Background

DOD officials have expressed concern that servicemembers are often the  victims of predatory lending practices by certain types of lenders who  typically lie outside the system of traditional financial institutions such as  banks. These lenders offer alternative access to cash for consumers with  low incomes or poor credit records, and generally do so without standard  credit checks. The fees charged for these alternative loans are generally  much higher than those charged by traditional financial institutions, and  other terms and conditions of such loans are often unfavorable to the  borrower. As a result, some federal, state, and consumer advocacy agencies  have expressed concern that many of these alternative loans could include  predatory practices. The most common of these loans include the  following:  Payday loans, according to the Federal Deposit Insurance Corporation,  are small, short-term loans that borrowers promise to repay out of their  next paycheck or deposit of funds. These loans typically have high fees  and are often rolled over repeatedly, which can make the cost of  borrowing—expressed as an annual percentage rate—extremely high.
Rent-to-own loans, according to the Federal Trade Commission, provide  immediate access to household goods (such as furniture and  appliances) for a relatively low weekly or monthly payment, typically  without any down payment or credit check. Consumers have the option  of purchasing the goods by continuing to pay “rent” for a specified  period of time—however; the effective cost of the goods may be two to  three times the retail price.
Automobile title pawns provide short-term loans to borrowers who give  the lender the title to their car as collateral for the loan. Effective  interest rates are generally very high.
Tax refund loans provide cash loans against the borrower’s expected  income tax refund.
Senior DOD and service officials have noted that such loans may have  associated predatory lending practices, which can be detrimental to  servicemembers who choose these loans as a way to overcome immediate  needs for cash. The fees for loans such as the payday loans provide a  general indication of the loans’ potential detrimental financial effects on  servicemembers’ finances. The Community Financial Services Association  of America, a payday-advance trade association, which says that it  represents more than half of the payday advance industry, developed a set  of best practices for its member companies. Among other things, the  association’s best practices limit the number of extensions for outstanding advances. Association representatives noted that borrowers select payday  loans over other alternatives for a number of reasons. For example, in  some instances, the officials stated that the individual may not have the  good credit history required to borrow from a bank or credit union. In other  instances, an individual might use a payday loan to avoid a bounced check  fee, late payment penalty, or reconnection fees associated with the late  payment of a utility bill. The Congressional Research Service estimated  that the number of payday loan offices nationwide increased from  approximately 300 in 1992 to almost 15,000 in 2002, and the total dollar  volume of payday loans in 2002 was about $25 billion.

	Use of Consumer Loans That Are Considered Predatory Is Unknown, but Sources Say Predatory Lenders May Be Targeting Servicemembers

The extent to which active duty servicemembers use consumer loans  considered to be predatory and the effects of such borrowing are unknown,  but many sources suggest that predatory lenders may be targeting  servicemembers. While DOD has some data on servicemembers’ use of  four types of loans, DOD is unable to quantify the extent to which these  types of loans have associated predatory practices, the frequency of  borrowing, the amounts borrowed, or the effects of the loans. Information  from our focus groups, however, provided insights to some of these issues.  Although DOD is unable to quantify usage and effects, consumer  advocates, state government officials, DOD officials, and servicemembers  in our focus groups indicated that military personnel are being targeted by  some predatory lenders.

		DOD Has Limited Data for Quantifying the Extent That Servicemembers Use Consumer Loans Considered Predatory

DOD does not have comprehensive data for quantifying the extent to which  servicemembers use consumer loans that are considered predatory in  nature and the effects of such use on servicemembers’ finances or their  units’ readiness. The only DOD-wide statistics on servicemembers’ use of  loans are obtained from surveys. In the August 2004 DOD survey,  12 percent of servicemembers indicated that, during the last 12 months,  they or their spouse had used at least one of the four specified types of  financial loans that DOD says may have associated predatory practices.  Seven percent of servicemembers indicated they (or their spouse) had  obtained payday loans; 4 percent had obtained rent-to-own loans, 1 percent  had obtained automobile title pawn loans, and 6 percent had obtained tax  refund loans. While only 2 percent of the officers had used any of the four  financial transactions, 14 percent of the junior and 13 percent of the senior  enlisted servicemembers had used at least one such loan. Although not  generalizable to all active duty servicemembers and their spouses, some of  the more than 400 participants in our 60 focus groups reported  encountering problems when they used the short-term consumer loans;  while other servicemembers said such loans have positive elements such as  being quick, easy, and obtainable even if servicemembers had a bad credit  history (see app. II for example comments).
DOD’s efforts to assess predatory lending are hampered by the lack of a  precise definition of predatory lending—a problem shared with other  organizations attempting to quantify the use and effects of predatory loans.  The lack of precision in the definition is found in DOD’s acknowledgement  that the four types of loans may (i.e., not always) contain predatory lending  practices, but other DOD statements state that payday lending is predatory,  without including a qualifier. Imprecision in the definition and the way the  questions are asked on surveys can affect results. For example, the  percentage of servicemembers who reported using the various types of  loans may be larger than the percentage of servicemembers who would  have said they obtained a predatory loan, had the question been oriented  somewhat differently. Other important issues not addressed in the survey  but needed to quantify the extent and effects of borrowing from lenders  that may use predatory lending practices include questions on the  frequency of use, amounts borrowed, negative and positive effects of the  loans, and any problems encountered during the transactions.
DOD, service, and installation officials maintained that obtaining data on  the use and effects of predatory lending are also hampered because of  privacy considerations and the reluctance of most servicemembers to  discuss their financial difficulties with their command. Installation officials  told us that they are likely to learn about servicemembers’ use of the  previously cited types of loans only when a situation has become serious  enough to warrant creditors contacting the command or servicemembers  contacting either financial counselors or legal assistance attorneys on the  installations. Because of general privacy concerns, it is unlikely that all  contacts with attorneys and counselors could be provided in an  installation-level statistic.

