[Federal Register: August 31, 2007 (Volume 72, Number 169)]
[Rules and Regulations]
[Page 50579-50594]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31au07-13]
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Part VI
Department of Defense
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32 CFR Part 232
Limitations on Terms of Consumer Credit Extended to Service Members
and Dependents; Final Rule
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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: Final rule.
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SUMMARY: The Department of Defense (the Department or DoD) is amending
32 CFR by adding new regulations to implement the consumer protections
provisions of 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 requires the Secretary of Defense to
prescribe regulations to carry out the new section. The final rule
regulates the terms of certain credit extensions to active duty service
members and their dependents.
EFFECTIVE DATE: October 1, 2007.
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 today's All
Volunteer Force is comprised of individuals who fit the stringent
requirements needed for success on the battlefield. The military has
seen many 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 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
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 and personal
responsibilities and their successful adjustment to military life. Part
of this training is in personal finance, which is an integral part of
their personal, and often, professional success. The Department of
Defense (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 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 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
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 impacts the performance of
Service members and has a major negative impact on family quality of
life.
Increase savings. Establishing personal and family goals,
helps motivate Service members to control their finances and live
within their means.
Decrease dependence on unsecured debt. This reduces the
stressors and vulnerabilities associated with living from paycheck to
paycheck.
Decrease the prevalence of predatory practices. This
provides 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 to obtain 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 a policy in November 2004: DoD
Instruction 1342.27, Personal Financial Management Programs for Service
Members.
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-
[[Page 50581]]
reported assessments through survey data have shown Service members are
doing a better job 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 supplement but 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 and aboard ships. The Military Services
annually provide over 10,000 classes and train approximately 24 percent
of the force, as well as nearly 20,000 family members. 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 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 the Federal Trade Commission primarily
providing these products. In addition, Military Money Magazine has run
several articles, to include two cover articles on predatory lending.
The magazine is free and is distributed through military commissaries,
family support centers and other service agencies on the installation,
as well as to residents on installation and to 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 laws or regulations. 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 among 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. Data from these and
others indicate 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 Excessive Unrealistic Repeated
Lending product borrowers' fees and payment rollover/
ability to interest schedule refinancing
repay
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Payday loan............................................. X X X X
Vehicle title loan...................................... X X X X
[[Page 50582]]
Military installment loan............................... ............ X ............ ............
Refund anticipation loan................................ ............ X ............ ............
Rent-to-own............................................. X X ............ ............
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A major concern of the Department has been the debt trap some forms
of credit can present for Service members and their families. The
combination of little-to-no regard for the borrower's ability to repay
the loan, unrealistic payment schedule, high fees, and interest and the
opportunity to roll over 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 Annual
Percentage Rate (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 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
charges are added to the interest rate. Tax refund anticipation loans
(RALs) 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.
According to the Consumer Federation of America (report dated
February 5, 2007) the advantage of RALs is minimal when comparing the
speed of the refund (between 7 and 14 days faster) against the cost of
the service ($30--$125). Moreover, the APR for this credit can be
triple digit. A study by Gregory Elliehausen of the Credit Research
Center (CRC) (Monograph 37, April 2005) showed a
disproportionate percentage of individuals under 35 years old use RALs.
Sixty-one percent of RAL borrowers were below 35 years old, although
individuals below 35 years old represent 28.6 percent of heads of
households. This is significant since 79 percent of Service members are
35 years old or below.
The reason for using RALs vary. The CRC study showed that 41
percent of borrowers obtain RALs 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 sites are located on most 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 by establishing a more
solid footing for their personal finances. The CRC study found that
users of RALs and payday loans both had similar levels of debt and
patterns of credit use. 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.
The Department considered the five products in developing the
regulation. Trade associations and financial institutions expressed
their concern that the regulation needed to be very clear about when
the provisions of the statute applied. During our consultation with the
Federal regulatory agencies, they reiterated the need for ``clear
lines'' around definitions of covered consumer credit and the impacted
creditors.
The regulation has focused on credit products that have, in general
practice, terms that can be detrimental to military borrowers. Rent-to-
own services provide rental opportunities (not covered by the
Department's rule making), as well as options for ownership which are
not loans under TILA. As a consequence, rent-to-own products and
services were not covered. Likewise, there are installment loans with
favorable terms and some with terms that can increase the interest rate
well beyond the limits prescribed by 10 U.S.C. 987. Isolating
detrimental credit products without impeding the availability of
favorable installment loans was of central concern in developing the
regulation. Consequently, installment loans that do not fit the
definition of ``consumer credit'' in Section 232.3(b), including the
definition of ``payday loans,'' ``vehicle loans,'' or ``tax refund
anticipation loans'' are not covered by the regulation. The
Department's intent is to balance protections with access to credit.
