S. HRG. 109–1081 

A REVIEW OF THE DEPARTMENT OF DEFENSE’S 

REPORT ON PREDATORY LENDING PRACTICES 

DIRECTED AT MEMBERS OF THE ARMED FORCES 

AND THEIR DEPENDENTS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

ON 

UNFAIR OR ABUSIVE LOANS, CREDIT SALES TRANSACTIONS, AND COLLECTIONS PRACTICES THAT ARE PARTICULARLY HARMFUL TO SERVICE MEMBERS AS IT UNDERMINES MILTARY READINESS AND HARMS 

TROOP MORALE 

THURSDAY, SEPTEMBER 14, 2006 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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LOANS, CREDIT SALES TRANSACTIONS, AND COLLECTIONS PRACTICES THAT 

Y HARMFUL TO SERVICE MEMBERS AS IT UNDERMINES MILTARY READINESS 

 MORALE 


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50–303 2009

S. HRG. 109–1081 

A REVIEW OF THE DEPARTMENT OF DEFENSE’S 

REPORT ON PREDATORY LENDING PRACTICES 

DIRECTED AT MEMBERS OF THE ARMED FORCES 

AND THEIR DEPENDENTS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

ON 

UNFAIR OR ABUSIVE LOANS, CREDIT SALES TRANSACTIONS, AND COLLECTIONS PRACTICES THAT ARE PARTICULARLY HARMFUL TO SERVICE MEMBERS AS IT UNDERMINES MILTARY READINESS AND HARMS 

TROOP MORALE 

THURSDAY, SEPTEMBER 14, 2006 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey 

WILLIAM D. DUHNKE, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

JONATHON GOULD, Counsel 

PATIENCE SINGLETON, Democratic Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor 


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C O N T E N T S 

THURSDAY, SEPTEMBER 14, 2006 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Johnson ............................................................................................... 2 

Prepared statement ................................................................................... 32 

Senator Dole ...................................................................................................... 3 

Senator Reed ..................................................................................................... 6 

Senator Allard ................................................................................................... 6 

Senator Schumer .............................................................................................. 7 

Senator Martinez .............................................................................................. 8 

Senator Sarbanes .............................................................................................. 27 

WITNESSES 

David S.C. Chu, Under Secretary for Personnel and Readiness, Department 

of Defense ............................................................................................................. 9 

Prepared Statement ......................................................................................... 34 

DoD Report on Predatory Lending Practices Directed at Members of 

the Armed Forces and Their Dependents ................................................... 41 

Admiral Charles S. Abbot, Retired, President and Chief Executive Officer, 

Navy-Marine Corps Relief Society ...................................................................... 19 

Prepared Statement ......................................................................................... 133 

Response to written questions of: 

Senator Shelby ........................................................................................... 200 

William O. Brown, Jr., Associate Professor, Department of Accounting and 

Finance, Bryan School of Business and Economics, University of North 

Carolina ................................................................................................................ 20 

Prepared Statement ......................................................................................... 143 

Response to written questions of: 

Senator Shelby ........................................................................................... 200 

Senator Crapo ............................................................................................ 201 

Lynn Drysdale, Staff Attorney, Jacksonville Area Legal Aid .............................. 21 

Prepared Statement ......................................................................................... 176 

Response to written questions of: 

Senator Shelby ........................................................................................... 201 

Hilary B. Miller, President, Payday Loan Bar Association .................................. 24 

Prepared Statement ......................................................................................... 182 

Response to written questions of: 

Senator Shelby and Senator Johnson ...................................................... 204 

Christopher L. Peterson, Assistant Professor of Law, Levin College of Law, 

University of Florida ............................................................................................ 25 

Prepared Statement ......................................................................................... 195 

Response to written questions of: 

Senator Shelby ........................................................................................... 216 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Hilary B. Miller on behalf of Community Financial Services 

Association of America ......................................................................................... 398 


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(1) 

A REVIEW OF THE DEPARTMENT OF DEFENSE’S REPORT ON PREDATORY LENDING 

PRACTICES DIRECTED AT MEMBERS OF 

THE ARMED FORCES AND THEIR DEPENDENTS 

THURSDAY, SEPTEMBER 14, 2006 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard Shelby, presiding. 

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. The Committee will come to order. 

This morning, the Committee will hear testimony on the recently 

completed Department of Defense report on predatory practices directed at members of the armed forces and their dependents. The 

report draws attention to the problems of predatory lending around 

military communities and the plight of servicemen and women who 

are caught in what the report describes as debt traps. 

Although predatory lending schemes differ in their details, they 

share certain characteristics. For example, some lenders target financially inexperienced consumers and make loans without regard 

to the consumers’ ability to repay. The lending products they offer 

also feature high interest rates and fees. 

These lenders often count on the fact that borrowers will be unable to pay the loan in full when it becomes due, forcing borrowers 

to seek additional loans which generate more fees. The end result 

is often the same: mounting debt, a deteriorating credit rating, and 

reduced availability of credit sources. 

Unfortunately, military personnel and their families are particularly attractive targets for this type of lending. They are often 

young and financially inexperienced, sometimes receiving their first 

steady paycheck. Because they fear military sanctions, including 

the loss of security clearance, servicemen and women are less likely 

to default entirely on loans and, therefore, represent a low credit 

risk to lenders. Finally, the fact that they are concentrated in large 

numbers on and around military bases makes them a readily accessible market for these types of loans. 

In addition to describing the most prevalent forms of predatory 

lending, the report that Secretary Chu will expound on also offers 

concrete legislative recommendations to reduce the impact and frequency of predatory lending. The Defense Department, is to be apVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A303.XXX A303

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plauded for the effort it has made to promote financial literacy 

among service members and their families, but education can only 

do so much. 

As the Committee has learned in the cases and situations involving certain mutual funds and insurance products aimed at military 

personnel, stronger Congressional action may be required. As long 

as certain unscrupulous lenders continue to employ predatory practices, our servicemen and women suffer and the toll on our readiness will increase. 

I would like at this time to take a minute to commend Senator 

Dole, for her work to initiate this important study. It was through 

her efforts that this study was included in last year’s Defense Authorization Act, and she has been very, very important to this 

cause. 

