------------------------------------------

4. Estimate of Anticipated Costs Associated With Identification of 
Covered Borrowers and Provision of Mandatory Disclosures
    The Department believes that creditors who offer consumer credit 
products that are subject to the modified regulation will face several 
types of compliance costs. 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 Sec.  
232.6); and, second, employing one of the methods available for 
conducting covered-borrower checks--through the use of information 
obtain from the MLA Database or the use of information in a consumer 
report obtained from a nationwide consumer reporting agency--and the 
retention of related records, as provided in Sec.  232.5(b).
    The Department recognizes that this assessment does not capture all 
possible compliance costs associated with the final rule. 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 Sec.  232.8 would need to adjust its computer and 
software systems to calculate the MAPR, develop new policies and 
procedures, or train staff on new procedures for identifying covered 
borrowers. Further, creditors likely would select different techniques 
for meeting compliance obligations under the final rule. The costs to 
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 E.O. 12866 and E.O. 13563, the Department has sought to 
quantify the important potential costs of the final rule and to 
identify important non-quantified potential costs and benefits.\280\ In 
considering whether to amend its existing rule, the Department sought 
comment on all aspects of the Proposed Rule and on the estimates made 
in this assessment. In particular, the Department sought specific data 
relating to the benefits and costs of amending the regulation, as 
proposed. The Department requested that commenters provide information 
on the type of costs and the magnitude of costs that might be borne by 
creditors by providing relevant data and studies.
---------------------------------------------------------------------------

    \280\ 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).
---------------------------------------------------------------------------

    Fewer than two dozen of the comments on the Proposed Rule contain 
estimates of potential costs or benefits with the proposal to modify 
the existing rule. Comments focus on the cost to creditors of updating 
their systems to comply with the interest-rate limit and set-up and 
ongoing costs associated with the optional safe harbor proposed for 
conducting a covered-borrower check,\281\ and potential costs 
associated with a potential decline in the availability of credit to 
covered borrowers.\282\ In addition, some comments provide examples of 
high-cost credit currently marketed to Service members and their 
families,\283\ and other comments describe the benefits to Service 
members and to the Department in reducing financial distress among the 
military force,\284\ underscoring the need to modify the existing rule.
---------------------------------------------------------------------------

    \281\ See, e.g., Associations, Dec. 18, 2014; TSYS, Dec. 24, 
2014.
    \282\ See, e.g., AFSA, Dec. 22, 2014; Just Military Loans, Dec. 
26, 2014.
    \283\ See, e.g., Texas Appleseed, Dec. 2, 2014; North Carolina 
Justice Center, Dec. 26, 2014.
    \284\ See, e.g., Military Officers Association of America, Dec. 
17, 2014; The Military Coalition, Dec. 11, 2014.
---------------------------------------------------------------------------

    Disclosures. Under the existing rule, a creditor who extends to a 
covered borrower one or more of the three consumer credit products 
covered by the regulation must ``clearly and conspicuously'' disclose: 
(i) A numerical value for the MAPR applicable to the extension of 
credit, including the total dollar amount of all charges included in 
the MAPR; (ii) any disclosures required by Regulation Z; (iii) a clear 
description of the payment obligation (which may be satisfied by a 
payment schedule provided pursuant to Regulation Z); and (iv) a 
Statement of Federal Protections. A creditor must provide the 
information orally and in writing prior to consummation of the credit 
transactions. 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 final rule amends the provisions relating to 
the information required by the MLA, first, to simplify the information 
that a creditor must provide to a covered borrower when extending 
consumer credit, and, second, to streamline the methods of orally 
providing the required disclosures. More specifically, the final rule: 
Relieves a creditor of the obligation to disclose ``clearly and 
conspicuously'' the information required by the MLA; relieves a 
creditor

[[Page 43595]]

of the obligation to provide the Statement of Federal Protections; no 
longer requires a creditor disclose a numerical value for the MAPR or 
``the total dollar amount of all charges'' and, instead, requires a 
creditor to provide a description of the charges that the creditor may 
impose; and provides a generally applicable mechanism through which a 
creditor may orally provide the required disclosures by permitting a 
creditor to provide a toll-free number to orally deliver those 
disclosures. In order to facilitate compliance, the final rule provides 
a model statement that a creditor could use to fulfill the requirement 
to provide a statement of the MAPR. Consistent with the Department's 
interpretation of its existing rule, the final rule 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 238 million 
transactions each year in which creditors would provide the required 
information,\285\ 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 37,500 creditors would be 
subject to the regulation.\286\
---------------------------------------------------------------------------

    \285\ The Department's methodology for estimating the number of 
accounts that will be affected each year is discussed in greater 
detail at the text accompanying note 280, infra. 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 (February 2015). For the six months 
prior to the first quarter of 2013, there were approximately 175 
million credit inquiries. The Department assumes that 68 percent of 
these inquiries were for credit accounts that would be consumer 
credit under Sec.  232.3(f). This estimate does not differentiate 
between credit applications and accounts established. If most 
creditors only supply the required information as part of 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 this estimate.
    \286\ The Department bases this estimate on relevant numbers of 
establishments published by the DOL's Bureau of Labor and 
Statistics, the FDIC, and the NCUA. See DOL, Bureau of Labor and 
Statistics, Quarterly Census of Employment and Wages, NAICS 522291 
Consumer Lending, NAICS 522298 All Other Nondepository Credit 
Intermediation (Annual Average for 2013) (the annual average number 
of establishments for consumer lending is 14,882; the annual average 
number of all other nondepository establishments for credit 
intermediation is 9,609); FDIC Institution Directory, available at 
http://www2.fdic.gov/IDASP/ (reporting 6,444 insured institutions as 
of March 26, 2015); and NCUA 2013 Annual Report, available at http://www.ncua.gov/Legal/Documents/Reports/AR2013.pdf (reporting 6,554 
credit unions).
    At the time that the Department assessed the Proposed Rule, 
there were approximately 40,000 creditors that fell within these 
parameters; the updated estimate of the affected creditors reflects 
the change in the overall number of establishments within the same 
categories from the Bureau of Labor and Statistics, the FDIC, and 
the NCUA.
---------------------------------------------------------------------------

(a) Statement of the MAPR
    For creditors who currently provide disclosures to covered 
borrowers (under the existing rule), the final rule is expected to 
reduce some of their compliance costs by eliminating the requirement to 
disclose a numerical value for the MAPR. The Department largely 
maintains for the final rule the estimates generated in developing the 
Proposed Rule, and updates that estimate to reflect more recent wage 
and dollar value figures.\287\ The Department estimates that 
eliminating the requirement under the existing rule to disclose a 
numerical value for the MAPR would reduce the compliance costs for 
creditors who currently offer forms of consumer credit by $73,065 per 
year. Over 10 years, the Department estimates that the total savings to 
this class of creditors would be between $0.51 million (at a 7 percent 
discount rate) and $0.62 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \287\ The Department also has revised wage compensation 
estimates to include an adjustment for the non-wage component of 
employee compensation.
---------------------------------------------------------------------------

    The requirement that creditors provide a statement of the MAPR, 
which may be satisfied through the use of a model statement, is 
anticipated to cost all creditors approximately $24.01 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).\288\ One commenter notes that some creditors may need to 
redesign their disclosure forms to make room for the statement of the 
MAPR.\289\ The Department estimates that, on an ongoing basis, 
providing the statement of the MAPR would require one-quarter of a 
printed page when included in standard account disclosures.
---------------------------------------------------------------------------

    \288\ 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 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. DOL, 
Bureau of Labor and Statistics, Occupational Employment and Wages, 
Table 1 (May 2014) (mean hourly wage for data entry and information 
processing workers is $15.48; mean hourly wage for supervisors of 
office and administrative support workers is $26.15; mean hourly 
wage for legal counsel is $64.17), available at http://www.bls.gov/oes/current/oes_nat.htm#23-0000. The Department further estimates a 
non-wage component of compensation to be an additional 30 percent of 
estimated wages. The Department, therefore, calculates a total 
estimated wage cost of approximately $18.47 million by multiplying 
the mean hourly wage by the portion of time for each classification 
of worker expected to be involved in modifying the documents. The 
Department's total estimated cost reflects an additional 30 percent 
adjustment for non-wage compensation.
    \289\ Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 17.
---------------------------------------------------------------------------

    The Department 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.\290\ The Department estimates that 
the ongoing costs for additional printing would be approximately $2.98 
million per year.\291\ Over 10 years, the total costs to creditors of 
providing a printed statement of the MAPR would be between $18.12 
million (at a 7 percent discount rate) and $25.38 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \290\ The Department relies on estimates of paper and printing 
costs recently published by the DOL. Reasonable Contract or 
Arrangement Under Section 408(b)(2)--Fee Disclosure, 77 FR 5632-5654 
(Feb. 3, 2012).
    \291\ 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 (238 million) by the cost 
per page ($.05) and the portion of the page used for the disclosure 
(0.25 page).
---------------------------------------------------------------------------

    Under the framework of the Proposed Rule, the Department had 
estimated that the cost of providing the statement of the MAPR orally 
at the time of sale in face-to-face transactions would be $0.69 million 
per year. Several commenters urge the Department to modify Sec.  232.6 
to permit a creditor to satisfy its obligation to orally provide 
disclosures by providing a toll-free telephone number, as the 
Department has permitted for transactions conducted over the internet. 
In the final rule, the Department adopts Sec.  232.6(d)(2) to allow a 
creditor to orally provide the required disclosures by providing to the 
covered borrower a toll-free telephone number, subject to certain 
conditions, and this option is permitted for all channels for 
conducting transactions or establishing accounts involving consumer 
credit. Solely for the purposes of its analyses under E.O. 12866 and 
E.O. 13563 and the other analyses in this section, the Department 
believes that the vast majority of creditors will avail themselves of 
this mechanism for orally providing the required disclosures.
    While commenters urge the Department to permit creditors to provide 
oral disclosure through a toll-free number, these commenters do not 
provide any estimate of the costs or savings associated with this 
provision.

