[Federal Register Volume 81, Number 166 (Friday, August 26, 2016)]
[Rules and Regulations]
[Pages 58840-58846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20486]
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DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 232
[Docket ID: DOD-2013-OS-0133]
RIN 0790-ZA11
Military Lending Act Limitations on Terms of Consumer Credit
Extended to Service Members and Dependents
AGENCY: Under Secretary of Defense for Personnel and Readiness,
Department of Defense.
ACTION: Interpretive rule.
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SUMMARY: The Department of Defense (Department) is interpreting its
regulation implementing the Military Lending Act (the MLA). The MLA as
implemented by the Department, limits the military annual percentage
rate (MAPR) that a creditor may charge to a maximum of 36 percent,
requires certain disclosures, and provides other substantive consumer
protections on ``consumer credit'' extended to Service members and
their families. On July 22, 2015, the Department amended 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 (the July 2015
Final Rule). This interpretive rule provides guidance on certain
questions the Department has received regarding compliance with the
July 2015 Final Rule.
DATES: Effective Date: August 26, 2016.
FOR FURTHER INFORMATION CONTACT: Marcus Beauregard, 571-372-5357.
SUPPLEMENTARY INFORMATION:
I. Background and Purpose
In July, 2015, the Department of Defense (Department) issued a
final rule \1\ (the July 2015 Final Rule) amending its regulation
implementing the Military Lending Act (MLA) \2\ primarily for the
purpose of extending the protections of the MLA to a broader range of
closed-end and open-end credit products, rather than the limited credit
products that had been defined as ``consumer credit.'' \3\ Moreover,
among other amendments, the July 2015 Final Rule modified provisions
relating to the optional mechanism a creditor may use when assessing
whether a consumer is a ``covered borrower,'' modified the disclosures
that a creditor must provide to a covered borrower, and implemented the
enforcement provisions of the MLA.
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\1\ 80 FR 435560.
\2\ 10 U.S.C. 987.
\3\ 32 CFR 232.3(b) as implemented in a final rule published at
72 FR 50580 (Aug. 31, 2007).
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Subsequently, the Department received requests to clarify its
interpretation of points raised in the July 2015 Final Rule. The
Department is issuing this interpretive rule to inform the public of
its views. The Department has chosen to provide this guidance in the
form of a question and answer document to assist industry in complying
with the July 2015 Final Rule. This interpretive rule does not
substantively change the regulation implementing the MLA, but rather
merely states the Department's preexisting interpretations of an
existing regulation. Therefore, under 5 U.S.C. 553(b)(A), this
rulemaking is exempt from the notice and comment requirements of the
Administrative Procedure Act, and, pursuant to 5 U.S.C. 553(d)(2), this
rule is effective immediately upon publication in the Federal Register.
II. Interpretations of the Department
The following questions and answers represent official
interpretations of the Department on issues related to 32 CFR part 232.
For ease of reference, the following terms are used throughout this
document: MLA refers to the Military Lending Act (codified at 10 U.S.C.
987); MAPR refers to the military annual percentage rate, as defined in
32 CFR 232.3(p); TILA refers to the Truth in Lending Act (codified at
15 U.S.C. 1601 et seq.); Regulation Z refers to the regulation, and
interpretations thereof, issued by the Consumer Financial Protection
Bureau (or the Board of Governors of the Federal Reserve System, as
applicable) to implement TILA, as defined in 32 CFR 232.3(s); DMDC
refers to the Defense Manpower Data Center.
1. What types of overdraft products are within the scope of 32 CFR
232.3(f) defining ``consumer credit''?
Answer: The MLA regulation generally directs creditors to look to
provisions of TILA and its implementing regulation, Regulation Z, in
determining whether a product or service is considered ``consumer
credit'' for purposes of the MLA.\4\ Also, the supplementary
information to the July 2015 Final Rule discusses coverage of overdraft
products.
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\4\ The Department notes that the Consumer Financial Protection
Bureau may from time to time revise Regulation Z. See, e.g., 79 FR
77102 (Dec. 23, 2014) (proposing to revise the definition of finance
charge with respect to charges imposed in connection with certain
credit features offered in conjunction with prepaid card accounts).
It is the Department's intention that this part should wherever
possible be interpreted consistently with Regulation Z as it evolves
in order to harmonize the two regulations and thereby minimize
compliance burden.
