re: proposed rule, limitations on terms of consumer credit … · 2014. 12. 22. · december 22,...

December 22, 2014 The Honorable Jessica L. Garfola Wright Under Secretary for Personnel and Readiness Department of Defense The Pentagon Washington, DC 20301 Re: Proposed Rule, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 79 Fed. Reg. 58602 (Sept. 29, 2014).

Dear Under Secretary Wright:

These comments are submitted on behalf of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (“CCMC”). The U.S. Chamber of Commerce (the “Chamber”) is the world’s largest business federation, representing the interests of more than three million companies of every size, sector, and region. The Chamber created CCMC to promote a modern and effective regulatory structure for capital markets to fully function in a 21st century economy.

CCMC appreciates the opportunity to comment on the proposal of the Department of Defense (the “Department”) to amend the rules implementing the Military Lending Act (the “MLA”). The Chamber is committed to the well-being of the men and women who serve our country, and to the families that sacrifice alongside them. The U.S. Chamber Foundation’s Hiring our Heroes (HOH) program is a nationwide initiative to help veterans, transitioning service members, and military spouses find meaningful employment opportunities. In less than four years, HOH has hosted more than 800 hiring events across the country and helped hundreds of thousands of service members and military spouses find meaningful employment.

We share the Department’s commitment to ensuring that service members are treated fairly in the financial marketplace. Americans who serve their country must be protected from exploitation by predatory lenders. We also believe the Department

The Honorable Jessica L. Garfola Wright December 22, 2014

must be careful not to reduce access to beneficial forms of credit or make them more expensive as it seeks to address predatory lending practices. Accordingly we want to work with the Department toward a final regulation focused on these two goals. Most notably,1 we believe the Department should not impose new, unnecessary, and extremely burdensome regulations on credit cards, products that the Department itself acknowledges (a) benefit service members,2 and (b) already are subject to what the Department itself terms the “comparable protections” of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”).3

We are concerned therefore that the Department proposes to expand the scope of the MLA to encompass credit cards for the first time. The Department would take this step even though (a) Congress did not intend for the MLA to cover credit cards; and (b) there is no evidence that predatory lenders have offered credit cards to service members or could do so given the established regulatory and other barriers that would prevent predatory lenders from entering the credit card market. While well-intentioned, the Department proposes to impose new regulations on the credit card market that are certain to have unintended adverse consequences.

The Department suggests that, unless it expands the scope of the MLA, predatory lenders that historically have not been subject to federal regulation4 could enter a new product category, which is heavily regulated at the federal level and for which there are substantial barriers to entry. The Department does not predict that this actually would happen in the absence of its proposed rule, however, and we urge the Department to recognize that such an outcome is so remote as to be practically impossible. A predatory lender wishing to enter the credit card marketplace would have to:

1 We focus on credit cards in this letter, but the Department for the same reasons should refrain from extending the MLA to cover other forms of credit that are extended by responsible creditors, that benefit consumers, and that are not among the predatory products that motivated passage of the MLA. 2 See Department of Defense, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 79 Fed. Reg. 58602, 58611 (Sept. 29, 2014) (“[T]he Department believes that credit card products represent a form of consumer credit that, in general, is beneficial to Service members, especially insofar as the costs of bona fide fees expressly tied to specific products or services may be imposed only upon the Service member’s own choices regarding the use of the card.”) (footnote omitted). 3 Id. 4 The Consumer Financial Protection Bureau is the first federal regulatory agency to exercise broad authority to protect all consumers in the markets for payday lending and other consumer loans – the markets that saw the abuses that led to passage of the MLA four years before the CFPB was created.


Find an issuing bank willing to associate itself with the predatory lender;

Satisfy the standards of one of the payment networks;

Agree to abide by the rules of that payment network; and

Comply with numerous legal requirements, including the CARD Act’s ability-to-repay requirement, the various fee limits the CARD Act imposes, and the Act’s requirement that issuers provide customer agreements to the Consumer Financial Protection Bureau (the “CFPB”).

The chances that a predatory lender would see opportunity in such a heavily regulated and scrutinized market―and then successfully navigate all of these requirements―is extremely small. And of course, even if a predatory lender did take that route, the CFPB would be able to investigate and enforce the federal consumer financial laws―including the prohibition on unfair, deceptive, and abusive acts or practices―against such a lender.

In short, to address a hypothetical―and extremely unlikely―risk, the Department is proposing to (a) impose a new, additional, extremely burdensome and costly compliance regime on every credit card issuer; and (b) extend the MLA’s ban on arbitration to service members’ credit cards even though arbitration provides the most accessible, inexpensive and realistic mechanism for resolving disputes that are typical in the credit card context. By doing so, the Department will increase the cost of credit and reduce access to the services that service members prefer. As a result, more servicemembers are likely to find themselves priced out of the credit card market―and pushed to the very predatory lenders that the MLA was intended to combat.

