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The Department of Defense ("Department") proposes to amend its regulation that implements the Military Lending Act, herein referred to as the "MLA." Among other protections for servicemembers, the MLA limits the amount of interest that a creditor may charge on "consumer credit" to a maximum annual percentage rate of 36 percent. The Department is proposing to amend its existing regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products, rather than the limited credit products currently defined as consumer credit. In addition, the Department is proposing to amend its existing regulation to amend the provisions governing a tool a creditor may use in assessing whether a consumer is a "covered borrower," modify the disclosures that a creditor must provide to a covered borrower, implement the enforcement provisions of the MLA, as amended, and for other purposes. The revisions to this rule are part of DoD's retrospective plan under Executive Order 13563 completed in August 2011. DoD's full plan can be accessed at: http://exchange.regulations.gov/exchange/topic/eo-13563.

Statement of Need:

    This regulation identifies the negative impact of high-cost consumer credit lending on servicemembers and their dependents quality of life and on general troop readiness. Servicemembers are younger than the population as a whole with 43 percent 25 years old or less. Thirty-five percent of enlisted servicemembers in the grades E1-E4 are married and 20 percent of them have children. This is compared with approximately 12 percent of their contemporaries in the U.S. population 18 through 24 who are married (2012 U.S. Census Bureau). The majority of recruits come to the military from high school with little financial literacy education.

The initial indoctrination provided to servicemembers 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.

A major concern of the Department has been the debt accumulation of some servicemembers and the continued financial turmoil caused by their use of credit particularly high-cost credit. The regulation has provided limitation on the use of credit posing the most significant concerns (short-term high-cost credit secured by pay, vehicle title, or tax return). Other forms of high-cost credit outside of the definitions in the regulation have been developed since the regulation was initially released in 2007 and the proposed changes to the regulation have been developed in part to extend protections to servicemembers and their families to cover these new developments.

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 servicemembers on how best to use their financial resources. Financial protections are an important part of fulfilling the Departments compact with servicemembers and their families and most importantly of sustaining force readiness and military capability.

Summary of the Legal Basis:

Public Law 109-364 the John Warner National Defense Authorization Act for Fiscal Year 2007 670 Limitations on Terms of Consumer Credit Extended to Servicemembers and Dependents (October 17 2006). Section 670 of Public Law 109-364 which was codified as 10 U.S.C. 987 requires the Secretary of Defense to prescribe regulations to carry out the new section.

Alternatives:

No other regulatory alternatives are available. Education represents a non-regulatory alternative that is an important aspect of the overall protection provided servicemembers and their families. However education has not been proven to change behavior and has not been sufficient to prepare many of servicemembers to avoid financial products and services that can cause them financial harm. This regulation works in tandem with on-going efforts to educate Service members and prepare them to manage their finances.

Anticipated Costs and Benefits:

Increased costs to the creditors as a result of the Regulation have been articulated in the Paperwork Reduction Act Submission as part of the EO 12866 review.  The Department anticipates that its regulation, if adopted as proposed, might impose costs of approximately $96 million during the first year, as creditors adapt their systems to comply with the requirements of the MLA and the Department’s regulation.  However, after the first year and on an ongoing basis, the annual effect on the economy is expected to be between approximately $7 million net (quantitative) costs and $117 million net (quantitative) benefits.  The potentially anticipated net benefits of the proposed regulation are attributable to the cost savings to the Department that would result from the reduction in involuntary separations of Service members due to financial distress; at some points in the range of estimates the Department has used to assess the proposal, these savings are estimated to exceed the compliance costs that would be borne by creditors

Risks:

The Regulation currently covers payday loans, vehicle-title loans, and tax refund anticipation loans (RALs). Some other credit products with favorable terms as well as terms that can increase the interest rate well beyond the limits prescribed by 10 U.S.C. 987 were not initially covered by the regulation. However access to payday and vehicle title loans has changed to include variations that are no longer covered by the regulation and there are other high-cost credit products that have become more of an issue for servicemembers and their families who have over extended their credit.

The regulation continues to complement other actions taken by the Department to include initial and follow-on financial education financial awareness campaigns savings campaigns free financial counseling at military installations and available 24 hours 7 days per week through Military OneSource. To complement these efforts Military Aid Societies provide grants and no-interest loans and a growing number of financial institutions located on military installations are providing low-cost small-dollar loans.