[Federal Register Volume 72, Number 69 (Wednesday, April 11, 2007)]
[Proposed Rules]
[Pages 18157-18170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-1780]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 232
[DOD-2006-OS-0216]
RIN 0790-AI20
Limitations on Terms of Consumer Credit Extended to Service
Members and Dependents
AGENCY: Department of Defense (DoD).
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Department of Defense (the Department or DoD) proposes to
amend our regulations by adding a new part to implement the consumer
protections covered by Public Law 109-364, the John Warner National
Defense Authorization Act for Fiscal Year 2007, section 670,
``Limitations on Terms of Consumer Credit Extended to Service Members
and Dependents'' (October 17, 2006). Section 670 of Public Law 109-364
created 10 U.S.C. 987 and requires the Secretary of Defense to
prescribe regulations to carry out the new section. The proposed
regulation is intended to regulate the terms of consumer credit
extended by creditors to active duty service members and their
dependents.
DATES: Comments must be received no later than June 11, 2007.
ADDRESSES: You may submit comments, identified by docket number and or
Regulatory Information Number (RIN) and title, by any of the following
methods:
--Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
--Mail: Federal Docket Management System Office, 1160 Defense Pentagon,
Washington, DC 20301-1160.
Instructions: All submissions received must include the agency name
and docket number or RIN for this Federal Register document. The
general policy for comments and other submissions from members of the
public is to make these submissions available for public viewing on the
Internet at http://regulations.gov as they are received without change,
including any personal identifiers or contact information.
FOR FURTHER INFORMATION CONTACT: Mr. George Schaefer, (703) 588-0876.
SUPPLEMENTARY INFORMATION:
I. Background
Today's joint force combat operations require highly trained,
experienced and motivated troops. We are fortunate that the All
Volunteer Force of today is comprised of individuals who fit the
stringent requirements needed for success on the battlefield. The
military has seen a lot of changes since it became an All Volunteer
Force in 1973. The technological advances over the ensuing 34 years
have made remarkable transformations to the capabilities of the Armed
Forces.
These advances would not have been as easily attained if it were
not for the All Volunteer Force. The members of this force have higher
levels of aptitude, stay in the military longer, and as a consequence,
perform better than their conscript predecessors. During the Vietnam
era draft, 90 percent of
[[Page 18158]]
conscripts quit after their initial two-year hitch, whereas retention
of volunteers is five-times better today--about half remain after their
initial (four-year) military service obligation. Said another way, two
thirds of the military was serving in its first two years of service
prior to 1973, where as today, the number is about one-fourth.
Today's Service members are still younger than the population as a
whole, with 46 percent 25 years old or less. Thirty eight percent of
these young Service members 25 years old or less are married and 21
percent of them have children. This is compared with approximately 13
percent of their contemporaries in the U.S. population 18 through 24
who are married (2000 Census). The majority of recruits come to the
military from High School, with little financial literacy education.
The initial indoctrination provided to Service members is critical,
providing basic requirements for their professional responsibilities
and to successfully adjust to military life. Part of this training is
in personal finance which is seen as an integral part of their
responsibilities. The Department continues to provide them messages to
save, invest and manage their money wisely throughout their career.
Service members and their families are experiencing the sixth year
of the Global War on Terror. The Department views the support provided
to military families as essential to sustaining force readiness and
military capability. From this perspective, it is not sufficient for
the Department to train Service members on how best to use their
financial resources--financial protections are an important part of
fulfilling the Department's compact with Service members and their
families.
Social Compact
The Department of Defense (DoD) believes that assisting Service
members with their family needs is essential to maintaining a stable,
motivated All Volunteer Force. As part of the President's February 2001
call to improve the quality of life for Service members and their
families, the Department of Defense developed a social compact
reflecting the Department's commitment to caring for their needs as a
result of their commitment to serving the Nation. The social compact
involved a bottom-up review of the quality-of-life support provided by
the Department, which articulated the linkage between quality-of-life
programs as a human capital management tool and the strategic goal of
the Department--military readiness.
The social compact is manifested in the programs the Department of
Defense provides to support the quality of life of Service members and
their families. This social compact includes personal finances as an
integral part of their quality of life. The Department equates
financial readiness with mission readiness. When asked in 2005 on a
blind survey to rate the stressors in their lives, Service members (as
a group) rated finances as a more significant stressor than
deployments, health concerns, life events, and personal relationships.
They only rated work and career concerns as a higher stressor in their
lives. As part of the social compact for financial readiness, the
Department established a strategic plan to:
Reduce the stressors related to financial problems--the
stress associated with out of control debt can impact the performance
of Service members and have major negative impact on family quality of
life.
Increase savings--establishes personal and family goals,
motivates Service members to control their finances and live within
their means.
Decrease dependence on unsecured debt--reduces the
stressors and vulnerabilities associated with living from paycheck to
paycheck.
Decrease the prevalence of predatory practices--provide
protection from financial practices that seek to deceive Service
members or take advantage of them at a time of vulnerability.
The Department has taken action on obtaining these outcomes by
providing financial awareness, education and counseling programs; by
advocating the marketplace deliver beneficial products and services;
and by advocating for the protection for Service members and their
families from harmful products and practices.
Financial Education
The Military Services are expected to provide instruction and
information to fulfill the needs of Service members and their families.
To this end, the Department established policy in November 2004: DoD
Instruction 1342.27, Personal Financial Management Programs for Service
Member.
As outlined in the Government Accountability Office (GAO) Report
05-348, the Military Services have their own programs for training
first-term Service members on the basics of personal finance. These
programs vary in terms of venue and duration; however, all Military
Service programs must cover the same core topics to the level of
competency necessary for first term Service members to apply basic
financial principles to everyday life situations.
The Department has tracked the ability of Service members to pay
their bills on time as a reflection of their competency and ability to
apply basic financial principles. Since 2002, self reported assessments
through survey data have shown Service members are paying better
attention to keeping up with their monthly payments.
To assist the Military Services in delivering financial messages,
the Department established the Financial Readiness Campaign in May
2003, which has gathered the support of 26 nonprofit organizations and
Federal agencies. In the past three years, Service members have
benefited from the materials and assistance from over 20 active
partnerships. These partnerships are on-going and have been developed
to allow the Military Services to choose which partner programs can
best supplement the education, awareness and counseling services they
provide. The materials and services are not mandatory and do not take
the place of the programs offered by the Military Services.
Aspects of predatory lending practices are covered as topics in
initial financial education training and in refresher courses offered
at the military installations. The Military Services provide over
10,000 classes and train approximately 24 percent of the force, as well
as nearly 20,000 family members on an annual basis. These classes are
primarily conducted on military installations located in the United
States.
In addition to these classes, Financial Readiness Campaign partner
organizations conduct over a thousand classes for informing over 60,000
Service members and family members per year. These classes are
primarily provided by the staff of banks and credit unions located on
military installations (military banks and defense credit unions).
These institutions provide these classes as part of their
responsibilities outlined in the DoD Financial Management Regulation.
Other organizations involved include local Credit Counseling Agencies,
State financial regulatory agencies, the InCharge Institute and the
NASD Foundation.
The Military Service financial educators, along with partner
organizations, also distributed over 200,000 brochures and pamphlets,
with the Military Services and Federal Trade Commission the primary
provider of these products. In addition, Military Money Magazine has
run several
[[Page 18159]]
articles, to include two cover article editions on predatory lending.
The free distribution of the magazine is through military commissaries,
family support centers, other service agencies on the installation,
residents on the military installations and home addresses off the
installation upon request. The distribution is approximately 250,000
per quarter.
Lending Practices Considered Predatory
As identified in GAO Report 05-349, DOD's Tools for Curbing the Use
and Effects of Predatory Lending Not Fully Utilized, April 2005, the
review of practices that are considered predatory has not benefited
from a consistent definition that has been universally applied.
However, sources studying the issue of predatory lending have focused
on similar characteristics. GAO Report 04-280, Federal and State
Agencies Face Challenges in Combating Predatory Lending, January 2004,
said the following:
While there is no uniformly accepted definition of predatory
lending, a number of practices are widely acknowledged to be
predatory. These include, among other things, charging excessive
fees and interest rates, lending without regard to borrowers'
ability to repay, refinancing borrowers' loans repeatedly over a
short period of time without any economic gain for the borrower, and
committing outright fraud or deception.
This definition has been reiterated in the FDIC Office of the
Inspector General Audit Report 06-0111, June 2006, which stated:
Characteristics associated with predatory lending include, but
are not limited to (1) abusive collection actions, (2) balloon
payments with unrealistic repayment terms, (3) equity stripping
associated with repeat financing and excessive fees, and (4)
excessive interest rates that may involve steering a borrower to a
higher-cost loan.
