50580 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

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. 

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 twoyear 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 bottomup review of the quality-of-life support 

provided by the Department, which 

articulated the linkage between qualityof-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 firstterm 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, selfVerDate Aug<31>2005 19:27 Aug 30, 2007 Jkt 211001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR3.SGM 31AUR3

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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 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: 

Lending product 

Without regard for borrowers’ ability to repay 

Excessive 

fees and 

interest 

Unrealistic 

payment 

schedule 

Repeated 

rollover/refinancing 

Payday loan ..................................................................................................................... X X X X 

Vehicle title loan .............................................................................................................. X X X X 


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50582 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

Lending product 

Without regard for borrowers’ ability to repay 

Excessive 

fees and 

interest 

Unrealistic 

payment 

schedule 

Repeated 

rollover/refinancing 

Military installment loan ................................................................................................... .................... X .................... ....................

Refund anticipation loan .................................................................................................. .................... 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. 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-inLending 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-ofdebt (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. 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 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 


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50584 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

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: 


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(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 definition of 

payday loans may allow creditors to 

change one aspect of their product to 

evade the regulation, such as extending 

the length of the loan or extending 

open-end credit. The Department’s 

intent is to balance these concerns 

against the concerns expressed by other 

respondents that the definition should 

remain as narrow as proposed to 

preclude unintended consequences 

regarding short-term, small-dollar credit 

availability for covered borrowers. Most 

financial institutions requested that the 

definitions of consumer credit clearly 

specify that they apply to closed-end 

loans to preclude misinterpretations. 

Industry and consumer group 

respondents requested clarification of 

the payday loan definition. Specifically, 

they sought to clarify that borrowers 

must provide a check to the creditor or 

authorize a debit to the borrower’s 

deposit account contemporaneously 

with the borrower’s receipt of funds, 

and not contemporaneously with the 

payment of interest or fees. Section 

232.3(b)(1)(i) of the final rule has been 

modified to make this clarification. 

The definition of ‘‘payday loans’’

includes transactions where the covered 

borrower receives funds and 

contemporaneously authorizes the 

creditor to initiate a debit or debits to 

the borrower’s deposit account. 

However, there is an exclusion to this 

definition in 232.3(b)(1)(i)(A): ‘‘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 exclusion only applies to 

a depository institution’s right of offset 

under State or other applicable law. 

Vehicle Title Loans 

The Department believes that vehicle 

title loans should be included within 

the definition of consumer credit, and 

that covering such transactions is 

consistent with the law’s purpose. The 

definition for ‘‘vehicle title loans’’ limits 

the rule’s coverage to loans of 181 days 

or fewer. Many States have not 

established statutes overseeing these 

loans. A 2005 survey of States 

conducted by the Consumer Federation 

of America found that, of the 16 States 

authorizing vehicle-title lending, 10 

require 30-day or one-month term limits 

(with authorized renewals or 

extensions), and one State allows up to 

60 days (with 6 renewals). Four States 

do not establish term limits. 

Some consumer groups remarked that 

the scope of the definition for vehicle 

title loans may not encompass all 

practices used by creditors to provide 

high-cost, short-term vehicle title loans. 

Some industry respondents said the 

restrictions in the regulation may make 

some creditors reluctant to offer 

beneficial loans to covered borrowers 

with poor or no credit history. However, 

the majority of federally-insured 

depository institution respondents said 

that their loans that use vehicles as 

collateral would be unaffected since 

they are made for longer than 181 days. 

As with payday loans, the Department 

has sought to balance the definition of 

vehicle title loans to reflect the 

countervailing concerns of respondents. 

The Department does not want 

protections from high-cost, short-term 

vehicle title loans to unnecessarily 

inhibit covered borrowers from 

accessing beneficial loans for which a 

vehicle is used as collateral. 

Comments received from a group of 

bank trade associations asked that the 

rule clarify that ‘‘motor vehicle’’ only 

includes vehicles which must be 

registered pursuant to state law. The 

final rule has been modified to make 

this clarification. 

Refund Anticipation Loans 

The Department believes that 

covering RALs is consistent with the 

intent of the statute. They have been 

included because survey data has 

shown RALs to be the second most 

prevalent high cost loan used by Service 

members, and because alternatives that 

can expedite their tax returns are 

available, generally at no cost. Some 

states have also addressed concerns 

with RALs. Connecticut has established 

a rate cap for RALs, prohibiting 

transactions where the APR exceeds 60 

percent. Other states, such as California, 

Washington, Oregon, and Nevada, have 

established statutes specifying 

disclosure requirements for RALs. 