We want to work with the Department to find a solution that allows for more effective policing of predatory lenders without adding unnecessary new layers of regulation that could needlessly limit service members’ access to responsible, highly regulated credit card products. Accordingly, we urge the Department to amend its proposed rule so that it excludes credit cards from the definition of consumer credit.5

5 As noted below, we would be happy to work with the Department if it concludes that it is necessary to adopt a back-up mechanism for asserting authority under the MLA in the unlikely event that predatory lenders do attempt to offer credit


At a minimum, if the Department decides, however, to proceed with its proposal to impose new regulations on issuers of responsible credit products already subject to extensive regulation, we urge the Department (a) to replace the very complicated and unworkable methodology for calculation of credit card products’ APR; and (b) to ensure that the MLA’s arbitration bar does not apply to responsible credit cards.

* * * * *

(1) The Definition of “Consumer Credit” Should Not Be Expanded to Encompass Credit Cards.

a. Congress Did Not Intend the MLA to Cover Credit Cards.

Congress long has made clear that service members should be protected against exploitative predatory lenders. At the same time, Congress has emphasized that credit cards are not part of that predatory lending problem.

Congress in 2005 required the Department to submit a report to Congress on “predatory lending practices directed at members of the Armed Forces and their families” and to recommend “additional legislative and administrative action to reduce or eliminate” such predatory lending.6 The sponsor of the relevant provision explained that it was intended to consider the “blatant targeting of service members by predatory lenders,” and did not mention credit cards.7

In response to this mandate, the Department submitted a 2006 report that identified various forms of predatory lending practices relating to payday lending, internet lending, car title lending, military installment lending, rent-to-own programs, tax refund anticipation loans, and

cards. Given the limited time available in this comment period, we do not recommend such alternatives now, but note that the CARD Act’s treatment of “fee-harvester” cards or its fee-reporting requirement could provide a basis for identifying and monitoring a limited set of problematic cards if that unlikely eventuality were to arise. 6 National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163 § 579, 119 Stat. 3136 (2005). 7 See 151 Cong. Rec. S12515-16 (daily ed. Nov. 8, 2005) (statement of Sen. Elizabeth Dole).


coercive collection actions.8 The Department described the key characteristics of these predatory practices as targeting young and inexperienced borrowers; lending without regard to the borrower’s ability to repay; excessive fees and interest rates; balloon payments with unrealistic repayment terms; marketing targeted at military members; repeat rollovers and refinancings that do not reduce principal; and efforts to evade state usury limits.9 In contrast, the Department identified responsible “alternative programs designed to assist Service members who need small short term loans.”10 The responsible alternatives included a credit card offered by a credit union that had “a $750 limit, with comparable interest rates to other VISA/Mastercards.”11

Likewise, the report included “low interest rate credit cards (secured and unsecured)” among a list of “alternatives to high cost borrowing” offered by banks and credit unions.12 Nothing in the report indicates that the Department considered credit cards to be part of the predatory lending problem.

In response to this report, Congress passed the MLA as part of the 2007 Defense Authorization bill.13 The provision’s sponsor, Senator Talent, explained that it would address “predatory payday lenders [that] are targeting American troops and are trying to make a buck off of their service to our country.”14 As the Department had done, Senator Talent mentioned credit cards only as an example of responsible consumer financial products, in contrast to payday lenders, explaining that the

8 Department of Defense, Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents 10-21 (Aug. 9, 2006). 9 Id. at 21-22. 10 Id. at 31. 11 Id. at 33. 12 Id. at 34. Holly Petraeus, who heads the CFPB’s Office of Service Member Affairs has cited this list of alternatives to high-cost loans approvingly. See Testimony of Hollister K. Petraeus Before the U.S. Senate Committee on Commerce, Science & Transportation (Nov. 20, 2013) (noting that her office held a panel discussion to consider alternatives to high-cost loans and noting that many of the alternatives that “were highlighted at that forum were discussed as part of the Department’s original report to Congress in 2006 – where the DoD listed 24 different alternatives to high-cost loans”), available at http://www.consumerfinance.gov/newsroom/hollister-k-petraeus-before-the-u-s-senate-committee-on-commerce-science-transportation/. 13 See John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364 § 670, 120 Stat. 2083 (Oct. 17, 2006). 14 152 Cong. Rec. S6406 (daily ed. June 22, 2006) (statement of Sen. Talent).


MLA would “limit[] the annual percentage rate that payday lenders can charge soldiers and their spouses to 36 percent or about 1 ½ to 2 times what credit cards typically charge.”15 Nothing in Senator Talent’s statement or any other portion of the legislative history indicates that Congress considered credit cards to be part of the problem the MLA authorized the Department to address.