These same characteristics were also identified in the DoD Report
to Congress on Predatory Lending Practices Directed at Members of the
Armed Forces and Their Dependents, August 9, 2006:
Predatory lending in the small loan market is generally
considered to include one or more of the following characteristics:
High interest rates and fees; little or no responsible underwriting;
loan flipping or repeat renewals that ensure profit without
significantly paying down principal; loan packing with high cost
ancillary products whose cost is not included in computing interest
rates; a loan structure or terms that transform these loans into the
equivalent of highly secured transactions; fraud or deception;
waiver of meaningful legal redress; or operation outside of state
usury or small loan protection law or regulation. The effect of the
practices include whether the loan terms or practices listed above
strip earnings or savings from the borrower; place the borrower's
key assets at undue risk; do not help the borrower resolve their
financial shortfall; trap the borrower in a cycle of debt; and leave
the borrower in worse financial shape than when they initially
contacted the lender.
While the Report to Congress provides a more expansive definition,
there are several commonalities between the definitions listed above:
--Lending without regard of the borrowers ability to repay;
--Excessive fees and excessive interest rates;
--Balloon payments with unrealistic repayment terms;
--Wealth stripping associated with repeat rollovers/financing; and
--Fraud and deception.
The Department started collecting information on high cost lending
in 2004 as part of the Defense Manpower and Data Center annual surveys
of active duty Service members. The survey requested input on payday
loans, rent-to-own, refund anticipation loans and vehicle title loans.
GAO Report 05-359 focused on these four practices and obtained feedback
from ``command leaders, [Personal Financial Management] PFM program
managers, command financial counselors, legal assistance attorneys,
senior noncommissioned officers (pay grades E8 to E9), chaplains, and
staff from the military relief/aid societies,'' concerning these
practices. Input from these individuals, among others was that ``The
extent to which active duty Service members use consumer loans
considered to be predatory in nature and the effects of such borrowing
are unknown, but many sources suggest that providers of such loans may
be targeting Service members.''
The Report to Congress reviewed five products (payday loans,
vehicle-title loans, rent-to-own, refund anticipation loans and
military installment loans) identified by installation-level financial
counselors (employed as PFM program managers and employed by the
Military Aid Societies) and legal assistance attorneys who regularly
counsel service members on indebtedness issues. When compared against
the common characteristics listed above, the five products reviewed in
the Report to Congress measure up somewhat differently:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without regard for Unrealistic payment Repeated rollover/
Lending product borrowers ability to repay Excessive fees and interest schedule refinancing
--------------------------------------------------------------------------------------------------------------------------------------------------------
Payday loan......................... X X X X
Vehicle title loan.................. X X X X
Military installment................ ........................... X ........................... ...........................
Refund anticipation................. ........................... X ........................... ...........................
Rent-to-own......................... X X ........................... ...........................
--------------------------------------------------------------------------------------------------------------------------------------------------------
A major concern of the Department has been the debt trap some forms
of credit can present for Service members and their families already
burdened with debt and recurring bills. The combination of little to no
regard for the borrower's ability to repay the loan, unrealistic
payment schedule, high fees and interest and the opportunity to
rollover the loan instead of repaying it, can create a cycle of debt
for financially overburdened Service members and their families.
Consumer groups, news media, and academics have chronicled concerns
about payday loans and the propensity for this lending practice to
create a cycle of debt. For example, M. Flannery and K. Smolyk state
the following in their June 2005 FDIC Financial Research Working Paper
No. 2005-09:
Although as economists we find it hard to define what level of
use is excessive, there seems little doubt that the payday advance
as presently structured is unlikely to help people regain control of
their finances if they start with serious problems.
Likewise, vehicle title loans are similarly structured, with
potentially similar results. According to a November 2005 report by the
Consumer Federation of America, vehicle title loans are generally made
for 30 days with high interest/fee structures (average of 295 APR).
Limits on title loans vary by State concerning interest rates,
duration, rollover allowances and rules on repossessing the vehicle.
Only four states cap interest rates at less than 100% APR. In many
states these loans can be rolled over by the borrower
[[Page 18160]]
several times if the borrower is unable to pay the principal and
interest when due. If not paid or rolled over, many states allow the
creditor to repossess the vehicle and in some states the borrower is
not entitled to any portion of the proceeds of the vehicle sale. Loan
amounts average 55 percent of the value of the vehicle.
Rent-to-own, refund anticipation loans and some military
installment loans present products with high fees and interest. Rent-
to-own, which is not covered as credit under the Truth-in-Lending Act
(TILA), can represent an expensive alternative to credit when used as a
means of purchasing an item. Military installment loans (an installment
loan marketed primarily or exclusively to the military) can represent a
high cost over the duration of the loan, particularly when other non
TILA fees and charges are added to the interest rate. Tax refund
anticipation loans also cost Service members and their families high
fees when they can easily obtain rapid returns through electronic
filing with the assistance of their installation legal assistance
office.
Refund anticipation loans (RALs) provide a limited time advantage
(approximately 10 day reduction in the time required to receive a tax
return) in comparison to the cost involved ($39-$100). As a
consequence, the annual percentage rate for this credit can be triple
digit. A study by Gregory Elliehausen of the Credit Research Center
(CRC) (Monograph 37, April 2005) showed that more individuals
below 35 years old use RALs (61 percent) as compared to the percentage
under 35 years old who head households (28.6 percent). Seventy nine
percent of Service members are age 35 or below.
The rationale for a borrower wanting to obtain a RAL vary; however,
the CRC study showed that 41 percent of borrowers obtaining RALs did so
to pay bills, 21 percent due to unexpected expenditures, 15 percent to
make purchases, 15 percent because of impatience and 7 percent for
other reasons. Less than one percent said they obtained a RAL to pay
for tax preparation. Through the Armed Forces Tax Council, in
collaboration with the IRS, Volunteer Income Tax Assistance (VITA)
sites are located on all active duty military installations to assist
Service members and their families with preparation and electronic
filing of their tax returns.
As with other forms of short term high cost credit, the Department
would prefer Service members and their families to consider low cost
alternatives to resolve their financial crisis with the perspective
that they should establish a more solid footing for their personal
finances. The CRC study showed similar patterns of use of credit and
debt burden between users of RALs and payday loans. Additionally,
through education the Department attempts to persuade Service members
that planning is an important part of managing finances, and a high
cost 10 day loan does not reinforce this lesson.
The five products reviewed in the Report to Congress represent two
kinds of financial problems for Service members and their families:
Those products that contribute to a cycle of debt (payday and vehicle
title loans) and those products that can cost the military consumer
high fees and interest costs (rent-to-own, installment loans and refund
anticipation loans). Cycle of debt represents a more significant
concern to the Department than the high cost of credit.
Alternatives
The Department would prefer Service members and their families who
experience financial duress seek out the alternatives available through
Military Aid Societies, military banks and defense credit unions rather
than credit products that would more likely mire them in a cycle of
debt. These institutions have established programs and products
designed to help Service members and their families resolve their
financial crises, rebuild their credit and establish savings.
The Military Aid Societies are strong advocates for limiting the
cost associated with credit and for creditors to develop alternative
products for Service members who cannot otherwise qualify for loans.
Within their own resources they provided $87.3 million in no cost loans
and grants to Service members and their families in 2005. These funds
were provided for emergencies and essentials, such as rent, food, and
utilities.
Banks and credit unions located on military installations also
understand the need to provide products and services that can help
those who mishandle their finances and who may need remedial
assistance. A review of on-base financial institutions surfaced 24
programs on 51 military installations in the U.S. providing alternative
small loan products designed to help Service members and their families
to recover from their financial problems. These financial institutions
supplement the emergency funding made available by the nonprofit
Military Aid Societies that provide grants and no-interest loans to
needy Service members and families.
These banks and credit unions provide low denomination loans at
reasonable annual percentage rates designed to assist their members who
need to get out of high cost credit and into more traditional lending
products. Financial counseling and education are often prerequisites
for the short term loan and some institutions have attached a
requirement to develop savings as part of the loan.
Many of these military banks and credit unions use their products
and services to maintain a watchful eye over their members to ensure
they do not abuse services designed to assist them, such as overdraft
protection, which if used on a chronic basis, can become very expensive
and propel someone already overextended into a deeper spiral of debt.
Representatives of the Association of Military Banks of America had an
opportunity to showcase their alternative small loan products at a FDIC
Conference held in December of 2006. FDIC hosted this conference to
spotlight the need to develop more of these types of products for
Service members and their families and several banks and credit unions
described above that currently provide such favorable credit to Service
members participated in the conference.
Efforts To Curb the Prevalence and Impact of Predatory Loans
The Department has found that it has a small window of opportunity
to inform and convince young Service families of what may constitute a
beneficial product that can fit their circumstances, particularly when
they receive many messages to the contrary. Nonetheless, the Department
has attempted to use the processes and resources available within the
Department to curb the prevalence of high cost short term lenders,
particularly those that can contribute to a spiral of debt.
Predatory lenders have seldom been placed off-limits, primarily
because the process associated with placing commercial entities off-
limits, through the review and recommendations of the Armed Forces
Disciplinary Control Board (AFDCB), is not well suited to this purpose.