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The MLA regulation defines ``consumer credit'' as credit offered or
extended to a covered borrower primarily for personal, family or
household purposes that is either subject to a finance charge or
payable by a written agreement in more than four installments, with
some exceptions. The exceptions include: Residential mortgage
transactions; purchase money credit for a vehicle or personal property
that is secured by the purchased vehicle or personal property; certain
transactions exempt from Regulation Z (not including transactions
exempt under 12 CFR 1026.29); and credit extended to non-covered
borrowers consistent with 32 CFR 232.5(b). Although coverage by the MLA
and the MLA regulation is not completely identical to that of TILA and
Regulation Z, the July 2015 Final Rule amends the definition of
consumer credit under the MLA to be more consistent with how credit is
defined under TILA. The supplementary information to the July 2015
Final Rule states:
As proposed, the Department is amending its regulation so that,
in general, consumer credit covered under the MLA would be defined
consistently with credit that for decades has been subject to TILA,
namely: Credit offered or extended to a covered borrower primarily
for personal, family, or household purposes, and that is (i) subject
to a finance charge or (ii) payable by a written agreement in more
than four installments.\5\
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\5\ 80 FR 43563 (footnotes omitted).
The MLA regulation also defines ``closed-end credit'' and ``open-
end credit'' with express references to the definitions of the same
terms in Regulation Z.
The supplementary information to the July 2015 Final Rule
illustrates how to apply these standards specifically with respect to
overdraft products and services.\6\ It states that consistent with
Regulation Z, an overdraft line of credit with a finance charge is a
covered consumer credit product when: It is offered to a covered
borrower; the credit extended by the creditor is primarily for
personal, family, or household purposes; it is used to pay an item that
overdraws an asset account and results in a fee or charge to the
covered borrower; and, the extension of credit
[[Page 58841]]
for the item and the imposition of a fee were previously agreed upon in
writing. The supplementary information further states that other types
of overdraft products not pursuant to a written agreement typically are
not covered 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.'' \7\
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\6\ 80 FR 43579-43580.
\7\ 80 FR 43580.
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Thus, whether or not a particular overdraft product or service is
``consumer credit'' under the MLA regulation depends on whether the
product or service meets each element of the definition of ``consumer
credit'' and whether an exception applies.
2. Does credit that a creditor extends for the purpose of purchasing
personal property, which secures the credit, fall within the exception
to ``consumer credit'' under 32 CFR 232.3(f)(2)(iii) where the creditor
simultaneously extends credit in an amount greater than the purchase
price?
Answer: No. Section 232.3(f)(1) defines ``consumer credit'' as
credit extended to a covered borrower primarily for personal, family,
or household purposes that is subject to a finance charge or payable by
written agreement in more than four installments. Section 232.3(f)(2)
provides a list of exceptions to paragraph (f)(1), including an
exception for any credit transaction that is expressly intended to
finance the purchase of personal property when the credit is secured by
the property being purchased. A hybrid purchase money and cash advance
loan is not expressly intended to finance the purchase of personal
property, because the loan provides additional financing that is
unrelated to the purchase. To qualify for the purchase money exception
from the definition of consumer credit, a loan must finance only the
acquisition of personal property. Any credit transaction that provides
purchase money secured financing of personal property along with
additional ``cash-out'' financing is not eligible for the exception
under Sec. 232.3(f)(2)(iii) and must comply with the provisions set
forth in the MLA regulation.
3. Under 32 CFR 232.4(b), are creditors permitted to waive fees or
periodic charges at the end of a billing cycle or earlier for open-end
credit, in order to prevent a borrower from being assessed a military
annual percentage rate (MAPR) in excess of 36 percent during that
billing cycle?
Answer: Yes. Section 232.4(b) requires that 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. In an open-end credit account, a covered
borrower's use of a line of credit might, under certain circumstances,
give rise to the imposition of a combination of fees and/or periodic
charges that would cause the MAPR to exceed the limit in Sec.
232.4(b). A creditor can comply with Sec. 232.4(b) by designing a
combination of periodic rates and fees that cannot possibly result in
an MAPR greater than 36 percent. Nevertheless, nothing in 32 CFR part
232 prohibits a creditor from complying by waiving fees or finance
charges, either in whole or in part, in order to reduce the MAPR to 36
percent or below in a given billing cycle. Thus, a creditor could
alternatively comply by not imposing charges in excess of 36 percent
MAPR that would otherwise be permitted under the credit agreement.