In 2007, the Department issued an implementing regulation that defined the category of “consumer credit” that would be subject to the statute’s 36% interest rate cap and bar on arbitration. The Department explained that “[t]he 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.”16 Balancing these concerns, the Department subjected three tightly defined types of credit products to the statute’s requirements: payday loans, vehicle title loans, and tax refund anticipation loans.17 The Department noted that it retained the authority to amend the definition of “consumer credit” by rule in order to achieve the statute’s goals.18

Two years after the promulgation of the regulation implementing the MLA, Congress passed the CARD Act. The CFPB recently explained the purpose of that law and the protections it provides as follows:

The CARD Act was enacted to “establish fair and transparent practices related to the extension of credit” in this market, regulating both the underwriting and pricing of credit card accounts. Among other things, the Act prohibits credit card issuers from extending credit without assessing the consumer’s ability to pay, with special rules regarding the extension of credit to persons under the age of 21. The Act restricts the amount of “upfront” fees that an issuer can charge during the first year after an account is opened, and limits the instances in which issuers can

15 Id. 16 Department of Defense, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50580, 50584 (Aug. 31, 2007) (emphasis added). 17 See id. at 50585-86. 18 Id. at 50585.


charge “back-end” penalty fees when a consumer makes a late payment or exceeds his or her credit limit. The Act also restricts the circumstances under which issuers can increase interest rates on credit cards and establishes procedures for doing so.19

The CARD Act, in short, significantly expanded the regulatory regime that applied to credit cards. Notably, however, it did so without reference to the MLA. Indeed, we have found nothing in the legislative history that indicates that Congress believed that predatory lenders were using credit cards to target service members.20 Surely Congress would have used the opportunity presented by the CARD Act to direct the Department to extend the MLA rules to credit cards if Congress believed that the Department had failed to follow congressional intent when it promulgated the MLA rule in 2007.

And at a minimum, Congress could have clarified that the MLA was intended to apply to credit cards when it amended that statute in 2013.21 Again, however, Congress gave no indication that credit cards should be covered as “consumer credit” and instead directed the Department to determine whether rule changes were needed “to protect covered borrowers from continuing and evolving predatory lending practices.”22

In sum, Congress intended the MLA to cover predatory lenders, not credit cards. And when it subsequently imposed separate regulatory requirements upon credit cards it did not indicate that it considered credit cards to be predatory lending products. As a result, Congress did not impose a rate cap or an arbitration ban on credit cards. The Department’s proposal to expand the MLA to cover credit cards notwithstanding Congress’ repeated exclusion of credit cards from its list of financial

19 Consumer Financial Protection Bureau, CARD Act Report: A Review of the Impact of the CARD Act on the Consumer Credit Card Market 4 (Oct. 1, 2013), available at http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf. 20 See, e.g., H.R. Rep. No. 111-88 (2009), reprinted in 2009 U.S.C.C.A.N. 453 (including no reference to the military or service members). 21 See National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239 §§ 661-663, 126 Stat. 1785-86 (Jan. 2, 2013). 22 H.R. Rep. No. 112-705 at 782-83 (2012). The version of the legislation that the Senate sent to conference would have mandated that the Department include all vehicle title loans and payday loans within the definition of “consumer credit.” Id. at 782. Tellingly, credit cards once again were not included in the list of potentially predatory products.


products used in predatory lending is clearly inconsistent with Congress’ intent in enacting the statute.

b. The Department Has Not Identified Any Examples of Predatory Lenders Use of Credit Cards to Exploit Service Members, Nor Explained Why It Believes There is a Risk That They Will Do So.

Holly Petraeus, the head of the CFPB’s Office of Servicemember Affairs, testified to Congress in November 2013 that changes to the MLA’s implementing regulations were necessary because predatory lenders had found ways to restructure their products to avoid the MLA’s requirements.23 The MLA, Petraeus explained, “was designed to protect servicemembers from the predatory lenders that were springing up around military bases in ever-increasing numbers.”24 Those predatory lenders, Petraeus further stated, had responded to the MLA by side-stepping the terms of the MLA’s implementing regulation, for example by offering payday loans of a greater duration or higher amount than contemplated by the regulation. Nothing in Petraeus’ testimony suggested that predatory lenders had started offering credit cards or that credit cards otherwise were part of the problem that regulatory amendments should address.

The Department likewise has not provided any evidence that predatory lenders offer credit card products, or plan to do so. Rather, credit cards continue not to be part of the predatory lending problem that the MLA was intended to address. None of the respondents to a survey by the Defense Manpower Data Center, for example, reported that they had a credit card with an APR over 36%.25 And the Department acknowledges now that credit cards benefit service members.26

The Department’s justification for subjecting credit cards to a new layer of regulation is not that credit cards currently are being used by predatory lenders to exploit service members. Rather, the Department’s theory is that predatory lenders might one day start offering credit cards. “[T]he Department believes,” the proposal reports, “that certain creditors could take advantage of an opportunity to exploit a complete exemption for credit cards by transforming high-cost, open-end credit 23 Petraeus Testimony, supra n.11. 24 Id. 25 Department of Defense, Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents 30 (April 2004). 26 See supra note 2 and accompanying text.


products (which otherwise would be covered as ‘consumer credit’) into credit card products.”27

The Department does not state any basis for this belief. Nor does it explain who these creditors might be, which issuing banks would partner with them, which payment network would accept them, or how they would comply with the CARD Act’s fee limits or its ability-to-repay rule. Perhaps most importantly, the Department also does not suggest that these “certain creditors” would “exploit a complete exemption for credit cards,” but instead limits itself to positing that they could.