Respondents representing tax preparers 

and financial institutions providing 

RALs objected to being included in the 

definitions of covered consumer credit 

products, stating their product does not 

contribute to a cycle of debt or place a 

critical family asset at risk. 

Credit union trade association 

respondents and bank trade association 

respondents said the inclusion of RALs 

in the rule would have little impact on 

their members because so few of them 

make these loans, and the few that do 

make them will likely cease doing so 

because of the rule’s requirements. The 

Department believes that its definition 

of RALs limits unintended 

consequences and allows for refunds to 

be provided expeditiously. 

One commenter expressed concern 

that the rule could be construed to 

apply when a borrower notes that the 

source of repayment is the tax refund. 

The intent of the regulation is to cover 

credit products that are designed 

expressly to use tax refunds as the 

collateral for the loan. The rule does not 

cover loans where borrowers merely 

note that a tax refund may be used to 

repay the advance. To ensure the 

Department’s intent is clear, the word 

‘‘expressly’’ has been repeated in the 

RAL definition to modify the statement 

concerning repayment of the loan. 

Loans Where the MAPR Is Less Than 

24% 

In its proposal the Department 

solicited comments on other approaches 

that would encourage lenders to offer 

responsible, small-dollar, short-term 

loans that meet the credit needs of 

Service members and their dependents. 

For example, comment was solicited on 

whether loans should be exempt from 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 50587 

coverage under Part 232 if the MAPR 

were less than 24%. 

Industry respondents generally said 

that such an exemption would have 

little impact on credit products defined 

in the regulation because the credit 

product definitions are already narrow 

enough in scope to leave institutions 

room to provide affordable small-dollar 

loans to Service members and their 

dependents. Some consumer groups 

favored such an exemption only if it 

were part of a ‘‘safe harbor’’

accompanied by significantly broader 

definitions of covered credit products. 

The Department has not adopted an 

MAPR-based exemption from the 

definition of consumer credit in the 

final rule to include this 

recommendation. To accommodate 

current and potential small-dollar, 

short-term loan programs, the 

Department has already made 

allowances in the regulation for credit 

products that are within the MAPR limit 

of section 232.4(b) and believes these 

are sufficient to support lower cost 

alternatives. 

Definition of MAPR 

The definition of MAPR creates a 

distinctive percentage rate that reflects 

the provisions of the statute. The MAPR 

does not include fees imposed on the 

borrower 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. 

Many respondents expressed concern 

that disclosing both an MAPR and an 

APR to Service members and their 

dependents would cause confusion. The 

statute requires that the MAPR be 

presented to the covered borrower. The 

Department will take steps to educate 

Service members and their dependents 

on the MAPR. 

While acknowledging that the narrow 

scope of the rule will ease the potential 

for confusion, comments from industry 

representatives sought to modify the 

MAPR definition to make it as close as 

possible to the APR disclosed under 

TILA. By contrast, consumer groups 

contended that the MAPR definition 

should include all cost elements, and 

should not contain exclusions in the 

proposed rule, such as for actual 

unanticipated late payments. 

The Department has designed the 

definition of MAPR within the context 

of the consumer credit covered by the 

regulation. The Department’s intent is to 

ensure that the credit products covered 

by the regulation cannot evade the 36 

percent limit by including low interest 

rates with high fees associated with 

origination, membership, 

administration, or other cost that may 

not be captured in the TILA definition 

of APR. 

Some industry respondents were 

concerned about including costs in the 

MAPR that are ‘‘associated with the 

extension of consumer credit’’ because 

this may include costs for products or 

services that are purchased in 

connection with a loan, but are not 

required. For example, industry 

respondents argue that ancillary 

products (such as voluntary credit 

insurance and debt cancellation 

coverage) should not be included in the 

MAPR calculation because these 

products may protect borrowers against 

being burdened with debt if a covered 

event occurs. 

The Department believes the 

definition is consistent with the statute 

and is appropriate in the context of the 

consumer credit covered by the rule. 

The Department is concerned that 

Service members are sold products such 

as voluntary insurance without having 

these credit insurance products placed 

in the context of the Service member’s 

employment status or his or her current 

level of insurance coverage. 