4. Are fees that a creditor is required to pay by law and passes
through to a covered borrower required to be included in the
calculation of the MAPR?
Answer: 32 CFR 232.4(c)(1) details the charges that must be
included in the calculation of the MAPR. Among the charges that must be
included are finance charges associated with the consumer credit.
Finance charges are defined by Sec. 232.3(n) to mean a ``finance
charge'' in Regulation Z. If such fees are considered ``finance
charges'' under Regulation Z, then such fees must be included in the
calculation of the MAPR, unless they are bona fide fees charged to a
credit card account that are excludable under Sec. 232.4(d). However,
if the fees are not ``finance charges'' under Regulation Z, then they
may be excluded from the calculation of the MAPR, provided they do not
qualify for any of the other categories of charges listed under Sec.
232.4(c)(1).
5. For open-end credit, what constitutes a situation where the MAPR
cannot be calculated because there is ``no balance'' in the billing
cycle under 32 CFR 232.4(c)(2)(ii)(B)?
Answer: Section 232.4(c)(2)(ii)(B) specifically provides that 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 for a
participation fee that complies with the limitations set forth in Sec.
232.4(c)(2)(ii)(B). Because the provision is tied to whether the MAPR
can be calculated based on whether there is a balance in the billing
cycle, creditors that impose fees or charges that are excluded from the
calculation of the MAPR during a particular billing cycle are not
subject to the limitations in Sec. 232.4(c)(2)(ii)(B) for that billing
cycle, as there would be no MAPR to calculate whether or not there was
a balance during the billing cycle. For example, if a creditor charged
a late fee for a late payment in accordance with its credit agreement
with the covered borrower and in compliance with Regulation Z, the
creditor may charge the fee, regardless of whether there is a balance
in the billing cycle, because a late fee is not among the charges that
are included in the calculation of the MAPR.
Furthermore, Sec. 232.4(c)(2)(ii)(A) states that the MAPR shall be
calculated following the rules set forth in 12 CFR 1026.14(c) and (d)
of Regulation Z. Thus, the reference in Sec. 232.4(c)(2)(ii)(B) to a
situation in which the MAPR cannot be calculated in a billing cycle,
because there is no balance, relates solely to the situation like the
one described in 12 CFR 1026.14(c)(2), which is the only provision in
12 CFR 1026.14(c) and (d) that describes the inability to calculate an
effective annual percentage rate when there is no balance in the
billing cycle. 12 CFR 1026.14(c)(2) discusses how to compute an
effective annual percentage rate when the charge imposed during the
billing cycle is or includes a minimum, fixed, or other charge not due
to the application of a periodic rate, other than a charge with respect
to any specific transaction during the billing cycle. Under 12 CFR
1026.14(c)(2), if there is no balance to which the charge is
applicable, an effective annual percentage rate cannot be determined
under the section. Similarly, Sec. 232.4(c)(2)(ii)(B) relates to when
finance charge imposed during the billing cycle is or includes a
minimum, fixed or other charge not due to the
[[Page 58842]]
application of a periodic rate, other than a charge with respect to a
specific transaction charge, and there is no balance to which the
charge is applicable.
6. Is a minimum interest charge that a creditor may charge a covered
borrower as part of a credit card account under an open-end (not home-
secured) consumer credit plan and that is generally disclosed in the
account-opening table under 12 CFR 1026.6(b)(2)(iii) eligible as a bona
fide fee excludable from the calculation of the MAPR?
Answer: Yes. 32 CFR 232.4(d)(1) provides that 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, provided it is a bona
fide fee and reasonable for that type of fee. A minimum interest charge
that a creditor will charge a covered borrower if the creditor charges
interest during a particular billing cycle for a credit card account
under an open-end (not home-secured) consumer credit plan is generally
required to be disclosed in the account-opening table under 12 CFR
1026.6(b)(2)(iii). Such a charge is not a periodic rate. Furthermore,
neither of the categories of fees that are ineligible for the exclusion
for bona fide fees (credit insurance premiums and fees for a credit-
related ancillary product) applies to this type of charge.