The AFDCB, covered by Joint Army Regulation 190-24, is designed to make
businesses outside of military installations aware that their practices
cause morale and discipline concerns and to offer these businesses an
opportunity to modify their practices to preclude being placed off-
limits. When the commercial entity refuses to comply, the AFDCB
recommends to the regional command authority to place the business off-
limits for all Service
[[Page 18161]]
members within the region (regardless of Service).
Normally concerns are raised when a business has demonstrated
practices that violate state or federal statute, and remediation
involves the business curtailing these illegal practices. In the case
of the loan products listed above, businesses usually offer their
services within the legal limits. Since the AFDCB takes on businesses
one at a time, bringing a lender under scrutiny has been difficult if
the lender is complying with the same rules as its competitors.
Additionally, the magnitude of mediating with the number of outlets
surrounding military installations has exacerbated the process. As
illustrated in research by Professor Steven M. Graves and Professor
Christopher L. Peterson published in the Ohio State Law Journal, Volume
66, Number 4, 2005, ``Predatory Lending and the Military: The Law and
Geography of `Payday' Loans in Military Towns,'' there are large
numbers of payday lenders which can be found in communities around
military installations.
Also, without appropriate authority, commanders and AFDCBs have
difficulty citing lenders offering payday, auto title and refund
anticipation loans as needing to take remedial action. In States that
authorize these types of loans, AFDCBs must establish their own local
guidelines in addition to the provisions of Federal and State law,
ensure all affected businesses are aware of these new rules, and then
require these businesses to comply.
The Department has considered establishing guidelines that would
ameliorate the concerns posed by lenders characterized above, but
establishing these policies within DoD poses legal problems and raises
the potential for litigation against the Department. Prior to the
Talent-Nelson Amendment of the John Warner National Defense
Authorization Act of 2007 (10 U.S.C. 987), there has not been any
established authority for DoD to make rules governing credit offered by
off-base private businesses. Commercial businesses offering these loans
could view DoD rules as restrictions outside of the existing statutes
and policies governing these entities and burdens provided without
sufficient statutory authority to establish rules governing their
businesses. Without sufficient authority, the Department would have
difficulty making ``off limits'' declarations enforceable and could
lead to legal action.
As State governments have considered restricting or controlling
payday lending, the Department has provided information concerning this
issue and has extended its support for these measures to the extent
that these provisions protect Service members and their families.
Internet lenders claim jurisdiction in States with lax protections and
unlimited rates and often attempt to bypass the State credit, usury or
payday loan laws of the State where the borrower receives the loan.
State regulators have successfully enforced home-State law against
Internet payday lenders making loans to consumers in their States in
Colorado, New York, Massachusetts, Kansas, Pennsylvania, and the
District of Columbia.
As stated above, the Department will continue to provide education,
awareness and counseling programs to influence skills and attitudes
towards managing personal resources wisely. There still remains a gap
between the opportunity to influence a young Service member or family
concerning the best way to manage their finances, and the level of
experience and capability necessary to be successful. The Department
has a limited opportunity to impress upon these young people the
importance of managing their resources, and does not have sufficient
control over the behavior of Service members and their families to
preclude them taking on financial risks that can impact not only their
quality of life, but also the mission performance of Service members.
The Department will continue to send Service members messages that
they and their families need to manage their resources wisely for their
own benefit and to maintain personal readiness. The Department's call
for responsibility competes with market messages from the sub-prime
financial industry to get cash now for purchases, vacations, and paying
bills. Their marketing stresses the ease and convenience of obtaining
these loans, with virtual guarantee of approval. These messages can be
particularly alluring to Service members and families already over
burdened with bills and debts. A 2006 survey accomplished by the
Consumer Credit Research Foundation stated that the primary reason
Service members choose payday loans is because they are convenient.
Certainly, obtaining ``fast cash'' from a payday lender is far more
convenient than considering uncontrolled debt or addressing inherent
overspending that creates situations where sub-prime loans are needed.
Service members have inherently understood that limits on interest
rates are appropriate, even if these limits would decrease the
availability of credit. When asked in a 2006 survey conducted by the
Consumer Credit Research Foundation if Service members strongly/
somewhat agree or disagree with the statement: ``The government should
limit the interest rates that lenders can charge even if it means fewer
people will be able to get credit,'' over 74 percent of the Service
members surveyed agreed with the statement (with over 40 percent
strongly agreeing). Similarly when asked their position on the
statement ``There is too much credit available today,'' 75 percent of
Service members not using payday loans and 63 percent of Service
members using payday loans agreed (with 51 percent of non users
strongly agreeing).
``Limitations on Terms of Consumer Credit Extended to Service Members
and Dependents,'' John Warner National Defense Authorization Act for
Fiscal Year 2007
After both the Congressional Banking and Armed Service Committees
reviewed the issue of predatory lending directed at members of the
Armed Forces and their dependents, the Armed Service Committees
included Sec. 670 in the John Warner National Defense Authorization
Act for Fiscal Year 2007. The resulting statute, 10 U.S.C. 987, directs
the Secretary of Defense to establish policy to implement the
provisions of the statute. The Secretary is to accomplish the
regulation prior to October 1, 2007, when the statute goes into effect,
and to draft the regulation in consultation with the Department of
Treasury, Office of the Comptroller of the Currency, Office of Thrift
Supervision, Board of Governors of the Federal Reserve System, Federal
Trade Commission, Federal Deposit Insurance Corporation, and the
National Credit Union Administration. Specifically, section (h)(2)
requires the Secretary of Defense to define key terms as part of
developing the regulation:
``(A) Disclosures required of any creditor that extends consumer
credit to a covered member or dependent of such a member.
(B) The method for calculating the applicable annual percentage
rate of interest on such obligations, in accordance with the limit
established under this section.
(C) A maximum allowable amount of all fees, and the types of fees,
associated with any such extension of credit, to be expressed and
disclosed to the borrower as a total amount and as a percentage of the
principal amount of the obligation, at the time at which the
transaction is entered into.
[[Page 18162]]
(D) Definitions of `creditor' under paragraph (5) and `consumer
credit' under paragraph (6) of subsection (i), consistent with the
provisions of this section.
(E) Such other criteria or limitations as the Secretary of Defense
determines appropriate, consistent with the provisions of this
section.''
This broad latitude allows the Department of Defense to determine
the scope and impact of the regulation, consistent with the provisions
of the statute. These provisions have been established to protect
Service members and their families from potentially abusive lending
practices and products. The provisions, or terms, of the statute
provide several limitations on credit transactions, and the statute
allows the Department to focus these limitations on areas that create
the most concern.
Through correspondence received from numerous creditors and trade
associations representing creditors, the Department has learned of the
potential unintended consequences of these limitations that could
potentially preclude Service members and their families from receiving
a multitude of credit products not determined as harmful. These
commenters suggested, as a simple way to limit the potential unintended
consequences of the rule and adverse impact on the availability of
credit for Service members by regulated depository institutions and
their subsidiaries, that the regulations include a complete or limited
carve-out from the ``creditor'' definition of insured depository
institutions and their subsidiaries. As described in the section-by-
section description that follows, the Department did not specifically
propose to exclude any types of lenders from the regulatory definition
of ``creditor.'' The intent of the statute is clearly to apply these
limitations so that their impact is upon credit practices evaluated as
negative without impeding the availability of credit that is benign or
beneficial to Service members and their families. The Department is
proposing a regulation it believes is fully consistent with this
intent.
QUESTION 1: However, we seek comment on whether the final
regulation should exclude regulated banks, credit unions and savings
associations and their subsidiaries from coverage by the regulation
generally, or in limited circumstances such as in the following
circumstances: (1) the depository institutions are subject to
supervision and regulation by a federal regulatory agency; (2) the
institution extends covered ``consumer credit''; (3) the extension of
consumer credit by the institution is subject to supervisory guidance
by the federal bank regulatory agency that addresses consumer
protection, disclosure, and safety and soundness criteria applicable to
such lending; and (4) the federal bank regulatory agency agrees to act
on matters referred to it by the Department concerning complaints that
such lending to a covered member may be inconsistent with the
supervisory guidance, applicable law, or is having an adverse effect on
military readiness. Would depository institutions find an exclusion
that is limited in this manner useful? The Department notes that if the
final regulatory definition includes additional limitations on the
definition of covered ``creditor,'' it would not be precluded from
expanding that definition in the future as appropriate to address new
concerns or changed circumstances.
II. Description of the Regulation, By Section:
232.1 and 232.2, Authority, purpose and coverage, and
Applicability: No further descriptions provided other than that
contained in the regulation.
232.3, Definitions:
In drafting a regulation to implement the statute, the Department
has chosen to use the opportunity to define the terms ``creditor'' and
``consumer credit'' judiciously, having heard from numerous groups
through comments received in response to Federal Register notice DoD-
2006-OS-0216, solicited and unsolicited comments and through meetings
requested of the Department that applying the provision broadly would
create numerous unintended consequences. These unintended consequences
would have a ``chilling effect'' on the availability of consumer credit
covered as part of the statute.
