[Federal Register Volume 82, Number 239 (Thursday, December 14, 2017)]
[Rules and Regulations]
[Pages 58739-58742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26974]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 232

[Docket ID: DOD-2017-OS-0038]
RIN 0790-ZA13


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; amendment.

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SUMMARY: The Department of Defense (Department) is amending its 
interpretive rule for 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). On August 26, 2016, the Department issued the first set of 
interpretations of that regulation in the form of questions and 
answers; the present interpretive rule amends and adds to those 
questions and answers to provide guidance on certain questions the 
Department has received regarding compliance with the July 2015 Final 
Rule.

DATES: Effective Date: This interpretive rule is effective December 14, 
2017.

FOR FURTHER INFORMATION CONTACT: Andrew Cohen, 703-692-5286.

SUPPLEMENTARY INFORMATION: 

I. Background and Purpose

    In July 2015, the Department of Defense (Department) issued a final 
rule \1\ (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\ 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 43560 (July 22, 2015).
    \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 elected to inform the public of its views by issuing an 
interpretive rule in the form of questions and answers to assist 
industry in complying with the July 2015 Final Rule. The Department 
issued the first set of such interpretations on August 26, 2016 (August 
26, 2016 Interpretive Rule).\4\ The present interpretive rule amends 
and adds to those questions and answers. This interpretive rule does 
not change the regulation implementing the MLA, but 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.
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    \4\ 81 FR 58840 (August 26, 2016).
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II. Interpretations of the Department

    The following questions and answers represent official 
interpretations of the Department on issues related to 32 CFR

[[Page 58740]]

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).
    In order to provide further guidance to industry and the public on 
the Department's view of its existing regulation, the Department amends 
its guidance on three questions and provides one additional question 
and answer. The numbering of this document follows the numbering of the 
questions and answers provided in the August 26, 2016 Interpretive 
Rule.
    2. Does credit that a creditor extends for the purpose of 
purchasing a motor vehicle or personal property, which secures the 
credit, fall within the exception to ``consumer credit'' under 32 CFR 
232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends 
credit in an amount greater than the purchase price of the motor 
vehicle or personal property?
    Answer: The answer will depend on what the credit beyond the 
purchase price of the motor vehicle or personal property is used to 
finance. Generally, financing costs related to the object securing the 
credit will not disqualify the transaction from the exceptions, but 
financing credit-related costs will disqualify the transaction from the 
exceptions.
    Section 232.3(f)(1) defines ``consumer credit'' as credit offered 
or 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 a motor vehicle when the credit is secured by 
the vehicle being purchased and 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 credit transaction that finances the object itself, as well as 
any costs expressly related to that object, is covered by the 
exceptions in Sec.  232.3(f)(2)(ii) and (iii), provided it does not 
also finance any credit-related product or service. For example, a 
credit transaction that finances the purchase of a motor vehicle (and 
is secured by that vehicle), and also finances optional leather seats 
within that vehicle and an extended warranty for service of that 
vehicle is eligible for the exception under Sec.  232.3(f)(2)(ii). 
Moreover, if a covered borrower trades in a motor vehicle with negative 
equity as part of the purchase of another motor vehicle, and the credit 
transaction to purchase the second vehicle includes financing to repay 
the credit on the trade-in vehicle, the entire credit transaction is 
eligible for the exception under Sec.  232.3(f)(2)(ii) because the 
trade-in of the first motor vehicle is expressly related to the 
purchase of the second motor vehicle. Similarly, a credit transaction 
that finances the purchase of an appliance (and is secured by that 
appliance), and also finances the delivery and installation of that 
appliance, is eligible for the exception under Sec.  232.3(f)(2)(iii).
    In contrast, a credit transaction that also finances a credit-
related product or service rather than a product or service expressly 
related to the motor vehicle or personal property is not eligible for 
the exceptions under Sec.  232.3(f)(2)(ii) and (iii). For example, a 
credit transaction that includes financing for Guaranteed Auto 
Protection insurance or a credit insurance premium would not qualify 
for the exception under Sec.  232.3(f)(2)(ii) or (iii). Similarly, a 
hybrid purchase money and cash advance credit transaction is not 
expressly intended to finance the purchase of a motor vehicle or 
personal property because the credit transaction provides additional 
financing that is unrelated to the purchase. Therefore, any credit 
transaction that provides purchase money secured financing of a motor 
vehicle or personal property along with additional ``cashout'' 
financing is not eligible for the exceptions under Sec.  
232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth 
in the MLA regulation.
    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 other applicable law 
and the creditor complies with all other provisions of 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. Borrowers may convey security interests for all 
types of consumer credit covered by the MLA regulation.
    Creditors should also note, however, that 32 CFR 232.7(a) provides 
that the MLA does not preempt any State or Federal law, rule or 
regulation to the extent that such law, rule or regulation provides 
greater protection to covered borrowers than the protections provided 
by the MLA. For example, although the MLA regulation does not prohibit 
borrowers from conveying security interests in all types of consumer 
credit covered by the regulation, including credit card accounts, such 
accounts may also be subject to other laws, rules and regulations 
governing offsets and security interests. See, e.g., 12 CFR 1026.12(d).
    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, or a right arising out of a 
security interest a borrower grants to a creditor, to take a security 
interest in funds deposited within a covered borrower's account at any 
time?
    Answer: No. In addition to the security interests granted by 
borrowers to creditors, as discussed in Question and Answer #17 of 
these Interpretations, above, under certain circumstances Federal or 
State statutes may grant creditors statutory liens on funds deposited 
within covered borrowers' asset accounts. Section 232.8(e) does not 
prohibit a creditor from exercising rights to take a security interest 
in funds deposited into a covered borrower's account at any time, 
including enforcing statutory liens, provided that it is not otherwise 
prohibited by other applicable law and the creditor complies with all 
other provisions of the MLA regulation, including the limitation on the 
MAPR to 36 percent. 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.''