Additionally, the Department is 

concerned about small loans that are 

associated with sales of products or 

services not related to the loans, such as 

credit offered as part of Internet access 

or catalog sales. The definition has been 

designed to cover sales such as these or 

sales similar to those mentioned in this 

paragraph and considers them 

‘‘associated with the extension of 

consumer credit.’’

One commenter expressed concern 

that only fees for ‘‘actual unanticipated’’

late payments would be excluded from 

the MAPR, because some borrowers 

might notify the lender if they know 

their payment will be late. The language 

in the proposed rule tracks the language 

in section 226.4(c)(2) of Regulation Z, 

which excludes such fees from the APR 

disclosed under TILA. The intent is to 

exclude charges from the MAPR that the 

lender does not anticipate under the 

terms of the agreement. The language in 

the final rule is being adopted as 

proposed, so that creditors 

determinations under Part 232 will be 

consistent with their existing practice 

under TILA. 

The final rule also has been revised to 

clarify that the MAPR does not include 

certain taxes or fees prescribed by law, 

such as fees paid to public officials in 

connection with perfecting a security 

interest. See § 232.3(h)(2)(i) and (ii). The 

revision is being made for consistency 

with the Federal Reserve Board’s 

Regulation Z, which does not require 

such charges to be included in the APR 

disclosed under TILA. 

Industry respondents also requested 

that the final rule clarify that the 

definition of ‘‘consumer credit’’ be 

limited to closed-end transactions so 

that the rules are not unintentionally 

interpreted to include credit cards. 

Many respondents stated it was not 

clear whether the rule included openend credit and that it is important that 

the final rule explicitly state it is limited 

to the three listed closed-end credit 

products. In order to clarify that the 

regulation covers only closed-end 

credit, the definition in 232.3(b) has 

been modified to include the words 

‘‘closed-end’’ as part of the definition of 

covered consumer credit. 

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 the Department 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). 

Some respondents expressed concern 

that imposing a duty on creditors to 

identify dependents of active duty 

Service members in order to comply 

with Part 232 would conflict with the 

Equal Credit Opportunity Act, which is 

implemented by the Federal Reserve 

Board’s Regulation B. These 

respondents noted that under 

Regulation B, a creditor may not inquire 

about a credit applicant’s marital status. 

The Department notes, however, that 

the final rule does not require creditors 

to inquire about marital status. The 

‘‘covered borrower identification 

statement’’ contained in § 232.5(a) of the 

final rule requests credit applicants to 

identify if they are a dependent based 

on any of the listed criteria (spouse, 

child or individual for whom the 

member provides financial support), but 


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does not require an applicant to specify 

which one of these applies in their 

specific case. Accordingly, the ‘‘covered 

borrower identification statement’’ does 

not inquire about an applicant’s marital 

status. The Department also notes that 

§ 202.5(a)(2) of the Federal Reserve’s 

Regulation B states that creditors may 

obtain information required by federal 

statutes or regulations. The Department 

has consulted with staff of the Federal 

Reserve Board, and they agreed with the 

Department’s analysis. 

The Department’s intent is to balance 

protections for covered borrowers 

(according to the statute) while also 

addressing creditors’ need to have some 

degree of certainty in determining that 

the loans they make are in compliance 

with the statute as implemented by Part 

232. The Department understands 

creditors may otherwise decline offering 

beneficial credit products to covered 

borrowers as a result of concerns over 

potential violations. 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. For creditors who provide 

consumer credit, as defined by the 

regulation, by means of the Internet, the 

applicant can provide an electronic 

signature that fulfills the requirements 

of the Electronic Signatures in Global 

and National Commerce Act, 15 U.S.C. 

§ 7001 et seq. 

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), 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 prevents 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. 

In contrast, when an applicant claims 

to be a covered borrower without 

presenting proof of status, further 

validation by the creditor is not 

required. 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 cases a leave and earnings 

statement might not reflect a recent 

change in the applicant’s active duty 

status. Military identification cards, 

which 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 final rule 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 final 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. 

The Department will 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 

Servicemembers Civil Relief Act 

(https://www.dmdc.osd.mil/scra/owa/ 

home). The proposed database 

(available at http://www.dmdc.osd.mil/ 

mla/owa/home), 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. 