In defining the term creditor, the statute provides the following:
``(5) CREDITOR.--The term `creditor' means a person--
(A) who--
(i) is engaged in the business of extending consumer credit; and
(ii) meets such additional criteria as are specified for such
purpose in regulations prescribed under this section; or
(B) who is an assignee of a person described in subparagraph (A)
with respect to any consumer credit extended.''
Consistent with the statute, the proposed regulation defines
``creditor'' as any person who extends consumer credit covered by part
232. For this purpose a ``person'' includes both natural persons as
well as business entities, but would exclude governmental entities.
Pursuant to the Department's authority to specify additional criteria,
a person would be a creditor only if the person is also a ``creditor''
for purposes of the Truth in Lending Act. For clarity, the Department
has implemented the provision covering assignees by including a
specific reference to assignees in each section of the regulation that
would apply to an assignee, in lieu of including assignees in the
definition of ``creditor.'' See sections 232.4, 232.8 and 232.9.
The definition of consumer credit provided in the statute is as
follows:
``(6) CONSUMER CREDIT.--The term `consumer credit' has the meaning
provided for such term in regulations prescribed under this section,
except that such term does not include (A) a residential mortgage, or
(B) a loan procured in the course of purchasing a car or other personal
property, when that loan is offered for the express purpose of
financing the purchase and is secured by the car or personal property
procured.''
This proposed regulation seeks to address the concerns addressed by
many institutions and associations that corresponded with the
Department by limiting the scope of the products upon which the
provisions of the statute would apply. It is clearly the intent of the
statute that consumer credit be defined by the Department, as long as
it does not include the two listed exemptions. The definition in this
proposed regulation clearly excludes these two types of loans and
focuses on three problematic credit products that the Department
identified in its August 2006 Report to Congress on the Impact of
Predatory Lending Practices on Members of the Armed Forces and Their
Dependents: payday loans, vehicle title loans, and refund anticipation
loans.
With respect to exclusion of ``residential mortgages'' the proposed
regulation clarifies that the exclusion applies to any credit
transaction secured by an interest in the borrower's dwelling. Thus,
home-purchase transactions, refinancings, home-equity loans, and
reverse mortgages would be excluded. Home equity lines of credit are
also excluded. In addition, the property need not be the consumer's
primary dwelling to qualify for the exclusion. A ``dwelling'' includes
any residential structure containing one to four units, whether or not
the structure is attached to real property, and would also include an
individual condominium unit, cooperative unit, mobile home, and
manufactured home.
The Department's proposed definition of the term ``consumer
credit'' is intended to narrow the regulation's
[[Page 18163]]
impact to consumer credit products and services that are potentially
detrimental and for which there are DoD-recommended, alternative
products or services available to Service members and their families.
DoD believes that a narrow definition can prevent unintended
consequences while affording the protections granted by the statute.
In addition to the above criteria, the Department intends to use
the definition of consumer credit to encourage the financial services
industry to offer affordable small loans for Service members and their
families.
Payday Loans
Payday loans have common characteristics that make them detrimental
to a Service member's financial well being and inferior to alternative
sources of emergency support. These characteristics can exacerbate a
cycle of debt, particularly if the borrower is already over-extended
through the use of other forms of credit. The proposed regulation
defines ``Payday loans'' based on certain characteristics, in order to
distinguish them from other financial products. A payday loan is
defined as a closed-end credit transactions having a term of 91 days or
less, where the amount financed does not exceed $2,000. The ``amount
financed'' is not defined in this regulation, but must be determined
based on the definition of that term in the Federal Reserve Board's
Regulation Z, which implements the Truth in Lending Act. In addition,
the definition of ``payday loan'' is limited to transactions where the
borrower contemporaneously provides a check or other payment instrument
that the creditor agrees to hold, or where the borrower
contemporaneously authorizes the creditor to initiate a debit or debits
to the covered borrower's deposit account.
Payday loans, otherwise known as deferred presentment loans, are
allowed in 39 States as a separate credit product from other forms of
credit regulated by Federal or State statute. States authorizing these
types of loans require payday lenders to obtain a license to operate
within the State. States have defined these products and services,
primarily through the basic process used to secure a payday loan,
either through holding a check or by obtaining access to a bank account
through electronic means. These basic processes have been included as
part of the definition of payday loans in the regulation (Section
232.3(c)). Many States have also established limits to the amount that
can be borrowed and the duration of the loan as part of the authorized
activities of lenders licensed to offer these products and services. A
review of State limits for payday loans establishes a foundation for
the definition used in this regulation.
The majority of States have a maximum dollar amount, maximum time
limits and maximum fees that regulate the product. Six States (New
Mexico, Oregon, Texas, Utah, Wisconsin and Wyoming) have no dollar
limit on the amount that can be loaned, and nine States (Alaska,
Arizona, Idaho, New Mexico, Rhode Island, South Dakota, Virginia,
Wisconsin and Wyoming) have no maximum limit established for the
duration of a payday loan. Of the States with dollar and duration
limits, the maximum amount loaned is $1,000 (Idaho and Illinois) and
the maximum duration of a loan is 180 days (Ohio). The average dollar
limit is $519 and the average duration limit is 46 days.
Payday loans offered over the internet often originate in States
with no limits on fees or maximum loan amounts. A survey of Web sites
offering payday loans indicates $1,500 as generally the maximum amount
loaned. A review of sites marketing ``Military Payday Loans'' refer to
loans of up to 40 percent of a Service member's take home pay. This
amount can vary considerably based on rank, other entitlements, tax
withheld and military allotments. For married enlisted Service members
in the grade of E-6 and below (no deductions for taxes or other
allotments), the proposed limit would cover a loan made for 40 percent
of take home pay. The limits established in the definition for payday
loans reflect the maximum duration and amount anticipated for loans
based on current State practices, to include internet payday loans
originating from locations without limits. QUESTION 2: The Department
seeks comments concerning whether the duration limit and monetary limit
on the amount of the loan included in the definition of payday lending
creates any unintended consequences for other credit products.
The definition provided in 232.3(b)(1)(A)(ii) includes the
following statement: ``This provision does not apply to any right of a
depository institution under statute or common law to offset
indebtedness against funds on deposit in the event of the covered
borrower's delinquency or default.'' This exemption only applies if the
depository institution has a right of offset under State or other
applicable law.
As previously stated, the Department's intention is that the
definition of payday loans does not impede creditors providing
alternatives to payday loans with high fees. The Department's August
2006 report to the Congress describes a variety of affordable credit
products that banks and credit unions located on military installations
offer to members of the armed services. Such loans generally had annual
percentage rates (APRs) for Truth in Lending Act purposes of 18% or
less. Because the loans may be for a small dollar amount, any flat fee
charged by the lender in connection with originating the loan could
cause the Military Annual Percentage Rate (MAPR), defined by the
proposed regulation, to exceed 36% even though the interest rate may be
much lower.
Vehicle Title Loans
The Department believes that vehicle title loans meet the proposed
definition of consumer credit, and that subjecting them to the proposed
rule is consistent with the Department's intent in developing the
regulation. The definition for ``vehicle title loans'' limits the
rule's coverage to loans of 180 days or less. Many States have not
established statutes overseeing these loans. A 2005 survey of States
conducted by the Consumer Federation of America (CFA) found that, of
the 16 States authorizing vehicle-title lending, 10 require 30 day or
one month term limits (with authorized renewals or extensions), one
State allows up to 60 days (with 6 renewals), one State requires
installments and four States do not establish term limits. QUESTION 3:
The Department seeks comments as to whether the limits established for
vehicle title loans for duration of the loan included as part of the
definition cause any unintended consequences for other credit products.
Refund Anticipation Loans
The Department believes that covering RALs is consistent with the
intent of the Department's proposed regulation. RALs can also be
defined to limit unintended consequences and refunds can be provided
expeditiously. There have been only a few States that have developed
statutes concerning RALs. Connecticut is the only state that has
established a rate cap, and prohibit transactions where the APR exceeds
60 percent. Other states, such as California, Washington, Oregon and
Nevada have established statutes specifying disclosure requirements for
RALs.
The Department is interested in ensuring that lenders continue to
offer responsible, small-dollar loan products that meet the credit
needs of service members and their families. QUESTION 4: Accordingly,
the Department solicits comments on regulatory approaches
[[Page 18164]]
that would encourage creditors to offer affordable, small-dollar,
short-term loans to Service members and their dependents. For example,
should transactions that would otherwise be covered as payday loans be
exempt from coverage under these rules if the MAPR is less than 24%
MAPR or some other rate specified in the rules? Would a similar rule be
appropriate for vehicle-title loans or tax refund anticipation loans?
Are there other approaches that DoD should consider?
The definition of MAPR creates a distinctive percentage rate that
reflects the provisions of the statute. The MAPR does not include fees
imposed for unanticipated late payments, default, delinquency or a
similar occurrence, because such fees are imposed as a result of
contingent events that may occur after the loan is consummated. Thus,
such fees are not included in the computation of the maximum 36% MAPR
cap imposed by these rules. QUESTION 5: The Department solicits comment
on whether there are other fees that should be expressly excluded for
the same reason.