[[Page 58741]]

    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 postdated 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--for example--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 other applicable law and the creditor complies 
with all other provisions of the MLA regulation, including the 
limitation on the MAPR to 36 percent.
    Creditors may exercise the right to take a security interest in 
funds deposited into a covered borrower's account in connection with 
all types of consumer credit covered by the MLA regulation, including 
credit card accounts, provided the creditor's actions are not 
prohibited by other State or Federal law, rule or regulation that 
provides greater protection to covered borrowers than the protections 
provided in the MLA. For example, although the MLA regulation does not 
prohibit borrowers from conveying security interests in all types of 
consumer credit covered by the regulation, including credit card 
accounts, such accounts may also be subject to other laws, rules and 
regulations governing offsets and security interests. See, e.g., 12 CFR 
1026.12(d).
    20. To qualify for the optional safe harbor under 32 CFR 
232.5(b)(3), must the creditor determine the consumer's covered 
borrower status simultaneously with the consumer's submission of an 
application for consumer credit or exactly 30 days prior?
    Answer: No. Section 232.5(b)(3)(i) and (ii) permit the creditor to 
qualify for the safe harbor when it makes a timely determination 
regarding the status of a consumer at the time the consumer either 
initiates the transaction or submits an application to establish an 
account, or anytime during a 30-day period of time prior to such 
action. Therefore, a creditor qualifies for the safe harbor under Sec.  
232.5(b) when the qualified covered borrower check that the creditor 
relies on is conducted at the time a consumer initiates a credit 
transaction or applies to establish an account, or up to 30 days prior 
to the action taken by the consumer. Similarly, the timing provisions 
in Sec.  232.5(b)(3)(i) and (ii) permit a creditor to qualify for the 
safe harbor when it conducts a qualified covered borrower check 
simultaneously with the initiation of the transaction or submission of 
an application by the consumer or during the course of the creditor's 
processing of that application for consumer credit.

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.
    This amended interpretive rule does not change the regulation 
implementing the MLA, but merely states the Department's preexisting 
interpretations of an existing regulation. Moreover, the Department's 
interpretive views do not further prohibit or limit the sale of credit 
and ancillary credit-related products beyond any limits that may be set 
forth in the final rule. For example, under the final rule as issued, 
the inclusion of ancillary credit products in a hybrid transaction 
makes the credit transaction ineligible for the exemption from 
``consumer credit'' under 32 CFR 232.3(f)(2)(ii) and (iii). This 
amended interpretive rule merely provides guidance on how the rule 
applies when such products are included in a credit transaction. 
Neither the final rule nor this amended interpretive rule prohibits the 
sale of ancillary credit products by the creditor as part of the credit 
transaction or as a separate transaction, nor does either prohibit a 
covered borrower from purchasing such products from the creditor or 
from another source. The Department estimates there remains a variety 
of venues for creditors to offer ancillary credit products and covered 
borrowers to acquire such ancillary credit products.
    In evaluating any potential economic impact, the Department has 
consulted with the Consumer Financial Protection Bureau (``Bureau'') 
\5\ to assess the scope of the market for motor vehicle loans that also 
provide financing for a credit-related product or service, as such 
loans would not meet the exception from ``consumer credit'' in 32 CFR 
232.3(f)(2)(ii). Specifically, the Department's assessment focused on 
guaranteed asset protection (GAP) and other credit insurance premiums, 
such as credit life and credit disability insurance, that are financed 
in connection with a credit transaction expressly intended to purchase 
a motor vehicle. In conducting its assessment, the Department excluded 
financing costs that are expressly related to the object being 
purchased because, as clarified in this interpretive rule, such costs 
would not prevent an otherwise exempt credit transaction from 
qualifying for the exemptions from ``consumer credit'' in 32 CFR 
232.3(f)(2)(ii) and (iii).\6\ In assessing the scope of the market, the 
Department, in consultation with the Bureau, relied on informal surveys 
and reports regarding the market for financed motor vehicle 
transactions, the utilization of GAP and other credit insurance 
premiums in that market, and the typical costs to