On our first panel today, we will have Dr. David Chu, Under Secretary of Defense for Personnel and Readiness; he will discuss the 

department’s report. Our second panel will consist of: Admiral 

Charles S. Abbot, President and Chief Executive Officer of the 

Navy-Marine Corps Relief Society; Dr. William O. Brown, Associate 

Professor at the Bryan School of Business and Economics at the 

University of North Carolina in Greensboro; Ms. Lynn Drysdale, a 

staff attorney with the Jacksonville Area Legal Aid; Mr. Hilary B. 

Miller, President of the Payday Loan Bar Association; and Mr. 

Christopher L. Peterson, Assistant Professor of Law at the Levin 

College of Law, University of Florida. 

STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. Well, thank you, Mr. Chairman, for this hearing, and I appreciate the Committee is meeting today to discuss an 

issue of critical importance. 

Thousands of our military personnel are currently serving in 

harm’s way in defense of our country. In my State of South Dakota, 

over 3800 military personnel and civilians are stationed at Ellsworth Air Force Base, 300 of which recently deployed in support of 

the Global War on Terror. As a father of an active duty soldier, an 

enlisted man who served combat tours in Iraq and Afghanistan, I 

am acutely aware of the very personal and financial challenges facing our men and women in uniform. I am proud of their courage 

and professionalism and am grateful for their service to our country. 

Financial stress can affect any soldier regardless of their marital 

or deployment status, but in particular younger or lower-ranked 

enlisted personnel. We all sympathize with the soldier who incurs 

debt because he is blind-sided by unexpected emergencies, auto repairs, personal or family illness, or is just struggling with basic living expenses. 

I share DoD’s concern about service members falling into a cycle 

of debt whether through inappropriate use of credit cards, payday 

loans, or other forms of credit. I believe Congress and DoD must 

work together to improve the financial literacy of our service members and crack down on abusive and truly predatory practices by 

any lender. 

It is very clear that military personnel, like many other consumers, have a real and legitimate need for short-term small deVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HR\OC\A303.XXX A303

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nomination credit products. According to the Federal Reserve, payday loans typically total $500 or less with fees ranging from $15 

to $100. As the loans typically last for just 2 weeks, however, the 

annualized interest rates tend to be high. 

Now, one of the concerns that I have as we discuss this issue is 

that there are various steps that the committee and Congress could 

take relative to various sectors of the credit industry, but the underlying problem remains, and that is the problem of military personnel, particularly younger enlisted, but others as well, who are 

not able to make ends meet; and whatever we do with the various 

sources of credit, those problems remain. Obviously, one of the reasons that payday lenders have stepped into a vacuum is because 

the banking industry and the credit union industry have chosen 

not to pursue that level of lending with very much aggressiveness, 

and as a result, a vacuum has occurred. 

If we are to eliminate payday lending altogether and make it 

unviable in this niche, then the question I have is who fills then 

that niche, because the need remains. Do we then go to increasing 

use of pawnshops? Internet lenders? Loan sharks out of the back 

of their car? Where do we go next? That is one of the concerns that 

I have, is that we not jump from the frying pan literally into the 

fire in terms of abusive practices toward our military personnel. 

So I think we have some far-ranging questions that need to be 

answered. I know that the military is aware of the need for greater 

financial literacy, which is part of the problem. That is a national 

problem, not simply a military, but it is a national problem. We 

have got a long ways to go on that, but I am concerned that the 

underlying problem remains and I want to make sure that we don’t 

have unintended consequences that are worse than the current illness that we may have. 

So as we continue to address the issue of predatory lending to 

the military, the primary goal, I believe, should be to develop 

meaningful solutions that will offer the greatest protections to our 

service members while avoiding measures that carry the potential 

for negative unintended consequences and driving service members 

into potentially far more abusive and more expensive and unregulated forms of credit. So, again, I thank you, Mr. Chairman, for 

holding this hearing and I hope that this leads us to a very constructive debate about how best to serve the needs of our American 

military personnel. 

STATEMENT OF SENATOR ELIZABETH DOLE 

Senator DOLE. Mr. Chairman, I thank you for your interest in 

this subject and thank you for holding this hearing today. Secretary Chu, thank you so much for your excellent report. I appreciate the diligent efforts that have been made by those who assisted you in this effort. I also want to thank the witnesses who 

appear before us today in addition to Secretary Chu. I look forward 

to hearing from all of you. 

I have to say I am proud to have authored this legislation that 

directed the Department of Defense to prepare the report that we 

are focused on today, because this problem does provide a real 

threat to our national defense in my view. It is a real threat and 

it poses issues that need to be focused upon. 


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Predatory lenders are blatantly targeting our military personnel, 

undermining their financial stability and tarnishing their service 

records. This practice not only creates financial problems for individual soldiers and their families, but also weakens our military’s 

operational readiness. Military conduct codes stress financial solvency, and bad credit can prevent service members from having the 

security clearances they need to perform their duties. Unfortunately, all too many are reluctant to seek help until it is too late, 

resulting in disciplinary measures that can end a career. 

Let me focus on testimony from a commanding officer included 

in the DoD report, and I quote: ‘‘Between 2000 and 2005, revoked 

or denied security clearances for sailors and Marines due to financial problems have increased 1600 percent.’’ I find it telling that 

the report also shows that in the same time period, the number of 

payday lenders more than doubled from 10,000 in the year 2000 to 

23,000 in 2005. 

Overall, predatory lending cost U.S. consumers more than $25 

billion a year, and these lenders profit from the most vulnerable 

borrowers. As we see in this report, Mr. Chairman, several factors 

make our men and women in uniform particularly susceptible to 

this practice, as we have already heard this morning. For starters, 

many are young, and like most young Americans, they lack financial savvy and security. In fact, the Defense Department is the 

largest employer of young adults in the United States with nearly 

half of its enlisted members under the age of 25. 

In addition, service members have job security and steady incomes, and they are fashioned by a military culture that emphasizes financial responsibility and settling debts. Borrowing can be 

an alluring option for a young soldier to get cash fast and easy, but 

exorbitant interest rates can quickly send an individual into a 

downward spiral of debt. 

As the Pentagon’s report mentions, my home State of North 

Carolina has been aggressively cracking down on predatory lenders, imposing a 36 percent small loan usury cap reinforced by a 

strong bank regulator. Other States also are active in combating 

this practice. While this is, indeed, encouraging, the report also 

mentions States where the problem continues, like Arkansas which 

has a low usury cap in its constitution, but still allows lenders to 

charge triple-digit interest rates to service members stationed at 

Little Rock. 

