GAO-07-1148R DOD Predatory Lending 

United States Government Accountability Office

Washington, DC 20548 

August 31, 2007 

The Honorable Tim Johnson 

Chairman 

Subcommittee on Financial Institutions 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Lindsey Graham 

Ranking Member 

Subcommittee on Personnel 

Committee on Armed Services 

United States Senate 

Subject: Military Personnel: DOD’s Predatory Lending Report Addressed Mandated 

Issues, but Support Is Limited for Some Findings and Recommendations 

Serious financial problems can adversely affect unit morale and readiness as well as 

servicemembers’ credit histories and military careers. If servicemembers experience serious 

financial problems, they may be subject to adverse actions such as loss of security 

clearances, criminal or nonjudicial sanctions, or adverse personnel actions including possible 

discharge from the military. The Department of Defense’s (DOD) Social Compact, which is 

part of its human capital plan, notes that mission readiness and quality of life depend on 

whether servicemembers use their financial resources responsibly.1

 For these reasons, 

Congress and DOD officials have expressed concerns about servicemembers’ financial 

conditions. DOD is particularly concerned about the use and effects of certain consumer 

loans that DOD identified as being predatory. 

In April 2005, we reported about problems servicemembers were experiencing with personal 

financial management and the steps that DOD was taking to address those issues.2

 In another 

April 2005 report, we noted that DOD did not know the extent to which servicemembers were 

using consumer loans that DOD considered to be predatory, nor the effects of that usage.3

Our report noted that DOD expressed concerns about four types of loans it labeled as 

 

1

DOD’s Social Compact is a long-term quality of life strategy for the department. It promotes the 

advancement of the military community through the reciprocal ties that bind servicemembers, the 

military mission, and military families by responding to their quality of life needs as individuals and as 

members of a larger community. See DOD, Office of Military Community and Family Policy, A New 

Social Compact: A Reciprocal Partnership between the Department of Defense, Service Members and 

Families (July 2002). 

2

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

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

3

GAO, Military Personnel: DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not 

Fully Utilized, GAO-05-349 (Washington, D.C.: Apr. 26, 2005). 
predatory—payday, rent-to-own, automobile title pawn, and tax refund loans. These financial 

products are typically offered by lenders that are outside the system of federally insured 

financial institutions. Although “predatory lending” has no precise definition, some practices 

(such as charging excessive fees or interest rates and repeatedly refinancing loans without 

economic gain for the borrower) are widely regarded as predatory. We also reported that 

DOD and active duty servicemembers have not fully used DOD’s existing tools for curbing 

the use and effects of predatory lending practices. To correct identified problems in DOD’s 

programs for addressing predatory lending practices, we recommended actions that would 

(1) clarify to servicemembers that DOD does not endorse the advertisers in installation 

newspapers and (2) make greater use of Armed Forces Disciplinary Control Boards which 

can place businesses off limits to servicemembers if the businesses adversely affect the 

servicemembers’ health, safety, morals, welfare, morale, and discipline. DOD concurred with 

the first recommendation and partially concurred with our second recommendation, noting 

constraints faced in using the boards. 

The 2006 National Defense Authorization Act required DOD to issue a report on predatory 

lending directed at servicemembers and their dependents.4

 The mandate required DOD’s 

report to include: (1) a description of the prevalence of predatory lending practices directed 

at servicemembers and their families; (2) an assessment of the effects of predatory lending 

on servicemembers and their families; (3) a description of DOD’s strategies and programs to 

educate servicemembers and their families about predatory practices; (4) a description of 

DOD’s strategies and programs to reduce or eliminate the prevalence of predatory lending 

practices directed at servicemembers and their families, as well as the negative effects of 

such practices; and (5) recommendations for additional legislative and administrative action 

to reduce or eliminate predatory lending practices. The act further specified that DOD was to 

prepare its report in consultation with the Secretary of the Treasury, the Chairman of the 

Federal Reserve, the Chairman of the Federal Deposit Insurance Corporation, and 

representatives from military charity organizations, and consumer groups and submit it to 

Congress within 180 days of the legislation’s enactment. DOD issued the mandated report on 

August 9, 2006.5

 Following the submission of DOD’s report, Congress added a new section to 

Title 10 of the U.S. Code which sets out a number of limitations and requirements related to 

terms of consumer credit extended to servicemembers and their dependents.6

 Many of the 

provisions in this section mirror the recommendations in DOD’s report. This statute required 

the Secretary of Defense to create regulations to implement the new provisions, and, in

response to that requirement, DOD has published in the Federal Register some proposed rule 

changes that would limit the terms of consumer credit extended to servicemembers and their 

dependents.7

 These proposed regulations are expected to be effective October 1, 2007.

Following the publication of DOD’s 2006 report, private-sector groups associated with 

segments of the financial industry raised concerns about the report’s preparation, quality, and 

recommendations. You requested that we review DOD’s 2006 report on predatory lending 

practices. Specifically, we evaluated DOD’s approach and support in preparing its mandated 

report on predatory lending practices. This report documents findings that we briefed to your 

offices on August 17, 2007. Enclosure I contains the briefing slides we presented. This

 4

National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163, § 579 (2006). 

5

DOD, Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their 

Dependents (Washington, D.C.: Aug. 9, 2006).

6

The John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, § 670 

(2006), added Section 987 to Title 10 of the U.S. Code. 

7

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed.

Reg. 18157 (proposed Apr. 11, 2007) (to be codified at 32 C.F.R. pt. 232). 