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. This 

includes the new disclosures 

established under 10 U.S.C. 987 and 

also includes disclosures that creditors 

are already required to provide pursuant 

to the Federal Reserve Board’s 

Regulation Z, which implements the 

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 

§ 232.5 and the disclosures provided 

pursuant to § 232.6(a)(1), (3), and (4) 

should not be interspersed with the 

TILA disclosures. 

The general rule is that disclosures 

required by § 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. Consumer groups that 

commented stated that providing 

borrowers with a toll-free telephone 

number would not be sufficient because 

it places the burden on the borrower 

instead of the lender. Many industry 

respondents expressed concern about 

the costs of providing the disclosures, to 

include developing software, training 

employees about the new rules, and 

updating all their forms. The 

Department believes providing 

consumers with a toll-free telephone 

number to access oral disclosures 

fulfills the intent of the statute and 

balances overall considerations for 

protection with access to credit. 


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The Department has received several 

comments about potential disparities in 

disclosures required by this part as 

opposed to TILA. Many respondents felt 

that the current APR disclosures are 

barely understood by consumers and 

that adding a new MAPR disclosure to 

the mix will only serve to create more 

confusion. As with other aspects of the 

statute, the Department’s intention has 

been to develop a regulation that is 

consistent with the statutory intent. The 

Department recognizes the potential 

confusion inherent in mandating the 

disclosure of two differing annual 

percentage rates (the MAPR required by 

this regulation and the APR required by 

TILA). As previously stated, the 

Department is responsible for training 

Service members and making similar 

education available for spouses. The 

differences between APR and MAPR 

will be added to their training, along 

with explaining their rights as a covered 

borrower. Some respondents sought 

clarification on whether MAPR 

disclosures would be required in 

advertising. These same respondents 

suggest that including MAPRs and APRs 

in marketing initiatives would be 

confusing to consumers. Under section 

232.6 of the final rule, creditors must 

provide the required disclosures in 

writing before consummation of the 

transaction. Disclosure of the MAPR in 

advertisements is not required. 

232.7, Preemption: The final rule 

implements the statute. Although, 

revisions have been made, this section 

has been drafted to clarify the statutory 

language, no substantive change is 

intended. 

Some respondents expressed concern 

about the adequacy of enforcement for 

lenders that are not subject to 

enforcement by the federal depository 

institution supervisory agencies. The 

Department does not view the 

regulation as having substantial direct 

effects on States, or distribution of 

power and authority. States determine 

whether they will enforce the regulation 

or not for creditors under their 

jurisdiction. Associations of state 

supervisors recommended the 

Department seek written agreements 

between the Department and state 

regulatory agencies about enforcement, 

supervision, and information sharing to 

help state authorities enforce those areas 

that will normally fall under their 

jurisdiction. The Department intends to 

rely on federal and state regulators to 

oversee or enforce compliance with the 

final rule, to the extent possible under 

their statutory authority, for their 

respective creditors. 

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 result in more 

favorable terms to the covered borrower, 

such as a lower MAPR. Most 

respondents agree that workout loans 

and other refinancings that are on ‘‘more 

favorable terms’’ for the borrower 

should be allowed. However, many 

respondents thought the standard for 

applying the exception was too 

subjective and would create uncertainty 

about what terms are considered ‘‘more 

beneficial.’’ Respondents suggested that 

financial institutions might err on the 

side of caution and forego entering 

transactions that could benefit the 

borrower in order to avoid any potential 

liability. Some respondents proposed 

specific ways to give creditors more 

certainty, such as by permitting 

creditors to show how the refinancing 

benefits the borrower or by allowing any 

refinancing initiated by the covered 

borrower. 

The final rule does not identify 

additional examples of ‘‘more favorable 

terms,’’ because the Department has 

determined the definition currently 

included in the regulation is sufficient 

to allow creditors to provide workout 

loans on the basis of factors other than 

a lower MAPR that result in more 

favorable terms. By not limiting the 

phrase ‘‘more favorable terms’’ to a 

limited set of circumstances, covered 

borrowers will be protected without 

constraining creditors’ ability to 

refinance loans on more favorable terms. 