We need national standards that ensure that all of our courageous men and women in uniform are protected no matter where 

they are based. The DoD report states that as many as one in five 

service members are falling victim to predatory loan operations. 

Still, there are some who question whether these lenders are truly 

targeting our military even when many, specifically military and 

installment lenders, market themselves with names and logos that 

imply an official military connection. For example, you see here 

‘‘Armed Force Loans’’, ‘‘Military Loans.com’’, and ‘‘Pioneer Military 

Lending’’. 

In addition, the geographic evidence speaks for itself. Let us look 

at this February 2005 map of the State of North Carolina. This was 

prepared by Dr. Steven Graves from California State University, 

Northridge. Now, keep in mind that this map was created at a time 


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when North Carolina had 612 payday lenders. Today, because of 

our State’s laws, these lenders no longer operate in North Carolina. 

This 2005 map shows us the most targeted ZIP Codes for payday 

lending in North Carolina. We can see that the larger population 

centers, like around Charlotte and Raleigh, have high concentrations of payday lenders, as would be expected. But look at the 

counties with the greatest number of payday lenders. These are 

areas with significant military presence. The county with the 

State’s highest concentration was Wayne County, home of Seymour 

Johnson Air Force Base. Cumberland County, where Fort Bragg 

and Pope Air Force Base are located, has the third-highest concentration, and Craven County, the site of Marine Corps Air Station at Cherry Point, has the fourth. 

Let us specifically look at Fort Bragg and Pope Air Force Base. 

In 2005, statewide, there were roughly four banks to one payday 

lender, but in the entire three-mile zone surrounding the perimeter 

of Bragg and Pope, the ratio was four banks to every five payday 

lenders. Now let us look at the February 2000 map of just the eastern side of Bragg and Pope. This map shows that seven of the thirty-six payday lenders in just this area, or about 20 percent, were 

within one mile of the bases while just five of the 68 banks are in 

the same area. And if we look between one and two miles of the 

base, there are six additional payday lenders and only one bank. 

In the two- to three-mile zone, the ratio of payday lenders to banks 

gets closer to the statewide average with three payday lenders and 

six banks. 

In reviewing the DoD report and other maps produced by Dr. 

Graves, it is apparent that some unscrupulous payday lenders are 

clustering around military bases across the nation. 

As a Senator representing more than 115,000 North Carolinabased service members and as a member of both this committee 

and the Senate Armed Services Committee, this issue is one of my 

top priorities. With my support, the Senate approved an amendment to the Fiscal Year 2007 defense authorization sponsored by 

Senator Jim Talent to enact a 36 percent annual interest rate cap 

on abusive loans to service members. Last year, Mr. Chairman, you 

will remember I proposed a similar amendment to the Defense Authorization Bill, but I encountered jurisdictional objections. 

The interest rate cap provision now awaits consideration by a 

House Senate Conference Committee. I am hopeful that a provision 

on predatory lending that includes the rate cap as well as additional recommendations from the Pentagon report will be included 

in the final legislation. Should the conference report not properly 

address this problem, I will introduce legislation that incorporates 

recommendations made in the report. 

Supporting our service members means more than providing the 

equipment and training necessary for fighting the War on Terror, 

Mr. Chairman. We should also support their livelihood and their 

families, and predatory lending can seriously harm both. 

I look forward to working with this committee as we strive to put 

a stop to this egregious practice. Thank you, Mr. Chairman. 


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STATEMENT OF SENATOR JACK REED 

Senator REED. Well, thank you very much, Mr. Chairman. I commend you for holding this hearing and I commend Senator Dole for 

her efforts in this regard, and I don’t represent North Carolina, but 

I used to command a parachute company in Fayetteville, North 

Carolina at Fort Bragg in the 504th Parachute Infantry Regiment, 

and I have seen young soldiers at payday who are financially 

strapped and willing to sign anything to get a few dollars, and I 

think this behavior, if it is targeted to exploit soldiers is absolutely 

reprehensible. We owe them a lot more than that. 

This is a command responsibility. I am glad the Secretary of Defense and the Defense Department are taking steps with this report. The commander at that base and every base in the country 

have to work hard to educate their soldiers. The community leaders 

of the Fayettevilles and all the other military towns had to step up 

to the box too, and we have to do our part. 

The provision that Senator Dole talked about, a 36 percent cap, 

I think is more than reasonable. Some of these loans have average 

annual percent rates of 470 percent. One of the advantages I had 

back in the 1970’s commanding a company is most States had 

usury laws capping interest rates at 21 percent or so. That is a 

thing of the past now. We didn’t have to worry, at least, in licensed 

agencies like this having soldiers pay a 470 percent interest rate. 

So I think we have to do more. I hope we can keep this provision 

in the bill, and I will not, I think, be here to ask questions. I have 

to go to the Armed Services Committee, I think along with Senator 

Dole, because of the military tribunal issue; but I would ask every 

witness to give their position with respect to that 36 percent cap, 

starting with Secretary Chu. 

Thank you, Mr. Chairman. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Thank you, Mr. Chairman, for holding this 

hearing to examine the ‘‘Department of Defense’s Report on Predatory Lending Practices Directed at Members of the Armed Forces 

and Their Dependents’’. I am proud to represent a State with a significant military presence, and I am looking forward to the opportunity to learn more about this matter. 

We owe our military personnel a great debt. They volunteered to 

risk their lives to protect freedom and democracy; therefore, it is 

only reasonable to expect that we would protect them against predatory lending. Predatory lending is an abhorrent practice, especially when it takes advantage of our men and women in uniform. 

Earlier this year, I was pleased to support Senate Bill 418, the 

Military Personnel Financial Services Protection Act. This is one 

way in which we can help prevent predatory practices aimed at 

those in uniform. During our hearings on that bill, it became obvious that financial literacy is key to preventing predatory practices 

and the Department of Defense has a serious need to fill regarding 

financial education. Unfortunately, too many people today lack 

basic financial literacy and skills, and military personnel face the 

same challenges. Therefore, it is important that the DoD help provide financial education that will enable personnel to make appropriate financial decisions. 


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The DoD report includes information on their strategy to educate 

members of the armed forces and their families regarding predatory lending as well as programs to reduce or eliminate predatory 

lending. This is particularly important for my home State of Colorado where military personnel are four times more likely than civilians to have taken a payday loan. Military personnel make up 1.1 

percent of the adult population, but they account for 4.6 percent of 

payday loan customers. 