Page 2 GAO-07-1148R DOD Predatory Lending 
briefing contributes to a larger GAO body of work on compensation and financial conditions 

of military personnel (see the list of related GAO products at the end of this report). 

In conducting our review, we limited the scope of our work to the types of loans that DOD 

identified as being predatory in its mandated 2006 report. We examined legislation that

mandated the DOD report and regulations such as governmentwide and DOD-wide standards 

for data quality. In addition to reviewing DOD’s predatory lending report and the reports 

cited in that study, we reviewed GAO, Congressional Research Service, and Federal Deposit 

Insurance Corporation Office of the Inspector General reports on related issues. We 

developed a tool to systematize our analysis of the quality of research studies and data

sources DOD used as support in its report. We interviewed representatives and obtained 

documents from DOD and the federal agencies, military charity organizations, and consumer 

groups involved in the preparation of DOD’s report as well as other groups whose 

perspectives were different from those provided in the DOD report. As an additional means 

for examining the support for DOD’s report, we conducted a site visit at one installation for 

each of the four active duty services. Enclosure II describes our scope and methodology in 

more detail. We performed our work between March 2007 and August 2007 in accordance 

with generally accepted government auditing standards. 

Summary 

DOD issued a report on predatory lending that addressed the mandated issues, but it 

contained limited support for some of its findings and recommendations. As required by the 

mandate in the 2006 National Defense Authorization Act, DOD issued its report in August 

2006 addressing the five required elements after consulting with the organizations and groups 

specified in the act. Among the points that DOD made are that predatory lending practices 

are prevalent and target military personnel and that the department is exerting significant 

effort to educate servicemembers on the potential dangers of using predatory loans. All 

mandated organizations and groups stated that they had commented on DOD’s report, 

although DOD appears to have consulted with military charity organizations and consumer 

groups more than with the federal agencies identified in the report. DOD’s report did not 

describe the content and extent of the consultations or make note of any concerns raised by 

those groups. The report’s authors indicated that they had to rely largely on previously

gathered data and may have done some things differently if they had had more time. 

Additionally, representatives for one of the consulted federal agencies noted that DOD faced 

a short timeframe to prepare its report and basically met the legislative requirements. Even 

though DOD provided several sources illustrating the negative effect that predatory loans 

have on servicemembers, our evaluation of the DOD report revealed methodological

problems in some of its analyses and in some of the studies cited in its report, particularly for 

the description of the prevalence and assessment of the effects of predatory lending 

practices. For example, the DOD report’s prevalence section provided several metrics that 

did not directly assess whether servicemembers actually (1) used the loan type and (2) 

considered the associated lending practices to be predatory. As we noted in our 2005 report 

on predatory lending, the extent to which active duty servicemembers use consumer loans 

considered to be predatory and the effects of such borrowing are unknown, but some of the 

information provided in the DOD report and obtained during our 2007 site visits suggests that 

some servicemembers can pay substantial sums for the loans. DOD’s report also showed the 

percentages of servicemembers who use loans that it had characterized as predatory and the 

percentage of servicemembers who experienced financial difficulties. It did not include an 

analysis of the relationship between the two types of information. In its sections on 

education and strategies to reduce or eliminate the prevalence and negative effects of

predatory lending practices, the DOD report documented the broad array of financial 

education classes and other programs offered. While the report linked the large numbers of 

financial education classes and materials provided to servicemembers and their families to 

Page 3 GAO-07-1148R DOD Predatory Lending
increased awareness and reduced usage of predatory loans, DOD has not implemented 

procedures for evaluating outcomes from its training programs as we recommended in 2005. 

For example, tools such as required personal financial management training for all 

servicemembers arriving at their first duty station, alternative loan programs from military 

charity organizations, and financial counseling are readily available to servicemembers; 

however, our 2005 report noted and our site visits in 2007 found that some servicemembers 

underutilize these resources because, in part, they do not want their command to know about 

their financial problems. DOD’s report included six recommendations for additional 

legislative and administrative actions, such as setting a 36 percent annual percentage rate cap 

for loans to military borrowers and requiring unambiguous and uniform price disclosures. 

While these recommendations may have merit, they were not directly linked to the report’s 

findings, were based on research studies that had some methodological problems, or did not 

address implementation issues. Similarly, DOD proposed the recommendations without 

discussing the feasibility of implementing and enforcing the recommendations. While DOD’s 

report addressed the requirements in the mandate, the shortcomings we identified in some of 

the methods and approach indicate that caution is necessary when interpreting the findings 

for some areas of DOD’s report. 

Agency Comments and Our Evaluation 

On August 21, 2007, we provided a draft of this report to DOD for review and comment. The 

Office of the Under Secretary of Defense for Personnel and Readiness provided the following 

comments. 

“The Department stands by the content and recommendations in its August 9th, 2006, Report 

to Congress on Predatory Lending Practices Directed at Members of the Armed Forces and 

Their Dependents. While more research is always a laudable objective, GAO's existing 

findings, as it acknowledges, point to the same conclusion the Department and the Congress 

reached: We need to act to protect our Service personnel from predatory lending practices.” 

Contrary to DOD’s comments, our report neither acknowledged nor disagreed with DOD’s 

conclusion stated above. While actions may be needed to protect servicemembers from 

predatory lending practices, our report did not endorse or reject any action recommended in 

DOD’s report. The scope of our work was limited to evaluating DOD’s approach and support 

in preparing its mandated report on predatory lending practices. 

As agreed with your office, unless you publicly announce its contents earlier, we plan no 

further distribution of this report until 4 days after its issue date. At that time, we will provide 

copies of this report to interested congressional committees and the Secretary of Defense. 

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. 