[[Page 43596]]

Nonetheless, the Department, for purposes of assessing the final rule 
under E.O. 12866 and E.O. 13563, provides qualitative analysis of the 
potential costs that creditors could incur as a result of this final 
rule. For those creditors who choose to orally provide disclosures via 
a toll-free telephone number, the costs associated with the final rule 
include establishing a toll-free number (in the event that a creditor 
does not already have a such a line available for consumers), updating 
the script used by staff, and training staff in connection with 
questions that consumers might raise about the disclosures. 
Additionally, creditors could experience some increase in call volume 
and costs associated with providing oral disclosures or other aspects 
of this rule. Due to the lack of available data, the Department has not 
quantified the potential costs of any increase in call volume due to 
the disclosures required by the MLA to be provided to covered borrowers 
in transactions or accounts involving consumer credit.
(b) Statement of Federal Protections
    Under the Proposed Rule, like the existing rule, a creditor would 
have been required to provide to a covered borrower the Statement of 
Federal Protections. Because the Proposed Rule would have applied the 
protections of 10 U.S.C. 987 to a broader scope of credit transactions, 
an additional 20,000 creditors would have been required to provide the 
Statement of Federal Protections. In the final rule, the Department 
determines that, in balancing the interests of covered borrowers in 
receiving useful information with the interests of creditors vis-
[agrave]-vis facilitating compliance and reducing the costs associated 
thereto, eliminating the requirement that creditors provide a Statement 
of Federal Protections best serves these purposes. This modification 
will relieve those creditors that offer consumer credit subject to the 
existing rule from the obligation to provide a Statement of Federal 
Protections when providing that credit to Service members and their 
dependents. Relieving creditors of the obligation to provide a 
Statement of Federal Protections will reduce some costs for those 
creditors that currently extend consumer credit subject to the existing 
rule. However, the Department believes that, due to the relatively low 
number of creditors who currently offer loans subject to the existing 
rule, the impact of this amendment generally will be relatively minor; 
therefore, the Department does not account for the estimated reduction 
in burden in this analysis of the final rule.
    Figure 3a provides a summary of the anticipated benefits and 
(costs) associated with the disclosures under the Department's modified 
regulation.

                   Figure 3a--Estimated Benefits and Costs of Disclosures Under the Final Rule
                                           [2015 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                              First year,  set-up                         PV 10-year,  7%      PV 10-year,  3%
                                     costs           Annual, ongoing       discount rate        discount rate
----------------------------------------------------------------------------------------------------------------
Cost savings of eliminating                    $0                $0.07                $0.51                $0.62
 requirement to disclose
 numerical MAPR.............
Set up costs of Statement of                 (24)                  n/a                  n/a                  n/a
 the MAPR...................
Ongoing costs of Statement                      0                  (3)                 (18)                 (25)
 of the MAPR (oral and
 printed)...................
                             -----------------------------------------------------------------------------------
    Total Net Costs.........                 (24)                  (3)                 (18)                 (25)
----------------------------------------------------------------------------------------------------------------

    Identification of Covered Borrowers. The Department has modified 
the mechanisms through which a creditor may avail itself of a safe 
harbor for identifying covered borrowers. The final rule permits, 
though does not require, a creditor to unilaterally assess the status 
of a consumer-applicant, rather than relying on the applicant to 
complete a self-declaration form. The final rule permits a creditor to 
definitively conduct a covered-borrower check either by using 
information obtained from the MLA Database or by using information in a 
consumer report obtained from a nationwide consumer reporting agency, 
and (when finding that the consumer is not a covered borrower) timely 
creating and thereafter maintaining a record of the information so 
obtained.
    Solely for the purposes of its assessment in this section V., 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 to use one of the mechanisms for 
conducting a covered-borrower check described in Sec.  232.5(b). As 
described above, the Department believes that approximately 37,500 
creditors would be subject to the final rule. The Department believes 
that setting up a process to use information obtained from the MLA 
Database or to use information in a consumer report obtained from a 
nationwide consumer reporting agency and to retain records of that 
information will take each creditor 70 hours of labor time. The actual 
cost for each creditor will depend on that entity's business decisions. 
For example, if one or more of the nationwide consumer reporting 
agencies incorporate information about covered borrower-status into 
consumer reports, a creditor that already obtains a consumer report 
from one of those nationwide consumer reporting agencies (or that 
report from a reseller) during the credit origination process might 
choose to use information provided as part of the report to avail 
itself of the safe harbor in Sec.  232.5(b). Another creditor, 
particularly one that does not already have the agreements and 
technological connections in place to obtain consumer reports from a 
nationwide consumer reporting agency, may instead choose to use 
information from the MLA Database, as permitted in Sec.  232.5(b). And 
a third creditor, particularly one that offers credit products that 
comply with the MLA and this final rule, may choose to forgo the use of 
a method described in Sec.  232.5(b) when determining the status of a 
consumer-applicant.
    Nonetheless, assuming that each of the approximately 37,500 
creditors subject to the final rule establishes a process for availing 
itself of one of the safe harbors under Sec.  232.5(b) and that each 
creditor will incur 70 hours of labor time in doing so, the Department 
estimates that the total costs relating to setting up the processes to 
use the methods set forth in Sec.  232.5(b) would be $84.02 
million.\292\ Some creditors may

[[Page 43597]]

incur additional costs related to adjusting or updating their 
technological capacity or systems in order to avail themselves of one 
of the methods for conducting covered-borrower checks in Sec.  
232.5(b), including ``costs associated with integrating the MLA 
[D]atabase with the lenders' database that ensure the security and 
protection of both'' \293\ and training staff on use of the MLA 
Database.\294\ The Department believes that these additional costs 
depend on the business judgment and practices of each creditor, such as 
whether the loan application process is performed manually and whether 
multiple ``databases'' interact with each other, and therefore declines 
to estimate the overall costs of such potential additional costs 
associated with the voluntary mechanism for identifying covered 
borrowers. The Department also recognizes that certain costs may be 
particular to the type of creditor and practices in that market. For 
example, the National Pawnbrokers Associations shared the report of one 
member estimating that as many as 4,000 pawn stores across the country 
do not have computers and would, therefore, need to purchase such 
equipment in order to take advantage of the safe harbor in Sec.  
232.5(b).\295\
---------------------------------------------------------------------------

    \292\ The Department estimates that staff time to set up access 
to one of the safe harbor mechanism 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. DOL, 
Bureau of Labor and Statistics, Occupational Employment and Wages 
Table 1 (March, 2015) (mean hourly wage for data entry and 
information processing workers is $15.48; mean hourly wage for 
supervisors of office and administrative support workers is $26.15; 
mean hourly wage for legal counsel is $64.17). The Department 
estimates total wages to be approximately $64.63 million. The 
Department arrives at an estimated total cost by including an 
additional non-wage component of compensation of 30 percent of 
estimated wages.
    \293\ Associations, Dec. 18, 2014, at 57.
    \294\ SBA Office of Advocacy, Dec. 18, 2014, at 4.
    \295\ Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 14.
---------------------------------------------------------------------------