Consequently, a minimum interest charge that is generally disclosed in
the account-opening table under 12 CFR 1026.6(b)(2)(iii) (even if it
does not exceed the threshold for required disclosure in the account-
opening table under 12 CFR 1026.6(b)(2)(iii)) may be a bona fide fee
excludable from the calculation of the MAPR if it meets the conditions
for exclusion.
7. Under 32 CFR 232.4(d)(3)(ii), may creditors rely on commercially
compiled sources of information in conducting calculations necessary
for the conditional reasonable bona fide credit card fee safe harbor?
Answer: Generally, yes. The July 2015 Final Rule intends to provide
a firm, yet flexible, adaptable standard allowing credit card issuers
to exclude bona fide and reasonable credit card fees from the
calculation of the MAPR. Under the safe harbor set forth in Sec.
232.4(d)(3)(ii), creditors are allowed to exclude a reasonable bona
fide fee charged to a credit card account from the calculation of the
MAPR, where that 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. As the Department stated in the supplementary information to
the July 2015 Final Rule, the Department believes that information on
credit card fees imposed by large credit card issuers is widely
available. Moreover, the Department stated in the supplementary
information to the July 2015 Final Rule that the amount of outstanding
credit card loans is available in both Securities and Exchange
Commission filings as well as Call Reports. Nevertheless, nothing in 32
CFR part 232 prohibits a credit card issuer from relying on information
sources compiled in commercially available databases or other industry
sources in making safe harbor calculations. However, the safe harbor
under Sec. 232.4(d)(3)(ii) is available only if the amount of the fee
is actually less than or equal to an average amount of a fee for the
same or a substantially similar product or service charge 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.
8. Under 32 CFR 232.4(d), is it permissible to consider benefits
provided by credit card rewards programs in determining whether the
amount of a fee is (a) less than or equal to an average amount of a fee
for a substantially similar product or service for purposes of
comparison under the safe harbor and (b) reasonable overall?
Answer: Generally, yes. Section 232.4(d)(1) provides that for 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, provided it is a bona fide
fee and reasonable for that type of fee. Under Sec. 232.4(d)(3)(i),
whether a fee is reasonable is determined by comparison to fees
typically imposed by other creditors for the same or a substantially
similar product or service. Under Sec. 232.4(d)(3)(iii), whether a fee
is reasonable depends on other factors relating to the credit card
account. Section 232.4(d)(3)(iv) further clarifies that whether a
participation fee is reasonable may be determined in reference to
whether a credit card offers additional services or other benefits.
Moreover, the supplementary information to the July 2015 Final Rule
explains that ``the `reasonable' condition for a bona fide fee 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.'' \8\
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\8\ 80 FR 43585 (Jul. 22, 2015).
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Under the Department's flexibly applied conditional exclusion,
creditors may use any reasonable approach in identifying whether a fee
is substantially similar for purposes of comparison and reasonable
overall. Thus, the Department's policy, in this regard, permits a
creditor to consider whether the benefits provided by a rewards program
in determining whether a fee is reasonable overall. Moreover, creditors
may consider rewards program benefits in determining whether the amount
of a fee is less than or equal to an average amount of a fee for a
substantially similar product or service for purposes of the safe
harbor in Sec. 232.4(d)(3)(ii).
9. Under 32 CFR 232.5(b), is an assignee permitted to avail itself of a
covered borrower identification safe harbor if the assignee has
maintained the original creditor's record of a covered borrower check?
Answer: Yes. Under Sec. 232.5(b) a creditor may conclusively
determine whether credit is offered or extended to a covered borrower
by assessing the status of a credit applicant, in accordance with the
methods for checking the status of consumers discussed in Sec.
232.5(b)(2). A creditor's timely covered borrower check is legally
conclusive, so long as the creditor creates and thereafter maintains a
record of the consumer's covered borrower status. Under Sec.
232.3(i)(2) a creditor, by definition, includes the creditor's
assignee. Thus, the Department's policy is to extend the covered
borrower check safe harbor to a creditor's assignee, provided that the
assignee continues to maintain the record created by the creditor that
initially extended the credit.
[[Page 58843]]
10. Does the historic lookback provision of 32 CFR 232.5(b)(2)(B)
prevent creditors from adopting a risk management plan that includes
periodically screening credit portfolios to discover changes to covered
borrower status?