		Multiple Sources Indicate Some Predatory Lenders May Be Targeting Servicemembers

According to some consumer advocates, state officials, DOD officials, and  military personnel, servicemembers are targeted by predatory lenders. A  2003 National Consumer Law Center report stated that junior enlisted  servicemembers are targeted because they have a relatively low but secure  income (with military basic pay that currently ranges from about $1,200 to  $1,900 per month) and tend to be young and financially inexperienced.  The report further suggested that deploying servicemembers are more  vulnerable targets than their nondeploying peers because the former often  must get their finances in order quickly and leave behind spouses who may  not know how to manage the family’s finances. The report noted several  financial practices that it considered “consumer scams” aimed at  servicemembers. These included payday loans, rent-to-own transactions,  and automobile title pawns.
Some state officials have also suggested that payday lenders—a type of  predatory lending according to DOD—target servicemembers. For  example, the Georgia General Assembly has recently determined as part of  its new antipayday lending legislation that despite its illegality, payday  lending was growing in Georgia and having an adverse effect on servicemembers and others in the state. Similarly, the Florida governor’s  2004 statement to the Committee on Senate Armed Services, Subcommittee  on Personnel, noted that Florida had regulated activities of payday loan  and check cashing businesses that traditionally target servicemembers. In  2004, the Under Secretary of Defense for Personnel and Readiness posted  an issue paper on its Web site to the National Governors Association that  addressed payday lending and other personnel issues. Regarding payday  lending, the Under Secretary stated that “Payday lending practices have  proven to be detrimental to servicemembers who have chosen these loans  as a way of overcoming immediate needs for cash…Statutes that cap small  loan interest rates and establish usury ceilings help protect vulnerable  servicemembers from the usury nature of payday loans and their  associated predatory practices.”
According to a 2004 Consumer Federation of America study, 15 states  prohibit or limit payday lending through laws on interest rate caps for small  loans, usury laws, or specific prohibitions for check cashers. We did not  independently verify that these 15 states, in fact, do prohibit this activity,  nor did we review laws in the other 35 states. Figure 1 shows these 15  states identified by the Consumer Federation of America, along with  information on the number of active duty servicemembers on installations  in each state. Even in those states that prohibit or otherwise regulate  payday loans, servicemembers may be able to obtain such loans. Another  Consumer Federation of America report noted that a growing number of  Web sites deliver small loans, with some lenders using anonymous domain  registrations or residing outside the United States.

	DOD’s Tools for Curbing the Use and Effects of Predatory Lending Underutilized

DOD and servicemembers are underutilizing the tools that DOD has for  curbing predatory lending practices and the effects of such lending. While  commanders at some installations we visited have changed the unfair  practices of businesses by using recommendations from Armed Forces  Disciplinary Control Boards to place or threaten to place businesses on off- limits lists to servicemembers, boards at other installations we visited  rarely met or made such recommendations. Although installation  newspapers appear to meet current disclaimer requirements by including a  statement noting that the U.S. government does not endorse a business’  products or services, the advertisements may lead to confusion for readers  because the disclaimers are not prominently printed or located near the  advertisement. Additionally, servicemembers typically have not made full  use of free DOD-provided legal assistance before signing contracts and  other financial documents, but they sometimes use the assistance after  financial problems develop. Recently, DOD has sought to expand the tools  available for curbing the use and effects of predatory lending practices by  exploring additional on-installation alternatives to payday loans.

		Armed Forces Disciplinary Control Boards Can Be an Effective Tool for Curbing Predatory Lending Practices, but They Are Underutilized