The proposal to expand the MLA to cover credit cards is thus not even based on a guess of what might happen. It is based on one possible outcome that the Department itself does not say is even likely to occur. That is an insufficient basis for imposing on the entire credit card industry the substantial burdens that would result from the Department’s proposal―particularly in light of the already-existing regulations, which we next discuss.

c. Further Regulation of Credit Cards Is Unnecessary.

A number of different federal statutes―and accompanying regulations―apply to credit cards, making them one of the most heavily regulated consumer financial products. The CARD Act alone imposes numerous requirements upon credit cards, including the following:28

Ability to repay: No issuer may open a credit card account or increase a credit limit without considering the ability of the consumer to repay the resulting debt.

Special considerations for younger borrowers: Issuers may not provide prescreened offers to borrowers who are under the age of 21, and may

27 79 Fed. Reg. at 58611 (emphasis added). 28 See 15 U.S.C. §§ 1665e (ability to repay); 1637(n) (subprime or “fee harvester” cards); 1665d (limiting penalty fees); 1637(j) (prohibiting on-time-payment penalties and double-cycle billing); 1637(k) (barring over-the-limit transactions without customer opt-in); 1666i-1 (limiting increases on outstanding balances); 1666i-2 (limiting increases on initial interest rates); 1666c (prescribing payment order); 1637(i) (requiring advanced notice of significant changes); 1632(d) (requiring publication of credit card agreements); 1681b(c)(1)(B)(iv) (barring prescreening offers for minors); 1637(c)(8) (limiting ability of minors to open accounts).


not open an account for someone under that age without an older co-signer or a demonstration of “independent means” of repaying the credit.

Subprime or “fee harvester” cards: Issuers effectively are barred from imposing fees in excess of 25% of the card’s credit limit during the first year (e.g., an account with a $1,000 credit limit may not be subject to more than $250 in fees during the first year).29 This de facto prohibition is achieved by barring an issuer from charging any additional fees against credit made available to the cardholder.

Limits on penalty fees: Any “late-payment fee, over-the-limit fee, or any other penalty fee or charge” must be “reasonable and proportional to the omission or violation to which the fee or charge relates.”

Limits on other fees: An issuer may not penalize a customer for paying on time or engage in double-cycle billing, and may not charge over-the-limit transaction fees absent an opt-in by the customer.

Limits on interest increases applicable to outstanding balances: An issuer generally may not increase the annual percentage rate applicable to an outstanding balance outside of limited circumstances, such as when the APR is linked to a public index or a temporary hardship arrangement has been completed.

Limits on increases of initial interest rates: An issuer generally may not increase interest rates, fees, or finance charges during the first year of an account, except in limited circumstances. Likewise, a promotional rate generally must last six months.

Payment order: Payments by a cardholder in excess of minimum payment amounts must be allotted first to the balance with the highest

29 This calculation does not include penalty fees, which are subject to a separate limitation.


interest rate, then to the balance with the next highest interest rate, and so on, until the payment is exhausted.

Advance notice: An issuer must provide 45 days advance notice prior to increasing the card’s interest rate or making other significant changes to the account terms. An issuer must simultaneously provide the customer notice of the right to cancel the account.

Internet publication of credit card agreements: Each issuer must submit its credit card agreements to the CFPB for publication.

The CARD Act’s consumer protections are extremely strong―and they reflect Congress’s specific determination regarding the appropriate consumer protections with respect to credit card products.

It is hard to imagine how a predatory lender could enter this marketplace, comply with the myriad requirements of the CARD Act―including an assessment of ability to repay, the disclosure of its cardholder agreement, and the limitation on various fees―and then still somehow find a way to impose a set of fees that would turn the credit card into a predatory product. Of course, the predatory lender also would have had to convince an issuing bank or credit union to go along with this scheme and take on the obvious regulatory risk. And it would have had to meet the standards of one of the payment networks and likewise convince the network to put its name on a patently risky product. The Department does not explain how a predatory lender could accomplish all of this.