[[Page 58742]]

consumers associated with such ancillary credit-related products.\7\
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    \5\ The Bureau monitors, analyzes, and performs outreach to the 
auto lending industry through its Office of Consumer Lending, 
Reporting & Collection Markets. The Bureau, as part of its ongoing 
assistance to the Department, provided the Department with certain 
data regarding the auto lending marketplace.
    \6\ For example, the Department excluded from this analysis 
credit transactions that also finance extended warranty protection 
or include financing to repay the credit on a trade-in vehicle 
because the Department interprets such costs as expressly related to 
the object (motor vehicle) being financed.
    \7\ See Experian, ``State of the Automotive Finance Market: A 
Look at Loans and Leases in Q4 2016,'' at 11, 19 (2016); Colonnade 
Advisors, ``F&I Products Industry Market Commentary,'' at 2 (2016), 
available at coladv.com/wp-content/uploads/FI-Product-Industry-Report-April-2016.pdf ; F&I and Showroom, ``Tracking F&I 
Performance,'' http://www.fi-magazine.com/article/story/2012/01/tracking-f-i-performance.aspx (last visited Sept. 20, 2017). The 
Department's research indicates that the available data regarding 
credit-related ancillary products in the auto lending marketplace 
are limited and primarily derived from informal surveys and reports.
    \8\ Approximately 82 percent of Service members are enlisted; 91 
percent do not have college degrees; 44 percent are under 25 years 
of age; and 67 percent of those under 25 own or lease at least one 
vehicle. The intersection of these portions creates a factor of 
approximately .22, which can be applied to the total market value of 
approximately $93.8 million, resulting in a possible market segment 
of approximately $21.7 million. This segment would then require 
further apportionment to reflect the share of the products therein 
that offer interest rates above the 36 percent cap. See 2015 
Demographics Profile of the Military Community, Chapter 2, 
Department of Defense, available at http://download.militaryonesource.mil/12038/MOS/Reports/2015-Demographics-Report.pdf and Table 3202. Consumer units with reference person 
under age 25 by income before taxes: Average annual expenditures, 
Consumer Expenditure Survey, 2015-2016, Bureau of Labor Statistics, 
available at https://www.bls.gov/cex/2016/CrossTabs/agebyinc/xunder25.PDF.
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    Based on available data, the Department estimates the annual total 
market revenue for these products at $6,116.5 and $3,761.7 million, 
respectively, or a total of $9,878.1 million. The Department estimates 
that the covered borrower market for these products is .95 percent of 
the total market for these products, as covered borrower households 
represent .95 percent of total U.S. households, which implies a total 
possible market for covered borrowers of approximately $93.8 million. 
Of these covered borrowers, the Department estimates that only a very 
small portion of these consumers could include the Service members and 
their families covered by the MLA. As an example, if the typical 
consumer of such a product is an enlisted Service member under 25, does 
not have a college degree, and owns a car, the possible market value 
relevant to the MLA and this interpretive rule might be more like $21.7 
million.\8\ Within this further market segment, an undetermined 
percentage of these products actually offer interest rates greater than 
36 percent and would actually be purchased by this group, which would 
represent the share of products that fall under the MLA requirement. 
Generally, in this and other possible scenarios across age groups and 
other demographic characteristics, the Department anticipates the 
universe of products that exceed 36 percent interest in this category 
is very small and possibly negligible, especially considering the time 
that has passed since the final rule was issued. This number is 
anticipated to be even more likely to be negligible when considering 
the number of covered borrowers who would choose to consume this 
product particularly in light of the existing MLA requirement.

2 U.S.C. Ch. 25, ``Unfunded Mandates Reform Act''

    Section 202 of the Unfunded Mandates Reform Act of 1995 (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, the 
Department did not consult with State and local officials because it 
was not necessary.

    Dated: December 11, 2017.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2017-26974 Filed 12-13-17; 8:45 am]
 BILLING CODE 5001-06-P