Page 4 GAO-07-1148R DOD Predatory Lending 
If you have any questions about this report or need additional information, please contact me 

at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. Key contributors to 

this report are listed in enclosure III. 

Brenda S. Farrell 

Director 

Defense Capabilities and Management 

Page 5 GAO-07-1148R DOD Predatory Lending
Enclosure I 

Briefing Slides

Military Personnel: DOD’s Predatory Lending Report Addressed 

Mandated Issues, but Support Limited for Some Findings and 

Recommendations

Briefing to Congressional Requesters

August 17, 2007

Page 6 GAO-07-1148R DOD Predatory Lending 
2

Outline of Briefing

Introduction/Background

Objective, Scope, and Methodology

GAO Observations

• DOD Consultations during Report Preparation

• DOD Addressed Five Elements in Its Report1

— Description of the prevalence of predatory lending practices,

— Assessment of the effects of the practices,

— Description of DOD’s strategy and programs to educate

servicemembers and their families regarding the practices,

— Description of DOD’s strategy and programs to reduce or eliminate the

prevalence and negative effects of the practices, and

— Recommendations for additional legislative and administrative action to

reduce or eliminate the practices.

1 The mandate required DOD to report on predatory lending practices directed at servicemembers and families for each element. Our observations

are typically applicable to both servicemembers and families, except for some unique points about education training for family members.

Page 7 GAO-07-1148R DOD Predatory Lending
3

Introduction/Background

• The Department of Defense’s (DOD) Social Compact, which is part of its human 

capital plan, notes that mission readiness and quality of life depend on whether 

servicemembers use their financial resources responsibly.2

• If servicemembers experience serious financial problems, they may be subject

to adverse actions such as loss of security clearances, criminal or non-judicial

sanctions, or adverse personnel actions including possible discharge from the 

military. 

• Serious financial problems can adversely affect unit morale and readiness as 

well as servicemembers’ credit histories and military careers.3

2 DOD, Office of Military Community and Family Policy, A New Social Compact: A Reciprocal Partnership between the Department of Defense, Service Members and Families (July 2002).

3 GAO, Military Personnel: More DOD Actions Needed to Address Servicemembers’ Personal Financial Management Issues, GAO-05-348

(Washington, D.C.: Apr. 26, 2005).

Page 8 GAO-07-1148R DOD Predatory Lending 
4

Introduction/Background

(cont.)

In our April 2005 report that addressed predatory lending practices and

servicemembers,4 we noted:

• “Predatory lending” has no precise definition, but some practices (such as

charging excessive fees or interest rates and repeatedly refinancing loans

without economic gain for borrower) are widely regarded as predatory.

• DOD officials expressed concerns about four types of consumer loans 

(payday, rent-to-own, automobile title pawn, and refund anticipation) 

that DOD labeled as predatory. These loans are typically provided by

lenders that are outside the system of federally insured financial institutions.

These loans provide 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 types of loans are generally much 

higher than those charged by traditional financial institutions, and other loan

terms and conditions are often unfavorable to the borrower. Descriptive 

information on these four types of consumer loans follows.

4 GAO, Military Personnel: DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized, GAO-05-349 (Washington, D.C.:

Apr. 26, 2005).

Page 9 GAO-07-1148R DOD Predatory Lending
5

Introduction/Background

(cont.)

— Payday loans, according to the Federal Deposit Insurance Corporation

(FDIC), 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.5

— 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 higher than the retail price.6

5 According to the Federal Reserve Bank of Philadelphia, fees for a payday loan range from $15 to $30 for 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 the borrower paying $75 in fees in addition to repaying the borrowed $100.

6 Survey of Rent-to-Own Customers, Federal Trade Commission Bureau of Economics Staff Report (undated).

Page 10 GAO-07-1148R DOD Predatory Lending 
6

Introduction/Background

(cont.)

— 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.

— Refund anticipation loans provide cash loans against the borrower’s

expected income tax refund.

• DOD did not know the extent to which servicemembers use consumer loans 

that it considered to be predatory or what the effects of that borrowing were,

at the time of our April 2005 report.

• Although DOD had tools in place to curb the use and effects of predatory 

lending practices in 2005, DOD and active duty servicemembers had not 

fully used its tools, such as a panel that can place a business off-limits to

servicemembers.

Page 11 GAO-07-1148R DOD Predatory Lending
7

Introduction/Background

(cont.)

The National Defense Authorization Act for Fiscal Year 2006 mandated DOD to

submit a report on predatory lending practices directed at servicemembers and 

their families and required:7

• Consultation with the Secretary of the Treasury, the Chairman of the 

Federal Reserve, the Chairman of the FDIC, military charity organizations, 

and consumer organizations;

• Information on the following five elements regarding predatory lending

practices directed at servicemembers and their families :

— Description of the prevalence of predatory lending practices,

— Assessment of the effects of the practices,

— Description of DOD’s strategy and programs to educate

servicemembers and their families regarding the practices,

— Description of DOD’s strategy and programs to reduce or eliminate the

prevalence and negative effects of the practices, and

— Recommendations for additional legislative and administrative action to

reduce or eliminate the practices; and

• Issuance of the report no later than 180 days after enactment of the

legislation.

7 National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163, § 579 (2006).

Page 12 GAO-07-1148R DOD Predatory Lending 
8

Introduction/Background

(cont.)

DOD published its Report on Predatory Lending Practices Directed at Members of

the Armed Forces and Their Dependents on August 9, 2006. Among the points 

made in the report were:

• The report had been prepared with assistance from the specific agencies

and types of organizations specified in the mandate.