Armed Forces Disciplinary Control Boards and the recommendations that  they make to an installation commander to place businesses off-limits to  servicemembers can be effective tools for avoiding or correcting unfair  practices, but data gathered during some of our site visits to the various  installations revealed few times when boards were used to address  predatory lending practices. For example, at three of the installations, the  board had not met for more than a year and, therefore, may not have  adequately addressed whether actions were needed against businesses  whose practices negatively affected servicemembers. The board at Fort  Bragg, North Carolina, had not met for over a year and the board at Fort  Stewart, Georgia, had not met since 2003 because the Directors for both  boards had deployed to Iraq. The board at Fort Drum, New York, had not  met in about 4 years because the board’s Director did not see a reason to  convene. He was not aware of two recent, lending-related lawsuits filed by  the New York Attorney General that had connections with Fort Drum  servicemembers.
The Attorney General settled a lawsuit in 2004 in behalf of 177  plaintiffs—most of whom were Fort Drum servicemembers—involving  a furniture store that had improperly garnished wages pursuant to  unlawful agreements it had required customers to sign at the time of  purchase.
The Attorney General filed a lawsuit in 2004 involving catalog sales  stores. He characterized the stores as payday-lending firms that charged  excessive interest rates on loans disguised as payments toward catalog  purchases. Some of the servicemembers and family members at Fort  Drum fell prey to this practice. The Attorney General stated that he  found it particularly troubling that two of the catalog stores were  located near the Fort Drum gate.
The Garrison Commander at Fort Drum and a representative of the board  said that had they known about these cases, they would have considered  placing the businesses on the off-limits list. Legal assistance attorneys at  Fort Drum were, however, aware of the legal actions by the New York  Attorney General. By not making full use of the boards, commanders may  not be doing all they can to help servicemembers avoid businesses that  employ predatory practices.
According to officials at the installations we visited, the boards might not  be used as a tool for dealing with predatory lenders for a variety of reasons.  First, high deployment levels have resulted in commanders minimizing  some administrative duties, such as convening the boards, in order to use  their personnel for other purposes. Second, as long as the lenders operate  within state laws, the boards may determine they have little basis to  recommend placing or threatening to place businesses on the off-limits  lists. Third, significant effort may be required to put businesses on off- limits lists. At the installations we visited, the boards’ composition included  representatives from functional areas like public works, family community  services, legal counsel, safety, and public affairs.
In contrast, businesses near two other installations we visited changed  their lending practices after boards recommended that commanders place  or threaten to place businesses on off-limits lists. The Commander of the  Navy Region Southwest’s board identified actions that were based on the  board’s recommendations against businesses committing illegal acts or  taking unfair advantage of servicemembers. For example, in October 2002,  a company was placed off-limits because it represented itself as a  government agency when arranging loan-repayment allotments with  servicemembers, threatened debtors with court-martial for nonpayment,  and wrote loans that had interest rates of 60 percent. Similarly, the board at  Camp Lejeune, North Carolina, threatened to take action against a lender  that was charging 33.1 percent interest and requiring servicemembers to  waive their rights set forth by the Servicemembers Civil Relief Act. The  business avoided being placed on the installation’s off-limits list by  terminating two employees and changing some of its business practices.

		Advertising in Installation Newspapers Could Confuse Servicemembers about Whether the Military Endorses Payday Lenders

In some instances, DOD is not providing a clear message about whether it  endorses advertisers in official installation newspapers. Some  servicemembers in our focus groups said they were confused about  whether the military endorses the businesses that advertise in installation  newspapers, and the confusion could lead servicemembers to use a type of  business that DOD has labeled as potentially having predatory lending  practices. Earlier, a 2003 Army publication stated that payday loan  advertisements appear in official and unofficial military publications, and  readers often incorrectly assume that military officials have approved the  businesses and their claims. A DOD instruction requires installation  publications to run disclaimers warning readers that advertisements do not  constitute endorsement by the U.S. government. The instruction also  requires public affairs staffs to oversee the appropriateness of  advertisements in installation publications. Among other things, the  public affairs staff is to review advertisements and identify any that may be  detrimental to DOD personnel or their family members. If an advertisement  is found to be detrimental, the public affairs staff is to take steps to either  have the advertisement removed by the publisher or report the situation to  the installation commander who can act to preclude distribution of the  publication on the installation.
Servicemembers’ confusion about businesses’ advertisements may have  multiple causes. First, readers may not see the advertising disclaimer. We  reviewed 14 installation newspapers and found that all of them contained a  disclaimer; however, we also observed that the disclaimers were typically  (1) included only once in the newspaper, (2) listed with other  administrative notices such as statements identifying the publisher and the  availability of advertised items, and (3) located remotely from many of the  advertisements. Second, advertisements for some types of businesses may  run contrary to official DOD statements about the use of those businesses.  Servicemembers participating in our focus groups said they were confused  because DOD officials and information provided during PFM training  warned against using payday lenders but such lenders were allowed to  advertise in installation newspapers. We observed two such advertisements  for a payday lender during our review of the 14 installation newspapers,  and PFM program managers wrote comments about this issue when  responding to a GAO survey of all PFM managers. Third, there is confusion  about which businesses do and do not use predatory lending practices. For  example, the PFM program manager at one installation identified a  particular car financing business as predatory, but the PFM program  manager at another installation sometimes directs servicemembers to this  same business when they have had past credit problems that limit their  loan options. Fourth, legal assistance attorneys on some of the installations  we visited told us that lenders and other businesses are free to advertise in  the newspapers. A potential negative effect of the confusion regarding  whether businesses are approved and endorsed by the installation is that  servicemembers may use types of businesses that DOD policy officials  have determined to be predatory, rather than seeking assistance through  alternatives such as military relief/aid societies identified by the installation  PFM program manager and staff.

