a

GAO

United States Government Accountability Office

Report to the Honorable Richard J. 

Durbin, U.S. Senate

April 2005 MILITARY 

PERSONNEL

DOD’s Tools for 

Curbing the Use and 

Effects of Predatory 

Lending Not Fully 

Utilized

GAO-05-349
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-349.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Derek Stewart 

at (202) 512-5559 or stewartd@gao.gov.. 

Highlights of GAO-05-349, a report to 

Senator Richard J. Durbin 

April 2005

MILITARY PERSONNEL

DOD's Tools for Curbing the Use and 

Effects of Predatory Lending Not Fully 

Utilized 

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. 

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 Recommends

GAO is making two 

recommendations for DOD to curb 

the use and effects of predatory 

lending practices on 

servicemembers: amend 

regulations to require at least semiannual meetings of the Armed 

Forces Disciplinary Control Boards 

and clarify regulations pertaining to 

advertisements in official DOD 

publications. DOD concurred with 

GAO’s recommendations. 
Page i GAO-05-349 Predatory Lending

Contents

Letter 1

Results in Brief 3

Background 5

Use of Consumer Loans That Are Considered Predatory Is 

Unknown, but Sources Say Predatory Lenders May Be Targeting 

Servicemembers 7

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

Underutilized 12

Conclusions 18

Recommendations for Executive Action 18

Agency Comments and Our Evaluation 19

Appendixes

Appendix I: Scope and Methodology 21

Appendix II: Predatory Lending Findings from GAO-Led Focus Groups 

Held at 13 Installations 24

Appendix III: Comments from the Department of Defense 30

Appendix IV: GAO Contact and Staff Acknowledgments 36

Appendix V: Related GAO Products 37

Table Table 1: Installations in the United States and Germany Where GAO 

Conducted Site Visits from May to October 2004 21

Figure Figure 1: The Number of Servicemembers in Each State and 

Whether or Not the State Has Payday Lending Laws with 

Interest Caps or Other Prohibitions 11

Abbreviations

DOD Department of Defense

PFM personal financial management
Contents

Page ii GAO-05-349 Predatory Lending

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Page 1 GAO-05-349 Predatory Lending

United States Government Accountability Office

Washington, D.C. 20548

A

April 26, 2005 Letr

The Honorable Richard J. Durbin

United States Senate

Dear Senator Durbin:

The Department of Defense (DOD) has expressed continuing concerns 

about servicemembers’ use of predatory consumer loans. These loans can 

result in financial problems that may lead to severe negative consequences 

for the military as a whole (e.g., decreases in unit readiness and morale) as 

well as for the servicemembers themselves (e.g., criminal and adverse 

personnel actions, including possible discharge from the military). 

“Predatory lending” has no precise definition, but is generally used to 

describe cases in which a lender takes unfair advantage of a borrower, 

sometimes through deception, fraud, or manipulation, to make a loan that 

contains terms that are disadvantageous to the borrower.1

 DOD policy 

officials have expressed concerns over certain types of high-cost, shortterm consumer loans that are typically provided by lenders who lie outside 

the system of federally insured financial institutions. These include payday 

loans, rent-to-own loans, automobile title pawn loans, and tax refund loans.

DOD has a number of tools to address the use and effects of loans that it 

considers predatory. These tools include: (1) the Armed Forces 

Disciplinary Control Boards,2

 which can make recommendations to 

installation commanders who can then use or threaten to use their 

“off-limits” authority to prohibit servicemembers from using a business that 

engages in predatory lending practices; (2) free legal assistance with 

1

See GAO, Consumer Protection: Federal and State Agencies Face Challenges in 

Combating Predatory Lending, GAO-04-280 (Washington, D.C.: Jan. 30, 2004). The cited 

report addresses home mortgage lending and equity loans, but our work did not. 

Nevertheless, some lending practices are widely acknowledged to be predatory and include 

charging excessive fees and interest rates, repeatedly rolling over or refinancing loans 

without economic gain for the borrower, falsifying documents, and intentionally 

misinforming borrowers about the terms of their loans.