232.4, Terms of consumer credit extended to covered borrowers: This
section implements the statutory prohibition limiting the amount that
creditors may charge for extensions of consumer credit to covered
borrowers. The proposed rule mirrors the statutory language. This
section also applies to ``assignees'' consistent with the statutory
definition of ``creditor.''
232.5, Identification of covered borrower:
The Department has received several comments expressing concern
over the potential difficulty in identifying a covered borrower,
particularly in light of the penalties for failing to provide the
statutory protections to a covered borrower. While DoD recognizes this
concern, the Department would emphasize that identifying the covered
borrower is only relevant in the context of transactions defined by the
regulation as consumer credit (for payday loans, vehicle title loans
and refund anticipation loans).
The Department's intent is to balance protections for covered
borrowers (according to the statute) and protections for creditors. The
Department understands creditors may otherwise decline offering
beneficial credit products to covered borrowers as a result of concerns
over penalties. To achieve an appropriate balance, the Department has
proposed a safe harbor, under which the creditor may require the
applicant to sign a statement declaring whether or not he or she is a
covered borrower (using the definition from the statute). If required
by the creditor, this declaration provides a ``safe harbor'' for the
creditor to prevent inadvertently violating the statute by failing to
recognize a covered borrower.
There is one caveat to this ``safe harbor'' provision. If the loan
applicant signs a declaration that denies being a covered borrower, but
the creditor obtains documentation as part of the credit transaction
reflecting that the applicant is a covered borrower (such as, a current
military leave and earning statement as proof of employment, or a tax
filing that takes advantage of a specific tax provision designed to
benefit the military), the applicant's declaration would not create a
safe harbor for the creditor. In such cases creditors should seek to
resolve the inconsistency, but if they are unable to do so, they may
avoid any risk of noncompliance by treating the applicant as a covered
borrower based on the documentation or by declining to extend credit
due to the inability to verify information provided in the borrower's
signed declaration.
This caveat is being included to prevent creditors from using the
declaration to allow covered borrowers to waive their right to the
protections provided by the regulation. This may occur when the
creditor recognizes the applicant is a covered borrower, as a result of
the documents presented as part of the credit transaction. The intent
of this caveat is not to hold the creditor accountable for false
statements made by an applicant when there is no indication through the
credit transaction that the applicant is a covered borrower.
The opposite situation, where an applicant claims to be a covered
borrower without presenting proof of his or her status does not require
further validation by the creditor. However, creditors have the option
of verifying the applicant's status as a covered borrower using several
sources of information, but they are not required to do so. Thus,
creditors may request applicants to provide proof of their current
employment and income, for example by requesting from service members a
copy of the most recent month's military leave and earning statement.
Creditors may also request service members or dependents to provide a
copy of their military identification card.
These sources, however, might not always be determinative. For
example, in some a cases a leave and earnings statement might not
reflect a recent change in the applicant's active duty status. Military
identification cards, that are the same as identification cards carried
by members of the active component, are issued to members of the
National Guard and the Reserve regardless of their duty status. Hence,
the proposed regulation states ``[u]pon such request, activated members
of the National Guard or Reserves shall also provide a copy of the
military orders calling the covered member to military service and any
orders further extending military service.'' This would also be the
case for their dependents. The proposed rule does not provide a safe
harbor to creditors in the situation described in this paragraph.
It is the Department's understanding that providing proof of
employment is a prerequisite to receiving a payday loan or a vehicle
title loan. The military leave and earning statement is the document
that provides validation of employment. There are several tax
provisions which are directed toward assisting the military. If the tax
preparer includes these provisions as part of the tax return, the
creditor should be made aware of this disclosure in order to validate
the status of the applicant prior to processing the application for a
refund anticipation loan. QUESTION 6: The Department would like
feedback on the creditor's involvement in tax filing aspects of a
refund anticipation loan.
The Department intends to provide access to a database to creditors
to validate the status of an applicant. This arrangement is currently
available to creditors to validate the active duty status of Service
members as part of implementation of benefits authorized by the Service
Members Civil Relief Act (https://www.dmdc.osd.mil/scra/owa/home). The
proposed database will include the status of covered borrowers and can
be used to resolve questions creditors may have about the status of an
applicant who denies being a covered member and yet presents
information during the credit transaction that is contrary to this
declaration. In these situations, the database would provide the most
accurate verification of the status of the applicant, to include
activated members of the National Guard and Reserve and their
dependents.
QUESTION 7: Since this issue is critical to the success of the
regulation, and also protecting the reputation of the creditor, the
Department solicits further comment on the proposed ``safe harbor''
concept and the methodology proposed to implement the intended balance
in approach to identification.
232.6, Mandatory disclosures:
Section 232.6 describes the disclosures that must be provided to
covered borrowers before they become obligated on a consumer credit
transaction, which includes the new
[[Page 18165]]
disclosures established under 10 U.S.C. 987 but also includes
disclosures that creditors are already required to provide pursuant to
the Federal Reserve Board's Regulation Z, which implements the Truth in
Lending Act (TILA). Regulation Z contains certain requirements
pertaining to the format of the TILA disclosures for closed-end credit
transactions, including a requirement that they ``shall be grouped
together, shall be segregated from everything else, and shall not
contain any information not directly related'' to the disclosures
required under Regulation Z. The Department intends that the
disclosures required under this proposal be provided consistent with
the format requirements of Regulation Z. Accordingly, the covered
borrower identification statement described in Sec. 232.5 and the
disclosures provided pursuant to Sec. 232.6(a)(1), (3), and (4) should
not be interspersed with the TILA disclosures.
The general rule is that disclosures required by Sec. 232.6(a)(1),
(3), and (4) must be provided orally as well as in writing. However, in
credit transactions entered into by mail or on the internet, a creditor
complies with this requirement if the creditor provides covered
borrowers with a toll-free telephone number on or with the written
disclosures and the creditor provides oral disclosures when the covered
borrower contacts the creditor for this purpose.
As with identification of the covered borrower, the Department has
received several comments about potential disparities in disclosures
required by this regulation as opposed to TILA, as well as the
difficulty of potentially presenting disclosures orally under part 232
when an offer is made through the mail or over the internet. QUESTION
8: The Department requests comment on whether the proposed rule for
providing certain disclosures orally adequately addresses the
compliance difficulties associated with the statutory requirements for
oral disclosures, or whether another approach is more appropriate.
As with other aspects of the statute, the Department's intention
has been to develop a regulation that is true to the intent of the
statute without creating a system that is so burdensome that the
creditor cannot comply. The Department also recognizes the potential
confusion inherent in mandating the disclosure of two annual percentage
rates (the MAPR required by this regulation and the APR required by
TILA). QUESTION 9: DoD therefore seeks comments on this proposed
requirement and invites suggestions on alternative approaches.
232.7, Preemption: The proposed regulation would implement the
statutory provision. Although revisions have been made to the statutory
language for clarity, no substantive change is intended.
232.8, Limitations:
Section 232.8(a) implements the statutory provision in 10 U.S.C.
987(e)(1), which prohibits a creditor from extending consumer credit to
a covered borrower in order to roll over, renew, or refinance consumer
credit that was previously extended by the same creditor to the same
covered borrower. The proposed regulation includes a limited exception
to this prohibition, however, to permit workout loans and other
refinancings that may benefit the borrower. QUESTION 10: The Department
solicits comment on whether it can or should adopt this approach.
QUESTION 11: Assuming the final rule permits a creditor to roll
over, renew or refinance credit that it previously extended to the same
covered borrower in limited circumstances, the Department solicits
comment on whether it can and should also adopt a rule clarifying that
refinancings or renewals of a covered loan require new disclosures
under Sec. 232.6 only when the transaction would also be considered a
new transaction that requires Truth in Lending Act disclosures. Whether
or not new disclosures are required, the Department believes that when
a creditor refinances or renews credit that it extended to a covered
borrower the limitations on rates and terms apply in the same manner as
they would for the original consumer credit transaction.
In some cases, a consumer might become a covered borrower after
obtaining consumer credit. When consumers request to refinance or renew
a short-term loan, creditors are likely to rely on their original
determination that the consumer is not a covered borrower. The
Department believes that it would be unnecessarily burdensome to impose
a duty on creditors to make a new determination in each transaction
given that a change in the borrower's status will infrequently occur
with short-term transactions. Accordingly, the proposed rule would not
apply when the same creditor extends consumer credit to a covered
borrower to refinance or renew an extension of credit that was not
covered by Part 232 because the consumer was not a covered borrower at
the time of the original transaction.
QUESTION 12: The Department solicits comment on this approach. If
such transactions were to be covered, however, should the disclosures
in Sec. 232.6 only be required for transactions also deemed to be
transactions requiring new disclosures under the Truth in Lending Act?
Subparagraph (a)(3) makes it unlawful for any creditor to extend
consumer credit to a covered borrower if the ``creditor requires the
covered borrower to submit to arbitration or imposes other onerous
legal notice provisions.'' The requirement is in accordance with 10
U.S.C. 987(e)(3). QUESTION 13: The Department does not have the
specific notice provisions or examples to include with this regulation
and requests feedback on particular legal notice provisions that should
be considered onerous.