Answer: No. Section 232.5 explains the methods available to
creditors when determining a consumer's covered borrower status prior
to or at the time the parties enter into a transaction or an account is
created. The provision permits a creditor to use its own method to
assess covered borrower status, and it provides a safe harbor to a
creditor that employs either of two available methods: Using
information obtained directly or indirectly from the DMDC database; or
obtaining a consumer report from a nationwide consumer reporting agency
(or a reseller of the same) containing a statement, code, or similar
indicator describing that status. To benefit from the safe harbor
provision, a creditor must determine a consumer's covered borrower
status at or before the time of the transaction or the time an account
is established and make a record of the determination. Section
232.5(b)(2)(B) prohibits a creditor from accessing the DMDC database
after the time a consumer entered into a transaction or established an
account for a specific purpose, namely ``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.'' Therefore, the plain
language of the regulation does not prohibit a creditor or assignee
from accessing the DMDC database for other purposes, such as
determining whether a previously covered borrower retains that status.
However, as stated in Sec. 232.7, other State or Federal laws
providing greater protections to covered borrowers may apply to covered
transactions under the MLA. Creditors should ensure compliance with any
such laws that may apply to them and these transactions.
11. Does the particular internet address referenced in 32 CFR
232.5(b)(2) limit the availability of a safe harbor for a covered
borrower check conducted through alternative methods of accessing the
MLA database provided by the Department?
Answer: No. Under the safe harbor provided in Sec. 232.5(b)(1), a
creditor may conclusively determine whether credit is offered to a
covered borrower by assessing the status of a consumer using
information related to that consumer obtained from the database,
maintained by the DMDC, for that purpose. Section 232.5(b)(2)
references a uniform resource locator (URL), more commonly known as an
Internet address, as a convenience to assist the public in locating the
DMDC MLA database. However, that particular URL address itself does not
serve as a restriction on the method through which the DMDC MLA
database is accessed. For technological reasons, the Department may
from time to time revise the DMDC MLA URL through providing notice on
the DMDC MLA Web page. Therefore, a creditor who makes a determination
regarding the status of a consumer by accessing the database maintained
by the DMDC through a URL provided by the DMDC that is different from
the one specifically referenced in Sec. 232.5(b)(2) may still take
advantage of the safe harbor in Sec. 232.5(b)(1), so long as the
creditor timely creates and thereafter maintains a record of the
information so obtained as provided in Sec. 232.5(b)(3).
Furthermore, the Department is currently developing a pilot project
in collaboration with several financial service providers that
anticipate a large volume of covered borrower checks. In this pilot
project, the Department is experimenting with a direct connection that
may improve access to the DMDC database for the financial services
industry. This direct connection pilot project accesses the same DMDC
database available through an internet query. A creditor may verify the
status of a consumer by using the database maintained by the Department
for that purpose, even though the creditor uses a method of accessing
that database provided by the Department other than the particular URL
listed in Sec. 232.5(b)(2). Thus, a creditor who makes a determination
regarding the status of a consumer under Sec. 232.5(b)(2) by
participating in the Department's direct connection pilot project (or a
similar form of access should it be provided by the Department at a
future date) is deemed 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 as provided in Sec.
232.5(b)(3).
12. How may a creditor orally provide the payment obligation disclosure
required under 32 CFR 232.6(a)(3) to meet the requirements of 32 CFR
232.6(d)(2)?
Answer: Section 232.6(a)(3) requires a creditor to provide to a
covered borrower, before or at the time the borrower becomes obligated
on the transaction or establishes an account for the consumer credit, a
clear description of the payment obligation of the covered borrower, as
applicable. A payment schedule (in the case of closed-end credit) or an
account-opening disclosure (in the case of open-end credit) provided
pursuant to the requirement to provide Regulation Z disclosures
satisfies this obligation. Therefore, a creditor may orally provide the
information in a payment schedule or an account-opening disclosure to a
covered borrower. However, an oral recitation of the payment schedule
or the account-opening disclosure is not the only way a creditor may
comply with Sec. 232.6(a)(3). A creditor may also orally provide a
clear description of the payment obligation of the covered borrower by
providing a general description of how the payment obligation is
calculated or a description of what the borrower's payment obligation
would be based on an estimate of the amount the borrower may borrow.