2

For the joint service instruction, see AR190-2, OPNAVIST1620.2A, AFI31-213, MCO1620.2C, 

COMDTINST1620.1D, Armed Forces Disciplinary Control Boards and Off-Installations 

Liaison and Operations (June 1993). Under this joint policy, installation commanders, at 

their discretion, may establish such boards to advise and make recommendations to the 

commanders on matters concerning eliminating conditions around their installations that 

are adversely affecting the health, safety, welfare, morale, and discipline of the Armed 

Forces.
Page 2 GAO-05-349 Predatory Lending

contracts and other financial transactions; and (3) personal financial 

management (PFM) programs that offer servicemembers assistance, such 

as financial management training and counseling. In addition, DOD has 

encouraged servicemembers to seek, for example, payday loan alternatives 

available from on-installation banks, on-installation credit unions, and 

service-affiliated relief/aid societies.3

This report supplements the information we provided to you in our 

February 2004 report on bankruptcies among active duty servicemembers, 

and our April 2005 report on the financial conditions of deployed 

servicemembers and the financial management assistance and training 

provided to servicemembers.4

 For this report, we agreed with your staff to 

answer 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?

In addressing these two questions, we limited the scope of our work to 

active duty personnel and emphasized junior enlisted servicemembers (i.e., 

pay grades E1 to E4) because DOD and service officials have indicated that 

this subgroup—whose basic pay currently ranges from about $1,200 to 

$1,900 per month—is most likely to encounter financial problems. 

Numerous methods were used to gather and assess information for this 

work.5

 We examined DOD and service policies and tools for assisting 

servicemembers with their financial management, establishing and using 

Armed Forces Disciplinary Control Boards, and advertising in installation 

publications. In addition, we reviewed reports by GAO, other congressional 

research offices, DOD, and other organizations. We contacted the Federal 

Trade Commission to ascertain what data were available through Military 

Sentinel regarding the types of consumer complaints servicemembers filed 

against businesses. We interviewed DOD and service policy officials and 

officials from organizations such as the Consumer Federation of America—

3

See GAO, Military Personnel: More DOD Actions Needed to Address Servicemembers’ 

Personal Financial Management Issues, GAO-05-348 (Washington, D.C.: Apr. 26, 2005) for 

information about the military’s PFM training and counseling, as well as other components 

of the PFM programs. These programs are part of DOD’s core family support programs that 

are used to address the adverse effects associated with personal financial problems.

4

See GAO-05-348 and GAO, Military Personnel: Bankruptcy Filings among Active Duty 

Service Members, GAO-04-465R (Washington, D.C.: Feb. 27, 2004).

5

The data for this work were gathered at the same time as the data used in GAO-05-348.
Page 3 GAO-05-349 Predatory Lending

a consumer advocacy group—and the Community Financial Services 

Association of America—a payday lending association—to understand the 

different perspectives about servicemembers’ use of short-term consumer 

loans. During site visits to 13 military installations in the United States and 

Germany, we requested documents pertaining to predatory lending such as 

guidance or instructions regarding predatory lending activities at the 

installations and training materials; used structured questionnaires to 

gather data from a variety of personnel on the 13 installations: command 

leaders, PFM program managers, command financial counselors, legal 

assistance attorneys, senior noncommissioned officers (pay grades E8 to 

E9), chaplains, and staff from the military relief/aid societies; and 

conducted 60 focus groups composed of over 400 junior (pay grades E1 to 

E4) and senior (pay grades E5 to E9) enlisted servicemembers, company 

grade officers (pay grade O1 to O3), and servicemembers’ spouses. In 

addition, we administered a questionnaire to participants in the focus 

groups to collect supplemental information. While data from these four 

types of homogeneously composed focus groups are not generalizable to 

the entire DOD population of active duty servicemembers, the data provide 

context for understanding lending/borrowing and PFM issues. In addition, 

we conducted group interviews of personnel affiliated with the PFM 

programs while they attended a November 2004 conference. We reviewed 

14 installation newspapers and examined the disclaimers and 

advertisements in these newspapers during the course of our review. We 

reviewed information in DOD’s August 2004 active duty survey related to 

findings for four types of loans: payday, rent-to-own, automobile title pawn, 

and tax refund, which DOD says may include 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 found the data sufficiently reliable to address 

our objectives. We performed our work from March 2004 through February 

2005 in accordance with generally accepted government auditing 

standards.