The protections posed in the statute assist Service members, when
applied with precision to preclude unintended barriers.
[[Page 50583]]
Alternatives
The Department prefers that Service members and their families who
experience financial duress seek help 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
ratings 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.
Financial institutions 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 financial institutions provide low denomination loans at
reasonable APRs 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
loans 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 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 financial institutions
described above that currently provide such favorable credit to Service
members participated in the conference.
Subsequent to the conference, FDIC issued guidelines to FDIC-
supervised banks to encourage them to offer affordable small-dollar
loan products. These guidelines explore a number of aspects of
developing alternative small loan products, including affordability and
streamlined underwriting. They also discuss tools such as financial
education and savings that may address long-term financial issues that
concern borrowers.
At the same time, the FDIC approved a two-year pilot project to
review affordable and responsible small-dollar loan programs in
financial institutions. The project is designed to assist institutions
by identifying information on replicable business models for affordable
small-dollar loans. FDIC expects to identify best practices resulting
from the pilot that will become a resource for institutions. The
Department supports the FDIC's efforts with the guidelines and the
pilot project as they both will help encourage banks to meet the demand
for small-dollar loans at more reasonable costs for the borrower.
Efforts To Curb the Prevalence and Impact of Predatory Loans
The Department has found that it has a small window of opportunity
to convince and inform Service families about products and services
beneficial to their particular situations, a job complicated by many
contrary messages and enticements. 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
raise 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 that the regional command authority place the business off-
limits for all Service members within the region (regardless of
Service).
Normally concerns are raised when a business has violated State or
Federal laws. 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. Numerous payday lenders can be found in
communities around military installations (Graves and Peterson, Ohio
State Law Journal, Volume 66, Number 4, 2005).
Also without clear standards and prohibitions, commanders and
AFDCBs cannot easily identify what remediation lenders offering payday,
auto title, and refund anticipation loans should take. In states
without relevant laws, Commanders and AFDCBs must not only establish
rules, but they must also educate those affected and then monitor their
compliance.
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
member 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. It does not have sufficient
control over the behavior of Service members and their families to
preclude them from taking on financial risks that can detract from not
only their quality of life, but also military mission accomplishment.
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 a virtual guarantee of approval. These messages can
be particularly alluring to Service members
[[Page 50584]]
and families already overburdened with bills and debts. A 2006 survey
accomplished by the Consumer Credit Research Foundation concluded that
Service members choose payday loans primarily because they are
convenient. Certainly, obtaining ``fast cash'' from a payday lender is
far easier than coming to terms with delinquent 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 agree,
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 (over 40 percent strongly
agreed). 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 (51 percent of non-users strongly agreed).
``Limitations on Terms of Consumer Credit Extended to Service Members
and Dependents,'' John Warner National Defense Authorization Act for
Fiscal Year 2007, Section 670, Codified at 10 U.S.C. 987
10 U.S.C. 987 directs the Secretary of Defense to establish and
implement regulations concerning consumer credit services for Service
members. Implementing regulations must be completed and published prior
to October 1, 2007, after 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 987(h)(2)
requires the Secretary of Defense to issue regulations establishing the
following:
(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.
(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 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 statute provides several limitations on credit
transactions, and allows the Department to focus these limitations on
areas of greatest concern.
As noted in the preamble to the proposed rule, the Department has
learned of the potential for unintended consequences that could
adversely affect credit availability if it were to adopt a broadly
applicable regulation. Some comments received suggested that one way to
limit the potential adverse and unintended consequences of the statute
would be to adopt a regulation that provided for a general or
conditional exception for credit products offered by insured depository
institutions and their subsidiaries. While the proposed rule did not
include any exceptions for insured depositories or their subsidiaries,
the Department explicitly asked for comment on the issue.
Most respondents to the request for comments addressed the question
of whether the final rule should exclude insured depository
institutions from coverage generally or in limited circumstances.
Almost all representatives of insured depository institutions strongly
supported the Department exempting lenders that are subject to
supervision by a Federal banking agency. They noted that these
institutions have not been identified as engaging in predatory lending
practices. Consumer representatives, on the other hand, as well as the
FTC staff who provided comment on this issue, did not favor making
distinctions in the ``creditor'' definition based on whether or not the
lender was subject to supervision by Federal banking agencies.