Similarly, subparagraph (a)(4) makes it unlawful for any creditor
to extend consumer credit to a covered borrower if the ``creditor
demands unreasonable notice from the covered borrower as a condition
for legal action.'' This requirement is in accordance with 10 U.S.C.
987(e)(4), and as with onerous legal notice provisions, the Department
does not have specific unreasonable notices or examples to include in
the regulation. QUESTION 14: Feedback is also requested on this
provision and particular notice requirements that should be considered
unreasonable.
Section 232.8(a)(5) provides an exemptions to creditors, with
respect to consumer credit, to use electronic fund transfer to repay a
consumer credit, require direct deposit of the consumer's salary as a
condition of eligibility for consumer credit, or take a security
interest in funds deposited after the extension of credit in an account
established in connection with the consumer credit transactions that
are below 36% MAPR. This exemption is made with the recognition that
this exemption must be provided in compliance with other applicable
statutes governing the use of electronic fund transfers, savings and
direct deposit of consumer's salary. The Department believes the
flexibility provided by the 10 U.S.C. 987(h)(2)(E) may allow the
Department the authority to provide this exemption to facilitate
creditors to make alternative loans designed to assist covered
borrowers with financial recovery. The Department believes providing
this opportunity is important in fulfilling the Department's intended
purpose of encouraging creditors to provide alternative loan products.
QUESTION 15: The Department solicits comments on whether it can or
should adopt this proposed exemption.
Section 8(a)(7) prohibits creditors from charging a prepayment
penalty to
[[Page 18166]]
covered borrowers. The proposed rule does not define what constitutes a
prepayment penalty, and the Department expects creditors to rely on
existing state and federal laws, as applicable. QUESTION 16: Comment is
specifically solicited on this approach.
232.9, Penalties and remedies:
This provision incorporates the penalties and enforcement
provisions contained in the statute. Section 9 provides, among other
things, that any credit agreement subject to the regulation which fails
to comply with this regulation is void from inception. It further
provides that a creditor or assignee who knowingly violates the
regulation shall be subject to certain criminal penalties.
The statute, however, does not provide explicitly for enforcement
of these rules beyond the provisions described above. The Department
understands that the federal bank, thrift and credit union regulatory
agencies have authority--derived from federal law unique to federally-
regulated depository institutions--to enforce these rules with respect
to the institutions that they supervise. However, the Department notes
that this authority extends to a narrow category of depository
institutions that it proposes to cover as ``creditors'' (See Question 1
above), but it does not extend to other creditors, such as nonbank
lenders, that would also be covered creditors and that may be most
likely to provide the types of consumer credit restricted by these
rules. The Department is concerned that reliance solely on private
litigation or criminal prosecution with respect to these other
creditors may be insufficient to ensure uniform compliance with these
rules with respect to all creditors. QUESTION 17: Comment is requested
on all aspects of these issues, and on how to ensure uniform
implementation of, and compliance with, the statute by creditors not
subject to oversight by the federal bank, thrift, and credit union
regulatory agencies.
232.10, Effective date and transition:
The comment period for this proposal is 60 days. The Department
intends to review the comments in a timely manner in order to propose
and publish final rules on or before September 1, 2007, which is 30
days before the rules would become effective on October 1, 2007.
QUESTION 18: Comment is solicited on the proposed timing for the
publication of final rules. In particular, the Department requests
comment on the ability of covered creditors to comply with the proposed
rules by October 1 in light of the specific credit products that would
be covered by the rules.
Statutory Certification
Executive Order 12866, ``Regulatory Planning and Review''
It has been determined that 32 CFR part 232 is not an economically
significant regulatory action. The rule does not:
(1) Have an annual effect to the economy of $100 million or more or
adversely affect in a material way the economy; a section of the
economy; productivity; competition; jobs; the environment; public
health or safety; or State, local, or tribal governments or
communities;
(2) Create a serious inconsistency or otherwise interfere with an
action taken or planned by another Agency;
(3) Materially alter the budgetary impact of entitlements, grants,
user fees, or loan programs, or the rights and obligations of
recipients thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
this Executive Order.
Nevertheless, the proposed regulation was submitted to the Office
of Management and Budget for review under other provisions of Executive
Order 12866 as a significant regulatory action.
Unfunded Mandates Reform Act (Sec. 202, Pub. L. 104-4)
It has been certified that this rule does not contain a Federal
mandate that may result in the expenditure by State, local and tribal
governments, in aggregate, or by the private sector, of $100 million or
more in any one year.
Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)
It has been certified 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. The North American Industrial Classification (NAIC)
for the impacted businesses is 522390--``other financial activities
related to credit intermediation.'' According to the 2002 Economic
Census, there are approximately 5,205 small businesses related to this
classification, with 3,000 of these small businesses having less than 5
employees. These 5,205 businesses represent a portion of the 51,725
potential respondents cited in the Paperwork Reduction Act evaluation.
The limitations and disclosures posed by this part impact a small
percentage of the market served by the industries covered by this part.
For example according to the payday lending trade association, Service
members and their dependents represent approximately 1-2 percent of the
payday lending market. Thus there is not a significant economic impact
on a substantial number of small entities.
Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 35)
Section 232.6 of this proposed rule contains information collection
requirements. DoD has submitted the following proposal to OMB under the
provisions of the Paperwork Reduction Act (44 U.S.C. Chapter 35).
Comments are invited on: (a) Whether the proposed collection of
information is necessary for the proper performance of the functions of
DoD, including whether the information will have practical utility; (b)
the accuracy of the estimate of the burden of the proposed information
collection; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden of
the information collection on respondents, including the use of
automated collection techniques or other forms of information
technology.
Title: Mandatory Loan Disclosures as Part of Limitations on Terms
of Consumer Credit Extended to Service Members and Their Dependents.
Type of Request: New requirement.
Number of Respondents: 51,725.
Responses per Respondent: 1 per respondent.
Annual Responses: 1,219,035.
Average Burden per Response: 2-2.5 minutes, plus one business day
to revise processes and two business days to revise applicable Web
sites.
Annual Burden Hours: 182,105.
Needs and Uses: With respect to any extension of consumer credit
(including any consumer credit originated or extended through the
Internet) to a covered borrower, a creditor shall provide to the member
or dependent the following information clearly and conspicuously before
consummation of the consumer credit transaction:
(1) The Military Annual Percentage Rate (MAPR) applicable to the
extension of consumer credit, and the total dollar amount of all
charges included in the MAPR.
(3) A clear description of the payment obligation of the covered
member or dependent, as applicable. A payment schedule provided
pursuant to subsection (2) satisfies this requirement.
(4) A statement that ``Federal law provides important protections
to active duty members of the Armed Forces and their dependents.
Members of the Armed Forces and their dependents may be able to obtain
financial
[[Page 18167]]
assistance from Army Emergency Relief, Navy and Marine Corps Relief
Society, the Air Force Aid Society, or Coast Guard Mutual Aid. Members
of the Armed Forces and their family members may request free legal
advice regarding an application for credit from a service legal
assistance office or financial counseling from a consumer credit
counselor.''
The creditor shall provide the disclosures in writing in a form the
covered borrower can keep. The creditor also shall provide the required
disclosures orally. In mail and internet transactions, the creditor
satisfies this requirement by providing a toll-free telephone number on
or with the written disclosures that consumers may use to obtain oral
disclosures.
Affected Public: Creditors making payday loans, vehicle title loans
and refund anticipation loans.
Frequency: One for each loan transaction, which is equal to an
occasional frequency .
Respondent's Obligation: Mandatory.
Written comments and recommendations on the proposed information
collection should be sent to the Office of Management and Budget, Desk
Officer for the Department of Defense, Room 10235, New Executive Office
Building, Washington, DC 20503, fax number: (202) 395-6974 with a copy
to the Office of the Under Secretary of Defense for Personnel and
Readiness (MC&FP), DoD State Liaison Office, Attn: Mr. George Schaefer,
4000 Defense Pentagon, Washington, DC 20301-4000, telephone (703) 588-
0876. Comments can be received from 30 to 60 days after the date of
this notice, but comments to OMB will be most useful if received by OMB
within 30 days after the date of this notice.
You may also submit comments, identified by docket number and
title, by the following method:
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
Instructions: All submissions received must include the agency
name, docket number and title for this Federal Register document. The
general policy for comments and other submissions from members of the
public is to make these submissions available for public viewing on the
Internet at http://www.regulations.gov as they are received without
change, including any personal identifiers or contact information.
To request more information on this proposed information collection
or to obtain a copy of the proposal and associated collection
instruments, please write to the Office of the Office of the Under
Secretary of Defense for Personnel and Readiness (MC&FP), DoD State
Liaison Office, Attn: Mr. George Schaefer, 4000 Defense Pentagon,
Washington, DC 20301-4000, or telephone Mr. Schaefer at (703) 588-0876.