• Predatory lending practices are prevalent and target military personnel.

• Efforts are on-going to persuade servicemembers “not to fall victim to the

lure of easy credit to solve their financial concerns” and to consider better

options.

• The department is exerting significant effort to educate servicemembers on

the potential dangers of using predatory loans and better ways of managing

their finances.

• Commanders are using the methods available to them (such as loans 

available from military charity organizations) to curtail the prevalence of

predatory loans.

• DOD is seeking protections for servicemembers by proposing six

recommendations for statutory controls.

Page 13 GAO-07-1148R DOD Predatory Lending
9

Objective, Scope, and Methodology

Objective

• For this report, we evaluated DOD’s approach and support in preparing its 

mandated report on predatory lending practices.

Scope

• We limited our work to the types of loans that DOD identified as being

predatory in its mandated report.

• We focused on active duty servicemembers based on DOD’s use of survey

results and other data on active duty servicemembers.

Methodology

To address our objective, we:

• Examined the 2006 legislation mandating the DOD report and regulations 

such as government-wide and DOD-wide standards for data quality;

• Reviewed reports on related issues from GAO, other agencies, and nongovernmental organizations;

Page 14 GAO-07-1148R DOD Predatory Lending 
10

• Constructed and used an evaluation tool to systematically analyze the

methodological soundness of some research studies and data sources that

DOD used in its report;

• Interviewed responsible DOD and service officials and representatives from

the U.S. Treasury, Federal Reserve, FDIC, military charity organizations, and

consumer organizations that were consulted by DOD in its report preparation;

• Held discussions with groups such as the Center for Regulatory Effectiveness 

and a payday lending association to understand perspectives that differed

from those provided in DOD’s report; 

• Conducted a site visit at one installation for each of the four active duty 

services and used structured protocols to conduct individual interviews and

group discussions with personnel representing installation leadership, legal

assistance, finance, senior enlisted supervisors, financial counselors and

trainers, and the military aid/relief unit representatives; and

• Performed our work between March 2007 and August 2007 in accordance

with generally accepted government auditing standards.

Objective, Scope, and Methodology

(cont.)

Page 15 GAO-07-1148R DOD Predatory Lending
11

DOD’s 2006 report indicated and our follow-up discussions confirmed that

the mandated agencies and organizations were consulted, but the report did 

not describe the content and extent of the consultations or make note of any 

concerns raised by those groups.

• The representatives for the mandated federal agencies stated that they had 

reviewed a draft of DOD’s report but did not participate during its preparation.

— Federal Reserve representatives stated that DOD orally described the

report and gave them a whole draft to review. Federal Reserve staff:

 provided general comments, but did not help with the report’s content,

 had no official opinion on the report since it was based on DOD’s 

research and studies of predatory loans on servicemembers, and

 did not help DOD formulate the recommendations nor did the Federal 

Reserve endorse them.

— FDIC representatives stated they reviewed the whole draft report and

 made general comments to DOD, and

 suggested that DOD add information on both alternative loan products

and FDIC’s conference, “Meeting the Needs: Affordable, Responsible 

Short-Term Lending,” which DOD agreed to do.

Observations: Consultations

Page 16 GAO-07-1148R DOD Predatory Lending 
12

Observations: Consultations

(cont.)

— Treasury representatives stated that they reviewed the whole draft report 

after DOD had developed it and 

 provided general rather than substantive comments on the draft

report,

 commented on the potential negative effect that DOD’s 

recommended limitations on credit may have on overall credit 

availability to servicemembers, and

 asked DOD to document in its report that the recommendations apply 

only to military servicemembers.

• Military charity organizations’ officials noted they provided input to the 

report’s authors during its preparation and generally supported its content.

— Army Emergency Relief officials said their comments were editorial, and 

they basically concurred with the draft.

— Navy/Marine Corps Relief Society officials said they agreed

“wholeheartedly” with DOD’s recommendations. 

— Air Force Aid Society official noted that the report reflected her 

experience regarding the impact of predatory lending products on young 

military families and concurred with the report’s recommendations.

Page 17 GAO-07-1148R DOD Predatory Lending
13

Observations: Consultations

(cont.)

• Consumer group representatives met with DOD officials and provided the 

history of predatory lending products and research studies.

— A Consumer Federation of America representative stated she provided

 the information about Internet payday loan and installment lenders 

contained in Appendix 3 of DOD’s report,

 gave feedback about her areas of expertise (such as about payday

loans), and 

 did not comment on DOD’s research. 

— A Center for Responsible Lending representative stated that he was very 

conscientious about not wanting to influence DOD and, therefore, he

and his staff

 provided DOD with the history and definition of abusive lending

practices and a discussion on consumer protection and advocacy,

 had differences of opinion with DOD regarding lending products and 

predatory practices, and 

 were concerned that the recommendations were so strict that the 

small loan product (payday loans) could morph into something else

or the lenders could find loopholes.

— A National Association of Consumer Advocates representative provided 

data to DOD and thought that the recommendations in DOD’s report are 

“completely appropriate.”

Page 18 GAO-07-1148R DOD Predatory Lending 
14

Observations: Consultations

(cont.)

• The 180-day requirement for issuing the DOD report may have contributed 

to some of the concerns identified in this and later sections of our 

evaluation.

— The authors of the DOD report indicated that they had to rely largely on 

previously gathered data and may have done some things differently if 

they had had more time.

− In addition, Treasury representatives noted that DOD faced a short 

timeframe to prepare the report and basically met the legislative 

requirements.