For example, a creditor could generally describe how minimum payments
are calculated on open-end credit plans issued by the creditor and then
refer the covered borrower to the written materials the borrower will
receive in connection with opening the plan. Alternatively, a creditor
could choose to generally describe borrowers' obligations to make a
monthly, bi-monthly, or weekly payment as the case may be under the
borrowers' agreements.
Neither the MLA nor the MLA regulation specifies particular content
or format for the requirement of a clear, oral description of the
payment obligation. Also, nothing in the MLA or the MLA regulation
requires that the clear description of the payment obligation provided
in writing must be the same as the oral disclosure, provided that both
disclosures are clear and accurate. As explained in the supplementary
information to the Department's July 2015 Final Rule, the Department's
approach has been to interpret the MLA's oral disclosure requirement in
a manner that provides creditors ``straightforward mechanisms'' that
afford ``latitude to develop the same (or consistent) systems to orally
provide the required disclosures--regardless of the particular context
. . .'' \9\ The requirement of a clear, oral payment obligation
disclosure has sufficient breadth that creditors may choose a variety
of acceptable oral disclosure compliance strategies. Thus, under the
Department's approach, a generic oral description of the payment
obligation may be provided, even though the disclosure is the same for
borrowers
[[Page 58844]]
with a variety of consumer credit transactions or accounts.
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\9\ 80 FR 43588.
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13. If a creditor chooses to provide the information that is required
to be provided orally by providing a toll-free telephone number,
consistent with 32 CFR 232.6(d)(2)(ii)(B), when must the information be
available to the borrower?
Answer: Section 232.6(d)(2) requires a statement of the MAPR and a
clear description of the covered borrower's payment obligation to be
provided to the covered borrower orally. Creditors may satisfy this
requirement by providing the information to the covered borrower in
person or through a toll-free telephone number. If the creditor decides
to provide the borrower with a toll-free telephone number, the toll-
free telephone number must be provided on i) a form the creditor
directs the consumer to use to apply for the transaction or account, or
ii) the written disclosure of the information that is required under
Sec. 232.6(d)(1). Since Sec. 232.6(d)(2) permits creditors to provide
oral disclosures by providing a toll-free telephone number, such
information must be available from the time the creditor provides the
toll-free telephone number. The difficulty of providing this
information in a timely way through a toll-free telephone system is
mitigated by the Department's interpretation of mandatory oral
disclosures as allowing for a nonnumeric statement of the MAPR and a
generic, clear description of the payment obligation. See Sec.
232.6(c) and Question and Answer #12 of these Interpretations. Oral
disclosures provided through a toll-free telephone system need only be
available under Sec. 232.6(d)(2)(ii)(B) for a duration of time
reasonably necessary to allow a covered borrower to contact the
creditor for the purpose of listening to the disclosure.
14. In circumstances where Regulation Z allows a creditor to provide
disclosures after the borrower has become obligated on a transaction
(as in the case of purchase orders or requests for credit made by mail,
telephone, or fax), does the MLA provide for similarly delayed
disclosure?
Answer: Yes. 32 CFR 232.6(a) states that a creditor shall provide
mandatory loan disclosures, including ``any disclosure required by
Regulation Z,'' to a covered borrower ``before or at the time the
borrower becomes obligated on the transaction or establishes an account
for the consumer credit. . .'' Section 232.6(a)(2) further states that
``any disclosure required by Regulation Z . . . shall be provided only
in accordance with the requirements of Regulation Z that apply to that
disclosure...'' In certain instances Regulation Z allows a creditor to
provide a disclosure after the borrower has become obligated on a
transaction, as in the case of purchase orders or requests for credit
made by mail, telephone, or fax under 12 CFR 1026.17(g). The MLA
regulation's general timing requirement does not override more specific
disclosure timing provisions in Regulation Z. The requirement in Sec.
232.6(a) that any disclosure required by Regulation Z be provided only
in accordance with the requirements of Regulation Z does not amount to
a requirement that MLA-specific disclosures be separately provided to
borrowers in advance of TILA disclosures. Thus, the disclosures
required in Sec. 232.6(a) may be provided at the time prescribed in
Regulation Z.
15. Under 32 CFR 232.8, within a single credit agreement may creditors
permissibly use a ``savings clause'' that excludes covered borrowers
from prohibited notice, waiver, arbitration, or other terms that would
otherwise be applicable to non-covered borrowers?
