[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