Page 19 GAO-07-1148R DOD Predatory Lending
15

The DOD 2006 report’s prevalence section discussed six types of loan

products with associated predatory practices and provided several metrics 

that did not directly assess whether servicemembers actually (1) used the

loan type and (2) considered the associated lending practices to be

predatory.

• DOD’s 2006 report added two types of predatory loans—military installment

loans and Internet lending—to the four types—payday loans, rent-to-own 

loans, automobile title pawn loans, and tax refund anticipation loans—that 

the Department had identified when we published our April 2005 report (see 

GAO-05-349) on predatory lending.

• DOD does not have comprehensive data for quantifying the extent to which

servicemembers use any of the six types of loan products that DOD

considers predatory. DOD’s report identified limitations such as the difficulty 

in ascertaining the use of payday loans by active duty servicemembers and

their families. We noted similar concerns in our 2005 report on predatory

lending and found similar data limitations during our 2007 site visits.

Observations: Prevalence

Page 20 GAO-07-1148R DOD Predatory Lending 
16

Observations: Prevalence

(cont.)

• DOD’s report inferred the prevalence of predatory lending practices by

using at least three types of metrics. The accuracy of the inferences 

associated with these metrics is unclear.

— Servicemembers’ self-reported usage of a loan product: DOD 

survey results, like those we examined in 2005 (GAO-05-349), illustrate

the percentages of servicemembers who had payday loans, which may 

not be the same thing as the percentage of servicemembers who would 

have characterized their loans as predatory. However, during our 2007

discussions with installation leaders and servicemembers, they

emphasized negative experiences with these types of loans.

— Geographic proximity of storefronts: DOD also inferred prevalence

using findings from a research study that examined the geographic 

proximity of loan storefronts to military installations. Our evaluation of

that study suggests that its descriptive analyses did not provide sufficient

evidence to support DOD’s perceptions and conclusions that (1) 

concentration of storefronts around installations suggest

servicemembers were being targeted more so than other groups of 

potential customers at other locations or (2) proximity implies only 

servicemember usage. Alternatively, civilians working on or near the

installations could be targets also. While the study did not definitively 

prove that lenders are targeting servicemembers, we observed during

our 2007 site visits that some lender storefronts are in close proximity to

bases and their advertising was often targeted to servicemembers.

Page 21 GAO-07-1148R DOD Predatory Lending
17

Observations: Prevalence

(cont.)

— Estimated number of active-duty servicemembers with predatory 

loans: DOD used industry data to estimate that servicemembers are 

three times more likely than civilians to have taken out a payday loan,

but there is no way to verify the accuracy of the industry data. However, 

our analysis of DOD’s calculations using the industry data found that 

DOD’s analysis was reasonable with the limitation that industry 

estimates of payday borrowers were not examined.

• As we reported in 2005 (GAO-05-349), DOD’s efforts to assess the

prevalence of predatory lending practices directed at servicemembers and 

their families 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;

— imprecision in the way questions are asked on DOD’s surveys; and

— privacy considerations and the reluctance of most servicemembers to

discuss their financial difficulties with their command.

Page 22 GAO-07-1148R DOD Predatory Lending 
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Observations: Effects

Although DOD’s 2006 report did include an analysis of predatory loan use 

and financial difficulties among servicemembers and their families, it did 

not include an analysis of the relationship between the two.

• Analytical and methodological limitations constrain the conclusions that can

be drawn from the DOD-wide survey results and the case studies detailed in

the effects section.

• Using the survey results, DOD separately analyzed the percentages of

active duty servicemembers who had (1) experienced financial problems 

such as bouncing checks and having utilities shut off and (2) used four 

types of predatory loan products.8 However, the report did not address the

relationship between financial problems and predatory loan usage by 

showing

— the percentages of servicemembers reporting financial problems who

had predatory loans as compared to those that did not have predatory 

loans, or

— the percentages of servicemembers with predatory loans who reported

financial problems as compared with those that did not report financial 

problems. 

8 The active duty survey gathered information about the four types of lending products DOD identified as predatory in 2005.

Page 23 GAO-07-1148R DOD Predatory Lending
19

Observations: Effects

(cont.)

• Seventeen anecdotal case studies gathered specifically for the report via an

installation-level data call were used to provide context on the effects of

predatory loan use among servicemembers. However, the case selection

methodology for choosing these 17 cases from the 3,000+ case studies was 

limited in that it provided for only one scenario of predatory loan use. — Specifically, the installation-level data call requested only “detail about a 

servicemember and/or a family member who has suffered from a

predatory loan” rather than requesting examples of both negative and

positive effects. — The report authors acknowledged that the  installation-level data call was not a statistical, generalizable sample 

and  17 case studies were selected because they told the “full story” of 

using a predatory loan. — Despite these methodological limitations, the case studies do illustrate

that some servicemembers can pay substantial sums for the loans—

money that could be used to meet other financial needs.

• As we reported in 2005 (see GAO-05-349), DOD’s inability to quantify the 

effects of using the loan products is due in part to the data problems that we 

discussed earlier in the prevalence section of this briefing. Being able to

identify the population of servicemembers who use the products is essential

for determining the negative as well as positive effects of using the loans

that DOD has characterized as predatory.

Page 24 GAO-07-1148R DOD Predatory Lending 
20

Observations: Education

DOD’s 2006 report linked the large numbers of financial education classes

and materials provided to servicemembers and their families to increased

awareness and reduced usage of predatory loans, but DOD—like other 

federal agencies—has a continuing need to implement procedures for 

evaluating outcomes from its training programs.