Executive Order 13132 Federalism
Executive Order 13132 requires that Executive departments and
agencies identify regulatory actions that have significant federalism
implications. A regulation has federalism implications if it has
substantial direct effects on the States, on the relationship or
distribution of power between the Federal Government and the States, or
on the distribution of power and responsibilities among various levels
of government.
The provisions of this part, as required by 10 U.S.C. 987,
overrides State statutes inconsistent with this part to the extent that
these provisions provide different protections for covered borrowers
than those provided to residents of that State. As discussed in the
section-by-section description of the proposed part, the provisions are
more stringent for creditors providing consumer credit to covered
borrowers (as defined in the part). In such circumstances, State laws
would not be preempted by operation of this part.
In this respect, this proposed part, if adopted, would not affect
in any manner the powers and authorities that any State may have or
affect the distribution of power and responsibilities between Federal
and State levels of government. Therefore, the Department has
determined that the proposed part has no federalism implications that
warrant the preparation of a Federalism Assessment in accordance with
Executive Order 13132.
List of Subjects in 32 CFR Part 232
Loan programs, Reporting and recordkeeping requirements, Service
members.
For the reasons set forth in the preamble, chapter I of title 32,
Code of Federal Regulations is proposed to amended by adding part 232
to read as follows:
PART 232--LIMITATIONS ON TERMS OF CONSUMER CREDIT EXTENDED TO
SERVICE MEMBERS AND DEPENDENTS
Sec.
232.1 Authority, purpose, and coverage.
232.2 Applicability.
232.3 Definitions.
232.4 Terms of consumer credit extended to covered borrowers.
232.5 Identification of covered borrower.
232.6 Mandatory loan disclosures.
232.7 Preemption.
232.8 Limitations.
232.9 Penalties and remedies.
232.10 Servicemembers Civil Relief Act protections unaffected.
232.11 Effective date and transition.
Authority: 10 U.S.C. 987.
Sec. 232.1 Authority, purpose, and coverage.
(a) Authority. This part is issued by the Department of Defense to
implement 10 U.S.C. 987.
(b) Purpose. The purpose of this part is to impose limitations on
the cost and terms of certain defined extensions of consumer credit to
Service members and their dependents, and to provide additional
consumer disclosures for such transactions.
(c) Coverage. This part defines the types of consumer credit
transactions, creditors, and borrowers covered by this part, consistent
with the provisions of 10 U.S.C. 987. In addition, this part:
(1) Provides the maximum allowable amount of all charges, and the
types of charges, that may be associated with a covered extension of
consumer credit;
(2) Requires creditors to disclose to covered borrowers the cost of
the transaction as a total dollar amount and as an annualized
percentage rate referred to as the Military Annual Percentage Rate or
MAPR, which must be disclosed before the borrower becomes obligated on
the transaction. The disclosures required by this regulation differ
from and are in addition to the disclosures that must be provided to
consumers under the Federal Truth in Lending Act;
(3) Provides for the method creditors shall use in calculating the
MAPR, and;
(4) Contains such other criteria and limitations as the Secretary
of Defense has determined appropriate, consistent with the provisions
of 10 U.S.C. 987.
Sec. 232.2 Applicability.
This part applies to consumer credit extended by creditors to a
covered borrower, as those terms are defined in this part.
Sec. 232.3 Definitions.
Terms used in this part are defined as follows:
(a) Closed-end credit means consumer credit other than ``open-end
credit'' as that term is defined in Regulation Z (Truth in Lending), 12
CFR Part 226.
(b) Consumer credit means credit offered or extended to a covered
borrower primarily for personal, family or household purposes, as
described in paragraph (b)(1) of this section.
[[Page 18168]]
(1) Except as provided in paragraph (b)(2) of this section,
consumer credit means the following transactions:
(i) Payday loans. Closed-end credit with a term of 91 days or less
in which the amount financed does not exceed $2,000 and the covered
borrower:
(A) Receives funds from and incurs interest and/or is charged a fee
by a creditor, and contemporaneously provides a check or other payment
instrument to the creditor who agrees with the covered borrower not to
deposit or present the check or payment instrument for more than one
day, or;
(B) Receives funds from and incurs interest and/or is charged a fee
by a creditor, and contemporaneously authorizes the creditor to
initiate a debit or debits to the covered borrower's deposit account
(by electronic fund transfer or remotely created check) after one or
more days. This provision does not apply to any right of a depository
institution under statute or common law to offset indebtedness against
funds on deposit in the event of the covered borrower's delinquency or
default.
(ii) Vehicle title loans. Closed-end credit with a term of 181 days
or less that is secured by the title to a motor vehicle owned by a
covered borrower, other than a purchase money transaction described in
paragraph (b)(2)(ii) of this section;
(iii) Tax refund anticipation loans. Closed-end credit in which the
covered borrower expressly grants the creditor the right to receive all
or part of the borrower's income tax refund or agrees to repay the loan
with the proceeds of the borrower's refund.
(2) For purposes of this part, consumer credit does not mean:
(i) Residential mortgages, which are any credit transactions
secured by an interest in the covered borrower's dwelling, including
transactions to finance the purchase or initial construction of a
dwelling, refinance transactions, home equity loans or lines of credit,
and reverse mortgages;
(ii) Any credit transaction to finance the purchase or lease of a
motor vehicle when the credit is secured by the property being
purchased or leased;
(iii) Any credit transaction to finance the purchase of personal
property other than a motor vehicle when the credit is secured by the
property being purchased; and
(iv) Any other credit transaction that is not consumer credit
extended by a creditor, is an exempt transaction, or is not otherwise
subject to disclosure requirements for purposes of Regulation Z (Truth
in Lending), 12 CFR Part 226.
(v) Credit secured by a qualified retirement account as defined in
the Internal Revenue Code.
(c) Covered borrower means a person with the following status at
the time he or she becomes obligated on a consumer credit transaction
covered by this part:
(1) A regular or reserve member of the Army, Navy, Marine Corps,
Air Force, or Coast Guard, serving on active duty under a call or order
that does not specify a period of 30 days or less, or such a member
serving on Active Guard and Reserve duty as that term is defined in 10
U.S.C. 101(d)(6), or
(2) The member's spouse, the member's child defined in 38 U.S.C.
101(4), or an individual for whom the member provided more than one-
half of the individual's support for 180 days immediately preceding an
extension of consumer credit covered by this part.
(d) Credit means the right granted by a creditor to a debtor to
defer payment of debt or to incur debt and defer its payment.
(e) Creditor means a person who is engaged in the business of
extending consumer credit with respect to a consumer credit transaction
covered by this part. For the purposes of this section, ``person''
includes a natural person, organization, corporation, partnership,
proprietorship, association, cooperation, estate, trust, and any other
business entity and who otherwise meets the definition of ``creditor''
for purposes of Regulation Z.
(f) Dwelling means a residential structure that contains one to
four units, whether or not the structure is attached to real property.
The term includes an individual condominium unit, cooperative unit,
mobile home, and manufactured home.
(g) Electronic fund transfer (EFT) has the same meaning for
purposes of this part as in Regulation E (Electronic Fund Transfers)
issued by the Board of Governors of the Federal Reserve System, 12 CFR
Part 205.
(h) Military annual percentage rate (MAPR). The MAPR is the cost of
the consumer credit transaction expressed as an annual rate. The MAPR
includes the following cost elements associated with the extension of
consumer credit to a covered borrower if they are financed, deducted
from the proceeds of the consumer credit, or otherwise required to be
paid as a condition of the credit: interest, fees, credit service
charges, credit renewal charges, credit insurance premiums including
charges for single premium credit insurance, fees for debt cancellation
or debt suspension agreements, and fees for credit-related ancillary
products sold in connection with and either at or before consummation
of the credit transaction. The MAPR does not include a fee imposed for
actual unanticipated late payments, default, delinquency, or similar
occurrence. The MAPR does not include tax return preparation fees
associated with a refund anticipation loan, whether or not the fees are
deducted from the loan proceeds. The MAPR shall be calculated based on
the costs in this definition but in all other respects it shall be
calculated and disclosed following the rules used for calculating the
Annual Percentage Rate (APR) for closed-end credit transactions under
Regulation Z (Truth in Lending), 12 CFR Part 226.
(i) Regulation Z means any of the rules, regulations, or
interpretations thereof, issued by the Board of Governors of the
Federal Reserve System to implement the Truth in Lending Act, as
amended from time to time, including any interpretation or approval
issued by an official or employee duly authorized by the Board of
Governors of the Federal Reserve System to issue such interpretations
or approvals. Words that are not defined in this part have the meanings
given to them in Regulation Z (12 CFR part 226) issued by the Board of
Governors of the Federal Reserve System (the ``Board''), as amended
from time to time, including any interpretation thereof by the Board or
an official or employee of the Federal Reserve System duly authorized
by the Board to issue such interpretations. Words that are not defined
in this part or Regulation Z, or any interpretation thereof, have the
meanings given to them by State or Federal law, or contract.
Sec. 232.4 Terms of consumer credit extended to covered borrowers.