In the proposal, the Department 

solicited comment on whether it should 

adopt a rule clarifying that the 

refinancing or renewal of a covered loan 

requires new disclosures under § 232.6 

only when the transaction would be 

considered a new transaction that 

requires TILA disclosures. Respondents’

opinions differed, but most respondents 

stated that consistency between the 

Department’s rules and Regulation Z 

would be less confusing and easier to 

implement. To maintain consistency 

between Part 232 and Regulation Z, the 

Department is adopting such a rule. See 

§ 232.6(c). Whether or not new 

disclosures are required in a particular 

transaction, when a creditor refinances 

or renews an extension of consumer 

credit to a covered borrower, the 

limitations on rates and terms apply in 

the same manner as they would for the 

original 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. 

Most respondents agreed that creditors 

should be able to rely on the original 

determination that the consumer is not 

a covered borrower for renewals and 

refinancings although a few argued for 

limiting the number of refinancings 

allowed before new disclosures and 

borrower identification were required. 

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 final rule 

does 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. See § 232.5(d). 

Subparagraph (a)(3), in accordance 

with 10 U.S.C. 987(e)(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.’’ Many respondents felt that 

a ban on ‘‘onerous’’ legal notice 

provisions was vague. Some offered 

examples of what should be considered 

onerous legal notice provisions, such as 

threats to use or using criminal process 

to collect a debt, making a misleading or 

deceptive statement, and requiring court 

or hearing costs to be borne by the 

borrower. Similarly, subparagraph 

(a)(4), in accordance with 10 U.S.C. 

987(e)(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.’’ Industry respondents also 

requested the rule provide a list of what 

would be considered an ‘‘unreasonable 

notice.’’ In general, the comments with 

this provision address a fear it is not 

clear enough. The Department has 

determined that the provisions provide 

adequate explanation of ‘‘unreasonable 

notice’’ and thus has not included 

specific examples in the final rule of 

what constitutes ‘‘onerous legal notice’’

or ‘‘unreasonable notice.’’ It has 

concluded, that in so far as necessary, 

the scope of the provision is more 


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50590 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

appropriately determined on a case-bycase basis. 

Under § 232.8(a)(5) creditors are 

generally prohibited from extending 

consumer credit to a covered borrower 

if the creditor uses a check or other 

method of access to the covered 

borrower’s deposit account. Section 

232.8(a)(5) also lists certain exceptions 

to the general prohibition. Accordingly, 

for credit transactions with an MAPR of 

36% or less, the creditor may require 

the borrower to use an electronic fund 

transfer to repay a consumer credit 

transaction, 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. Creditors 

must also comply with any other 

applicable statutes governing the use of 

electronic fund transfers, savings and 

direct deposit of consumer’s salary. 

Respondents were generally supportive 

of allowing borrowers to use electronic 

fund transfers to pay debt if the MAPR 

is below 36% as conducive to creating 

flexible alternatives to lower cost 

consumer credit and helping stop the 

cycle of debt exacerbated by payday 

lending. The Department believes the 

flexibility that 10 U.S.C. 987(h)(2)(E) 

provides will encourage beneficial 

alternative loans designed to assist 

covered borrowers with financial 

recovery. 

As proposed, § 232.8(a)(5) would have 

prohibited covered borrowers from 

using a vehicle title as security for any 

loan, even if the loan complied with the 

restrictions, limits and disclosure 

requirements of Part 232. Industry 

respondents pointed out this was 

inconsistent with other provisions 

treating vehicle-secured loans as 

covered transactions under these rules. 

The reference to vehicle secured loans 

in the proposed § 232.8(a)(5) was 

inadvertent, and has been corrected in 

the final rule. 

Section 8(a)(7) prohibits creditors 

from charging a prepayment penalty to 

covered borrowers. The final regulation 

does not define what constitutes a 

prepayment penalty, and the 

Department expects creditors to rely on 

existing State and Federal laws for 

guidance. 

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 that 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. No 

comments were received, and the final 

rule incorporates the statutory 

provisions without change. 

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,’’ 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. The 

Department understands that the 

consumer credit covered in the 

regulation is primarily overseen by state 

regulatory agencies. Consequently, the 

Department has made contact with the 

state regulatory agencies to determine 

which states plan to enforce the 

regulation and to determine how best to 

work with all 50 states on enforcement. 

232.10, Servicemembers Civil Relief 

Act protections unaffected: Section 

232.10 incorporates the statutory 

language, no comments were received 

on this provision and the final rule is 

unchanged from the proposal. 