• The report provided statistics documenting the services’ efforts in 2005 to

educate servicemembers and their families about financial issues that 

included predatory lending. For example,

— The services offered more than 10,000 classes in which predatory

lending topics were covered, and external organizations such as oninstallation banks and credit unions offered more than 1,000 additional

courses on these topics.

— Together, the services and the external organizations distributed nearly 

225,000 pieces of financial education materials.

— The services delivered nearly 1,000 news articles addressing predatory

lending to local base papers and base bulletins, and they promulgated

more than 150 policy memos addressing financial issues.

Page 25 GAO-07-1148R DOD Predatory Lending
21

Observations: Education

(cont.)

• The report emphasizes that financial education occurs throughout the

military.

— DOD requires all servicemembers to take personal financial

management training within 3 months of arriving at the first permanent

duty station.

— Prior to assuming a leadership role as a supervisor, officers and 

noncommissioned officers receive financial training and are expected to

demonstrate a basic understanding of related policies and practices

designed to protect junior servicemembers.

— The DOD report shows that while servicemembers’ families are also

offered financial training, they attended at much lower levels than did

servicemembers. During our 2007 site visits, installation personnel noted 

that it is difficult to get family members to attend the voluntary financial

management classes.

• Since May 2003, DOD’s Financial Readiness Campaign has partnered with 

approximately 20 federal agencies and nonprofit organizations to provide

materials and assistance to the services and, among other things, increase

financial awareness and abilities, increase savings, and reduce dependence 

on credit.

Page 26 GAO-07-1148R DOD Predatory Lending 
22

Observations: Education

(cont.)

• As we reported in 2005 (GAO-05-348), some junior enlisted

servicemembers are not receiving the required personal financial

management training.

— Our 2007 site visits found that the services do not consistently track 

attendance to ensure that all servicemembers attend the required

training.

— Our discussions with senior noncommissioned officers and other 

program officials at four installations visited in 2007 found that financial 

education training may not occur because of competing needs such as

completing deployment-related training.

Page 27 GAO-07-1148R DOD Predatory Lending
23

Observations: Education

(cont.)

• We also noted in our 2005 report (GAO-05-348) that DOD does not have

outcome-related measures to determine whether personal financial 

management training helps servicemembers manage their finances better.

— We therefore recommended that DOD

 develop and implement, in conjunction with the services, a DOD-wide

oversight framework with a results-oriented evaluation plan for the 

personal financial management programs and formalize DOD’s 

oversight role by including evaluation and reporting requirements in 

the personal financial management instruction; and

 require the services to develop and implement a tactical plan with

time-based milestones to show how the appropriate service policy

office will monitor financial management training and thereby ensure 

that junior enlisted servicemembers receive the required training.

— Although DOD concurred with these recommendations, it has not

implemented them.

• Shortcomings in training evaluation are not unique to DOD. In a 2006 GAO

letter9 to Congressional leadership suggesting high priority areas of 

oversight for the 110th Congress, we noted a need to enhance and improve

all federal agencies’ abilities to evaluate financial literacy programs and

determine if they promote positive behavioral change.

9 GAO, Potential Oversight Issues: Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington, D.C.: Nov. 17, 2006).

Page 28 GAO-07-1148R DOD Predatory Lending 
24

DOD’s 2006 report describes a broad array of tools provided to 

servicemembers to help reduce or eliminate the prevalence and effects of 

predatory lending practices; however, some of the tools may be underutilized.

• The report noted that DOD has worked with the military charity

organizations and on-installation banks and credit unions to provide

alternatives to predatory loans. For instance,

— The military charity organizations indicated that they provided about

100,000 grants and no-interest loans worth nearly $90 million to 

servicemembers in 2005.

— 24 on-installation financial institutions documented examples of small,

short-term, and lowered interest alternatives that they made available

specifically for servicemembers.

— Despite these substantial efforts and available resources, our 2005

report (GAO-05-349) as well as site visits in 2007 found that

servicemembers may choose to use non-DOD resources if, for example,

they do not want the command to be aware of their financial conditions.

Observations: Strategy

Page 29 GAO-07-1148R DOD Predatory Lending
25

Observations: Strategy

(cont.)

• Free credit counseling and debt management services are another part of 

DOD’s strategy to reduce or eliminate the prevalence and effects of

predatory lending practices.

— Installations provide credit counseling through family support programs.

— DOD also makes confidential, 24-hour, 7-days-a-week credit counseling

available through toll-free telephone and Web access to DOD’s Military 

OneSource.

— Although not mentioned in DOD’s report, information obtained in our 

2007 site visits also indicated that military charity organizations may 

similarly help servicemembers with tasks such as developing budgets as

a step in awarding a grant or no-interest loan.

— The DOD report additionally cites special emphases that Navy and

Marine Corps leaders have placed on eliminating any stigma that might

have formerly been associated with servicemember financial problems.

During our 2007 site visits, several installation leaders stated that they

are encouraging servicemembers to use available installation resources,

such as command personal financial specialists and military charity 

organizations, without fear of repercussions.

Page 30 GAO-07-1148R DOD Predatory Lending 
26

Observations: Strategy

(cont.)

• The DOD report reiterates a point previously made in our 2005 report

(GAO-05-349)—Armed Forces Disciplinary Control Boards have been used

in a limited number of instances to place or threaten to place a lender offlimits to servicemembers. One reason for this infrequent use is that the

boards may have little basis to take actions against lenders that DOD 

considers as predatory if the lenders operate within state laws.

• Even though DOD has a robust set of tools for curbing predatory lending 

practices and their effects, our 2005 report (GAO-05-349) concluded that

servicemembers under-utilize those resources. 