Moreover, even if a predatory lender somehow were to overcome the various barriers to entry into the credit card market, financial regulators would have ample tools to respond. For example, the CFPB is tasked with collecting and publishing all of the agreements for credit cards offered to consumers.30 Because of this, the CFPB has ongoing visibility into the terms of credit card agreements―an early warning system for any hint of predatory practices under the guise of offering a credit card. The supervision of issuing banks and credit unions performed by the CFPB and the prudential regulators also would provide ready insight into any new predatory product

30 Id. § 1632(d).


offerings. Likewise, the CFPB collects complaints from consumers about credit cards through its website, and therefore has real-time data about consumer concerns about particular issuers. As a result, we believe the CFPB would take notice of a predatory lender that enters the credit card market. And as the agency primarily responsible for administering the federal consumer financial laws, including the prohibition against unfair, deceptive, or abusive acts or practices, the CFPB would have regulatory, supervisory, investigatory, and enforcement tools with which to respond to any threat to service members.

d. Expanding the MLA to Include Credit Cards Would Impose Substantial Compliance Costs that Ultimately Would Be Borne By Both Service Members and Civilians.

i. Compliance Costs Associated with Calculating the APR for Purposes of the MLA Would Be Substantial.

Most credit card APRs, as Senator Talent observed in connection with the enactment of the MLA, are substantially lower than the MLA’s 36% interest rate cap. But as the Department itself notes, credit cards bear various fees. In addition to late-payment fees and other comparable charges, various credit cards charge participation fees (e.g. annual fees or membership fees)31 or transaction fees that reflect the convenience of using a credit card. The MLA’s text would appear to require inclusion of those fees in the APR calculated for purposes of the MLA’s interest rate cap.32 Doing so, as even the Department recognizes, likely would result in creditors being “required to significantly re-structure their current products, services, and pricing mechanisms when providing credit cards to Service members and their families—without a corresponding benefit to the Service members and their families.”33

Rather than recognizing that the problems of applying the MLA formula to the credit card context confirm that Congress never intended credit cards to be subject to the MLA, the Department proposes a regulatory work-around: excluding “bona fide

31 The Department appears to use the term “participation fee” in keeping with the manner in which it has been used by the Federal Reserve, such that it includes annual fees, membership fees, or other comparable fees that may bear different labels. See Federal Reserve Board, Credit Cards: Fees (June 15, 2010), available at http://www.federalreserve.gov/creditcard/fees.html. 32 See 10 U.S.C. § 987(i)(4) (defining “annual percentage rate”). 33 79 Fed. Reg. at 58611.


fees” from the calculation of the APR for the MLA’s purposes.34 The proposed method for determining whether a fee is “bona fide” is complex and entirely unworkable.

A fee would be “bona fide” only if it is both “reasonable” and “customary,”35 as compared to “fees typically imposed by other creditors for the same or a substantially similar product or service.”36 The Department proposes what it describes as a “safe harbor,” but the “harbor” is extremely confusing and not very “safe”―here are the requirements for its application:

A fee would be “reasonable” if it is the same or less than the average of the equivalent fees charged by at least five credit card issuers that each hold more than $3 billion of outstanding credit card loans (which condition is subject to a rolling three-year look-back period).37 (But, then again, a fee may be reasonable even if other market participants do not charge a fee for that service.38)

Whether a fee is “customary” would turn on whether “other creditors typically compute, or customarily have computed,” the fee in the manner by which the creditor would do so.39 By this, the Department appears to mean that a fee is not “customary” if an issuer calculates it on a percentage basis while the rest of the industry imposes a flat fee, and vice versa. But the Department also states that it intends the standard to have sufficient “flexibility” that an issuer can continue to charge a fixed fee even if “substantially all other creditors compute that fee on a percentage basis.”40 And to add to the uncertainty, the Department

34 The Department would exclude fees that fall within the definition of “interest” in 10 U.S.C. § 987(i)(3) from this “bona fide” fees exclusion. 35 79 Fed. Reg. at 58611. 36 Id. at 58611-12 (internal quotation marks omitted). 37 Id. at 58612. 38 Id. at 58613. 39 Id. (internal quotation marks omitted). 40 Id. (internal quotation marks omitted).


states, in essence, that a participation fee would be “reasonable and customary” if it is reasonable and customary.41

This extremely vague and complex method of determining compliance with the MLA’s cap on APRs will impose substantial burdens on all credit card issuers:

The Department significantly underestimates the complexity and burden associated with determining the average fees of other market participants and whether those fees are “like-kind.”42

The Department’s insistence on the “flexibility” of the definitions of “reasonable” and “customary” undermines any confidence issuers might have in what those terms might mean.43 Flexibility is not helpful if it means that only a regulator will be able to determine compliance – and only after the fact.

The Department emphasizes that the exclusion would be unavailable if a fee were unreasonable “in any respect” or if it were not customary “in any respect.”44 What the Department means by this and what these “respects” are against which a fee will be judged is completely unclear.

The Department would require inclusion in the calculation of the APR (subject to application of the “reasonable and customary” exclusion) of fees for all ancillary products, even fees that cannot fairly be described as relating to the financing of credit.45 The Department also would calculate the APR so that any ancillary product fee (e.g. a rewards program fee) could dramatically affect the effective APR, particularly if

41 Id. (“[P]roposed [32 C.F.R.] § 232.4(d)(3)(v) would provide a standard stating that ‘[a]n amount of a bona fide fee for participation in a credit card account may be reasonable and customary . . . if that amount reasonably and customarily corresponds to the credit limit in effect or credit made available when the fee is imposed, to the services offered under the credit card account, or to other factors relating to the credit card account.’”) (emphasis added). 42 See id. at 58611-13. 43 See, e.g., id. at 58613. 44 Id. at 58611. 45 Id. at 58617-18.


the card holder happens to have a low balance in the particular month in which the fee is collected.46

Even beyond the specifics of the Department’s proposal, calculating an actual APR for any open-ended credit product, and certainly any credit card, is complicated and burdensome.

