The Department of Defense (DoD) has issued a notice of proposed rulemaking and request for comment on proposed regulations implementing the consumer protections covered by Section 670 of Public Law 109-364, the John Warner National Defense Authorization Act of 2007 (10 U.S.C. § 987). 72 Fed. Reg. 18157 (Apr. 11, 2007). By statute, the DoD is directed, in consultation with the Department of Treasury, Office of the Comptroller of the Currency, Office of Thrift Supervision, Board of Governors of the Federal Reserve System, Federal Trade Commission, Federal Deposit Insurance Corporation, and National Credit Union Administration, to prescribe regulations to carry out Section 987. The proposed regulations are intended to regulate the terms of consumer credit extended by creditors to active duty service members and their dependents.

    Most importantly, the DoD’s proposal limits the coverage of the statute by:

    Covered Loans

    Limiting the definition of “consumer credit” to closed-end payday loans, vehicle title loans and tax refund anticipation loans.

    Covered Lenders

    Limiting the definition of “creditor” to persons engaged in the business of extending “consumer credit,” but not excluding particular types of lenders.

    Safe Harbor

    Creating a “safe harbor” for a creditor that (i) obtains a signed statement (substantially similar to the statement set forth in the rule) from an applicant declaring that the applicant is not a “covered borrower” under the regulation and (ii) has not determined, pursuant to the optional verification procedures in the regulations, that the applicant is a covered borrower.

    Among other things, the proposal also (i) prohibits a creditor or assignee from imposing a “military annual percentage rate” (defined in the regulation to include interest and certain fees and charges) greater than 36% in connection with an extension of consumer credit to a covered borrower; (ii) in certain circumstances, permits the use of a toll-free telephone number that consumers may use to obtain oral disclosures required by the rule; (iii) includes voiding of the loan contract as a possible penalty; and (iv) specifies that it applies only to consumer credit that is extended to a covered borrower and consummated on or after October 1, 2007.

    The issuance includes 18 specific questions regarding the proposed regulation. The DoD intends to propose and publish final rules on or before September 1, 2007, which is 30 days before the rules would become effective on October 1, 2007.

    Creditors who wish to make comments on the proposed rulemaking must submit them to the DoD no later than June 11, 2007. Creditors who may be subject to the rules should begin developing procedures to ensure compliance by October 1, 2007.

    • Margaret Stolar and Judy Scheiderer