		Servicemembers Do Not Make Full Use of Free DOD- Provided Legal Assistance for Financial Issues

Servicemembers do not take full advantage of free DOD-provided legal  assistance on contracts and other financial documents. Legal assistance  attorneys at the 13 installations we visited stated that servicemembers  rarely seek their assistance before entering into financial contracts for  goods or services such as purchasing cars or lifetime film developing.
The attorneys said that servicemembers are more likely to seek their  assistance after encountering problems such as the following selected  examples:  Used car dealers offered low interest rates for financing a vehicle, but  the contract stated that the interest rate could be converted to a higher  rate later if the lender did not approve the loan. Servicemembers were  later called to sign a new contract with a higher rate. By that time, some  servicemembers found it difficult to terminate the transaction because  their trade-in vehicles had been sold.
Used car dealers refused to allow servicemembers to take their  contracts to a legal assistance attorney for review. In one such instance,  a servicemember signed a contract to pay $30,000 for a car with a blue  book value of $12,000.
A company used car titles as collateral on loans and required  servicemembers to provide an extra set of keys to the cars so that they  could be easily repossessed if the loans were not paid. This type of  transaction can result in triple-digit interest.
During our interviews, legal assistance attorneys said they provide  preventive briefings to incoming and deploying servicemembers to address  financial issues such as car buying, payday loans, and debt management  during deployment. In some cases, they might take actions to assist  servicemembers who have financial problems. Depending on the  circumstances, they may represent servicemembers in local court involving  consumer cases that affect the military community. In addition, while most  legal assistance attorneys do not represent servicemembers in bankruptcy  cases, they may provide servicemembers with information on bankruptcy,  advice about whether filing is appropriate, and a reference to an off- installation civilian attorney.
Legal assistance attorneys, as well as other personnel in our interviews and  focus groups, noted reasons why servicemembers might not take greater  advantage of the free legal assistance before entering into business  agreements. They stated that junior enlisted servicemembers who want  their purchases or loans immediately may not take the time to visit the  attorney’s office for such a review. Additionally, the legal assistance  attorneys noted that servicemembers feared information would get back to  the command about their financial problem and limit their career  progression.

		DOD Is Exploring On- Installation Alternatives to Payday Loans

DOD, service, and installation officials are exploring on-installation  alternatives to payday loans for those servicemembers with financial  problems. In 2004, DOD said it surveyed approximately 150 defense credit  unions and received responses from 48. Of those responding, which may  not be representative of all defense credit unions due to the low response  rate, 29 credit unions said that they offer an alternative to payday lending.  The alternatives, which can be shared with other on-installation credit  unions and banks as well as PFM program managers and command  financial counselors, included (1) low-cost, short-term lines of credit;  (2) short-term signature loans or small unsecured signature loans; and  (3) availability of funds 2 days before the servicemember’s normal pay date.
Some of the PFM program managers at the 13 installations we visited had  also worked with on-installation credit unions and banks to obtain payday  loan alternatives, which included special loan programs or overdraft  protection of up to $500 for customers with “less-than perfect” credit  histories. One credit union that we visited advertised a loan alternative  called QuickCash, which had an annual percentage rate of 18 percent. To  use QuickCash, servicemembers were required to join the credit union,  apply for the loan, and have the repayment deducted from their account the  following pay period. Some of the on-installation credit unions also offer  seminars and training to assist servicemembers in finding lending  alternatives.
Other alternatives to payday loans include pay advances and military  relief/aid society grants and no interest loans to servicemembers. Some  servicemembers in our focus groups stated that they would not use these  types of installation-related alternatives because the alternatives take too  long, are intrusive because the financial institution or relief/aid society  required in-depth financial information in the loan or grant application, or  may be career limiting if the command found out the servicemembers were  having financial problems. The Army Emergency Relief Society has  attempted to address the time and intrusiveness concerns with its test  program, Commander’s Referral, for active duty soldiers lacking funds to  meet monthly obligations of $500 or less. After the commander approves  the loans, the servicemembers can expect to receive funds quickly.  Noncommissioned officers in our individual interviews and focus groups  said the program still does not address servicemembers’ fears that  revealing financial problems to the command can jeopardize their careers.

	Conclusions

Although we have cited examples where installation commanders changed  the predatory practices of businesses by adding or threatening to add the  lenders to an off-limits list, other installation commanders we visited have  made only limited use of their Armed Forces Disciplinary Control Board for  such purposes. The fact that some boards have not met for a year or more  seems to run contrary to DOD, service, and installation efforts to curb the  use and effects of predatory lending practices. As we have discussed,  failure to utilize this valuable tool fully and appropriately for curbing unfair  or illegal commercial or consumer practices can have negative, but  difficult-to-quantify, consequences on servicemembers’ finances as well as  unit morale and readiness. Furthermore, although military installations  appear to be meeting current requirements regarding disclaimers for  advertisements in installation publications, the location of the disclaimer  has resulted in unclear messages to some servicemembers about whether  inclusion of certain advertisements constitutes approval or endorsement of  the business by DOD. In addition, some servicemembers have been  confused when the content of some advertisements is contrary to official  DOD statements regarding the use of lenders who may use predatory  lending practices. This confusion is particularly problematic because it  may harm DOD’s efforts to reduce the use and effects of predatory lending  practices.

	Recommendations for Executive Action

We are making the following two recommendations to the Secretary of  Defense:  To improve DOD’s ability to curb the use and effects of predatory  lending practices, we recommend that the Secretary of Defense direct  the Under Secretary of Defense for Personnel and Readiness to amend  existing regulations to require installation commanders to convene the  Armed Forces Disciplinary Control Boards at least semiannually to  investigate and make recommendations to commanders on matters  related to eliminating conditions which adversely affect the health,  safety, morals, welfare, morale, and discipline of the Armed Forces, to  include servicemembers’ use of lenders who may use predatory lending  practices.
To ensure DOD provides servicemembers a clear message about  whether it endorses advertisers in official installation newspapers that  may use predatory lending practices, we recommend that the Secretary  of Defense direct the Assistant Secretary of Defense for Public Affairs to  clarify the regulations pertaining to advertisements in installation  publications by requiring disclaimers to be more prominent and taking  steps to ensure advertisements reflect stated DOD policies regarding  what it considers to be predatory lending.