Results in Brief The extent to which active duty servicemembers use consumer loans 

considered to be predatory in nature and the effects of such borrowing are 

unknown, but many sources suggest that providers of such loans may be 

targeting servicemembers. The only DOD-wide data come from surveys 

that have low response rates that make findings projected to the population 
Page 4 GAO-05-349 Predatory Lending

of all active duty servicemembers or subgroups thereof tenuous. 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, rentto-own, automobile title pawn, and tax return, 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 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 such as 

high fees and debt collection methods resulting from the use of these types 

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. While 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 and are adversely affected when they use 

businesses that employ predatory lending practices.

DOD and active duty servicemembers are not fully utilizing DOD’s tools for 

curbing the use and effects of predatory lending practices. While 

commanders at some installations we visited have changed the illegal or 

unfair practices of some businesses by using recommendations from 

Armed Forces Disciplinary Control Boards to place or threaten to place 

businesses off-limits to servicemembers, boards at three installations we 

visited had not met in over a year. For example, Fort Drum’s board 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. 

Installation 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 the off-limits list. A second tool that DOD is 

underutilizing pertains to advertisements in installations’ newspapers. 

Participants in GAO’s focus groups said they were confused because DODprovided financial management training 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 that the confusion and 
Page 5 GAO-05-349 Predatory Lending

incorrect assumptions may be, in part, the result of the disclaimers often 

being located away from the advertisement or not being prominently 

displayed. Third, 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. According to servicemembers and legal assistance attorneys, 

military personnel may avoid the DOD-provided legal assistance for fear 

that their career progression would be limited if the command were to 

learn of their financial problems. Recently, DOD has explored additional 

on-installation alternatives to payday loans, like special loan programs 

offered by on-installation credit unions and banks.

We are making two recommendations to improve DOD’s ability to curb the 

use and effects of predatory lending practices: (1) amend existing 

regulations to require at least semiannual meetings of the Armed Forces 

Disciplinary Control Boards and (2) clarify regulations pertaining to 

advertisements in installation publications to require more prominent 

disclaimers and additional steps to ensure advertisements reflect stated 

DOD policies. In commenting on a draft of this report, DOD concurred 

with our recommendations.

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:
Page 6 GAO-05-349 Predatory Lending

• 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.6

• 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.7

• 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

6

According to the Federal Reserve Bank of Philadelphia, fees for a payday loan range from 

$15 to $30 on each $100 advanced. If the fee is $15 to borrow $100 for 14 days, the 

annualized percentage rate for that loan is 391 percent. If the borrower extends the 14-day 

loan four times beyond the initial loan, the 70-day loan of $100 would result in paying $75 in 

fees in addition to repaying the borrowed $100.

7

Survey of Rent-to-Own Customers, Federal Trade Commission Bureau of Economics Staff 

Report (undated).
Page 7 GAO-05-349 Predatory Lending

advances.8 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.9

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.

8

The association’s Web site (www.cfsa.net) states that “a member will comply with State 

laws on rollovers (the extension of an outstanding advance by payment of only a fee). In 

States where rollovers are not specifically allowed, a member will not under any 

circumstances allow a customer to do a rollover. In the few States where rollovers are 

permitted, a member will limit rollovers to four (4) or the State limit, whichever is less.” The 

association also established a separate set of best practices for dealing with military 

customers and published them on its Web site.

9

See Congressional Research Service, Payday Loans: Federal Regulatory Initiatives, 

RS21728 (Washington, D.C.: Feb. 5, 2004).
Page 8 GAO-05-349 Predatory Lending

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,10

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 

10Because the response rate for this survey was 40 percent, uncertainty exists as to how well 

the survey findings actually project to the population of all active duty servicemembers or 

any subgroup thereof. The loan-related items presented in this report are only a small 

portion of the many and diverse questions on the survey. According to DOD, the sampling 

errors for all of the following estimates from the August 2004 survey do not exceed plus or 

minus 2 percentage points.
Page 9 GAO-05-349 Predatory Lending

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.11

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

11See National Consumer Law Center, Inc., In Harm’s Way—At Home: Consumer Scams 

and the Direct Targeting of America’s Military and Veterans (Boston, Mass.: May 2003).
Page 10 GAO-05-349 Predatory Lending

servicemembers and others in the state.12 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 site13 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.14 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.15

12Official Code of Georgia Annotated Title 16, Chapter 17.