Moreover, the proposed penalties for even unintentional miscalculation are incredibly severe. Should any portion of any fee be deemed not “reasonable and customary,” all fees must be included, in their entirety, in the APR.47 If doing so pushes the APR over the 36% rate cap―which seems highly likely―the credit card contract would be deemed void from its inception.48

In sum, were this proposal adopted, issuers would struggle to calculate the APR for their products and would have to incur enormous expenses to do so. This uncertainty and the draconian penalties for non-compliance would put issuers in the untenable position of having to choose between offering service members products service members want (e.g. the ability to use their credit cards abroad) and risk violating the MLA, or denying service members their preferred services. Whether card issuers would or could apply such restrictions across all of their customers or would be forced to create a less desirable set of products for service members remains to be seen. Either way, the certain consequence of this compliance regime would be increased prices and reduced access to affordable credit. Ironically, in other words, the Department’s proposal could end up pricing service members out of the credit card market―and pushing them to the very predatory lenders that the MLA was intended to combat.

ii. The MLA Database is Unreliable.

The Department’s proposal also would change the manner in which a creditor determines whether a credit applicant is a service member protected by the MLA. Some service members, it appears, had concealed their military status in order to

46 Id. at 58619. 47 Id. at 58638-39. 48 Id. at 58640.


access credit beyond the MLA’s 36% rate cap.49 The Department’s proposed response is to shift all responsibility for determining service member status to credit providers by making the information they gather from the MLA database determinative in most instances.50 This approach would create a number of severe problems.

First, creditors and their service providers would have to check the MLA database for every credit card applicant, not just individuals who identify themselves as service members. The Department offers only speculation that credit card companies would be able to automate that process for applicants or otherwise ensure that checking every applicant for MLA protections would not unreasonably delay the application process. But that speculation does not comport with reality.

Consider, for example, a consumer who applies for a store-branded credit card in order to take advantage of special financing deals and various product savings during the holidays. The Department provides no assurance that the retailer would find the MLA process―with a database lookup for each and every client applicant―either workable or efficient.

Second, and relatedly, the MLA database is unreliable, both because it includes faulty records and because it has suffered from significant service outages. Reliance on the MLA database thus would lead to incorrect determinations about service members’ eligibility for certain credit cards or other forms of credit. Likewise, the failure to receive a definitive answer from the database about an applicant’s military status (or lack thereof) effectively would prevent that applicant from being approved for the relevant financial product.

Third, the proposed rule would preempt reliance on the MLA database if a creditor has “actual knowledge” of a service member’s status as a service member.51 “Actual knowledge” could not be established based exclusively on a statement, but instead would require provision of some form of record.52 Thus, for example, a company would not have “actual knowledge” of a potential customer’s status as a

49 Id. at 58614. 50 See id. 51 Id. at 58615. 52 Id.


service member if he or she verbally informed the company representative of that fact. In contrast, a company would have “actual knowledge” if the service member presented a record to the company representative. Credit card issuers thus would need to provide extensive training to all of their customer service and marketing personnel, as well as to develop substantial systems to ensure that any qualifying indication of service-member status was properly captured and―in view of the dramatic consequences discussed above―accounted for in determining which products could be offered to a particular applicant.

e. The Proposal Will Freeze Innovation in the Credit Card Market.

The Department’s proposal, if adopted, also would have the harmful effect of freezing innovation in the credit card market – because it bases compliance on the use of “reasonable and customary” fees. Notwithstanding all the Department’s repeated references to “flexibility,” the practical effect of a “safe harbor” turning on industry norms will be to incentivize inertia and penalize experimentation in the marketplace as issuers seek to avoid risk of liability under the MLA. Once again, we believe the Department’s proposal would have substantial negative effects across the credit card marketplace.

(2) If the Department Insists on Extending the Definition of “Consumer Credit” to Cover Credit Cards, It Should at Least Simplify Compliance and Preserve Service Members’ Access to Arbitration.

We strongly urge the Department to abandon its proposal to extend the definition of “consumer credit” to cover credit cards. Congress did not intend the MLA to cover credit cards and there is no basis for doing so now. In contrast, doing so would impose substantial compliance costs on credit card issuers and reduce access to affordable credit.