Comments from lending institutions about the need for a general or
limited exemption of Federally-insured depository institutions and
their subsidiaries from this regulation were tempered in part by their
support of the proposed definition of ``consumer credit,'' which is
limited to potentially abusive credit products identified by the
Department in its report to Congress. Specifically, they noted that if
the regulations were expanded to cover a wider range of financial
products, the need for an exemption of insured depository institutions
from this regulation would be increased to ensure that Service members
and their dependents have access to affordable credit by responsible
lenders.
The intent of the statute is clearly to restrict or limit credit
practices that have a negative impact on Service members without
impeding the availability of credit that is benign or beneficial to
Service members and their families. The Department has determined that
given the limited types of credit products covered by the rule, an
exemption for depository institutions is not needed to ensure access to
beneficial credit by Service members and their dependents. Accordingly,
the final rule does not provide exemptions for insured depository
institutions or their subsidiaries. As noted above, Federally-
supervised financial institutions that commented appeared to be
concerned about future iterations of the regulation and the potential
for the regulation to impact their ability to provide beneficial credit
to Service members and their families. If the Department considers it
necessary to reconsider the products included as covered consumer
credit, the issue of such exemptions would also be reconsidered.
II. Description of the Regulation, by Section
232.1 and 232.2, Authority, purpose and coverage, and
Applicability: No comments were received on these provisions. The
provisions in the proposed rule are being adopted without substantive
change.
232.3, Definitions: In implementing the statute, the Department has
defined 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 for Service members and
their dependents in circumstances that are not necessarily predatory.
In defining the term ``creditor,'' the statute provides the
following:
[[Page 50585]]
(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 final rule 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 (TILA). Section 987(c) of 10 U.S.C. provides
that the disclosures required by that section be presented along with
the disclosures required under TILA, and in accordance with the terms
prescribed by the regulations implementing TILA. Thus, it does not
appear that section 987 was intended to apply to persons or
transactions that are not covered by TILA.
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.
It is clearly the intent of the statute that the Department define
which types of consumer credit transactions shall be covered by the
law, provided that they do not include the two listed exemptions. This
is because the statute authorizes the Department to specify additional
criteria for an entity to be considered a creditor that is engaged in
the business of extending consumer credit. The Department has exercised
this authority by limiting the rule's applicability to creditors that
engage in certain types of consumer credit transactions. Accordingly,
the final rule 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. The Department's definition of the term ``consumer
credit'' in the proposed rule was intended to narrow the regulation's
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 dependents.
DoD believes that a narrow definition will prevent unintended
consequences while affording the protections granted by the statute.
After review of comments received through the Federal Register
publication of the proposed rule, the Department believes that the
scope of the regulation as proposed is appropriate to address the
concerns that formed the basis of its report to the Congress. Comments
received from consumer advocates and some others expressed the view
that the Department's proposed definition of ``consumer credit'' was
too narrow and that creditors could restructure their loan products to
make high-cost extensions of credit while avoiding coverage under Part
232. Comments received from representatives of federally-insured
depository institutions generally supported the consumer credit
definition in the proposed rule.
The Department continues to believe that the scope of the proposed
rule and the definition of consumer credit are appropriate. The
Department maintains the ability to issue additional rules in the
future and the Department plans to continue surveying Service members
and their dependents to collect data on their use of credit products.
The Department will also monitor market developments that affect
Service members and will obtain a variety of inputs from regulatory
agencies, consumer protection groups and the credit industry to assess
the level of protection provided by the final rule. The Department will
review this data to determine if further revisions are needed.
Accordingly, the proposed definition of ``consumer credit'' is being
adopted without substantive change. The Department has made technical
changes to the regulation to clarify that the consumer credit defined
in the regulation is closed-end credit and not open-end credit.
With respect to exclusion of ``residential mortgages'' the final
rule adopts the proposed rule's exclusion which 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, or
manufactured home.
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 final rule 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 transaction having a term of 91 days or
fewer, 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 TILA. 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
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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 trigger regulation. 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 that impose limits on the loan
amount or loan duration, the highest dollar limit is $1,000 (Idaho and
Illinois) and the longest permissible loan term is 180 days (Ohio). The
average dollar limit is $519 and the average limit on loan term 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 websites
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 $2,000 limit in the final rule 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.
Many respondents expressed some concern that the four-part | 