	Agency Comments and Our Evaluation

In written comments on a draft of this report, DOD concurred with our  recommendation to clarify regulations pertaining to advertisements in  installation publications and partially concurred with our recommendation  to amend regulations to require at least semiannual meetings of the Armed  Forces Disciplinary Control Boards.
In its comments, DOD noted that it is in the initial stages of staffing and  coordinating changes to the Armed Forces Disciplinary Control Boards’  joint regulations and will take two actions—require boards to meet four  (instead of two) times a year and direct that businesses on the off-limits list  for one service be off-limits for all services.  Although DOD’s comments  dealt primarily with the issue of payday lending, the intent of our  recommendation was to address all types of consumer predatory lending  encountered by servicemembers.  Moreover, DOD’s actions will go even  further than our recommendation suggested.  DOD also noted that the  boards’ process would be an ineffectual deterrent against payday lenders  for several reasons.  For example, it stated that the boards’ process would  be ineffectual because of the difficulty in providing adequate oversight of  all payday lending businesses and noted that installation commanders may  have to develop criteria outside of state statutes for the 35 states where  payday lending is legal.  Our draft report had already noted that boards may  have little basis for recommending or threatening to place businesses on an  off-limits list when lenders operate within state laws.  Our recommendation  will (1) require the boards to meet regularly and (2) provide installation  commanders additional focus and oversight into conditions that may  adversely affect servicemembers on their installations.  Implementing our  recommendation does not require installation commanders to monitor all  payday lending businesses; instead, it is intended to provide commanders  with a routine process for reviewing and taking appropriate action against  those lenders that adversely affect servicemembers on the commanders’  installation.
DOD’s comments are reprinted in appendix III.  DOD also provided  technical comments, which we incorporated in the final report as  appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date.  At that time we will send copies of the report to the Secretary of  Defense and interested congressional committees.  We will also make  copies available to others upon request.  This report will be available at no  charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please contact  me at (202) 512-5559 (stewartd@gao.gov) or Jack E. Edwards at (202) 512- 8246 (edwardsj@gao.gov). Other staff members who made key  contributions to this report are listed in appendix IV.

Scope and Methodology

In addressing the objectives of this engagement on predatory lending, we  limited our scope to active duty servicemembers because we have  previously issued a number of reports on the compensation, benefits, and  pay-related problems of reservists. While performing our work, we visited  13 installations with high deployment levels, as identified by service  officials (see table 1). During these site visits to installations in the United  States and Germany, special emphasis was given to ascertaining the  financial conditions of junior enlisted servicemembers because the  Department of Defense (DOD) and service officials have reported that this  subgroup is more likely to encounter financial problems.
To address servicemembers use of consumer loans considered to be  predatory in nature, we reviewed and analyzed laws, policies, and  directives—such as the Servicemembers Civil Relief Act and DOD’s  Financial Management Regulation 7000.14R, Volume7A. We also reviewed  and analyzed lending-related findings and perspectives contained in  publications issued by GAO, DOD, Congressional Research Service,  Federal Reserve Bank of Philadelphia, Federal Deposit Insurance  Corporation, Federal Trade Commission, state government officials,  consumer groups (Consumer Federation of America and National  Consumer Law Center), and an association that says it represents around  50 percent of payday lenders (Community Financial Services Association  of America). We reviewed a 2004 Consumer Federation of America study,  which cited 15 states that prohibit or limit payday lending through laws on  interest rate caps for small loans, usury laws, or specific prohibitions for  check cashers. We did not independently verify that these 15 states, in fact,  do prohibit this activity, nor did we review laws in the other 35 states. We  also contacted the Federal Trade Commission and ascertained that its  Military Sentinel database has little information on servicemembers’  complaints against businesses. We interviewed DOD and service policy  officials, as well as representatives of consumer groups and a payday  association. During our 13 site visits, we developed and used structured  questionnaires for interviews with seven types of officials: installation  leaders, personal financial management (PFM) program managers,  command financial counselors, senior noncommissioned officers (pay  grades E8 to E9), legal assistance attorneys, chaplains, and relief/aid  societies. We used a structured protocol for conducting 60 focus groups  with over 400 individuals who met in four homogeneous types of groups:  junior enlisted servicemembers (pay grades E1 to E4), noncommissioned  officers (pay grades E5 to E9), company-grade officers (pay grades O1 to  O3), and spouses of servicemembers. In addition, we constructed,  pretested, and administered a survey to participants in the focus groups to  collect supplemental information that may have been difficult to collect in  a group setting. We also obtained data from an August 2004 DOD-wide  survey to assess its reliability and determine prevalence rates for four  types of loans that DOD says may contain predatory practices. The August  2004 survey had a response rate of 40 percent. DOD has conducted and  reported on research to assess the impact of this response rate on overall  estimates. They found that, among other characteristics, junior enlisted  personnel (E1 to E4), servicemembers who do not have a college degree,  and members in services other than the Air Force were more likely to be  nonrespondents. We have no reason to believe that potential non-response  bias in the estimates, not otherwise accounted for by DOD’s research, is  substantial for the variables we studied in this report.  Therefore, we  concluded the data to be sufficiently reliable to address our objectives. We  found the data sufficiently reliable to address our objectives. This  information was supplemented with information obtained from three group  discussions with a total of 50 personnel affiliated with the PFM programs  while they attended a November 2004 conference.
To assess whether DOD was fully utilizing the tools that it has to curb the  use and effects of predatory lending practices, we obtained information  from the laws, policies, directives, and reports that were used to address  servicemembers’ use of loans that DOD considered to be predatory in  nature. DOD and service policy officials identified DOD’s primary tools for  curbing the use and effects of predatory loans. These individuals also  supplied their perspectives on how fully utilized those tools were. Similarly,  individual interviews and focus groups with others who supplied  information on the question related to servicemembers’ use of consumer  loans also provided their perspectives on how fully the tools were used, the  effects of underutilizing the tools, and possible reasons that some tools  were not used more fully. In addition, we examined official installation  newspapers to determine whether they contained disclaimers and  advertisements for loans that DOD officials say may contain predatory  practices. This examination of newspapers was just a cursory review and  was not based on any sort of random sampling. Interviews with  representatives of on-installation credit unions and national military  relief/aid societies provided input about alternatives to payday loans.
We performed our work from March 2004 through February 2005 in  accordance with generally accepted government auditing standards.