Alternatively,53 if the Department nonetheless concludes that it has an adequate record to justify expanding the MLA to include credit cards, it should, at a bare

53 We would be happy to meet with Department staff to determine whether there are alternative approaches for extending the MLA to credit cards offered by predatory lenders, while excluding those offered by responsible lenders, within the scope of the MLA. We note, for example, that the CARD Act focused one of its provisions on “subprime


minimum, (a) simplify compliance by defining acceptable fees consistently with the CARD Act; and (b) preserve service members’ access to the effective, prompt, and fair resolution of disputes provided by arbitration.

a. If the Department Extends the MLA to Cover Credit Cards, It Should Simplify Compliance by Defining Acceptable Fees by Reference to the Standards Set Forth in the CARD Act.

As already discussed, the Department’s proposal sets forth an extremely complex mechanism for determining whether a fee may be excluded from the APR calculated for purposes of the MLA. A simpler and better approach is available. The Department could—and should—make the standards for fees under the MLA consistent with those under the CARD Act.

The Department’s exception for “bona fide” fees from calculation of the APR for purposes of the MLA does not include fees that are classified as proxies for interest under the Truth In Lending Act, such as fees for credit insurance, debt cancellation, or debt suspension.54 As a result, the key categories of fees that would be subject to the “bona fide” analysis, as we understand it, are penalty fees of various kinds, application fees, and participation fees.55 We recommend that the Department treat any such fee that is charged in compliance with the CARD Act to be a bona fide fee for purposes of the MLA. The CARD Act reflects Congress’ clear statement of what it considers to be inappropriate fees for credit card issuers. Passed after the MLA, the CARD Act should be the Department’s guide in implementing the MLA.

We recognize, however, that the Department is concerned that fees that are acceptable under the CARD Act somehow could be used to exploit service members. While we disagree, we would note that, should it persist in this view, the Department could address such concerns without departing substantially from the legal regime

and fee harvester” cards, a category that conceivably could be useful in expanding the MLA to cover credit cards that are most likely to be used to exploit economically vulnerable service members. For this comment, however, we focus exclusively on two limited steps that the Department, at a bare minimum, should take to make its proposal workable and to eliminate wholly unjustified burdens on credit card providers and, potentially, a curtailment of credit availability for service members. 54 Id. at 58611. 55 If the Department believes that other fees merit attention now, it should state a clear standard for determining whether such fees are bona fide for purposes of its proposal. Absent such a statement, any fee that is charged in compliance with the CARD Act should be considered bona fide for purposes of this rule.


Congress imposed in the CARD Act. Specifically, the Department could, in that event, treat those three categories of fees as follows:

Penalty fees: The Department could clarify that any penalty fee that falls within the CARD Act safe harbor is a bona fide fee for purposes of the MLA.

Application fees: The Department could synchronize the MLA with the CARD Act and treat as a bona fide fee any application fee that is charged as part of a package of fees that complies with the CARD Act by limiting the fees charged on an account during its first year to less than 25% of the available line of credit in effect when the account is opened.

Participation fees: The Department should exclude from the APR calculation any participation fees that are for products or services that are separate from the routine extension of credit,56 such as fees for a rewards card, for a card that provides concierge services, or for use of a card abroad or to access cash.57 And if the Department remains concerned about cards that impose an annual fee without providing additional services, the Department should calculate and publish a clear safe-harbor fee level based on the prevailing price in the marketplace.

The Department’s touchstone in defining bona fide fees should be clarity. Alternatively, if it cannot provide such clear rules, it should remove the draconian punishments that would follow from even unintentional violations of the bona fide fees provision. Although these are not our preferred options, the Department must at a minimum improve upon its current proposal that would impose vague and uncertain requirements and punish any failure to comply with those requirements with extremely harsh legal consequences.

56 See also id. at 58610-11 (describing fees that are “segregable from the cost of the funds borrowed”). 57 Should the Department be concerned about possible exploitation through phony “rewards” programs, it could impose a requirement that the “rewards” program be widely used and marketed and that it have tangible benefits reasonably proportionate to its costs, or some other such limitation.


b. If the Department Does Extend the Definition of “Consumer Credit” to Cover Credit Cards, It Should Do So in a Way That Preserves Service Members’ Access to Arbitration.

i. Arbitration Has Substantial Benefits for Service Members.

Arbitration has substantial benefits for consumers and is preferable to the available alternatives of leaving consumers to navigate the court system on their own, hire their own attorneys, or rely on self-interested class action lawyers to provide relief. Arbitration enables consumers with grievances to obtain redress for the vast majority of disputes they are likely to have—small, individualized claims for which litigation in court is often impractical. This access to an inexpensive and simple system of dispute resolution is an extremely significant benefit that is often overlooked entirely in the debate over arbitration.

Judicial litigation, by contrast, provides little in the way of benefits to the consumer. Because typical consumer disputes are small and individualized, consumers almost never will be able to hire an attorney to help navigate the overcrowded and underfunded court system. And the overwhelming majority of class actions are dismissed voluntarily by the named plaintiffs—either because they decide not to proceed with the case or because they settle out on an individual basis—or are dismissed by courts because they are not legally sustainable. Either way, the result is that purported class members do not benefit, in contrast to the lawyers. Arbitration is at least as likely, and often more likely, than litigation in court to result in positive outcomes for consumers, as empirical studies repeatedly have shown.