    The Department contemplates that a creditor could use batch 
processing to conduct covered borrower checks of a portfolio of 
potential customers. For example, a depository institution or credit 
union that offers open-end lines of credit with an MAPR in excess of 36 
percent might choose to use batch processing capacity in the MLA 
Database before offering or extending those types of loans, and thereby 
take advantage of the safe harbor in Sec.  232.5(b), to identify 
potential covered borrowers within its account portfolio. As with 
making an individual inquiry of the MLA Database, making a batch 
inquiry of the MLA Database can be done by a creditor (or nationwide 
consumer reporting agency) free of charge. Nonetheless, the comments on 
the Proposed Rule do not provide any data as to the costs to creditors 
associated with identifying covered borrowers through batch processing 
on the MLA Database. In light of the absence of data relating to batch 
processing for covered-borrower checks, the Department does not 
estimate the costs of conducting those checks. The Department observes 
that a creditor who currently offers consumer credit products (as 
defined by the existing rule), typically requires all consumer-
applicants to complete the self-declaration form, and for that type of 
creditor, replacing the self-declaration form with a process to use 
information obtained from the MLA Database or information in a consumer 
report from a nationwide consumer reporting agency is estimated to 
result in a savings from transaction time, printing and paper costs, as 
well as a reduction in legal risks. In assessing the Proposed Rule, the 
Department estimated that the elimination of the self-certification 
procedure would result in savings for creditors who currently offer 
consumer credit products covered by the existing rule. The Department 
maintains those estimates in assessing the final rule, and updates the 
figures for 2015 dollars. The Department estimates that the savings in 
printing and paper for those creditors who offer consumer credit 
products covered under the existing rule will be $0.29 million per 
year; over 10 years, the Department estimates a savings of between 
$1.77 million (at a 7 percent discount rate) and $2.48 million (at a 3 
percent discount rate). As in the Proposed Rule, the Department has not 
quantified the expected savings for creditors with respect to the 
potential reduction in transaction time or legal risk.
    For the purposes of its assessments in this section V., the 
Department expects that the final rule will 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. The Department estimates 
that of the estimated 238 million covered credit applications each 
year,\296\ there will be approximately 100 million applications when 
creditors choose to query the MLA Database as a single-record check. In 
assessing the Proposed Rule, the Department had estimated, using then-
current data, that there would be approximately 70 million applications 
each year in which creditors would conduct a single-record inquiry of 
the MLA Database. A comment on behalf of certain credit card issuers 
suggests, instead, that there would be 100 million such transactions 
each year.\297\ The Associations assert that there would be between 450 
million and 700 million inquiries made of the MLA Database in total 
each year.\298\ In arriving at those figures, the Associations assume 
that ``the regulation may require multiple inquires'' for each 
account.\299\ Mindful of the potential ambiguity in the Proposed Rule, 
the Department has clarified in the final rule that a creditor who uses 
one of the methods described in Sec.  232.5(b) for conducting a 
covered-borrower check may do so solely by using the qualifying 
information at one time, relatively early in the process of conducting 
a transaction or establishing an account involving consumer credit. In 
light of this revision, the overall estimate from the Associations 
would be between 225 million and 350 million. Nonetheless, the 
Department is unable to determine from the estimates provided by the 
Associations how many of these inquiries would be conducted as a 
single-record check of the MLA Database or how many would be conducted 
through a batch-processing method. The Department believes that many 
creditors that impose periodic rates of 36 percent or less, impose only 
reasonable and bona fide non-periodic fees, and do not market credit-
related ancillary products may choose to forego covered-borrow checks 
because their credit products may be extended to covered borrowers and 
civilians alike. Furthermore, many creditors that already request 
consumer reports on applicants from a nationwide credit reporting 
agency may choose to determine covered borrower status through the 
procedure set out in Sec.  232.5(b)(2)(ii). In light of these factors 
and after review of the information provided in the comments, the 
Department believes that the estimate of 100 million transactions more 
accurately assesses the costs associated

[[Page 43598]]

with conducting a covered-borrower check under the final rule.\300\
---------------------------------------------------------------------------

    \296\ The Department estimates 238 million relying 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 (February 2015). For the six months prior to the first 
quarter of 2015, there were approximately 175 million credit 
inquiries. The Department assumes that 68 percent of these inquiries 
were for credit accounts that would be consumer credit under Sec.  
232.3(f).
    \297\ L. Chanin, Dec. 23, 2014, at 21.
    \298\ Associations, Dec. 18, 2014, at 32.
    \299\ Associations, Dec. 18, 2014, at 31.
    \300\ If creditors were to individually check covered-borrower 
status 225 million times per year, then the regulation in this 
respect would impose estimated annual costs of approximately $62.44 
million per year. In this scenario, the 10-year cost associated with 
covered borrower checks would be approximately $532.7 million at a 3 
percent discount rate and $380.28 million at a 7 percent discount 
rate. If creditors were to individually check covered borrower 
status 350 million times per year, then the regulation in this 
respect would impose estimated annual costs of approximately $97.13 
million per year. In this scenario, the 10-year costs associated 
with covered borrower checks would be approximately $828.5 million 
at a 3 percent discount rate and $591.45 at a 7 percent discount 
rate.
---------------------------------------------------------------------------

    For each of the uses of a record to conduct a covered-borrower 
check, the inquiry and record retention is expected to add 
approximately 60 seconds to each new consumer credit transaction.\301\ 
The Department estimates that the total cost to creditors for using 
information obtained from the MLA Database or using information in 
consumer reports obtained from nationwide consumer reporting agencies 
and retaining records relating to consumer-applicants would be 
approximately $27.75 million per year; \302\ over 10 years, the total 
cost of using the MLA Database would be between $169.01 million (at a 7 
percent discount rate) and $236.76 million (at a 3 percent discount 
rate).
---------------------------------------------------------------------------

    \301\ The National Pawnbrokers Association shared the report of 
one member who found that querying the MLA Database took ``less than 
20 seconds from start to finish.'' (Nat'l Pawnbrokers Assoc., Nov. 
24, 2014, at 15). In contrast, AFSA shares the report of a ``small 
business'' that had estimated that querying the MLA Database would 
take ``about five to 10 minutes per loan application.'' (AFSA, Dec. 
22, 2014, at 7). And a comment submitted on behalf of certain credit 
card issuers suggests that checking the MLA Database could cause a 
``delay'' for the transaction in question and for ``the transactions 
of any other consumer in line behind that consumer seeking to engage 
in a transaction, even if the consumer is not apply for credit.'' 
(L. Chanin, Dec. 23, 2014, at 22). In light of these divergent 
estimates and the lack of other data, the Department elects to 
maintain the estimate of the transaction time developed when the 
Proposed Rule was assessed.
    \302\ The Department calculates the estimated wage costs of 
21.35 million per year by multiplying the expected number of 
transactions involving a single-record inquiry (100 million) by the 
mean hourly wage for financial tellers ($12.81) and the additional 
transaction time expected (1/60th of an hour) based on wage 
information in the DOL, Bureau of Labor and Statistics, Occupational 
Employment and Wages Table 1 (May, 2014). The Department arrives at 
a total cost estimate by including an additional non-wage component 
of compensation of 30% of estimated wages.
---------------------------------------------------------------------------

    Because modern credit applications, whether conducted online or in 
person, involve highly automated systems for underwriting, the 
Department expects that many creditors--including creditors who issue 
credit cards--will choose to develop systems that would make the 
marginal increase in time for using information from the MLA
    Database relatively low. The Department does not estimate the 
potential costs associated with computer programming or including a 
covered-borrower check in automated underwriting.\303\
---------------------------------------------------------------------------

    \303\ 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 final 
rule.

             Figure 3b--Estimated Benefits and Costs of Covered-Borrower Checks Under the Final Rule
                                          [2015 dollars in millions] *
----------------------------------------------------------------------------------------------------------------
                                                                                    PV 10-year,     PV 10-year,
                                                    First year,       Annual,       7% discount     3% discount
                                                   set up costs       ongoing          rate            rate
----------------------------------------------------------------------------------------------------------------
Benefits of Eliminating Printing and Paper Costs              $0           $0.29           $1.77           $2.48
 for Self-Certification.........................
Set-up Costs to Use MLA Database................            (84)             n/a             n/a             n/a
Covered-Borrower Checks.........................               0            (28)           (169)           (236)
                                                 ---------------------------------------------------------------
    Total.......................................            (84)            (28)           (167)           (234)
----------------------------------------------------------------------------------------------------------------
* Assumes 100 million credit checks per year.

4. Anticipated Costs Associated With Other MLA Conditions
    The Department recognizes that the preceding quantitative 
assessment does not capture all possible compliance costs associated 
with the final rule. 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.\304\ By addressing 
such costs in a qualitative analysis rather than attempting to provide 
a quantitative assessment, the Department does not discount the 
potential costs that attempting to comply with the other MLA conditions 
might impose on creditors; rather, the Department recognizes the 
potential for costs in addition to those included within the 
quantitative analysis and had taken into account the impact on 
creditors of complying with all aspects of the modified rule.
---------------------------------------------------------------------------

    \304\ 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 Sec.  232.8(b)) is not material to this 
regulatory impact assessment because the potential costs of this 
prohibition are negligible.
---------------------------------------------------------------------------

    In considering whether to amend its regulation, the Department 
sought comment on all aspects of the Proposed Rule and on the estimates 
made in its assessment. In particular, the Department sought 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 requested that 
commenters provide information on the type of costs and the magnitude 
of costs that might be borne by creditors by providing relevant data 
and studies.
    The Associations state that the analysis of the Proposed Rule 
``grossly underestimates the intrinsic costs of the expansion in 
coverage of the proposed rule, as well as the cost of particular 
provisions.'' \305\ This Department

[[Page 43599]]

appreciates that creditors represented by the Associations have a 
``culture of compliance'' that ``demands an associated caution when 
implementing regulations.'' \306\ Indeed, in analyzing the final rule--
as throughout the rulemaking proceeding--the Department's estimates and 
judgments about how the final rule is likely to operate when 
implemented reflect the Department's expectation that creditors subject 
to the final rule will take steps to comply with each one of the other 
MLA conditions.
---------------------------------------------------------------------------

    \305\ Associations, Dec. 18, 2014, at 56.
    \306\ Associations, Dec. 18, 2014, at 56.
---------------------------------------------------------------------------

    The Associations describe certain, specific costs other than those 
accounted for in the qualitative analysis that the Department should 
take into account in assessing the cost of complying with the final 
rule, namely, costs associated with: (a) Reviewing, revising, and 
replacing contracts for all credit contracts; (b) reviewing and 
revising contracts to comply with the prohibition on the waiver of 
legal rights; (c) reviewing, adjusting, and implementing systems to 
calculate the MAPR and waiving fees when the costs of the credit during 
a given billing cycle exceeds the interest-rate limit, as well as 
``significant systems and operations changes'' to comply with the 
interest-rate limit for open-end credit products; (d) class actions 
that ``the regulation itself will attract;'' (e) being subject to 
supervisory examination; and (f) implementing and maintaining a 
``shadow control process'' for MAPR compliance.\307\ The Associations 
do not provide estimates for the magnitude of any of these costs.
---------------------------------------------------------------------------