232.11, Effective date and transition: 

Virtually all respondents who would be 

subject to the rule requested a delayed 

effective date so that they would have 

more time to comply with the rules than 

the proposed 30-day period. Many 

respondents suggested six months to a 

year after publication of the final rule 

would be more reasonable for making 

the necessary systems changes. Two 

industry trade associations commented 

that it will be easier for creditors to 

comply by the effective date if the final 

rule remains as narrow in scope as the 

proposed rule. A consumer group and 

state regulators that commented believe 

that 30 days was sufficient. 

The Department recognizes the 

limited time provided to creditors to 

react to implement the rules. However, 

the statute does not provide the 

Department any flexibility in 

determining the effective date of the 

statute, which is October 1, 2007. The 

Department believes this situation is 

ameliorated somewhat by the fact that 

the scope of the proposed rule is narrow 

and the policy decisions embedded in 

the final rule mirror to a great extent the 

provisions contained in the proposed 

rule. This should have afforded 

applicable creditors ample time to begin 

preparing for the requirements under 

the rule. 

B. 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 and materially affect 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. Law. 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 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 50591 

small businesses related to this 

classification, with 3,000 of these small 

businesses having fewer 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 only 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 one-to-two 

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 rule contains 

information collection requirements. As 

required by the Paperwork Reduction 

Act (44 U.S.C. Chapter 35), DoD has 

submitted an information clearance 

package to the Office of Management 

and Budget for review. In response to 

DoD’s invitation in the Proposed Rule to 

comment on any potential paperwork 

burden associated with this rule, the 

following comments were received. 

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. This 

includes the new disclosures 

established under 10 U.S.C. 987 and 

also includes disclosures that creditors 

are already required to provide pursuant 

to the Federal Reserve Board’s 

Regulation Z, which implements the 

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 

§ 232.5 and the disclosures provided 

pursuant to § 232.6(a)(1), (3), and (4) 

should not be interspersed with the 

TILA disclosures. 

The general rule is that disclosures 

required by § 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. Consumer groups that 

commented stated that providing 

borrowers with a toll-free telephone 

number would not be sufficient because 

it places the burden on the borrower 

instead of the lender. Many industry 

respondents expressed concern about 

the costs of providing the disclosures, to 

include developing software, training 

employees about the new rules, and 

updating all their forms. The 

Department believes providing 

consumers with a toll-free telephone 

number to access oral disclosures 

fulfills the intent of the statute and 

balances overall considerations for 

protection with access to credit. 

The Department has received several 

comments about potential disparities in 

disclosures required by this regulation 

as opposed to TILA. Many respondents 

felt that the current APR disclosures are 

barely understood by consumers and 

that adding a new MAPR disclosure to 

the mix will only serve to create more 

confusion. As with other aspects of the 

statute, the Department’s intention has 

been to develop a regulation that is 

consistent with the statutory intent. The 

Department recognizes the potential 

confusion inherent in mandating the 

disclosure of two differing annual 

percentage rates (the MAPR required by 

this regulation and the APR required by 

TILA). As previously stated, the 

Department is responsible for training 

Service members and making similar 

education available for spouses. The 

differences between APR and MAPR 

will be added to their training, along 

with explaining their rights as a covered 

borrower. Some respondents sought 

clarification on whether MAPR 

disclosures would be required in 

advertising. These same respondents 

suggest that including MAPRs and APRs 

in marketing initiatives would be 

confusing to consumers. Under section 

232.6 of the final rule, creditors must 

provide the required disclosures in 

writing before consummation of the 

transaction. Disclosure of the MAPR in 

advertisements is not required. 

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, override 

State statutes inconsistent with this part 

to the extent that state statutes provide 

lesser protections for covered borrowers 

than those provided to residents of that 

State. 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, Title 32, Code of Federal 

Regulations is 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. 

§ 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 the 

regulation, consistent with the 


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50592 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

provisions of 10 U.S.C. 987. In addition, 

the regulation: 

(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. 

§ 232.2 Applicability. 

This part applies to consumer credit 

extended by creditors to a covered 

borrower, as those terms are defined in 

this part. 

§ 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 closed-end 

credit offered or extended to a covered 

borrower primarily for personal, family 

or household purposes, as described in 

paragraph (b)(1) of this section. 