Answer: Yes. Section 232.8 makes it unlawful for any creditor to
extend consumer credit in which the credit agreement imposes on a
covered borrower a proscribed term or provision listed in Sec. 232.8.
However, nothing in the MLA regulation restricts the ability of
creditors to impose on non-covered borrowers those provisions
proscribed under Sec. 232.8 for covered borrowers. Along these lines,
the supplementary information in the July 2015 Final Rule explains that
the Department ``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.'' \10\ Under the MLA, a
creditor may include a proscribed term under Sec. 232.8, such as a
mandatory arbitration clause, within a standard written credit
agreement with a covered borrower, provided that the agreement includes
a contractual ``savings'' clause limiting the application of the
proscribed term to only non-covered borrowers, consistent with any
other applicable law.
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\10\ 80 FR 43587 n. 238.
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16. Does the limitation in Sec. 232.8(e) on a creditor using a check
or other method of access to a deposit, savings, or other financial
account maintained by the covered borrower prohibit the borrower from
repaying a credit transaction by check or electronic fund transfer?
Answer: No. As a general proposition the prohibition of a
creditor's use of a check or other method of access in Sec. 232.8(e)
does not in any way imply that a creditor cannot be paid. In no case
does paragraph (e) prevent covered borrowers from tendering a check or
authorizing access to a deposit, savings, or other financial account to
repay a creditor. Section 232.8(e) also does not prohibit a covered
borrower from authorizing automatically recurring payments, provided
that such recurring payments comply with other laws, such as the
Electronic Fund Transfer Act and its implementing regulations,
including 12 CFR 1005.10, as applicable.
In contrast, Sec. 232.8(e) prohibits a creditor from using the
borrower's account information to create a remotely created check or
remotely created payment order in order to collect payments on consumer
credit from a covered borrower. Similarly, a creditor may not use a
post-dated check provided at or around the time credit is extended that
deprives the borrower of control over payment decisions, as is common
in certain payday lending transactions.
Section 232.8(e)(1) and (2) further clarify that covered borrowers
may tender checks and authorize electronic fund transfers by specifying
permissible actions creditors may take to secure repayment by covered
borrowers. The exceptions address cases where a creditor requires a
covered borrower to provide repayment in a certain way. Specifically,
under Sec. 232.8(e)(1), a creditor may require an electronic fund
transfer to repay a consumer credit transaction, unless otherwise
prohibited by law. The Department notes that 12 CFR 1005.10(e)(1)
prohibits anyone from conditioning an extension of credit to a consumer
on the consumer's repayment by preauthorized electronic fund transfers
(except for credit extended under an overdraft credit plan or extended
to maintain a specified minimum balance in the consumer's account).
However, a preauthorized electronic fund transfer is defined under 12
CFR 1005.2(k) as an electronic fund transfer authorized in advance to
recur at substantially regular intervals.
In addition, Sec. 232.8(e)(2) clarifies that a creditor is
permitted to require direct deposit of the consumer's salary as a
condition of eligibility for consumer
[[Page 58845]]
credit, unless otherwise prohibited by law. While Sec. 232.8(g)
prohibits a creditor from requiring as a condition for the extension of
consumer credit that the covered borrower establish an allotment to
repay an obligation, the regulation does not apply this restriction to
a ``military welfare society'' or a ``service relief society'' as
defined in 37 U.S.C. 1007(h)(4).
17. Does the limitation in Sec. 232.8(e) on a creditor using a check
or other method of access to a deposit, savings, or other financial
account maintained by the covered borrower prohibit the borrower from
granting a security interest to a creditor in the covered borrower's
checking, savings or other financial account?
Answer: No. The prohibition in Sec. 232.8(e) does not prohibit
covered borrowers from granting a security interest to a creditor in
the covered borrower's checking, savings, or other financial account,
provided that it is not otherwise prohibited by applicable law and the
creditor complies with the MLA regulation including the limitation on
the MAPR to 36 percent. As discussed in Question and Answer #16 of
these Interpretations, Sec. 232.8(e) prohibits a creditor from using
the borrower's account information to create a remotely created check
or remotely created payment order in order to collect payments on
consumer credit from a covered borrower or using a post-dated check
provided at or around the time credit is extended.