Predatory Lending Findings from GAO-Led Focus Groups Held at 13 Installations

We held focus group sessions at the 13 military installations we visited  during the course of this engagement to obtain servicemembers’  perspectives on a broad range of topics, including the impact of  deployment on servicemembers’ finances and the types of lenders military  families use, along with the personal financial management (PFM) training  and assistance provided to servicemembers by the Department of Defense  (DOD) and service programs (see app. I for a list of installations visited).  Servicemembers who participated in the focus groups were divided into  three groups: junior enlisted personnel (pay grades E1 through E4), senior  enlisted personnel (pay grades E5 through E9), and junior officers (pay  grades O1 through O3). Although we requested to meet with  servicemembers who had returned from a deployment within the last  12 months, some servicemembers who had not yet deployed also  participated in the focus groups. At some installations, we also held  separate focus groups with spouses of servicemembers. Most of the focus  groups consisted of 6 to 12 participants.
We developed a standard protocol, with seven central questions and  several follow-up questions, to assist the GAO moderator in leading the  focus group discussions. The protocol was pretested during our first  installation visit, and, after minor changes, was used at the remaining 12  installations. During each focus group session, the GAO moderator posed  questions to participants who, in turn, provided their perspectives on the  topics presented. We essentially used the same questions for each focus  group, with some slight variations to questions posed to the spouse groups.  Questions and sample responses are listed below.
We sorted the 2,090 summary statements resulting from the 60 focus  groups into categories of themes through a systematic content analysis.  First, our staff reviewed the responses and agreed on response categories.  Then, two staff members independently placed responses into the  appropriate response categories. A third staff member resolved any  discrepancies.
In this report, we provide focus group participants’ statements for only  question 5—the one that asked participants about their experiences with  predatory lenders. Before the question was asked we attempted to provide  participants with a general context for answering the question by reading  the following information: “Now we would like to talk about specific  problems with predatory lenders. These include lenders that charge  excessive fees and interest rates and those that lend without regard to  borrowers’ ability to repay—usually lending to those with limited income  or poor or no credit. Some payday lenders and fast checking places that  charge high interest rates may fall into this category. Or a predatory lender  could be a lender that commits outright fraud or deception—for example,  falsifying documents or intentionally misinforming the borrowers about the  terms of a loan, which may occur with unscrupulous car dealers.”
The themes and the number of installations for which a statement about a  theme was cited are provided in italics below. Also, two examples of the  statements categorized in the theme are provided. Only those themes cited  at a minimum of three installations are presented. The number of  installations—rather than the number of statements—is provided because  (1) the focus of this engagement was on DOD-wide issues and (2) a lengthy  discussion in a single focus group may have generated numerous  comments. 5. What kinds of experiences have your fellow servicemembers or  subordinates had with predatory lenders?
A. Other issue regarding experiences with predatory lenders (N = 13)
Example: Businesses will tell young Marines that they can buy an  item for a certain amount each month. They keep the Marine focused  on the low monthly payments and not on the interest rate or the  terms of the loan.
Example: Some Marines feel that a business would not take  advantage of them because they are in the military. This leads them  to be more trusting of the local businesses than they should be,  which in turn, leads the businesses to take advantage of them.
B.  Predatory lender used—car dealers (N = 11)
Example: Most of the participants stated that the car dealerships  around base were the worst predatory lenders because they charge  high interest rates and often provide cars that are “lemons.” They  said that most of the sales people at the dealerships are former  personnel who know how to talk to servicemembers to obtain their  trust. Servicemembers do not expect this.
Example: One captain had a Marine in his unit who signed a contract  with a car dealer for a loan with a 26 percent interest rate. The  captain took the Marine to the Marine Credit Union and got him a  new loan with 9.5 percent interest.
C. Predatory lender used—payday lenders (N = 10)
Example: A master sergeant got caught in the check-cashing cycle.
He would write a check at one payday lender in order to cover a  check written at another lender the previous week.