While not all payday loans are necessarily predatory, these numbers do raise important concerns. First, why do military personnel 

account for a disproportionate share of payday loans? The second, 

do the personnel have other options? And third, do members of the 

armed forces understand the implications of the different alternatives? 

I am eager to learn more about these issues as we delve into the 

report. I would like to thank the witnesses for being here today. 

Their testimony will provide us with a better understanding of the 

issues. I look forward to their testimony. 

Thank you, Mr. Chairman. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Well, thank you, Mr. Chairman. Thank you 

for holding this timely hearing, and I want to praise my colleague, 

Senator Dole, for getting this report done and into the Defense Authorization Act. We may be at loggerheads on certain things outside the Capitol, but we can work well together inside the Capitol. 

Senator DOLE. Thank you. 

Senator SCHUMER. Now, this is a topic that has been of great 

concern to me for a long time. I have heard of so many bad stories 

in New York State by Fort Drum near Watertown, our largest military installation, one of the largest in the country, in the capital 

region in Albany by Watervliet near the Stratton Air Force Base, 

and in western New York by Niagra Air Force Base. We are in a 

funny situation in New York. We have pretty strict usury laws. So 

you would think that payday lending wouldn’t occur, these loans as 

high as 800 percent, just absolutely disgusting, ripping off service 

men and women and their families; but the banks find ways 

around so that at first, we had New York processing the loans 

through, say, Delaware or other banks, and we worked with the 

FDIC, and they finally shut that down. 

But in this new information society, the internet, newspapers, 

etc., still hold the service men and women, who we are so proud 

of in New York, they are holding us victim. 

So here, and I would like to point this to Secretary Chu’s attention, the ‘‘Army Times’’, and you have fast cash, Force One lending 

from Albuquerque, New Mexico. A soldier in Fort Drum can read 

that, go on line, or whatever. ‘‘Need a loan?’’ This is one in Nevada. 

So unless we have a national law, we are not going to stop this 

no matter what we do at the State level, no matter what we do in 

terms of the FDIC, and one thing, Mr. Secretary, I would urge you 

to do is—I don’t know if there is a way you can, but could you prohibit ads like this in the ‘‘Army Times’’? Maybe you will talk about 

that when you come before us and the other kinds of newspapers 

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dom of speech, but I don’t think if they put an ad, you know, join 

a bank robber, come join Joe Smith Bank Robbery Team, you 

would put that in. Well, this is sort of the same thing. So I would 

urge you to look into that. 

And I would ask unanimous consent that the rest of my statement be put in the record. I want to thank you, Mr. Chairman. 

Senator SHELBY. Without objection, it will be made part of the 

hearing record. 

Senator SCHUMER. Thank you, Mr. Chairman, for the good work 

you have done with the Military Personnel Financial Services Protection act which we passed in June, and that did a good job about 

abusive sales practices. We need to do the same good job about 

abusive lending practices, and I know that we decided against including those lending practices in this bill so DoD would conduct 

a review, and now we don’t have to wait. So I want to join with 

you and all of my colleagues to make sure we shut this down once 

and for all. 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Mr. Chairman, thank you very much. I would 

ask again, likewise, that my entire statement be made part of the 

record. 

Senator SHELBY. Without objection, your entire opening statement will be made part of the record. 

Senator MARTINEZ. Thank you. Also, a letter from Daniel Mica, 

President and CEO of CUNA, be made part of the record. 

Senator SHELBY. It will be made part of the record. He is head 

of the credit union. 

Senator MARTINEZ. Correct. 

Mr. Chairman, I would just comment along the lines of what 

Senator Schumer said, that this is an egregious practice. It is a terrible plight upon the lives of our service men and women and really 

to all people who fall prey to this kind of lending. When I was 

Mayor of Orange County in Orlando, Florida, we had a problem 

with payday loans, a very similar problem, more afflicting the civilian population, but nonetheless where they would take the security, a vehicle, and then people get a bunch of cash. Within 6 

months after they have paid off a car, they no longer have a car. 

It has been repossessed from them. This is the kind of practices 

that take place. 

As the chairman well knows, during my time at HUD, we did a 

lot to try to work against predatory lending in home lending, which 

is a first cousin to this problem. So let me just commend you for 

holding the hearing and commend Senator Dole for her leadership 

on this issue, and I share my full support for whatever we can 

move forward to ensure that this egregious practice, particularly 

the plight upon our servicemen and women comes to a stop. 

Senator SHELBY. Thank you, Senator Martinez. 

Secretary Chu, your written statement will be made part of the 

hearing record in its entirety. You can proceed as you wish. We appreciate your work in doing this report. Thank you very much. 


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STATEMENT OF DAVID S.C. CHU, UNDER SECRETARY FOR 

PERSONNEL AND READINESS, DEPARTMENT OF DEFENSE 

Secretary CHU. Thank you, Mr. Chairman, members of the Committee. It is a privilege to be here this morning to testify on the 

report that we rendered at the direction of the Congress on this 

issue of predatory lending practices directed at military personnel. 

It certainly is a special privilege to be here with Senator Dole 

whose actions led to that direction and to which we were delighted 

to respond. 

Financial readiness in our judgment equates to mission readiness. It was my privilege in May of 2003 to join with the Treasury 

Department in launching our broader financial readiness campaign. That campaign encourages service members to achieve good 

credit standing and to save on a regular basis for emergencies, to 

watch their borrowing practices, including the interest rates they 

accept, to take advantage of the Thrift Savings Plan and the Service Members and Veterans Group Life Insurance Program. Through 

these diverse efforts, we focus on the issue of personal financial 

stability. We hope to develop a culture that focuses on sound financial decisions by our military personnel. That culture will encourage service members to reduce reliance on credit cards, to implement short-term and long-term savings plans, and to resist predatory lenders. 

The department, as we reported, is concerned about predatory 

lending because it is detrimental to mission readiness and because 

it can have disastrous consequences on the quality of life and for 

the careers of service members. It is one of the reasons that we 

have made this issue, predatory lending, one of the 10 key issues 

the department and the Secretary of Defense is addressing with 

the Governors of our Nation and other State officials to seek their 

assistance as well. 