13See DOD Web site http://www.USA4MilitaryFamilies.org.

14 See Consumer Federation of America, Unsafe and Unsound: Payday Lenders Hide 

Behind FDIC Bank Charters to Peddle Usury (Washington, D.C.: Mar. 30, 2004). This report 

noted that 33 states and the District of Columbia authorize payday loans by law or 

regulation, and two additional states have no usury limits on small loans by licensed lenders.

15See Consumer Federation of America, Internet Payday Lending: How High-Priced 

Lenders Use the Internet to Mire Borrowers in Debt and Evade State Consumer 

Protections (Washington, D.C.: Nov. 30, 2004).
Page 11 GAO-05-349 Predatory Lending

Figure 1: The Number of Servicemembers in Each State and Whether or Not the State Has Payday Lending Laws with Interest 

Caps or Other Prohibitions

States that prohibit payday loans due to small loan interest rate caps, usury laws, and/or specific

prohibitions for check cashiers

0 - 4,999 active duty service members 

5,000 - 29,999 active duty service members

30,000 or more active duty service members

S.C.

Va.

N.C.

Fla.

Source: Department of Defense and Consumer Federation of America.

N.H.

Mass.

R.I.

Conn.

N.J.

Del.

Md.

D.C.

Alaska

Hawaii

Ala.

Ariz.

Ark.

Calif. Colo.

Ga.

Idaho

Ill. Ind.

Iowa

Kans.

La.

Maine

Mich.

Minn.

Mo.

Mont.

Nebr. Nev.

N.Mex.

N.Y.

N.Dak.

Okla.

Oreg.

Pa.

S.Dak.

Tenn.

Tex.

Utah

Wash.

W.Va.

Wisc.

Wyo.

Miss.

Ohio

Ky.

Vt.
Page 12 GAO-05-349 Predatory Lending

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 offlimits 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.16 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 

16Under current DOD joint policy, if a board concludes that an establishment has unfair 

commercial or consumer practices, the installation commander can prohibit 

servicemembers from frequenting the business by placing the entity on an off-limits list. 

There are several steps a board completes prior to making a recommendation to the 

commander to place an establishment on the off-limits list. These steps include (1) notifying 

the owner or manager that the board is considering actions, and giving the owner or 

manager time to correct any adverse conditions or practices; (2) if the adverse conditions 

are not corrected, giving the owner or manager the opportunity to appear and present 

matters before the board; and (3) recommending an off-limits restriction, if further 

investigation indicates that improvements have not been made. These steps, according to 

some installation officials, can be time consuming and are designed to permit the owner or 

manager to voluntarily correct conditions or practices before the board recommends 

placement on an off-limits list. If a commander places a business on the off-limits list, 

servicemembers are prohibited from entering the establishment and face disciplinary action 

if they violate this prohibition.
Page 13 GAO-05-349 Predatory Lending

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 offlimits 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.
Page 14 GAO-05-349 Predatory Lending

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.17 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.18 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.19 Among other things, the 

public affairs staff is to review advertisements and identify any that may be 

1750 U.S.C. App. § 501. The act, among other things, caps the annual interest at 6 percent on 

debts incurred prior to a person’s entry into active duty military service and sets forth 

procedures for requesting such a reduction.

18See “Consumer Scams: Are You Getting Ripped Off?” Hot Topics, Vol. 5, No. 4 (2003). 

U.S. Army publication by the Office of the Chief of Public Affairs.

19DOD Instruction 5120.4, Enclosure 4, Department of Defense Newspapers, Magazines and 

Civilian Enterprise Publications (June 16, 1997).
Page 15 GAO-05-349 Predatory Lending

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 DODProvided 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. 
Page 16 GAO-05-349 Predatory Lending

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 offinstallation 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.
Page 17 GAO-05-349 Predatory Lending

DOD Is Exploring OnInstallation 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.20 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 

20These are provided during emergencies, which include nonreceipt or loss of pay, funeral 

expenses for dependents, repair of a primary vehicle, and payment of rent to prevent 

eviction. See AR-930-4, Army Emergency Relief (Aug. 30, 1994) section 2-11 (Categories of 

authorized emergency financial assistance); and Air Force Instruction 36-3109, Air Force 

Aid Society (Mar. 5, 2004). The Navy and Marine Corps Relief Society officials said they do 

not have an instruction.
Page 18 GAO-05-349 Predatory Lending

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 
Page 19 GAO-05-349 Predatory Lending

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 
Page 20 GAO-05-349 Predatory Lending

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.

