Federal Register, Volume 80 Issue 140 (Wednesday, July 22, 2015)

[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\
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\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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
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\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\
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\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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.''
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\140\ The Department is aware of at least 16 creditors who hold
loans above the proposed asset threshold. See The Nilson Report,
Issue 1,025 (Sept. 2013) at 10 (listing 14 MasterCard and Visa
issuers with above $3 billion in outstanding loans mid-year 2013);
Discover Bank, Consolidated Reports on Condition and Income for A
Bank with Domestic Offices Only-- FFEIC 041 (July 30, 2013) at 17
(indicating that Discover held more than $49 billion in such loans);
and American Express Company, Consolidated Statements of Income
(July 17, 2013) at 13 (indicating that American Express held $54.6
billion in cardmember loans. These 16 creditors (who are not the
only creditors above the $3 billion threshold) hold over $582
billion in credit card loans or greater than 87 percent of the
market in 2013.
---------------------------------------------------------------------------

In order for a creditor to use the fee(s) charged by a credit card
issuer when computing an average, the credit card issuer must have met
the $3-billion threshold at any time during the 3-year period preceding
the date when the creditor computes the average. If the amount of the
creditor's own bona fide fee is less than or equal to the average of
the amount charged by those 5 or more credit card issuers who each
meets the $3-billion threshold, then the creditor's bona fide fee is
reasonable for the purposes of the exclusion.
Section 232.4(d)(3)(ii) sets a threshold of $3 billion in
outstanding credit card loans on U.S. credit card accounts held by a
credit card issuer (or at least $3 billion in loans on U.S. credit card
accounts initially extended by the creditor) in order for that issuer's
fees to be eligible for inclusion in an average calculated for the
purposes of compliance with the ``reasonable'' condition of 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.
---------------------------------------------------------------------------

The Department believes that all creditors who offer credit card
products to Service members and their dependents could readily
calculate whether each type of fee associated with those products may
fit within the safe harbor because data relating to the fees imposed by
other credit card issuers, as well as the amount of credit card loans
outstanding, is widely available. With regard to credit card fees, most
credit card issuers, particularly all of the largest issuers, make
complete contract terms on their current offerings freely available on
their Web sites as part of solicitations and applications for their
products.\142\ Indeed, subject to certain conditions, TILA, as amended
by the CARD Act, requires a creditor to maintain an internet site on
which the creditor must post its written agreement with a cardholder,
and must provide that agreement to the Bureau to be made publicly
available on the Bureau's site.\143\
---------------------------------------------------------------------------

\142\ See, e.g., the solicitations available at https://creditcards.chase.com.
\143\ 15 U.S.C. 1632(d).
---------------------------------------------------------------------------

With regard to the amount of outstanding credit card loans held by
a credit card issuer, issuers provide this information in both filings
to the Securities and Exchange Commission (SEC filings) and
Consolidated Reports of Condition and Income (Call Reports). Both SEC
filings \144\ and Call Reports \145\ are available online without
charge. In addition, the Department recognizes that data collected from
these and other information sources is compiled in commercially
available databases regularly used by financial institutions to track
the marketplace for credit card products and services, and the
Department believes that creditors should be permitted to reasonably
rely upon those industry-specific databases when computing an average
fee under Sec. 232.4(d)(3)(ii).
---------------------------------------------------------------------------

\144\ The SEC makes public filings available through its
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
Information on this system is available at http://www.sec.gov/edgar/aboutedgar.htm.
\145\ Call Reports for institutions insured by the FDIC can be
found on the Federal Financial Institutions Examination Council's
Web site, available at https://cdr.ffiec.gov/public/. Call Reports
for credit unions are available online through the NCUA's Web site,
available at http://researchcu.ncua.gov/Views/FindCreditUnions.aspx.
---------------------------------------------------------------------------

For example, a creditor seeking to determine whether another credit
card issuer could qualify as one of the 5 creditors for determining the
average fee under 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.
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\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\
---------------------------------------------------------------------------

\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\
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\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\
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\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\174\ See 12 CFR 1026.29, regarding state application for Bureau
exemption of a class of transactions within the state.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

(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).
---------------------------------------------------------------------------

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.'').
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

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

\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\
---------------------------------------------------------------------------

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

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\
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\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.
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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\
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\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.
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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.
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\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.''
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\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.
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
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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