Section 232.8(e)(3) further clarifies that covered borrowers may
convey security interests in checking, savings, or other financial
accounts by describing a permissible security interest granted by
covered borrowers. Thus, for example, a covered borrower may grant a
security interest in funds deposited in a checking, savings, or other
financial account after the extension of credit in an account
established in connection with the consumer credit transaction.
18. Does the limitation in Sec. 232.8(e) on a creditor using a check
or other method of access to a deposit, savings, or other financial
account maintained by the covered borrower prohibit a creditor from
exercising a statutory right to take a security interest in funds
deposited within a covered borrower's account?
Answer: No. Under certain circumstances federal or state statutes
may grant creditors statutory liens on funds deposited within covered
borrowers' asset accounts. For example, under 12 U.S.C. 1757(11)
federal credit unions may ``enforce a lien upon the shares and
dividends of any member, to the extent of any loan made to him and any
dues or charges payable by him.'' As discussed in Question and Answer
#16 of these Interpretations, Sec. 232.8(e) serves to prohibit a
creditor from using the borrower's account information to create a
remotely created check or remotely created payment order in order to
collect payments on consumer credit from a covered borrower or using a
post-dated check provided at or around the time credit is extended.
Section 232.8(e)(3) describes a permissible activity under Sec.
232.8(e). However, the fact that Sec. 232.8(e)(3) specifies a
particular time when a creditor may take a security interest in funds
deposited in an account does not change the general effect of the
prohibition in Sec. 232.8(e). Therefore, Sec. 232.8(e) does not
impede a creditor from exercising a statutory right to take a security
interest in funds deposited in an account at any time, provided that
the security interest is not otherwise prohibited by applicable law and
the creditor complies with the MLA regulation, including the limitation
on the MAPR to 36 percent.
19. Under 32 CFR 232.3(f)(2)(ii) and 232.8(f) what methods of
transportation are included within the definition of a ``vehicle''?
Answer: For purposes of the MLA, the term ``vehicle'' means any
self-propelled vehicle primarily used for personal, family, or
household purposes for on-road transportation. The term does not
include motor homes, recreational vehicles (RVs), golf carts, or motor
scooters.
III. Regulatory Impact
Executive Order 12866, ``Regulatory Planning and Review'' and Executive
Order 13563, ``Improving Regulation and Regulatory Review''
Executive Orders 13563 and 12866 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
It has been determined that this is not a significant rule. This
interpretive rule will not have an annual effect of $100 million or
more on the economy, or adversely affect productivity, competition,
jobs, the environment, public health or safety, or State or local
governments. This rulemaking will not interfere with an action taken or
planned by another agency, or raise new legal or policy issues.
Finally, this rulemaking will not alter the budgetary impacts of
entitlements, grants, user fees, or loan programs or the rights and
obligations of recipients of such programs. Accordingly, this
rulemaking is not subject to Office of Management and Budget (OMB)
review under Executive Order 12866.
2 U.S.C. Ch. 25, ``Unfunded Mandates Reform Act''
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (2
U.S.C. 1532) requires agencies to assess anticipated costs and benefits
before issuing any rule whose mandates require spending in any 1 year
of $100 million in 1995 dollars, updated annually for inflation. In
2014, that threshold is approximately $141 million. This rule will not
mandate any requirements for State, local, or tribal governments, nor
will it affect private sector costs.
Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. Ch. 6)
The Department of Defense certifies that this rule is not subject
to the Regulatory Flexibility Act (5 U.S.C. 601) because it would not,
if promulgated, have a significant economic impact on a substantial
number of small entities. Therefore, the Regulatory Flexibility Act, as
amended, does not require us to prepare a regulatory flexibility
analysis.
Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 35)
This rule does not impose reporting and record keeping requirements
under the Paperwork Reduction Act of 1995.
Executive Order 13132, ``Federalism''
This rule was analyzed in accordance with the principles and
criteria contained in Executive Order 13132 (``Federalism''). It has
been determined that it does not have sufficient Federalism
implications to warrant the preparation of a Federalism summary impact
statement. This rule has no substantial effect on the States, or on the
current Federal-State relationship, or on the current distribution of
power and responsibilities among the various local officials. Nothing
in this rule preempts any State law or regulation. Therefore,
Department did not consult with State and local officials because it
was not necessary.
[[Page 58846]]
Dated: August 23, 2016.
Morgan Park,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2016-20486 Filed 8-25-16; 8:45 am]
BILLING CODE 5001-06-P