We do recognize that it is the first responsibility of the Department of Defense to prepare our service members through education 

and counseling, and as the report indicates, the military services 

have devoted considerable time and talent to educating service 

members and, to the extent possible, their spouses so that they do, 

indeed, become better stewards of their finances. To enhance the 

educational capability of the military services, several prestigious 

nonprofit agencies and members of the Federal Financial Literacy 

Commission have joined our financial readiness campaign, and 

they will help us increase awareness, understanding, and knowledge of the assistance that is available to our military personnel. 

Commanders at every echelon, from the Chiefs of Staff down to 

the unit commanders, as Senator Reed testified, have been involved in emphasizing this important message to our troops. It was 

my privilege this week to invite the service department secretaries 

to endorse a campaign that we will be initiating next February 

called ‘‘Military Saves’’, which asks everyone associated with the 

Department of Defense to consider reducing his or her debt, and 

save for the future. This campaign is part of ‘‘America Saves’’, 

which has been endorsed by the Chairman of the Federal Reserve 

Board. 

It is through these diverse efforts, we believe, that we will keep 

our current focus on the issue of personal finance in place and deVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 E:\HR\OC\A303.XXX A303

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velop the intended culture within the military that encourages 

service members to seek assistance when they need it rather than 

burying their financial concerns in additional debt. The report we 

provided to Congress gives an overview of the efforts within the department to educate, inform, and influence service members and 

their families to take control of their finances, to build wealth, and 

to escape the cycle of debt for their own well-being and to enhance 

their military readiness. 

The department has, indeed, recommended—specifically to Senator Schumer’s question, the department has recommended establishing an interest rate cap of 36 percent for service members and 

their families. The department believes service members who acquire loans with interest rates above 36 percent should seek assistance and not consider further debt load. The 36 percent limit creates a barrier for installment lenders to refrain from packing fees 

and premiums—and others have alluded to this this morning—onto 

the base interest rate that is charged for a loan. The limit of 36 

percent is considered appropriate since it mirrors the limitations 

found in several States, actually a majority of States, for their 

small loan products. It is an amount that has been proven reasonable for consumers and the industries that serve them. 

To accelerate this process, we have recommended in our report 

to the Congress that limits be placed on the credit opportunities 

that do not consider service members’ ability to repay their debt, 

and that is the subject you mentioned, Mr. Chairman. We want 

service members to take the tough steps necessary to get themselves out of debt rather than the quick cash solutions that lead 

them to much worse circumstances. It is our job to give them the 

tools they need to resolve their debt. We are continuing to improve 

the already substantial system of support available to them, but we 

need your assistance in limiting the availability of loans that fail 

to consider the ability of the borrower to repay so that service 

members can and will consider other alternatives. 

As long as these options are legal, we have little to no control 

over how much and how often service members access these options. By the time commanders are aware of their troops’ financial 

problems, that damage is done. 

Service members inherently understand that limits on interest 

rates are appropriate even if these limits will decrease the ability 

of credit. When asked in a recent survey, 74 percent of service 

members agreed with the statement, and I quote it, The Government should limit the interest rates that lenders can charge even 

if it means fewer people will be able to get credit, end quote. 

Service members are in agreement that there should be limits. 

Commanders have made their positions known that limits should 

be established. The department sees this as an important issue as 

part of our compact with our commanders, service members, and 

their families for their well-being and in support of military readiness. The department asks for your assistance in adopting the statutory steps necessary to establish more effective limits. 

I am very grateful for this opportunity to appear, Mr. Chairman, 

to share our concerns with you and the members of the Committee. 

The department is ready to assistant your committee in developing 


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effective limits on predatory lending that affects military readiness. 

Thank you, sir. 

Senator SHELBY. Senator Dole, you are the leader here. We will 

recognize you first. 

Senator DOLE. Thank you, Mr. Chairman. 

Secretary Chu, I thank you very much for your testimony this 

morning. 

In a June article in ‘‘Sea Power Magazine’’, Master Chief Petty 

Officer of the Navy Terry Scott is quoted as saying: ‘‘The No. 1 reason our sailors are forced from one job to another is because they 

lose their security clearance, and the No. 1 reason they lose their 

security clearance is because of financial difficulties.’’ Do you know 

this statement to be accurate and are these financial difficulties 

due to predatory lending? 

Secretary CHU. Ma’am, my understanding is that Master Chief 

Scott’s statement is based on an internal Navy analysis and, therefore, I would accept it as a good description of the challenge we face 

in this arena. And, yes, an important part of that problem is the 

result of predatory lending. 

Senator DOLE. Now, in your report, you included testimony from 

a commanding officer stating that revoked or denied security clearances for sailor and Marines due to financial problems have increased 1600 percent between the year 2000 and the year 2005. Is 

predatory military lending a leading cause of these financial problems and do you expect this trend to continue without legislative 

action? 

Secretary CHU. We need legislative action, to get to the bottom 

line, because without it, and I think members of this committee 

have spoken to that, we cannot curtail the migration of this set of 

predatory practices to other products. The advantage, I think, of 

the Senate amendment that you co-sponsored is that it does shut 

it off. It shuts it off by including fees within the cap. It shuts it 

off by making internet-based loans unenforceable across State 

lines. So even if State A fails to curb the internet lender, the contract is null and void across the country. You can’t enforce it if you 

are a military person. 

So, yes, ma’am, we do need legislative assistance to curb this 

problem. We do think we are making progress in the awareness of 

our people about their situation and how they should conduct 

themselves, but education and preparation alone are not enough 

given the practices that you so eloquently described with the maps 

that you showed just a few moments ago. 

Senator DOLE. Now, you reported the strong actions—I think this 

is page 47 of your report—that North Carolina has taken to combat 

predatory lending. Can you tell the committee how this has affected personnel who are stationed at bases in North Carolina? 

Have the actions taken by North Carolina eliminated the threat of 

predatory lending or are there further actions the State should 

take? 

Secretary CHU. First of all, I want to commend North Carolina 

for its actions. They have had a dramatic affect. They have substantially reduced the problem. At least that is what our commanders tell us at the important bases in that State. They do not— 

this gets to your issue, ma’am, of do we need national legislation. 


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Our view is, yes, it would be very beneficial, and I particularly 

value the provisions in the Senate amendment you co-sponsored because of their effect in curbing the internet interstate lending operation by making those contracts unenforceable. That is a key provision. 

Moreover, it helps us in other States. I don’t want to in any way 

denigrate what North Carolina has done, but we need national action on this as far as military personnel are concerned. 