— We found that free legal assistance—a useful tool that was not 

mentioned in the DOD report—is available to review contracts and other 

financial documents, but servicemembers might not use this assistance.

— We identified multiple reasons for the under-utilization, such as

servicemembers’ desires to make purchases immediately. 

Page 31 GAO-07-1148R DOD Predatory Lending
27

DOD’s 2006 report included six recommendations for additional 

legislative and administrative actions; while these recommendations 

may have merit, they were not directly linked to the report’s findings, 

were based on research studies that had some methodological 

problems, or did not address implementation issues. 

• In the DOD report section that preceded the recommendations, DOD

concluded that it cannot prevent predatory lending without assistance from 

Congress, the state legislatures, and federal and state enforcement agencies. 

DOD also commented on issues such as rollover of loans and usury laws.

• DOD’s report provided six recommendations that it concluded will protect

servicemembers and their families from predatory lending abuses: — Require unambiguous and uniform price disclosure for extension of credit, — Require a federal ceiling on the cost of credit to military borrowers, — Prohibit extending credit without regard to ability to repay, — Prohibit provisions in loan contracts that require servicemembers and their 

families to waive their rights to take legal action, — Prohibit contract clauses that require servicemembers and their families to

waive any special legal protections, and — Prohibit states from discriminating against servicemembers and their

families stationed within their borders and prohibit lenders from making

loans to servicemembers that violate state consumer lending protections.

Observations: Recommendations

Page 32 GAO-07-1148R DOD Predatory Lending 
28

Observations: Recommendations

(cont.)

• There is limited transparency to show the basis for some of the 

recommendations in the DOD report.

— After being unable to identify a clear link between reported findings and 

recommendations, we asked the DOD authors to identify the portions of

the report supporting each recommendation.

— Although DOD subsequently provided us with a list of pages containing

information purported to support each recommendation, we were still

unable to link some recommendations to supporting documentation.

• Methodological problems in some of DOD’s analyses and in some of the 

studies cited in DOD’s report suggest that some recommendations may not 

be grounded in sound research.

— Throughout this evaluation, we have noted some methodological

concerns such as those associated with the measurement of prevalence 

and effects.

Page 33 GAO-07-1148R DOD Predatory Lending
29

Observations: Recommendations

(cont.)

— Other methodological problems were also present. For example,

 DOD based some of its recommendations on Appendix 3 of its 

report; however, the methodology used to select the Web sites of

lenders listed in this appendix was not statistically representative of a 

defined universe of such lenders. For example, Appendix 3 notes 

that the 18 listed are a small sample of Internet lenders. DOD’s

report states that an on-line search for “military loans” got more than

38 million hits. Therefore, the findings based on this appendix cannot 

be generalized beyond the 18 sites that were reviewed. 

 DOD combined information from two samples and drew

generalizations that were not methodologically sound about payday 

loan use by all enlisted personnel.

• Financial markets specialists at GAO examined the six recommendations

and noted DOD’s report did not address the feasibility of implementing and 

enforcing the recommendations, which could cause challenges.

• While DOD’s report included a strategy for personal finance to increase 

servicemembers’ awareness, it did not identify any additional changes that

could be made to DOD’s current financial education programs that would 

make these programs more beneficial.

Page 34 GAO-07-1148R DOD Predatory Lending 
Enclosure II 

Scope & Methodology 

Scope 

In conducting our evaluation of DOD’s report on predatory lending, we limited the scope of 

our work to the types of loans that DOD identified as being predatory in its mandated report. 

This includes payday loans, rent-to-own loans, automobile title pawns, tax refund loans, 

military installment loans, and Internet lending. Our work focused on active duty 

servicemembers as in our April 2005 reports. While DOD’s report does not specify that some 

parts of its report pertain to only active or reserve personnel, we focused on active duty 

servicemembers based on DOD’s use of survey results and other data on active duty 

servicemembers. 

Methodology 

To address our objective, which was to examine the approach and support for DOD’s report, 

we examined legislation that mandated the DOD report and regulations such as 

governmentwide and DOD-wide standards for data quality. In addition to reviewing DOD’s 

predatory lending report and the reports cited in that study, we reviewed and analyzed

findings and perspectives contained in publications on related issues by GAO, the 

Congressional Research Service, Federal Reserve Board staff in Washington, D.C., Federal 

Deposit Insurance Corporation’s Office of Inspector General, consumer groups (Consumer 

Federation of America and Center for Responsible Lending), and an association (Community 

Financial Services Association of America) that says it represents more than 50 percent of 

payday lenders. DOD, service, and installation officials also provided additional views and 

documents pertaining to the prevalence and effects of predatory lending practices, programs 

and current strategies to educate servicemembers and their families about those practices, 

current strategies and programs for reducing or eliminating the prevalence and effect of

predatory lending practices, and recommendations for legislative and administrative actions 

to reduce or eliminate the prevalence and effects of predatory lending practices. 

In addressing our objective, we conducted interviews with and obtained documents from the 

officials in DOD’s Office of the Under Secretary of Defense for Personnel and Readiness who 

were responsible for preparing the report, and service policy officials. We also interviewed 

representatives from organizations that DOD consulted while developing its report (see table 

1), and in some cases obtained related documentary evidence concerning their input during 

DOD’s preparation of its report. We also held discussions with groups such as the Center for 

Regulatory Effectiveness and Community Financial Services Association of America, a 

payday lending association, to understand perspectives that were different from those 

provided in the DOD report. Additional perspectives were obtained from the public 

comments that other groups (e.g., other consumer groups and the lending industry) provided 

in response to proposed regulations that DOD published in the Federal Register on April 11, 

2007. 