Example: One participant shared that when he was a younger Marine  he got caught up with a payday lender. The problem did not resolve  itself until he deployed and was not able to go to the lender anymore.
D. Reason for using predatory lender—get fast cash and no hassle  (N = 10)
Example: People use payday lenders because they are quick and  easy. All soldiers have to do is to provide their leave and earnings  statement and they get the money.
Example: Most of the participants say they know people that have  used a payday lender and those soldiers use them because they have  bad credit and can get quick cash.
E. Predatory lender targeting—close proximity and clustering  around bases (N = 9)
Example: It is almost impossible to be unaware of lenders and  dealerships because many are clustered in close proximity to the  installation. They also distribute flyers and use pervasive advertising  in local and installation papers.
Example: The stores and car lots near the installation have signs that  say “E1 and up approved” or “all military approved” to get the  attention of the military servicemembers.
F. Command role when contacted by creditors (N = 8)
Example: The noncommissioned officers sometimes offer to go with  the junior enlisted to places like car dealers; but, the young soldiers  do not take them up on these offers.
Example: One participant said that debt collectors do call his house  and the command. He noted that one lender called him nine times in  one day and his chief petty officer eventually asked the lender to stop  harassing his sailor.
G. Predatory lender targeting—advertising in installation/local  newspaper (N = 7)
Example: Soldiers are being targeted by predatory lenders in a  variety of ways; for example, flyers are left on parked cars at the  barracks, advertising is present at installation functions, and words  such as “military” are used on every piece of advertising to make the  servicemember believe that the company is part of or supported by  the military. The servicemember would normally trust lenders  associated with the military.
Example: Most predatory lenders have signs that say “Military  Approved” or commercials that say the same thing or “E1 and above  approved.”
H. Reason for using predatory lender—urgent need (N = 6)
Example: Many soldiers use payday lenders because they are in a  bind for money and they know these lenders can provide quick cash.
Example: Soldiers will use a payday lender because they need money  for a child, the kids, the house payment, etc.  In many cases, it does  not matter why they need it; they just need it. So, they go where they  can get cash the fastest and the easiest way possible.
I. Predatory lender used—furniture/rent-to-own (N = 6)
Example: One of the participants stated that he had obtained a loan  to purchase a new washer and dryer. The loan had a 55 percent  interest rate and the appliances cost a lot more than they should  have.
Example: Rent-to-own businesses are widely used by soldiers. One  soldier ended up paying $3,000 for an $800 washer and dryer set.
J. No problem with predatory lenders (N = 5)
Example: There have not been any problems with predatory lenders  lately. The state of Florida has been using legislation to shut them  down.
Example: The participants said that they had never encountered an  officer who had to use payday lenders or predatory lenders.  According to the participants, most of the officers’ problems come  when they have a bitter divorce.
K. Reason for using predatory lender—other reasons (N = 5)
Example: One soldier stated that his credit was so bad that he had no  other option but to use high interest rate lenders. He stated that, “I  have bad credit and I will always get bad credit.”
Example: One participant said he has several friends that use payday  lenders because they are E1s or E2s and don’t make much money.
L. Predatory lender targeting—employing former military members  (N = 4)
Example: The people running and working for the predatory  businesses are usually former military servicemembers who use their  knowledge of the system to take advantage of Marines.
Example: Many times the predatory lenders are veterans, former  Marines, or retirees. Using these types of people gives the younger  Marines a false sense of trust and then the lenders will take  advantage of the servicemember or stab the servicemember in the  back.
M. Reason for using predatory lender—command will not know  financial conditions (N = 3)
Example: When a soldier needs money, a payday loan can be used  without notifying the chain of command. Any form of assistance from  the Army requires a soldier to obtain approval from a dozen people  before they can get any money.
Example: The most significant reason that people use payday lenders  is privacy. The spouses stated that to obtain assistance through the  Air Force, you must use the chain of command to obtain approval. By  doing so, everyone in the unit will know your business.

Comments from the Department of Defense

GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the individual named above, Leslie Bharadwaja, Alissa Czyz,  Marion A. Gatling, Gregg Justice, III, David Mayfield, Brian Pegram, Minette  Richardson, Terry Richardson, and Allen Westheimer made key  contributions to this report.