Senator DOLE. You cite a Center for Responsible Lending report 

as follows: ‘‘Active duty personnel are three times more likely than 

civilians to have taken out a payday loan and that predatory payday lending costs military families over $80 million in abusive fees 

every year.’’ Do you believe this analysis is correct, Secretary Chu? 

Secretary CHU. We have done our internal estimates. They are 

not precisely the same, but they are in the same ballpark. You 

would get similar results from other methodologies. Yes, ma’am. 

Senator DOLE. And the report on page 14 states that: ‘‘The Uniform Code of Military Justice penalizes service members for deliberately writing a check not covered by funds on deposit.’’ Can you 

describe the penalties that the service members are subjected to? 

Secretary CHU. First, let me emphasize the important provision 

of the Code, because it makes personal financial responsibility 

something that is governed by our military justice system, and so 

it calls it to the attention of all our personnel. What the penalties 

are depends, of course, upon the seriousness of the offense, and as 

you appreciate, ma’am, we administer it on a decentralized basis 

where commanders decide the immediate courts-martial, or other 

administrative authorities decide what the penalties should be. So 

there will be a range of penalties depending upon the seriousness 

of the infraction. 

Senator DOLE. Thank you. 

The final question, Mr. Chairman, the report states: ‘‘Lenders 

who only lend to nonresident military personnel in about half the 

States have either been granted formal exemption from State regulation or have not been required to be licensed or supervised by 

State regulators under a variety of legal arguments.’’ Secretary 

Chu, can you describe in greater detail how these lenders circumvent regulation and are they able to do this in North Carolina? 

Secretary CHU. As you suggest, ma’am, and this is another reason for national legislation, a number of States have taken the position that if you are lending to a non-State resident, the State law 

does not apply. We do not like that rule. We are advocating the 

States to change that position, but it is essential, I think, to have 

national legislation. That is also an issue in North Carolina, I 

would acknowledge. 

Senator DOLE. Thank you very much. 

Thank you, Mr. Chairman. 

Senator SHELBY. Senator Johnson. 

Senator JOHNSON. Thank you, Secretary Chu. 

I think it is easy for us to sit here in a committee room and say 

that, Well, these military personnel should just forego getting credit; they have a funeral to go to; they have no cash; the heck with 

them. That isn’t a very satisfactory answer and I don’t think it is 


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very realistic either. I think that they are going to continue to seek 

credit for low denomination short-term debt. I think that is a given. 

The question is if we eliminate—if we place a 36 percent cap, that means you cannot borrow $250 for airfare for a $25 fee because that would, annualize, exceed the cap. Where do you suggest 

these guys go? What should they do? 

It seems to me that it’s saying, Well, just don’t borrow money. 

That is a good thing to say, but these needs do arise. They have 

arisen, and that is the reason we have this vacuum that has been 

filled by this particular industry, because the credit unions, the 

banks have not stepped in. And so I just wonder what do you say 

to that young soldier. He wants to go to his mother’s funeral. What 

are you going to do? 

Secretary CHU. Nothing we propose, Senator, and nothing that 

has been advanced is about broadly denying credit to military personnel. Many, if not most, military personnel have credit cards to 

help them pay for airline tickets, not cash. Cash: I believe the 

Transportation Security Agency views it as a signal that perhaps 

you are not a person we want on our airlines. 

So I don’t think that is the issue, Senator. The issue is predatory 

lending, getting people in over their heads, and the maps Senator 

Dole displayed, are, in fact, the indictment of this practice and the 

reason we need to curb it. These people are taking military people 

into a debt load that they cannot sustain. It is not about the airline 

ticket to a funeral. 

For that purpose specifically, if a military person has a pressing 

need, that is why we have and why we encourage the Military Aid 

Societies. I have talked with every military service about this. They 

have energetic programs to make sure that if there is a legitimate 

emergency, the Military Society is there to step forward, is eager 

to step forward. A major fraction of what they do these days is 

make sure that those kinds of needs are covered. We are also talking with the credit unions and other agencies of that type that offer 

regular banking products to be sure that they are responsive to 

these needs as well. 

So I don’t think the example that you offered, sir, is, in fact, the 

situation. That is not what we are confronting here. We are confronting people in over their heads on a long-term basis. This is the 

rollover issue. 

Senator JOHNSON. Well, that is somewhat my point, is that it 

seems to me the problem here is not so much a fee on a particular 

low denomination loan as it is the rollover problem and how many 

rollovers are going to go on, and it seems to me that that is the 

larger issue than a fee that a credit card company charges or a 

bank charges for an overdraft and so on. It is how deep you go and 

how long you stretch out the loan, it seems to me, the greater problem than the 36 percent issue. 

But in any event, I appreciate your observations. It just seems 

to me that the need for low denomination short-term loans is not 

going to go away. I hope that there are mechanisms to deal with 

it. 

One of other points that it has brought out to me that I think 

we need to have some discussion as this goes forward is that two 

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fected by the 36 percent rate cap because their fees are not subject 

to the Truth-in-Lending Act. So I think we have some other issues 

that we need to work together on as well as we go forward with 

this. 

But I want to see all of our soldiers treated fairly, and I think 

we are all on the same page with that. The only reservations I 

raise are we are going to wind up denying short-term credit for 

people who have a legitimate need that is not rolled over time and 

time and time again and are we going to wind up putting a lot of 

our military personnel in a uniquely difficult circumstance that the 

other citizens of America don’t have. So that is the issue I raise. 

I think we all are in good faith trying to do what is right for our 

men and women in uniform, but these are things I think we need 

to talk through in the committee. 

Secretary CHU. If I may, Senator, respond very briefly to two important points you made, first of all, we agree that you need a 

broad set of legislative restrictions. That is why we like the TalentNelson amendment to the Senate Defense Authorization Bill. It accomplishes that purpose in our judgment. 

The second issue of need for cash on an emergency basis, that 

is one of the reasons we have emphasized in our financial readiness 

campaign the importance of saving; you need to start setting the 

money aside. We pay adequately in the military these days. It is 

not the Army of 30 years ago. So one of the points is you need to 

start setting aside some money yourself for a rainy day. 

Senator JOHNSON. Well, I would say that we on the Congressional side think some of our enlisted personnel would maybe disagree with you that the military, particularly if they have children, 

is paying at a level that doesn’t occasionally cause some financial 

stress; but one last question, and I know nothing about this proposal myself. It was called to my attention that the CFSA has 

made a proposal to DoD relative to an alternative approach to 

managing these loans. Have you had any opportunity to review 

that at all? 