In short, any rational assessment of the benefits and costs of arbitration must conclude that prohibiting or regulating arbitration will harm consumers much more than it would benefit them. This is particularly true for servicemembers. Arbitration proceedings, for example, frequently can be conducted on the papers or by teleconference or with commonly available videoconference software (i.e. Skype), meaning that service members who have been ordered abroad, who have been transferred to another base, or who simply do not have the free time to go to court, can advance their claims and survive the various procedural hurdles that frequently come up in court. Likewise, arbitrations are far less expensive than court proceedings and often may be subsidized by the credit provider, which helps ensure that seeking


compensation for any harm done does not unduly add to the service member’s financial stress.

In addition, arbitration clauses in credit card agreements increase service members’ access to credit by reducing the transaction costs that credit card issuers must bear associated with judicial litigation, which are much higher than those incurred in connection with arbitration. As scholars have noted, “companies . . . include arbitration clauses in their contracts to cut dispute resolution costs and produce savings that they may pass on to consumers through lower prices.”58 The public record regarding the benefits of arbitration weighs strongly in favor of supporting the use of credit card arbitration clauses to allow service members to continue to benefit from APRs well below the MLA’s cap.59

ii. The Department Will Preempt the CFPB’s Ongoing Arbitration Study if It Proceeds with This Proposal.

In the Dodd-Frank Act, Congress required the CFPB to conduct a study of pre-dispute arbitration agreements as a prerequisite to any proposed regulation of arbitration; any “prohibit[ion] or impos[ition] of conditions or limitations” on arbitration must be supported by a finding “that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with th[at] study.”60 That evaluation is ongoing, and although the scope of the CFPB’s study is not clear, public indications are that the statutorily required study will be provided to Congress soon. We are confident that a thoughtful, thorough, and reasoned approach to this study will lead to the recognition of the benefits of arbitration.

58 See Amy J. Schmitz, Building Bridges To Remedies For Consumers In International Econflicts, 34 U. Ark. Little Rock L. Rev. 779, 779–80 (2012). 59 For further explanation of the advantages of arbitration over class action proceedings and other forms of judicial litigation, please see our previous submission to the CFPB, see Letter from David Hirschmann and Lisa A. Rickard to Director Richard Cordray, Re: Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements (Dec. 11, 2013), available at http://www.instituteforlegalreform.com/uploads/sites/1/2013_12.11_CFPB_-_arbitration_cover_letter.pdf, and its appendix, see Mayer Brown LLP, Do Class Actions Benefit Class Members? An Empirical Analysis of Class Actions, available at http://www.instituteforlegalreform.com/uploads/sites/1/Class_Action_Study.pdf. 60 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 1028(a)-(b), 124 Stat. 1376, 2003-04 (2010).


The Department will preempt this ongoing study if it proceeds with its proposal. Rather than allowing the CFPB’s process to reach its conclusion, the Department would create a new rule against arbitration that applies to a broad swath of consumers using a mainstream financial product. The Department should wait to learn the results of the CFPB’s study before rushing to depart so significantly from the general federal policy favoring arbitration. Likewise, to the extent that the CFPB is collaborating in this process, it should not use this process to shirk its statutory obligation to study arbitration and then engage in the statutorily specified rulemaking process limiting the availability of arbitration.

c. The Department Could Impose the MLA Rate Cap on Credit Cards Without Barring Credit Card Arbitration Agreements.

Even assuming that the Department decides to impose the MLA’s 36% rate cap on credit cards, it need not and should not simultaneously impose the MLA’s arbitration bar. The Department could achieve both results by including within the definition of “consumer credit” only those credit cards that exceed the 36% rate cap (as alternatively defined above) within the definition of “consumer credit.” By doing so, the Department would significantly discourage the offering of credit cards above that cap, but would leave credit cards offering interest rates below the cap outside the scope of the MLA (and its arbitration ban).

This approach would address the Department’s apparent concern about the possible emergence of predatory credit cards without unnecessarily reducing service members’ access to arbitration. And it would allow the CFPB to conclude its arbitration study.

* * * * *

Service members and their families deserve our full support and our protection. We strongly support what we believe to be the underlying objective of the MLA proposal – to protect our service members from predatory financial products. We agree that service members are helped both through effective enforcement against unscrupulous actors as well as ensuring that service members have convenient access to well-regulated credit and other financial services providers, and we want to work with the Department to address our concerns and strike this critical balance.


We thank you for your consideration of these comments and would be happy to discuss these issues further with appropriate staff.

Sincerely,

Jess Sharp Managing Director

Center for Capital Markets Competitiveness U.S. Chamber of Commerce

re: proposed rule, limitations on terms of consumer credit … · 2014. 12. 22. · december 22,...

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