    \307\ Associations, Dec. 18, 2014, at 56-58.
---------------------------------------------------------------------------

    The Department believes that many creditors will incur costs with 
implementing changes to their business operations and, on an ongoing 
basis, maintaining systems to comply with the other MLA conditions. The 
Department believes that many creditors will review and revise their 
credit contracts in order to comply with the MLA conditions going 
forward and that there will be costs associated with this process. For 
example, the Department expects that creditors will review and, as 
needed, revise contracts currently in use in order to comply with the 
prohibition on requiring a covered borrower to waive legal rights under 
the Servicemembers Civil Relief Act or other laws. The Associations 
report that one bank has six basic account agreements and 
``approximately 180 ancillary original documents in its library;'' 
\308\ the Department expects that banks and other creditors will incur 
costs in conducting this type of review. On an ongoing basis, the 
Department believes that creditors will revise contracts so that when 
new contracts are prepared, the MLA conditions already are included.
---------------------------------------------------------------------------

    \308\ Associations, Dec. 18, 2014, at 58.
---------------------------------------------------------------------------

    Credit card issuers who offer consumer credit at costs in excess of 
the interest-rate limit and who wish to avail themselves of the 
conditional exclusion for bona fide fees will need to update computer 
systems for these products in order to calculate the MAPR. Depending on 
the business practices of the creditor, these programs could be 
``complex and sophisticated'' and could ``require ongoing transaction 
monitoring and crediting processes.'' \309\
---------------------------------------------------------------------------

    \309\ L. Chanin, Dec. 23, 2014, at 18.
---------------------------------------------------------------------------

    In assessing the Proposed Rule, the Department considered, though 
did not quantify, the costs associated with the MLA's prohibition on 
requiring a Service member or his dependent to submit to arbitration in 
the case of a dispute related to an extension of consumer credit. Under 
the existing rule, the prohibition against requiring a covered borrower 
to submit to arbitration applies only to certain payday loans, vehicle 
title loans, and refund anticipation loans. Under the final rule, the 
prohibition against requiring arbitration applies to agreements for a 
significantly broader range of credit products, such as credit cards 
and deposit advance loans. In assessing the final rule, the Department 
continues to recognize that extending the application of the 
prohibition in Sec.  232.8(c) likely will lead to costs, primarily as a 
result of the significantly broader range of creditors affected by that 
prohibition. The Associations suggest that the prohibition on requiring 
arbitration will itself attract class action lawsuits, though do not 
provide an estimate of those costs.\310\ Nevertheless, commenters 
addressing the limitation do not provide specific information about the 
costs associated with complying with the prohibition against compelling 
arbitration, and the Department has not attempted to quantify the costs 
associated with those compliance measures.
---------------------------------------------------------------------------

    \310\ Associations, Dec. 18, 2014, at 58.
---------------------------------------------------------------------------

    The Department also recognizes that the fact of a regulation may 
cause a creditor to incur certain costs associated with the need to 
``know and implement'' the laws applicable to certain activity in the 
market and the process of supervisory examination.\311\ Indeed, the 
credit market is highly regulated today and many creditors are subject 
to supervision by state or federal regulators. The expanded scope of 
consumer credit under the final rule is expected to cause many 
creditors to be subject to the requirements of the MLA. Nonetheless, 
the presence of regulation or supervision itself is not due to any 
requirement imposed by this final rule. Even though the Department 
identifies and accounts for the most direct forms of compliance costs 
due to the amendments to the existing rule, the Department does not 
endeavor to quantify the costs associated with the fact that financial 
institutions are, in general, subject to an array of state and federal 
laws.
---------------------------------------------------------------------------

    \311\ Associations, Dec. 18, 2014, at 56.
---------------------------------------------------------------------------

5. Sensitivity Analysis on Potential Benefits
    Each year, thousands of well-trained Service members are compelled 
to leave military service where financial distress contributes 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.B., II.C., and II.D., the Department 
makes a significant investment in recruiting, training, and progressing 
each qualified Service member. Losing a qualified soldier, sailor, 
airman, or Marine can cause a loss of mission capability, and there are 
substantial costs associated with replacing that Service member. Even 
though, for the purposes of this regulatory impact assessment under EO 
12866 and EO 13563, the most direct effect of the interest-rate limit 
is a transfer payment, a secondary--yet no less direct--effect is the 
reduction in the overall amount of debt owed to creditors by covered 
borrowers. The Department believes applying the interest-rate limit to 
a broader range of credit products will reduce the overall amount of 
debt owed to creditors; 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 where 
financial distress is a contributing factor. Thus,

[[Page 43600]]

the Department believes that the savings of the Department's costs 
associated with replacing Service members who are involuntarily 
separated constitute benefits to the Department for the purposes of 
this regulatory impact assessment--entirely independently of the 
transfer payment flowing from the interest-rate limit. 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 regulation will be the reduction in involuntary 
separations among Service members when financial distress is a 
contributing factor. The Department also anticipates that the 
regulation will entail non-quantifiable benefits, reducing stress for 
Service members or their families, which currently affects 
approximately 60 percent of military families who report experiencing 
stress related to their financial condition.\312\
---------------------------------------------------------------------------

    \312\ Blue Star Families, The 2014 Military Family Lifestyle 
Survey 35 (May 2014).
---------------------------------------------------------------------------

    The Department estimates that each separation costs the Department 
$58,250.\313\ The Department estimates the potential impact of the 
regulation by using two alternative approximations of the current 
number of separations attributable to financial distress.
---------------------------------------------------------------------------

    \313\ U.S. Gov't Accountability Office, GAO-11-170, Military 
Personnel: Personnel and Cost Data Associated with Implementing 
DOD's Homosexual Conduct Policy (January 20, 2011) (estimating that 
each separation costs the Department $52,800 in 2009 dollars). The 
cost of $58,250 is calculated in 2015 dollars, using the DOL, Bureau 
of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI-
U), available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
---------------------------------------------------------------------------

(1) Estimate One
    For the years 2004 through 2013, there was an average of 54,293 
involuntary separations per year. Of those involuntary separations that 
were due to legal or standard-of-conduct issues--an average of 18,961 
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.\314\ Based on this data and these 
assumptions, the Department estimates that, going forward, there would 
be approximately 7,580 separations each year where financial distress 
is a contributing factor.
---------------------------------------------------------------------------

    \314\ 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.
---------------------------------------------------------------------------

(2) Estimate Two
    In 2005, there were 1,999 revocations of security clearances as a 
result of financial problems in the Navy and Marine Corps,\315\ and in 
those two branches, there was a total of 23,392 involuntary 
separations.\316\ For the purposes of formulating an estimate of the 
potential impact of financial distress, the Department believes that 
the rate of involuntary separation due to financial distress across all 
of the services reasonably could be based on the 2005 data relating to 
the Navy and Marine Corps. Assuming that 8.5 percent of involuntary 
separations occur because of a security clearance revocation as a 
result of financial problems,\317\ the Department estimates that, going 
forward, there would be approximately 4,640 separations each year where 
financial distress is a contributing factor.\318\
---------------------------------------------------------------------------

    \315\ Amy Klamper, ``Double Whammy,'' Seapower Magazine, Navy 
League of the United States (June 2006), available at 
www.seapowermagazine.org/archives/june/2006/double-whammy.html.
    \316\ Military OneSource, 2005 Demographic Report, at 35.
    \317\ Thus, in this estimate two, the overall rate of 
involuntary separations due to financial distress is computed as 
follows: (1,999)/(23,392) = 0.085.
    \318\ Thus, in this estimate two, the Department computes the 
total number of separations per year as follows: (54,293)/(.085) = 
4,640.
---------------------------------------------------------------------------

    The Department estimates that the 10-year cost of involuntary 
separations due to financial distress is between $1.646 billion and 
$3.769 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 final rule will 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 will 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 final rule will 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,\319\ 17.5 
percent,\320\ and 30 percent.\321\ 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.
---------------------------------------------------------------------------

    \319\ See, generally, Scott Carrell & Jonathan Zinman, In Harm's 
Way? Payday Loan Access and Military Personnel Performance (August 
2014) (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.
    \320\ 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.
    \321\ 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 final rule will result in savings 
from involuntary separations due to financial distress of between 
$13.51 million and $132.52 million per year. Over 10 years, the rule 
will save the Department between $95.81 million and $1.263 billion. 
Figure 4 provides a summary of the anticipated savings that reasonably 
could be attributable to reduction in involuntary separations where 
financial distress is a contributing factor.