Secretary CHU. We have the proposal from them. We will look at 

their proposal. I think our preliminary assessment is it doesn’t 

fully deal with the issues at hand. I think, again, we believe that 

the Senate Authorization Bill, Section 666, if I recall, Senator, correctly does do a good job in that regard. 

Senator JOHNSON. Well, thank you for testimony. 

Secretary CHU. Thank you, sir. 

Senator SHELBY. Senator Martinez. 

Secretary CHU. Good morning. 

Senator MARTINEZ. Good morning. How are you, sir? 

Secretary CHU. Fine. Thank you. 

Senator MARTINEZ. We had the pleasure to work together a little 

bit on some of these issues, frankly, relating to our servicemen and 

women when we began this war. We worked at little bit on the 

Sailors and Seamen’s Relief Act, which I think is a very good thing, 

and I appreciate your working with me at that time. 

Mr. Chairman, I am pleased that there are some Floridians on 

the second panel today: Lynn Drysdale, Staff Attorney with the 

Jacksonville Area Legal Aid, and Christopher Peterson, Associate 

Professor of Law at the University of Florida. I don’t know if I will 


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be here, but I want to make sure the Committee will issue a welcome to them from myself. 

The issue of rollover has come up, and I wanted to ask you 

whether you thought a prohibition of these rollovers and loan flipping would address many of the practices that we see as the most 

egregious. 

Secretary CHU. That type of prohibition would, indeed, be helpful, sir, because that is part of the problem, people taking one loan. 

Then when it comes due, they can only pay it off by taking the next 

loan, and, of course, the fees and the interest rate build on that 

total. That is partly how you get these high numbers and you get 

people in a kind of trouble which they find tough to extricate themselves from. 

Senator MARTINEZ. One of the things that I notice in your report 

is that this industry particularly advertises and preys upon our 

military personnel. Why is that? And if you can explain and articulate that, what is it that causes our folks in the military to be so 

vulnerable and at the same time to be such a target of these unscrupulous lenders? 

Secretary CHU. It is a very important question, sir. I agree. I 

think there are several reasons. First of all, as Senator Dole 

brought out, we insist people pay their debts. So you have got the 

power of our leadership behind making good on the loan eventually. 

Second, they have a steady paycheck, and so as you know, many 

payday loans are, indeed—just as the name implies, they predate 

a check. They know, unlike perhaps might be true in the private 

sector where sometimes you get paid—sometimes you don’t get 

paid—they know that paycheck is going to show up in the bank account the first of the month. They are certain to get the money 

back. 

Second, or third I should say, our people have started to accumulate assets. Some have cars. So another version of this is the car 

title. They have an asset that can secure the loan. So our people 

do have collateral often, and they, unfortunately, for whatever reason, give it up for what is really a terrible financial deal. Of course, 

that is an educational issue for us, to make sure they understand, 

no, you really shouldn’t go there; that is not the way to handle your 

situation; come to one of the other possible sources of assistance instead. 

Senator MARTINEZ. I understand that at times people may have 

an emergency and they need short-term financial assistance. Is 

there not a network of assistance to our military families and the 

personnel in the event of a family death or bereavement sort of 

trip, things of that nature that can be available to them through 

governmental and nongovernmental sources? 

Secretary CHU. I think this is another example of the great volunteer spirit in our nation. We have a set of military aid societies, 

essentially one per military department. They have made it a priority to devote a substantial fraction of their resources to this issue 

of short-term cash needs. As Senator Johnson indicated, we need 

to lecture people and encourage them to save, but if you do get to 

the point where you need the cash, we ask that you come to the 

military aid society. That is why they are there. I reviewed with 


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them just very recently what fraction of their portfolios are they 

devoting to this, and it is a high number in each case. 

They are trying to do that job. They are willing to do more if that 

is necessary. So there is a safety net out there. We are also asking 

our credit unions—we have credit unions on our military installations—to be sure they offer appropriate small loan products to our 

personnel as well. 

So I think there are several avenues of assistance. Ultimately 

what is needed is the military member or family member needs to 

get control of their finances, whatever pressed them to the wall. 

Senator MARTINEZ. Financial literacy, in other words. 

Secretary CHU. Right. The loan is a Band-Aid. It is not a solution. 

Senator MARTINEZ. I understand payday loans are now available 

on the internet from off-shore lenders, and if Congress acts to curb 

unethical lending practices at home, what more can we do to protect the Nation’s military personnel from online lenders outside the 

country? 

Secretary CHU. Well, I think the important provision that is in 

this, as I understand the Senate Authorization Amendment, is to 

make internet contracts as far as military personnel are concerned 

unenforceable, and that means we can go—I am not trying to encourage inappropriate behavior, but if we faithfully execute that 

provision as Congress might desire, it will essentially make it unattractive for any internet lender to lend to a military person. 

Senator MARTINEZ. Often times, subprime lending, particularly 

longer-term loans, can be confused with predatory lending. There 

is a difference between the two, is there not? There can be people 

with a credit rating that may not be as worthy as another or their 

loan might be at a higher interest rate, still within the law, still 

within reason, but a higher interest rate. That is not what we are 

talking about here today, is it? 

Secretary CHU. You are absolutely correct, sir. That is not what 

we are talking about. That is why we have endorsed the 36 percent 

limit. That is a high number. It is a high number, but we think 

it allows for subprime lending. It does cutoff a source of credit that 

might be important to people. It is consistent with the laws of a 

majority of States of our nation. 

Senator MARTINEZ. Speaking of State laws, in 2001, partially in 

reaction to what Orange County had done in Florida, the State 

passed a very comprehensive law to prohibit the abuse of payday 

loans and by both licensed providers and consumers, and some say 

that the Florida laws are some of the strictest in the country. Are 

there aspects, if you are familiar with Florida law, that you believe 

would be a good basis for a national model? And perhaps our next 

panel might be better to answer this question, but I wanted to put 

it before you. 

Secretary CHU. Thank you, sir. I should probably turn to them. 

I am not an expert on Florida law, but I do know that across the 

board, Florida has been a leader in trying to support our military 

families in this area and in several other arenas as well. 

Senator MARTINEZ. Thank you, Mr. Chairman. 

Senator SHELBY. Thank you, Senator Martinez. 