(a) A creditor who extends consumer credit to a covered borrower
and an assignee of the creditor, shall not require the member or
dependent to pay a military annual percentage rate with respect to such
extension of credit, except as--
(1) Agreed to under the terms of the credit agreement or promissory
note;
(2) Authorized by applicable State or Federal law; and
(3) Not specifically prohibited by this part.
(b) A creditor described in paragraph (a) of this section or an
assignee may not impose an MAPR greater than 36 percent in connection
with an extension of consumer credit to a covered borrower.
Sec. 232.5 Identification of covered borrower.
(a) This part shall not apply to a consumer credit transaction if
the
[[Page 18169]]
conditions described in paragraphs (a)(1) and (2) of this section are
met:
(1) Prior to becoming obligated on the transaction, each applicant
is provided with a clear and conspicuous ``covered borrower
identification statement'' substantially similar to the following
statement and each applicant signs the statement indicating that he or
she is not a covered borrower:
------------------------------------------------------------------------
-------------------------------------------------------------------------
Federal law provides important protections to active duty members of the
Armed Forces and their dependents. To ensure that these protections are
provided to eligible applicants, we require you to sign one of the
following statements as applicable:
I AM a member of the Armed Forces on active duty.
------------------------------------------------------------------------
I AM a dependent of a member of the Armed Forces on active duty because
I am the member's spouse, the member's child under the age of eighteen
years old, or I am an individual for whom the member provided more than
one-half of my financial support for 180 days immediately preceding
today's date.
------------------------------------------------------------------------
--OR--
I AM NOT a member of the Armed Forces on active duty (or a dependent of
such a member).
------------------------------------------------------------------------
Warning: It is important to fill out this form accurately. Knowingly
making a false statement on a credit application is a crime
------------------------------------------------------------------------
(2) The creditor has not determined, pursuant to the optional
verification procedures in paragraph (b) of this section, that any such
applicant is a covered borrower.
(b) The creditor may, but is not required to, verify the status of
an applicant as a covered borrower by requesting the applicant to
provide a current (previous month) military leave and earning
statement, or a military identification card (DD Form 2 for members, DD
Form 1173 for dependents), as described in DoD Instruction 1003.1,
Identification (ID) Cards for Members of the Uniformed Services, Their
Dependents, and Other Eligible Individuals, December 5, 1997. Upon such
request, activated members of the National Guard or Reserves shall also
provide a copy of the military orders calling the covered member to
military service and any orders further extending military service.
(c) The creditor may, but is not required to, verify the status of
an applicant as a covered borrower by accessing the information
available at https://www.dmdc.osd.mil/scra/owa/home. Searches require
the service member's full name, Social Security number, and date of
birth.
(d) This part shall not apply to a consumer credit transaction in
which the creditor rolls over, renews, repays, refinances, or
consolidates consumer credit in accordance with Sec. 232.8(a)(1) if
Sec. 232.5(a)(1) and (2) applied to the previous transaction.
Sec. 232.6 Mandatory loan disclosures
(a) Required information. With respect to any extension of consumer
credit (including any consumer credit originated or extended through
the Internet) to a covered borrower, a creditor shall provide to the
member or dependent the following information clearly and conspicuously
before consummation of the consumer credit transaction:
(1) The MAPR applicable to the extension of consumer credit, and
the total dollar amount of all charges included in the MAPR.
(2) Any disclosures required by Regulation Z (Truth in Lending), 12
CFR Part 226.
(3) A clear description of the payment obligation of the covered
borrower, as applicable. A payment schedule provided pursuant to
paragraph (a)(2) of this section satisfies this requirement.
(4) A statement that ``Federal law provides important protections
to active duty members of the Armed Forces and their dependents.
Members of the Armed Forces and their dependents may be able to obtain
financial assistance from Army Emergency Relief, Navy and Marine Corps
Relief Society, the Air Force Aid Society, or Coast Guard Mutual Aid.
Members of the Armed Forces and their dependents may request free legal
advice regarding an application for credit from a service legal
assistance office or financial counseling from a consumer credit
counselor.''
(b) Method of disclosure. (1) Written disclosures. The creditor
shall provide the disclosures required by paragraph (a) of this section
in writing in a form the covered borrower can keep.
(2) Oral disclosures. The creditor also shall provide the
disclosures required by paragraphs (a)(1), (3) and (4) of this section
orally before consummation. In mail and internet transactions, the
creditor satisfies this requirement if it provides a toll-free
telephone number on or with the written disclosures that consumers may
use to obtain oral disclosures and the creditor provides oral
disclosures when the covered borrower contacts the creditor for this
purpose.
Sec. 232.7 Preemption.
(a) Inconsistent laws. 10 U.S.C. 987 as implemented by this
regulation preempts any State or Federal law, rule or regulation,
including any State usury law, to the extent such law, rule or
regulation is inconsistent with this part, except that any such law,
rule or regulation is not preempted to the extent that it provides
protection to a covered borrower beyond those protections provided by
10 U.S.C. 987 and this part.
(b) Different treatment under State law of covered borrowers
prohibited. States may not:
(1) Authorize creditors to charge covered borrowers MAPRs for
consumer credit higher than the legal limit for residents of the State,
or
(2) Permit the violation or waiver of any State consumer lending
protection that is for the benefit of residents of the State on the
basis of the covered borrower's nonresident or military status,
regardless of the covered borrower's domicile or permanent home of
record, provided that the protection would otherwise apply to the
covered borrower.
Sec. 232.8 Limitations.
(a) 10 U.S.C. 987 makes it unlawful for any creditor to extend
consumer credit to a covered borrower with respect to which:
(1) The creditor rolls over, renews, repays, refinances, or
consolidates any consumer credit extended to the covered borrower by
the same creditor with the proceeds of other consumer credit extended
by that creditor to the same covered borrower, unless the new
transaction results in more favorable terms to the covered borrower,
such as a lower MAPR.
(2) The covered borrower is required to waive the covered
borrower's right to legal recourse under any otherwise applicable
provision of State or Federal law, including any provision of the
Servicemembers Civil Relief Act (50 U.S.C. App. 527).
(3) The creditor requires the covered borrower to submit to
arbitration or
[[Page 18170]]
imposes other onerous legal notice provisions in the case of a dispute.
(4) The creditor demands unreasonable notice from the covered
borrower as a condition for legal action.
(5) The creditor uses a check or other method of access to a
deposit, savings, or other financial account maintained by the covered
borrower, or uses the title of a vehicle as security for the
obligation, except that, in connection with a consumer credit
transaction with an MAPR consistent with Sec. 232.4(b):
(i) The creditor may require an electronic fund transfer to repay a
consumer credit transaction, unless otherwise prohibited by Regulation
E (Electronic Fund Transfers) 12 CFR Part 205;
(ii) The creditor may require direct deposit of the consumer's
salary as a condition of eligibility for consumer credit, unless
otherwise prohibited by law; or
(iii) The creditor may, if not otherwise prohibited by applicable
law, take a security interest in funds deposited after the extension of
credit in an account established in connection with the consumer credit
transaction.
(6) The creditor requires as a condition for the extension of
consumer credit that the covered borrower establish an allotment to
repay the obligation.
(7) The covered borrower is prohibited from prepaying the consumer
credit or is charged a penalty fee for prepaying all or part of the
consumer credit.
(b) For purposes of this section, an assignee may not engage in any
transaction or take any action that would be prohibited for the
creditor.
Sec. 232.9 Penalties and remedies.
(a) Misdemeanor. A creditor or assignee who knowingly violates 10
U.S.C. 987 as implemented by this part shall be fined as provided in
title 18, United States Code, or imprisoned for not more than one year,
or both.
(b) Preservation of other remedies. The remedies and rights
provided under 10 U.S.C. 987 as implemented by this part are in
addition to and do not preclude any remedy otherwise available under
law to the person claiming relief under the statute, including any
award for consequential damages and punitive damages.
(c) Contract void. Any credit agreement, promissory note, or other
contract with a covered borrower which fails to comply with 10 U.S.C.
987 as implemented by this regulation or which contains one or more
provisions prohibited under 10 U.S.C. 987 as implemented by this
regulation is void from the inception of the contract.
(d) Arbitration. Notwithstanding 9 U.S.C. 2, or any other Federal
or State law, rule, or regulation, no agreement to arbitrate any
dispute involving the extension of consumer credit involving a covered
borrower pursuant to this part shall be enforceable against any covered
borrower, or any person who was a covered borrower when the agreement
was made.
Sec. 232.10 Servicemembers Civil Relief Act protections unaffected.
Nothing in this part may be construed to limit or otherwise affect
the applicability of Section 207 and any other provisions of the
Servicemembers Civil Relief Act (50 U.S.C. App. 527).
Sec. 232.11 Effective date and transition.
Applicable consumer credit--This part shall only apply to consumer
credit that is extended to a covered borrower and consummated on or
after October 1, 2007.
Dated: April 5, 2007.
L.M. Bynum,
Alternate OSD Federal Register Liaison Officer, DOD.
[FR Doc. 07-1780 Filed 4-6-07; 12:20 pm]
BILLING CODE 5001-06-P