[[Page 43601]]



                   Figure 4--Scenario Analysis of Costs Savings From Reductions in Separations
                                           [2015 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                    10-year, 7%     10-year, 3%
                                                                      Annual       discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
                                   Estimate One: 7,840 separations per year *
----------------------------------------------------------------------------------------------------------------
Separations Reduced by 30%......................................            $133            $940          $1,263
Separations Reduced by 17.5%....................................              78             550             739
Separations Reduced by 5%.......................................              22             157             210
----------------------------------------------------------------------------------------------------------------
                                    Estimate Two: 4,640 separations per year
----------------------------------------------------------------------------------------------------------------
Separations Reduced by 30%......................................              81             575             773
Separations Reduced by 17.5%....................................              47             336             452
Separations Reduced by 5%.......................................              14              96             129
----------------------------------------------------------------------------------------------------------------
* 7840 = 18961*0.5*0.8

    In addition to reducing the quantifiable costs associated with 
separations where financial distress contributed, the Department 
believes that the regulation will 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. As one commenter observed the 
Service member's ``mission can easily be jeopardized if he or she is 
worried about financial burdens back home.'' \322\ Additionally, the 
protections afforded to covered borrowers under the MLA might, over 
time, improve the Department's capabilities to retain Service members, 
offering further non-quantifiable benefits.\323\ 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.\324\
---------------------------------------------------------------------------

    \322\ See, e.g., The Military Coalition, Dec. 11, 2014, at 1.
    \323\ See, e.g., Military Officers Association of America, Dec. 
17, 2014, at 2 (observing that ``retention of highly qualified and 
experiences service members and their families is beneficial to the 
morale, well-being and readiness of the force, which in turn 
redounds to maintaining a strong national defense.'').
    \324\ Scott Carrell & Jonathan Zinman, In Harm's Way? Payday 
Loan Access and Military Personnel Performance (August 2014) at 
Sec.  6 (Conclusion), available at http://www.econ.ucdavis.edu/faculty/scarrell/payday.pdf (``Overall the results are consistent 
with DoD's assertion 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%.'').
---------------------------------------------------------------------------

6. Estimate of Amount of Transfer Payments
    The Department believes that the interest-rate limit and the 
corresponding provisions governing computation of the MAPR entails some 
costs to creditors, particularly creditors who might need to adjust 
their systems to compute the MAPR in accordance with the standards of 
the final rule. However, there are no reliable data that would allow 
the Department to develop a quantifiable estimate of the costs 
associated with compliance with the interest-rate limit and the 
provisions governing computation of the MAPR. In this regard, for 
example, the Associations assert that calculating the MAPR will be ``a 
significant challenge and costly,'' even in light of ``the 
sophisticated technology of today's world.'' \325\ To this point, the 
Associations provide the reports of ``initial inquiries with depository 
institutions'' suggesting that developing or, as appropriate, modifying 
computer systems ``would be extremely complicated and disruptive of the 
information technology schedules.'' \326\ Additionally, for ``[s]mall 
mid-sized depository institutions . . . [there are] few attractive 
options in the likely case that their third-party processor does not 
offer the capability'' to calculate the MAPR and waive fees, as 
necessary.\327\ In contrast, one such third-party processor suggests 
that ``the calculation [of the MAPR] would still be performed during 
the statement billing cycle with remediation calculations made on those 
accounts exceeding the 36% MAPR.'' \328\ Neither comment provides data 
or an estimate of the costs associated with making the adjustments to 
processing systems or the ongoing costs of calculating the MAPR or 
waiving fees, as may be necessary. Thus, for the purposes of this 
analysis under E.O. 12866 and E.O. 13563, the Department has assessed 
the effects of the interest-rate limit only in terms of the amount of 
the transfer payments relating to certain consumer credit products.
---------------------------------------------------------------------------

    \325\ Associations, Dec. 18, 2014, at 36.
    \326\ Associations, Dec. 18, 2014, at 36.
    \327\ Associations, Dec. 18, 2014, at 37.
    \328\ TSYS, Dec. 24, 2014, at 2.
---------------------------------------------------------------------------

    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 E.O. 12866 and E.O. 
13563, the Department has estimated the amounts involved in these 
payments.\329\ 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.\330\
---------------------------------------------------------------------------

    \329\ One commenter argues that the Department's estimate of the 
cost of modifying the existing rule should account for credit that 
would not be extended to covered borrowers because a creditor would 
choose to not extend credit in compliance with the interest-rate 
limit. This commenter states estimates that the annual ``cost'' to 
service members of this forgone credit availability would be $70 
million each year, with a 10-year cost ``somewhere between $355.8 
million (7% discount) and $520.9 million (3% discount).'' Just 
Military Loans, Dec. 26, 2014, at 9. The Department acknowledges 
that reduction of availability of credit is a cost, but is not able 
to quantify this cost at this time due to lack of data.
    \330\ By using estimates related to these four credit products, 
the Department does not assume that these types of credit are the 
only credit products on the market today and used by Service 
members. For example, a comment from the National Pawnbrokers 
Association describes pawn transactions that also would be covered 
by the final rule, suggesting that subjecting these transactions to 
the interest-rate limit would result in ``smaller-dollar returns 
against each dollar's worth of collateral value'' or for pawnbrokers 
purchase items outright, rather than loaning against them, in 
transactions with Service members (Nat'l Pawnbrokers Assoc., Nov. 
24, 2014, at 10). Rather, the Department focuses on credit card 
products, payday loans, auto title loans, and installment loans 
because these products together represent much of the market for 
credit with a cost in excess of 36 percent MAPR and data on the cost 
of these products is readily available.

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

[[Page 43602]]

    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 Sec.  
232.4(b). Taking into account the exclusion for bona fide fees under 
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 also carry a credit 
insurance or debt cancellation product that would cause the MAPR to 
exceed the 36-percent threshold.
    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,\331\ revolving an average balance of $5,000.\332\ 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.\333\ Assuming that a borrower makes only the minimum payment 
each month on this card while paying 28 percent APR, 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 10 years.\334\
---------------------------------------------------------------------------

    \331\ Blue Star Families, The 2013 Military Family Lifestyle 
Survey 34 (May 2013).
    \332\ FINRA Investor Education Foundation, Financial Capability 
in the United States, Military Survey (October 2010).
    \333\ 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).
    \334\ 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 existing rule, 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 final rule, 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.\335\
---------------------------------------------------------------------------

    \335\ 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 $6.72 million per year.\336\ Over 10 years, the 
discounted amount that would be transferred would be between $53.91 
million (at a 7 percent discount rate) and $60.92 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \336\ 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 $2.96 million per year.\337\ Over 10 years, the 
discounted amount that would be transferred would be between $23.72 
million (at a 7 percent discount rate) and $26.80 million (at a 3 
percent discount rate).
---------------------------------------------------------------------------

    \337\ 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 are subject to the final 
rule, 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 
will be covered under the rule.\338\ 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 rule.
---------------------------------------------------------------------------

    \338\ 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); Pew, Payday Lending in America: Who 
Borrowers, Where They Borrow, and Why 4 (July 2012).
---------------------------------------------------------------------------

    In order to estimate the amount that will 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 
10 transactions per year, each borrowed for 14 days,\339\ 0.3

[[Page 43603]]

percent of Service members use auto title loans with a median APR of 
300 percent,\340\ and 7 percent of Service members use installment 
loans with a median APR of 80 percent.\341\
---------------------------------------------------------------------------

    \339\ 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 existing 
rule.
    \340\ 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).
    \341\ 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 will be transferred is $534 
per borrower per year for payday loans.\342\ Assuming that 4.9 percent 
of Service members use payday loans each year, the Department estimates 
that the rule will result in transfer payments of $36.59 million per 
year relating to the domestic payday lending industry.\343\ Over 10 
years, the Department estimates that the amount of the transfer 
payments relating to the domestic payday lending industry will be 
between $222.80 million (at a 7 percent discount rate) and $312.10 
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 will be $51.95 million per year.\344\ Over 10 years, 
the Department estimates that the transfer payments under the 
regulation will be between $316.35 million (at a 7 percent discount 
rate) and $443.14 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \342\ The Department assumes that the average loan amount is 
$392, 10 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 existing rule ($588), and the permissible cost of a 
loan complying with the 36 percent interest rate limitation ($54).
    \343\ 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).
    \344\ 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.\345\ The Department estimates that the transfer 
payments relating to these offshore creditors will be between $2.56 
million and $3.64 million per year. Over 10 years, the Department 
estimates that the total amount of the transfer payments relating to 
these offshore creditors will be between $15.60 million (at a 7 percent 
discount rate, assuming 4.9 percent usage) and $31.02 million (at a 3 
percent discount rate, assuming 7 percent usage).
---------------------------------------------------------------------------

    \345\ 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 will 
lead to transfer payments relating to the auto title lending industry 
of $0.86 million per year.\346\ Over 10 years, the Department estimates 
that the total amount of the transfer payments relating to auto title 
lenders would be between $5.62 million (at a 7 percent discount rate) 
and $7.36 million (at a 3 percent discount rate).
---------------------------------------------------------------------------

    \346\ 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 
existing 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 will result in transfer payments relating to the 
domestic installment lending industry of $59.81 million per year.\347\ 
Over 10 years, the Department estimates that the total amount of 
transfer payments from installment-loan creditors will be between 
$364.23 million (at a 7 percent discount rate) and $510.21 million (at 
a 3 percent discount rate).
---------------------------------------------------------------------------

    \347\ The Department assumes that a typical loan is $1,000 and 
borrowed for two years. Under the existing rule with an APR of 80 
percent, the monthly payment is $85 per month, for a sum of payments 
of $2,032. Under the final rule 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.\348\ The 
Department estimates the regulation will result in transfer payments 
relating to these offshore creditors of approximately $4.19 million per 
year. Over 10 years, the total amount of transfer payments from these 
offshore creditors is estimated to be between $25.50 million (at a 7 
percent discount rate) and $35.71 million (at a 3 percent discount 
rate).
---------------------------------------------------------------------------

    \348\ 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 
will be between $100.22 million and $119.34 million per year; over 10 
years, the overall amount of these transfer payments will be between 
$616.01 million (assuming lower usage rates and a 7 percent discount 
rate) and $1.022 billion (assuming higher usage rates and a 3 percent 
discount rate). Of these overall amounts, between $6.75 million and 
$7.83 million of the transfer payments relate to offshore creditors, 
and between $41.10 million and $66.73 million over 10 years. The 
transfer payments from domestic creditors will be between $93.47 
million and $111.51 million per year; over 10 years, these transfer 
payments will be between $574.91 million (assuming lower usage rates 
and a 7 percent discount rate) and $954.90 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.