Page 35 GAO-07-1148R DOD Predatory Lending
Table 1: Organizations Supplying Information about Their Consultations with DOD during the

Preparation of Its Mandated Report 

Type of organization Organization and location of the representative(s) interviewed

Federal agencies Federal Reserve, Washington, D.C. 

Treasury Department, Washington, D.C. 

Federal Deposit Insurance Corporation, Washington, D.C. 

Military charities Army Emergency Relief, Alexandria, Virginia 

Navy/Marine Corps Relief Society, Arlington, Virginia

Air Force Aid Society, Arlington, Virginia

Consumer groups Consumer Federation of America, Washington, D.C. 

Center for Responsible Lending, Washington, D.C. 

National Association of Consumer Advocates, Washington, D.C.

National Consumer Law Center, Boston, Massachusetts 

Source: GAO.

To further address our objective, we conducted site visits at the four installations shown in 

table 2. The team decided to select a nonprobability sample of four military installations—

one per active duty DOD service. The criteria for selection included (1) installations with 

high personnel tempo; (2) installations from different services in the same geographic area 

for comparison between services; and (3) at least one installation that GAO visited during 

prior work on predatory lending for comparison across time.9

 Our findings from these site 

visits cannot be generalized to the population of all military personnel; however, these site 

visits provided us with additional information for our evaluation. During these site visits, we 

requested documents (such as training materials) pertaining to DOD’s current efforts to 

minimize or eliminate the use and effects of predatory lending practices. We conducted 

individual interviews with seven types of officials at each base: installation leaders, personal 

financial management program managers, installation finance officials, command financial 

counselors, legal assistance attorneys, public affairs staff, and military charity organization 

officials. We used a structured protocol for conducting group discussions with more than 60 

senior enlisted personnel at the four installations to gather anecdotal data from 

servicemembers about their experiences with the types of loans DOD identified as predatory. 

Table 2: Locations Where GAO Conducted a Site Visit 

Service Location

Army Fort Lewis, Washington 

Navy Navy Region Southwest, San Diego, California 

Marine Corps Camp Pendleton, California 

Air Force McChord Air Force Base, Washington 

Source: GAO.

Part of our assessment of DOD’s report involved a review of the overall report methodology 

as well as a review of the methodology of key research studies and data sources cited in the 

report. Specifically, we focused our review on research studies that were critical to the

report’s message and the data sources used by DOD. We discussed these data sources with 

the DOD report authors to gain a better understanding of how and why they were selected for 

use. At least two internal methods experts, with support from statisticians as appropriate, 

reviewed these reports and data sources for the reasonableness and rigor of their data

collection and analysis methods. Our review focused on the validity of the results and 

conclusions in relation to how they were used in the DOD report. 

We performed our work between March 2007 and August 2007 in accordance with generally 

accepted government auditing standards. 

 9

GAO-05-348 and GAO-05-349. 

Page 36 GAO-07-1148R DOD Predatory Lending 
Enclosure III 

GAO Contact and Staff Acknowledgments 

GAO Contact: 

Brenda S. Farrell, (202) 512-3604 or farrellb@gao.gov

Acknowledgments: 

In addition to the individual named above, Jack E. Edwards, Assistant Director; Pat L Bohan; 

Nora Boretti; Renee S. Brown; Cody Goebel; K. Nicole Harms; Ron La Due Lake; Charles W. 

Perdue; S. Andrew Stavisky; Elizabeth W. Wood; and Yiling Wong made key contributions to 

this report.

Page 37 GAO-07-1148R DOD Predatory Lending
Related GAO Reports

Guard and Reserve Personnel: Fiscal, Security, and Human Capital Challenges Should be 

Considered in Developing a Revised Business Model for the Reserve Component. GAO-07-

984. Washington, D.C.: June 20, 2007. 

Military Personnel: DOD Needs to Establish a Strategy and Improve Transparency over 

Reserve and National Guard Compensation to Manage Significant Growth in Cost. GAO07-828. Washington, D.C.: June 20, 2007. 

Military Personnel: DOD Has Taken Steps to Address Servicemembers’ Financial Needs, 

but Additional Effort is Warranted. GAO-06-749T. Washington, D.C.: May 18, 2006. 

Financial Product Sales: Actions Needed to Protect Military Members. GAO-06-245T. 

Washington, D.C.: November 17, 2005. 

Financial Product Sales: Actions Needed to Better Protect Military Members. GAO-06-23. 

Washington, D.C.: November 2, 2005.

Military Personnel: DOD Needs Better Controls over Supplemental Life Insurance 

Solicitation Policies Involving Servicemembers. GAO-05-696. Washington, D.C.: June 29, 

2005. 

Military Personnel: DOD’s Comments on GAO’s Report on More DOD Actions Needed to 

Address Servicemembers’ Personal Financial Management Issues. GAO-05-638R. 

Washington D.C.: May 11, 2005. 

Military Personnel: More DOD Actions Needed to Address Servicemembers’ Personal 

Financial Management Issues. GAO-05-348. Washington, D.C.: April 26, 2005. 

Military Personnel: DOD Tools for Curbing the Use and Effects of Predatory Lending Not 

Fully Utilized. GAO-05-349. Washington, D.C.: April 26, 2007.

Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit from

Targeted Educational Efforts. GAO-05-223. Washington, D.C.: March 16, 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: 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. 

Page 38 GAO-07-1148R DOD Predatory Lending 
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: 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. 

(350995)

Page 39 GAO-07-1148R DOD Predatory Lending
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