Sincerely yours,

Derek B. Stewart

Director, Defense Capabilities and Management
Page 21 GAO-05-349 Predatory Lending

Appendix I

Scope and Methodology ApApenednxidexiIs

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.1

 While performing our work, we visited 

13 installations with high deployment levels, as identified by service 

officials (see table 1).2

 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.

Table 1: Installations in the United States and Germany Where GAO Conducted Site 

Visits from May to October 2004

Source: GAO.

To address servicemembers use of consumer loans considered to be 

predatory in nature, we reviewed and analyzed laws, policies, and 

1

Our work focused on active duty servicemembers. The Related GAO Products section at 

the end of this report lists several products that focus on reservists and their compensation, 

benefits, and pay-related problems that result from deployment.

2

To facilitate efficient data collection, the data for this engagement were gathered at the 

same time as those used to prepare GAO-05-348.

Service Installation

Army Fort Bragg, North Carolina

Fort Campbell, Kentucky

Fort Drum, New York

Fort Lewis, Washington

Fort Stewart, Georgia

Ray Barracks, Friedberg, Germany

Navy Naval Air Station Jacksonville, Florida

Naval Station San Diego, California

Marine Corps Camp Lejeune, North Carolina

Camp Pendleton, California

Air Force Bolling Air Force Base, Washington, D.C.

Langley Air Force Base, Virginia

Ramstein Air Base, Germany
Appendix I

Scope and Methodology

Page 22 GAO-05-349 Predatory Lending

directives—such as the Servicemembers Civil Relief Act3 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.4

 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 

survey5

 to assess its reliability and determine prevalence rates for four 

types of loans that DOD says may contain predatory practices. The August 

3

50 U.S.C. App. § 501.

4

See Consumer Federation of America, Unsafe and Unsound: Payday Lenders Hide 

Behind FDIC Bank Charters to Peddle Usury (Washington, D.C.: Mar. 30, 2004).

5

The target population for all active duty Status of Forces Surveys consists of active duty 

members of the Army, Navy, Marine Corps, and Air Force, excluding National Guard and 

Reserve members who (1) have at least 6 months of service at the time the questionnaire is 

first fielded, and are (2) below flag rank.
Appendix I

Scope and Methodology

Page 23 GAO-05-349 Predatory Lending

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.
Page 24 GAO-05-349 Predatory Lending

Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations ApendxiI

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.1

 Before the question was asked we attempted to provide 

participants with a general context for answering the question by reading 

1

See GAO-05-348, app. II, for participants’ answers on the other six questions asked in the 

focus groups.
Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations

Page 25 GAO-05-349 Predatory Lending

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.
Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations

Page 26 GAO-05-349 Predatory Lending

• 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.
Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations

Page 27 GAO-05-349 Predatory Lending

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.
Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations

Page 28 GAO-05-349 Predatory Lending

• 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 
Appendix II

Predatory Lending Findings from GAO-Led 

Focus Groups Held at 13 Installations

Page 29 GAO-05-349 Predatory Lending

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.
Page 30 GAO-05-349 Predatory Lending

Appendix III

Comments from the Department of Defense ApendxiI
Appendix III

Comments from the Department of Defense

Page 31 GAO-05-349 Predatory Lending
Appendix III

Comments from the Department of Defense

Page 32 GAO-05-349 Predatory Lending
Appendix III

Comments from the Department of Defense

Page 33 GAO-05-349 Predatory Lending
Appendix III

Comments from the Department of Defense

Page 34 GAO-05-349 Predatory Lending
Appendix III

Comments from the Department of Defense

Page 35 GAO-05-349 Predatory Lending
Page 36 GAO-05-349 Predatory Lending

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Jack E. Edwards (202) 512-8246

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.
Page 37 GAO-05-349 Predatory Lending

Appendix V

Related GAO Products ApendxiV

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. GAO04-1005. 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.
Appendix V

Related GAO Products

Page 38 GAO-05-349 Predatory Lending

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.

(350661)
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