[[Page 43604]]



         Figure 5--Sensitivity Analysis: Amount of Transfer Payments Relating to the Interest-Rate Limit
                                           [2015 dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                  PV 10-year, 7%  PV 10-year, 3%
                                                                      Annual       discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
Payday
    (1) At 4.9% usage...........................................             $37            $223            $312
    (2) At 7% usage.............................................              52             316             443
Auto title......................................................               1               5               7
Installment.....................................................              60             364             510
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).................................             100             616             856
    High (7% payday, 7% cards)..................................             119             740           1,022
----------------------------------------------------------------------------------------------------------------

    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.
    Further, 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.\349\
---------------------------------------------------------------------------

    \349\ See, e.g., Air Force Aid Society, Nov. 14, 2014, at 1. In 
2013, the Air Force Aid Society provided $9 million in interest-free 
loans and $668,000 in grant assistance.
---------------------------------------------------------------------------

B. Congressional Review Act

    The Congressional Review Act establishes certain procedures for 
major rules, defined as those with similar major impacts. This final 
rule will have a major impact as that term is used under the 
Congressional Review Act.

C. Unfunded Mandates Reform Act (Title 10, U.S. Code, Chapter 25)

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires an 
agency to prepare a budgetary impact statement before promulgating a 
rule that includes a federal mandate that may result in the expenditure 
within any one year by state, local, and tribal governments, in the 
aggregate, or by the private sector of $100 million or more in 1995 
dollars updated annually for inflation.\350\ That threshold level is 
currently approximately $155 million.\351\ The Department certifies 
that this final rule 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 
inflation adjusted 1995 dollars in any one year.\352\
---------------------------------------------------------------------------

    \350\ 2 U.S.C. 1532.
    \351\ DOL, Bureau of Labor and Statistics, Consumer Price Index 
Inflation Calculator, available at: http://data.bls.gov/cgi-bin/cpicalc.pl.
    \352\ See analysis in section V.A. for calculations. The 
Department expects expenditure by the private sector of 
approximately $106 million in the first-year, phase-in period for 
setting up the required disclosures and optional procedure(s) for 
conducting covered-borrower checks. On an ongoing basis, the 
Department expects expenditure by the private sector of 
approximately $30 million to comply with the provision of the 
required disclosures and optional covered-borrower checks.
---------------------------------------------------------------------------

D. Regulatory Flexibility Act (Title 5, U.S. Code, Chapter 6)

    The Department certifies that this proposed regulation is not 
subject to the Regulatory Flexibility Act (``RFA'') \353\ because the 
regulation, if adopted as proposed, would not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \353\ 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 $38.5 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 $550 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.
    As detailed in Section V.A., the Department estimates the final 
rule might impose costs of approximately $106 million during the first 
year, as creditors adapt their systems to comply with the requirements 
of the rule. After the first year and on an ongoing basis, the annual 
cost to the economy is expected to be approximately $30 million. The 
first-year costs reflect the costs of revising disclosures to include 
the required statement of the MAPR and the costs of modifying lending 
systems (if needed) and procedures to take advantage of the optional 
methods to conduct covered-borrower checks that fit within the safe 
harbor afforded under Sec.  232.5(b). On an ongoing basis, the costs 
reflect the costs to creditors of providing the required disclosure--
generally, as part of standard form loan agreements--and the costs 
attributable to the use of the methods for conducting covered-borrower 
checks described in Sec.  232.5(b).
    In the Proposed Rule, the Department sought comment, particularly 
from potentially affected small businesses themselves, on the possible 
impact of the Proposed Rule on small businesses. The SBA Office of 
Advocacy observes that the Department ``underestimated the number of 
entities that might be

[[Page 43605]]

impacted.'' \354\ The Department's estimates are based on the size 
standards established by the SBA and the 2007 Economic Census, 
published by the U.S. Census Bureau; the SBA Office of Advocacy does 
not provide alternate estimates in its comment. The Department believes 
that relying on standards from the SBA and Census Bureau to assess the 
number of entities that fit the description of a ``small business 
entity'' and may be affected by the rule is appropriate. However, the 
Department is not able to estimate the portion of businesses within 
these size categories that offer credit with an MAPR in excess of the 
interest-rate limit of the MLA or that otherwise conflict with the MLA 
conditions. For a small-entity creditor engaged in lending activity 
that would not violate MLA when extending consumer credit, the creditor 
might choose to forgo the use of a method for conducting a covered-
borrower check described in Sec.  232.5(b). In this instance, the cost 
that could be attributable to the final rule would be limited to (in 
the first year) updating disclosures and (on an ongoing basis) 
providing the statement of the MAPR, which may be included as part of a 
loan agreement.
---------------------------------------------------------------------------

    \354\ SBA Office of Advocacy, Dec. 18, 2014, at 3.
---------------------------------------------------------------------------

    The SBA Office of Advocacy also suggests that ``requiring small 
entities to check every customer to determine if he or she is a 
[covered borrower] could become burdensome.'' \355\ Another commenter 
asserts that using the MLA Database ``would be a substantial cost 
burden on small businesses.'' \356\ Neither comment provides data in 
support of its assertions.
---------------------------------------------------------------------------

    \355\ SBA Office of Advocacy, Dec. 18, 2014, at 4.
    \356\ AFSA, Dec. 22, 2014, at 25.
---------------------------------------------------------------------------

    The final rule--like the Proposed Rule--does not require any 
business to determine whether a customer is a covered borrower. A 
creditor may choose to make such a determination in order to obtain the 
protection of the safe harbor in Sec.  232.5(b); 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 a 
procedure to determine whether a particular customer is a covered 
borrower.
    The Department believes that setting up the process to use 
information obtained from the MLA Database or using information in a 
consumer report obtained from a nationwide consumer reporting agency, 
as well as to timely create and maintain a record of that information 
will take each creditor 70 hours of labor time. The actual cost for 
each creditor will depend on that entity's business decisions and 
operations. For example, if nationwide consumer reporting agencies 
incorporate covered-borrower indicators into consumer reports, a 
creditor that already obtains a consumer report during the credit 
origination process might choose to use that indicator to conduct a 
covered-borrower check, and keep a record of that indicator, pursuant 
to Sec.  232.5(b). Another creditor, particularly one that does not 
already obtain consumer reports from a nationwide consumer reporting 
agency, may instead choose to use information obtained from the MLA 
Database, and keep a record of that indicator, pursuant to Sec.  
232.5(b). And a third creditor, particularly one that offers credit 
products that comply with the limitation under the MLA, may, as 
expressly permitted in Sec.  232.5(a), choose to forgo the use of a 
covered-borrower check described in Sec.  232.5(b).
    Nonetheless, assuming that each of the approximately 37,500 
creditors subject to the regulation establishes a process to conduct 
covered-borrower checks through a method provided in Sec.  232.5(b), 
and that each creditor will incur 70 hours of labor time in doing so, 
the Department estimates that the total costs relating to setting up 
the processes for one of those methods would be $84.02 million.\357\ 
The actual amount of time and the cost of the adjustment will depend on 
business decisions and operations. For example, a small creditor only 
originating loans in face-to-face transactions through a manual process 
may find that updating its procedures and training staff to query the 
MLA Database takes substantially less than 70 hours.
---------------------------------------------------------------------------

    \357\ The Department estimates that staff time to set up access 
to one of the safe harbor mechanism 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. DOL, 
Bureau of Labor and Statistics, Occupational Employment and Wages 
Table 1 (May, 2014) (mean hourly wage for data entry and information 
processing workers is $15.48; mean hourly wage for supervisors of 
office and administrative support workers is $26.15; mean hourly 
wage for legal counsel is $64.17). The Department estimates total 
wages to be approximately $64.63 million. The Department arrives at 
an estimated total cost by including an additional non-wage 
component of compensation of 30 percent of estimated wages.
---------------------------------------------------------------------------

    The Department also recognizes that certain costs may be particular 
to the type of creditor and practices in that market. For example, the 
National Pawnbrokers Associations shares the report of one member 
estimating that as many as 4,000 pawn stores across the country do not 
have computers and would, therefore, need to purchase such equipment in 
order to take advantage of the safe harbor in Sec.  232.5.\358\
---------------------------------------------------------------------------

    \358\ Nat'l Pawnbrokers Assoc., Nov. 24, 2014, at 14.
---------------------------------------------------------------------------