Related GAO Products

Military Personnel: More DOD Actions Needed to Address  Servicemembers’ Personal Financial Management Issues. GAO-05-348.  Washington, D.C.: April 26, 2005.
Credit Reporting Literacy: Consumers Understood the Basics but  Could Benefit from Targeted Educational Efforts. GAO-05-223.  Washington, D.C.: March 16, 2005.
DOD Systems Modernization: Management of Integrated Military  Human Capital Program Needs Additional Improvements. GAO-05-189.  Washington, D.C.: February 11, 2005.
Highlights of a GAO Forum: The Federal Government’s Role in  Improving Financial Literacy. GAO-05-93SP. Washington, D.C.:  November 15, 2004.
Military Personnel: DOD Needs More Data Before It Can Determine  if Costly Changes to the Reserve Retirement System Are Warranted. GAO- 04-1005. Washington, D.C.: September 15, 2004.
Military Pay: Army Reserve Soldiers Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-911. Washington, D.C.:  August 20, 2004.
Military Pay: Army Reserve Soldiers Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-990T. Washington, D.C.:  July 20, 2004.
Military Personnel: Survivor Benefits for Servicemembers and Federal,  State, and City Government Employees. GAO-04-814. Washington, D.C.:  July 15, 2004.
Military Personnel: DOD Has Not Implemented the High Deployment  Allowance that Could Compensate Servicemembers Deployed Frequently  for Short Periods. GAO-04-805. Washington, D.C.: June 25, 2004.
Military Personnel: Active Duty Compensation and Its Tax Treatment.  GAO-04-721R. Washington, D.C.: May 7, 2004.
Military Personnel: Observations Related to Reserve Compensation,  Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.  GAO-04-582T. Washington, D.C.: March 24, 2004.
Military Personnel: Bankruptcy Filings among Active Duty Service  Members. GAO-04-465R. Washington, D.C.: February 27, 2004.
Military Pay: Army National Guard Personnel Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-413T. Washington, D.C.:  January 28, 2004.
Military Personnel: DOD Needs More Effective Controls to Better Assess  the Progress of the Selective Reenlistment Bonus Program. GAO-04-86.  Washington, D.C.: November 13, 2003.
Military Pay: Army National Guard Personnel Mobilized to Active Duty  Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.:  November 13, 2003.
Military Personnel: DFAS Has Not Met All Information Technology  Requirements for Its New Pay System. GAO-04-149R. Washington, D.C.:  October 20, 2003.
Military Personnel: DOD Needs More Data to Address Financial and  Health Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.:  September 10, 2003.
Military Personnel: DOD Needs to Assess Certain Factors in Determining  Whether Hazardous Duty Pay Is Warranted for Duty in the Polar  Regions. GAO-03-554. Washington, D.C.: April 29, 2003.
Military Personnel: Management and Oversight of Selective Reenlistment  Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.:  November 25, 2002.
Military Personnel: Active Duty Benefits Reflect Changing  Demographics, but Opportunities Exist to Improve. GAO-02-935.  Washington, D.C.: September 18, 2002.

Summary:
Why GAO Did This Study

The Department of Defense (DOD) has expressed concerns about servicemembers' use of predatory consumer loans as well as their overall financial conditions. "Predatory lending" has no precise definition but describes cases where a lender takes unfair advantage of a borrower, sometimes through deception, fraud, or terms such as very high interest or fees. Serious financial problems can adversely affect unit morale and readiness as well as servicemembers' credit history and military career. DOD has tools such as off-limits lists to help curb the use and effects of predatory loans. GAO answered two questions: (1) To what extent do active duty servicemembers use consumer loans considered to be predatory in nature? and (2) Are DOD and active duty servicemembers fully utilizing the tools that DOD has to curb the use and effects of predatory lending practices?

What GAO Found

The extent to which active duty servicemembers use consumer loans considered to be predatory and the effects of that borrowing are unknown. The only DOD-wide data come from surveys. In a 2004 survey, 12 percent of servicemembers said they or their spouse had used, during the last 12 months, at least one of four types of loans: payday, rent-to-own, automobile title pawn, or tax refund, which DOD says can often be associated with predatory lending practices. DOD is unable to quantify the extent to which the loans have associated predatory practices, the frequency of such borrowing, the amounts borrowed, or the effects of the loans. Although not generalizable, participants in GAO's 60 focus groups at 13 bases in the United States and Germany identified problems resulting from the use of short-term consumer loans, but other participants described the loans as quick, easy, and obtainable by servicemembers with bad credit. Privacy concerns and the reluctance of servicemembers to reveal financial problems make it difficult to quantify the use and effects of predatory lending. DOD and active duty servicemembers are not fully utilizing DOD's tools for curbing the use and effects of predatory lending practices. At some of the installations that we visited, the Armed Forces Disciplinary Control Board--a panel that can recommend to an installation commander that a business be placed off-limits to servicemembers--had not met in over a year. Fort Drum's board, for example, had not met in about 4 years, even though the New York Attorney General had filed two lending-related lawsuits against businesses on behalf of servicemembers and some of their family members at Fort Drum. DOD officials told us the reasons for boards not meeting or making recommendations include high deployment levels and the effort required to place a business on an off-limits list. Other commanders effectively changed businesses' predatory practices by using their board's recommendations to place or threaten to place the businesses off-limits. In addition, DOD is not always providing a clear message regarding advertising in installation publications. Participants in GAO's focus groups said they were confused because DOD-provided financial management training (described in our 2005 report, Military Personnel: More DOD Actions Needed to Address Servicemembers' Personal Financial Management Issues) warned them against using payday lenders but some installation newspapers carried advertisements for such businesses. These problems occur even though a DOD instruction requires (1) a disclaimer indicating that the advertisement does not constitute endorsement by the U.S. government and (2) a review by public affairs staff to determine if the advertisement might be detrimental to servicemembers. Our review of some installation newspapers showed possible reasons for the confusion; the disclaimers were often not prominently displayed or were located away from the advertisements. DOD also offers servicemembers free legal review of contracts and other financial transactions, but servicemembers often do not use the reviews until problems result. Recently, DOD began exploring additional on-installation alternatives to payday loans.