(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 fewer 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 with 

the receipt of funds, 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 with 

the receipt of funds, 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 fewer 

that is secured by the title to a motor 

vehicle, that has been registered for use 

on public roads and 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 

expressly 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 

vehicle being purchased or leased; 

(iii) Any credit transaction to finance 

the purchase of personal property when 

the credit is secured by the property 

being purchased; 

(iv) Credit secured by a qualified 

retirement account as defined in the 

Internal Revenue Code; and 

(v) 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. 

(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 fewer, 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 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. 

(1) 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: 

(i) Interest, fees, credit service 

charges, credit renewal charges; 

(ii) Credit insurance premiums 

including charges for single premium 

credit insurance, fees for debt 

cancellation or debt suspension 

agreements; and 

(iii) Fees for credit-related ancillary 

products sold in connection with and 

either at or before consummation of the 

credit transaction. 

(2) The MAPR does not include: 

(i) Fees or charges imposed for actual 

unanticipated late payments, default, 

delinquency, or similar occurrence; 

(ii) Taxes or fees prescribed by law 

that actually are or will be paid to 

public officials for determining the 

existence of, or for perfecting, releasing, 

or satisfying a security interest; 

(iii) Any tax levied on security 

instruments or documents evidencing 

indebtedness if the payment of such 


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Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 50593 

taxes is a requirement for recording the 

instrument securing the evidence of 

indebtedness; and 

(iv) Tax return preparation fees 

associated with a tax refund 

anticipation loan, whether or not the 

fees are deducted from the loan 

proceeds. 

(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 regulation 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 regulation or Regulation 

Z, or any interpretation thereof, have the 

meanings given to them by State or 

Federal law, or contract. 

§ 232.4 Terms of consumer credit 

extended to covered borrowers. 

(a) Neither a creditor who extends 

consumer credit to a covered borrower 

nor an assignee of the creditor shall 

require the member or dependent to pay 

a military annual percentage rate 

(MAPR) 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. 

§ 232.5 Identification of covered borrower. 

(a) This part shall not apply to a 

consumer credit transaction if the 

conditions described in paragraphs 

(a)(1) and (a)(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 or 

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 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 fewer. 

lllllllllllllllllllll

I AM a dependent of a member of the Armed 

Forces on active duty as described above, 

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. 

lllllllllllllllllllll

—OR—

I AM NOT 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 fewer (or a dependent 

of such a member). 

lllllllllllllllllllll

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 paragraphs (b) or (c) 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 

http://www.dmdc.osd.mil/mla/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 § 232.8(a)(1) if 

§ 232.5(a)(1) and § 232.5(a)(2) applied to 

the previous transaction. 

§ 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 

regular or reserve members 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 fewer, 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) 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), (a)(3) and (a)(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. 

(c) When disclosures are required for 

refinancing or renewal of covered loan. 

The refinancing or renewal of a covered 

loan requires new disclosures under 

§ 232.6 only when the transaction 


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50594 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

would be considered a new transaction 

that requires disclosures under the 

Truth in Lending Act, as implemented 

by the Federal Reserve Board’s 

Regulation Z, 12 CFR part 226. 

§ 232.7 Preemption. 

(a) Inconsistent laws. 10 U.S.C. 987 as 

implemented by this part 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 by this part to the extent that 

it provides protection to a covered 

borrower greater than those protections 

provided by 10 U.S.C. 987 and this part. 

(b) Different treatment under State 

law of covered borrowers is prohibited. 

States may not: 

(1) Authorize creditors to charge 

covered borrowers rates of interest that 

are 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. 

§ 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. This part shall not apply 

to a transaction permitted by this 

paragraph when the same creditor 

extends consumer credit to a covered 

borrower to refinance or renew an 

extension of credit that was not covered 

by this part because the consumer was 

not a covered borrower at the time of the 

original transaction. 

(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. 10 U.S.C. 527 et seq.). 

(3) The creditor requires the covered 

borrower to submit to arbitration or 

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, except that, in 

connection with a consumer credit 

transaction with an MAPR consistent 

with § 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. 

§ 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 State or Federal law or 

regulation 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 that 

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 to 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. 

§ 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). 

§ 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: August 27, 2007. 

L.M. Bynum, 

Alternate OSD Federal Register Liaison 

Officer, DoD. 

[FR Doc. 07–4264 Filed 8–28–07; 9:56 am] 

BILLING CODE 5001–06–P 


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