    On an ongoing basis, the Department estimates that using 
information obtained from the MLA Database will add approximately 60 
seconds to each new consumer credit transaction.\359\ The Department 
estimates that the total cost to all creditors for using information 
obtained from the MLA Database or information in consumer reports 
obtained from a nationwide consumer reporting agency and retaining 
records relating to those covered-borrower checks would be 
approximately $27.75 million per year.\360\ The actual cost for a small 
business of engaging in one of these optional methods to conduct a 
covered-borrower check depends on several factors, such as the number 
of customers that each business does business with or whether the small 
business regularly extends credit in a manner that could be 
inconsistent with the interest-rate limit or one or more of the other 
MLA conditions.
---------------------------------------------------------------------------

    \359\ The National Pawnbrokers Association shared the report of 
one member who found that querying the MLA Database took ``less than 
20 seconds from start to finish.'' (Nat'l Pawnbrokers Assoc., Nov. 
24, 2014, at 15). In contrast, AFSA shared the report of a ``small 
business'' that estimated that querying the MLA Database would take 
``about five to 10 minutes per loan application.'' (AFSA, Dec. 22, 
2014, at 7). And a comment submitted on behalf of certain credit 
card issuers suggested that checking the MLA Database could cause a 
``delay'' for the transaction in question and for ``the transactions 
of any other consumer in line behind that consumer seeking to engage 
in a transaction, even if the consumer is not apply for credit.'' 
(L. Chanin, Dec. 23, 2014, at 22). In light of these divergent 
estimates and the lack of other data, the Department elected to 
maintain its transaction time estimate from the Proposed Rule.
    \360\ The Department calculates an estimated wage cost of $21.35 
million by multiplying the expected number of transactions involving 
a single-record inquiry (100 million) by the mean hourly wage for 
financial tellers ($12.81) and the additional transaction time 
expected (1/60th of an hour) based on wage information in the DOL, 
Bureau of Labor and Statistics, Occupational Employment and Wages 
Table 1 (May, 2014). The Department arrives at a total cost estimate 
by including an additional non-wage component of compensation of 30 
percent of estimated wages.
---------------------------------------------------------------------------

    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 final rule would affect a small percentage 
of the consumers served by entities that could be creditors covered by 
this final rule.

[[Page 43606]]

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 final rule would not (for the purposes of the RFA) have a 
significant economic impact on a substantial number of small businesses 
because: (i) The cost for each business associated with updating 
disclosures is not substantial; (ii) the cost for each business of 
updating systems or procedures to use a method for conducting covered-
borrower checks described in Sec.  232.5(b) (if the business were to do 
so) is not substantial, and (iii) small businesses nonetheless have 
very few customers who are covered borrowers.

E. Paperwork Reduction Act (Title 45, U.S. Code, Chapter 35, Sub-
Chapter 1)

    The final rule contains information-collection requirements and has 
been submitted to OMB under the provisions of the Paperwork Reduction 
Act.\361\ The paperwork costs associated with this final rule are 
accounted for in the assessment under E.O. 12866 and E.O. 13563.
---------------------------------------------------------------------------

    \361\ 44 U.S.C. 3502, 3506-07.
---------------------------------------------------------------------------

    Title: Mandatory Loan Disclosure and Covered-Borrower Check as Part 
of Limitations on Terms of Consumer Credit Extended to Service Members 
and Their Dependents.
    Number of Respondents: 37,500.
    Responses per Respondent: Varies by type of respondent.
    Annual Responses: 238 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 (100 million); 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 disclosures, as well as a process for 
conducting covered-borrower checks and retaining records.
    Annual Burden Hours: 3,375,000 set-up burden hours in the first 
year; 2,000,000 ongoing burden hours each year.
    Needs and Uses: With respect to any extension of consumer credit to 
a covered borrower, a creditor is required to provide to the borrower a 
statement of the MAPR. In approximately 238 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, as permitted under Sec.  232.5(b) and, in the 
event that the information 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 so obtained.
    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 disclosure for each transaction involving consumer 
credit; one covered-borrower check for each transaction involving 
consumer credit.
    Respondents' Obligation: Mandatory loan disclosures; optional use 
of information from agency database or optional use of a consumer 
report obtained from a nationwide consumer reporting agency, and 
subsequent record retention.

F. Executive Order 13132 Federalism

    Executive Order 13132 (``E.O. 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 final rule, in sections III and IV, the 
rule revises the corresponding section of the Department's existing 
rule 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 final rule does 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 determines that the final rule does not have 
any federalism implications that warrant the preparation of a 
Federalism Assessment in accordance with E.O. 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 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.
232.13 Compliance 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 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 Sec.  232.6(a)(1) 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.

[[Page 43607]]

Sec.  232.2  Applicability; examples.

    (a)(1) 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. Nothing in this part applies to a credit transaction or 
account relating to a consumer (which otherwise would be consumer 
credit) when the consumer no longer is a covered borrower.
    (2) Examples--(i) Covered borrower. Consumer A is a member of the 
armed forces but not serving on active duty, and holds an account for 
closed-end credit with a financial institution. After establishing the 
closed-end credit account, Consumer A is ordered to serve on active 
duty, thereby becoming a covered borrower, and soon thereafter 
separately establishes an open-end line of credit for personal purposes 
(which is not subject to any exception or temporary exemption) with the 
financial institution. This part applies to the open-end line of 
credit, but not to the closed-end credit account.
    (ii) Not a covered borrower. Same facts as described in paragraph 
(a)(2)(i) of this section. One year after establishing the open-end 
line of credit, Consumer A ceases to serve on active duty. This part 
never did apply to the closed-end credit account, and because Consumer 
A no longer is a covered borrower, this part no longer applies to the 
open-end line of 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.

    As used in this part:
    (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 a dwelling, including a transaction to finance the 
purchase or initial construction of the 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;
    (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; and
    (v) Any credit transaction or account for credit for which a 
creditor determines that a consumer is not a covered borrower by using 
a method and by complying with the recordkeeping requirement set forth 
in Sec.  232.5(b).
    (g)(1) 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 paragraph (g)(2) of this section) or a dependent (as defined 
in paragraph (g)(3) of this section) of a covered member.
    (2) 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).
    (3) 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).
    (4) Notwithstanding paragraph (g)(1) of this section, covered 
borrower does not mean a consumer who (though a covered borrower at the 
time he or she became obligated on a consumer credit transaction or 
established an account for consumer credit) no longer is a covered 
member (as defined in paragraph (g)(2) of this section) or a dependent 
(as defined in paragraph (g)(2) of this section) of a covered member.
    (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), (f), and (g), 
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) Federal credit union has the same meaning as ``Federal credit 
union'' in the Federal Credit Union Act (12 U.S.C. 1752(1)).
    (n) Finance charge has the same meaning as ``finance charge'' in 
Regulation Z.
    (o) Insured depository institution has the same meaning as 
``insured depository institution'' in the Federal Deposit Insurance Act 
(12 U.S.C. 1813(c)).
    (p) 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).
    (q) 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.
    (r) Person means a natural person or organization, including any 
corporation, partnership, proprietorship, association,

[[Page 43608]]

cooperative, estate, trust, or government unit.
    (s) 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 part 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.
    (t) Short-term, small amount loan means a closed-end loan that is--
    (1) Subject to and made in accordance with a Federal law (other 
than 10 U.S.C. 987) that expressly limits the rate of interest that a 
Federal credit union or an insured depository institution may charge on 
an extension of credit, provided that the limitation set forth in that 
law is comparable to a limitation of an annual percentage rate of 
interest of 36 percent; and
    (2) Made in accordance with the requirements, terms, and conditions 
of a rule, prescribed by the appropriate Federal regulatory agency (or 
jointly by such agencies), that implements the Federal law described in 
paragraph (t)(1) of this section, provided further that such law or 
rule contains--
    (i) A fixed numerical limit on the maximum maturity term, which 
term shall not exceed 9 months; and
    (ii) A fixed numerical limit on any application fee that may be 
charged to a consumer who applies for such closed-end loan.


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:
    (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) Any credit insurance premium or fee, any charge for single 
premium credit insurance, any fee for a debt cancellation contract, or 
any fee for a debt suspension agreement;
    (ii) Any fee for a credit-related ancillary product sold in 
connection with the credit transaction for closed-end credit or an 
account 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, other than an application fee charged by a Federal 
credit union or an insured depository institution when making a short-
term, small amount loan, provided that the application fee is charged 
to the covered borrower not more than once in any rolling 12-month 
period; 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) through (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) and (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) and (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 (d) applies only to the 
extent that the charge by the creditor is a bona fide fee, and must be 
reasonable 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--
    (i) Any credit insurance premium or fee, including any charge for 
single premium credit insurance, any fee for a debt cancellation 
contract, or any fee for a debt suspension agreement; or
    (ii) Any fee for a credit-related ancillary product sold in 
connection with the credit transaction for closed-end credit or an 
account for open-end credit.
    (3) Standards relating to bona fide fees --(i) Like-kind fees. To 
assess whether a bona fide fee is reasonable 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. Conversely,

[[Page 43609]]

when assessing a foreign transaction fee, that fee may not be compared 
to a cash advance fee because the foreign transaction fee involves the 
service of exchanging the consumer's currency (e.g., a reserve 
currency) for the local currency demanded by a merchant for a good or 
service, and does not involve the provision of cash to the consumer.
    (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 of whose U.S. 
credit cards in force is at least $3 billion in an outstanding balance 
(or at least $3 billion in loans on U.S. credit card accounts initially 
extended by the creditor) at any time during the 3-year period 
preceding the time such average is computed.
    (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) Indicia of reasonableness for a participation fee. An amount 
of a bona fide fee for participation in a credit card account may be 
reasonable under paragraph (d)(1) of this section if that amount 
reasonably corresponds to the credit limit in effect or credit made 
available when the fee is imposed, to the services offered under the 
credit card account, or to other factors relating to the credit card 
account. For example, even if other creditors typically charge $100 per 
annum for participation in credit card accounts, a $400 fee 
nevertheless may be reasonable 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) Effect of charging fees on bona fide fees--(i) Bona fide fees 
treated separately from charges for credit insurance products or 
credit-related ancillary products. If a creditor imposes a fee 
described in paragraph (c)(1) of this section and imposes a finance 
charge to a covered borrower, the total amount of the fee(s) and 
finance charge(s) shall be included in the MAPR pursuant to paragraph 
(c) of this section, and the imposition of any fee or finance charge 
described in paragraph (c)(1) of this section shall not affect whether 
another type of fee may be excluded as a bona fide fee under this 
paragraph (d).
    (ii) Effect of charges for non-bona fide fees. If a creditor 
imposes any fee (other than a periodic rate or a fee that must be 
included in the MAPR pursuant to paragraph (c)(1) of this section) that 
is not a bona fide fee and imposes a finance charge to a covered 
borrower, the total amount of those fees, including any bona fide fees, 
and other finance charges shall be included in the MAPR pursuant to 
paragraph (c) of this section.
    (iii) Examples. (A) In a credit card account under an open-end (not 
home-secured) consumer credit plan during a given billing cycle, 
Creditor A imposes on a covered borrower a fee for a debt cancellation 
product (as described in paragraph (c)(1)(i) of this section), a 
finance charge (as described in paragraph (c)(1)(iii)(A)), and a bona 
fide foreign transaction fee that qualifies for the exclusion under 
this paragraph (d). Only the fee for the debt cancellation product and 
the finance charge must be included when calculating the MAPR.
    (B) In a credit card account under an open-end (not home-secured) 
consumer credit plan during a given billing cycle, Creditor B imposes 
on a covered borrower a fee for a debt cancellation product (as 
described in paragraph (c)(1)(i) of this section), a finance charge (as 
described in paragraph (c)(1)(iii)(A)), a bona fide foreign transaction 
fee that qualifies for the exclusion under this paragraph (d), and a 
bona fide, but unreasonable cash advance fee. All of the fees--
including the foreign transaction fee that otherwise would qualify for 
the exclusion under this paragraph (d)--and the finance charge must be 
included when calculating the MAPR.
    (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  Optional identification of covered borrower.

    (a) No restriction on method for covered-borrower check. A creditor 
is permitted to apply its own method to assess whether a consumer is a 
covered borrower.
    (b) Safe harbor--(1) 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 
paragraph (b).
    (2) Methods to check status of consumer--(i) Department database--
(A) In general. To determine whether a consumer is a covered borrower, 
a creditor may verify the status of a consumer by using information 
relating to that consumer, if any, obtained directly or indirectly from 
the database maintained by the Department, available at https://www.dmdc.osd.mil/mla/welcome.xhtml. A search of the Department's 
database requires the entry of the consumer's last name, date of birth, 
and Social Security number.
    (B) Historic lookback prohibited. At any time after a consumer has 
entered into a transaction or established an account involving an 
extension of credit, a creditor (including an assignee) may not, 
directly or indirectly, obtain any information from any database 
maintained by the Department to ascertain whether a consumer had been a 
covered borrower as of the date of that transaction or as of the date 
that account was established.
    (ii) Consumer report from a nationwide consumer reporting agency. 
To determine whether a consumer is a covered borrower, a creditor may 
verify the status of a consumer by using a statement, code, or similar 
indicator describing that status, if any, contained in a consumer 
report obtained from a consumer reporting agency that compiles and 
maintains files on consumers on a nationwide basis, or a reseller of 
such a consumer report (as each of those terms is defined in the Fair 
Credit Reporting Act (15 U.S.C. 1681a) and any implementing regulation 
(12 CFR part 1022)).
    (3) Determination and recordkeeping; one-time determination 
permitted. A creditor who makes a determination regarding the status of 
a consumer by using one or both of the methods set forth in paragraph 
(b)(2) of this section 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 timely creates and 
thereafter maintains a record of the information so obtained. A 
creditor may make the determination described in this paragraph (b), 
and keep the record of that information obtained at that time, solely 
at the time--
    (i) A consumer initiates the transaction or 30 days prior to that 
time;
    (ii) A consumer applies to establish the account or 30 days prior 
to that time; or
    (iii) The creditor develops or processes, with respect to a 
consumer, a firm offer of credit that (among the criteria used by the 
creditor for the offer) includes the status of the

[[Page 43610]]

consumer as a covered borrower, so long as the consumer responds to 
that offer not later than 60 days after the time that the creditor had 
provided that offer to the consumer. If the consumer responds to the 
creditor's offer later than 60 days after the time that the creditor 
had provided that offer to the consumer, then the creditor may not rely 
upon its initial determination in developing or processing that offer, 
and, instead, may act on the consumer's response as if the consumer is 
initiating the transaction or applying to establish the account (as 
described in paragraph (b)(3)(i) or (ii) of this section).


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; and
    (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.
    (b) One-time delivery; multiple creditors. (1) The information 
described in paragraphs (a)(1) and (a)(3) 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, then only one of those creditors must provide the disclosures 
in accordance with this section. The creditors may agree among 
themselves which creditor may provide the information described in 
paragraphs (a)(1) and (a)(3) 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 specified credit transactions or accounts); 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) and (3) of 
this section in writing in a form the covered borrower can keep.
    (2) Oral disclosures. (i) In general. The creditor also shall 
orally provide the information required by paragraphs (a)(1) and (3) of 
this section.
    (ii) Methods to provide oral disclosures. A creditor may satisfy 
the requirement in paragraph (d)(2)(i) of this section if the creditor 
provides--
    (A) The information to the covered borrower in person; or
    (B) A toll-free telephone number in order to deliver the oral 
disclosures to a covered borrower when the covered borrower contacts 
the creditor for this purpose.
    (iii) Toll-free telephone number on application or disclosure. If 
applicable, the toll-free telephone number must be included on--
    (A) A form the creditor directs the consumer to use to apply for 
the transaction or account involving consumer credit; or
    (B) A written disclosure the creditor provides to the covered 
borrower, pursuant to paragraph (d)(1) of this section.
    (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, the term ``creditor'' means a person 
engaged in the business of

[[Page 43611]]

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 uses the title of a vehicle as security for the 
obligation involving the consumer credit, provided however, that for 
the purposes of this paragraph, the term ``creditor'' does not include 
a person that is chartered or licensed under Federal or State law as a 
bank, savings association, or credit union.
    (g) 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).
    (h) 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 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) In general. This regulation shall take effect October 1, 2015, 
except that, other than as provided in this section and in Sec.  
232.13(b)(1), nothing in this part shall apply to consumer credit that 
is extended to a covered borrower and consummated before October 3, 
2016.
    (b) Prior extensions of consumer credit. Consumer credit that is 
extended to a covered borrower and consummated any time between October 
1, 2007, and October 3, 2016, is subject to the definitions, 
conditions, and requirements of this part as were established by the 
Department and effective on October 1, 2007.
    (c) New extensions of consumer credit. Except as provided in 
paragraphs (d) and (e) of this section with respect to extensions of 
consumer credit under

[[Page 43612]]

paragraph (b) of this section (and except as permitted by Sec.  
232.13(b)(1)), the requirements of this part that are effective as of 
October 1, 2015, shall apply only to a consumer credit transaction or 
account for consumer credit consummated or established on or after 
October 3, 2016.
    (d) 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), took effect on January 2, 2014.
    (e) 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.


Sec.  232.13  Compliance dates.

    (a) In general. Except as provided in paragraph (c) of this 
section, a creditor must comply with the requirements of this part, as 
may be applicable, with respect to a consumer credit transaction or 
account for consumer credit consummated or established on or after 
October 3, 2016, not later than that date.
    (b) Safe harbors for identifying a covered borrower--(1) New safe 
harbors. Section 232.5 shall apply October 3, 2016.
    (2) Prior safe harbor valid until general compliance date. The 
provisions relating to the identification of a covered borrower set 
forth in Sec.  232.5(a) of the regulation established by the Department 
and effective on October 1, 2007 (including the interpretation by the 
Department that provides an exception from the safe harbor for the 
creditor's knowledge that the applicant is a covered borrower) shall 
remain in effect until October 3, 2016.
    (c) Limited exemption for credit card account; reservation of 
authority--(1) In general. Notwithstanding Sec.  232.3(f)(1) and 
subject to paragraph (c)(2) of this section, until October 3, 2017, 
consumer credit does not mean credit extended in a credit card account 
under an open-end (not home-secured) consumer credit plan.
    (2) Authority to issue an order to extend exemption. The Secretary, 
or an official of the Department duly authorized by the Secretary, may, 
by order, extend the expiration of the exemption set forth in paragraph 
(c)(1) of this section, until a date not later than October 3, 2018.

    Dated: July 13, 2015.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2015-17480 Filed 7-21-15; 12:00 pm]
 BILLING CODE 5001-06-P