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Dr. Chu, it is my understanding that the Armed Forces Disciplinary Control Board can place commercial entities off limits to military personnel. Can you explain why this mechanism is not being 

used more frequently to ban specific predatory lenders from accessing military personnel? First, it that true? Can the Armed Forces 

Disciplinary Control Board place commercial entities off limits to 

military personnel? 

Secretary CHU. Yes, sir, it can. 

Senator SHELBY. Have you done that? Has the Pentagon done 

any? If not, why not or do you plan to? 

Secretary CHU. It is a responsibility at the local level, installation level, as you can appreciate, sir. 

Senator SHELBY. Is that by commander? 

Secretary CHU. By commanders. The difficulty, as I believe you 

are aware, is that as a matter of law, and I am not a lawyer, but 

as I understand the situation, basically, the way they place them 

off limits is because the establishment is violating the law. Of 

course, that is the essence of the issue here. These practices in 

many States are not illegal. We have looked at using this mechanism. Our counsels, plural, advise it is legally problematic to do 

that for this and other reasons. 

So in our judgment, the Disciplinary Control Board mechanism 

placing establishments off limits, at least under the present statutory construct, will not be effective for this purpose. 

Senator SHELBY. For this purpose, but it could help, could it not? 

Secretary CHU. It is doubted by our legal staff that we can get 

very far with that instrument. 

Senator SHELBY. In other words, the base commander can to 

some extent restrict who is coming on that base. Is that right? 

Secretary CHU. That is a different statement, sir, but in terms 

of patronizing off-base establishments— 

Senator SHELBY. Off base. 

Secretary CHU. He is, as I appreciate the law and I ought to let 

the lawyers speak to this, he is restricted to those establishments 

that are violating a law. If the product is legal, and that is our central problem, if the product is legal, however much we may find it 

distasteful, that establishment is not violating the law and he can’t 

reach it with this mechanism. 

Senator SHELBY. I believe Senator Dole said something to the effect that over half of the service people are under 25 years of age. 

A lot of them are 18 and 19 years of age. 

Secretary CHU. Yes, sir, and some of their spouses are younger. 

Senator SHELBY. Do you know what percentage are 18 or 19 

years of age? 

Secretary CHU. Not of the top of my head, sir. I can get those 

numbers for you. 

Senator SHELBY. Could you do that for the record? 

Secretary CHU. I would be delighted to, sir. 

Senator SHELBY. I just believe that we should, working with you 

and the Administration, do everything we can to protect the young 

soldiers because they are highly vulnerable, are they not? 

Secretary CHU. We agree, sir. They are early in their careers. 

Our nation’s educational establishments, I think you and others 

noted this morning, do not give a large amount of education on fiVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 E:\HR\OC\A303.XXX A303

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nancial management. That is something that is worth looking at, 

I think as a country, but, of course, people come to us with the 

preparation that our country gives them, and they often don’t have 

the preparation. That is why we are investing in their preparation 

starting in basic training, but it does take time for those lessons 

to sink in. 

So yes, sir. We would appreciate the kinds of steps that Congress 

is considering to put temptation aside. 

Senator SHELBY. Most of these young people, most of them or a 

great percentage of them, this is their first steady paycheck. I believe Senator Dole mentioned that I, as well Senator Martinez. Is 

that correct? 

Secretary CHU. Yes, sir. That is true. 

Senator SHELBY. So people know that they have got a steady 

paycheck. So they know where the potential is often times for exploitation. 

Secretary CHU. Yes, sir. 

Senator SHELBY. Does the report that you are talking about 

today indicate any trends concerning the prevalence and the impact of predatory lending on our service members? I think it does, 

but I would like to hear from you. 

Secretary CHU. Yes, sir. We have seen a growth, and Senator 

Dole’s maps are eloquent in the North Carolina case, a growth in 

predatory lending institutions near military bases. I was struck 

just yesterday that a citizen with no connection to the problem, unaware that the department had done a survey, raised with me why 

when he was in the White Sands Missile Base did he see a clustering of these kinds of payday lenders right outside the gate. He 

thought that was shameful and a blot on our national reputation. 

Senator SHELBY. Your report makes clear that loopholes and 

State laws or exemptions granted by State authorities are often 

abused by predatory lenders to avoid interest rates caps, disclosure 

requirements, and other consumer protections. Has the Defense 

Department approached the States with its concerns, with your 

concerns, and if so, what kind of response have you seen from the 

States in this regard? 

Secretary CHU. Yes, sir, we have. As I indicated, it is one of the 

issues the Secretary is personally engaging the Governors on, and 

as a broad matter, we are pleased with the Governors’ willingness 

to listen to us. That does not, of course, always mean they can get 

the necessary legislation enacted in their States. That is why I 

think all of us pulling together can make a difference here, and I 

think national legislation will send a strong signal to every State 

that this is where the country wants us to be. 

Senator SHELBY. Dr. Chu, we appreciate your work as the Under 

Secretary of Defense for Personnel and Readiness and especially in 

this issue. We will continue to work with you to try to resolve a 

real problem that we have on the bases. Thank you very much. 

Secretary CHU. Thank you, Mr. Chairman. Thank you for the opportunity. Thank you for your questions. 

Senator SHELBY. I am going to call up now our second panel: Admiral Charles S. Abbot, Retired, President and Chief Executive Officer, Navy-Marine Corps Relief Society; Dr. William O. Brown, Jr., 

Associate Professor, Department of Accounting and Finance, Bryan 


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School of Business and Economics, University of North Carolina; 

Ms. Lynn Drysdale, Staff Attorney, Jacksonville Area Legal Aid; 

Mr. Hilary Miller, President of the Payday Loan Bar Association; 

Mr. Christopher Peterson, Assistant Professor of Law, Levin College of Law, University of Florida. 

If you will all take your seats. 

Senator SHELBY. All of your written testimony, as I have previously said, will be made part of the hearing record in its entirety, 

and what we would like to do, because we are going to have a vote 

on the floor in a little bit and we will have to move on, is let you 

sum up your top points that you want to make orally as fast as you 

can. 

Admiral Abbot, we will start with you. Welcome to the Committee. 

STATEMENT OF ADMIRAL CHARLES S. ABBOT, RETIRED, 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, NAVY-MARINE 

CORPS RELIEF SOCIETY 

Admiral ABBOT. Mr. Chairman, members of the Committee, 

thank you very much. 

I am grateful for the opportunity to appear here and to comment 

on the Department of Defense report, and I will abbreviate my remarks to leave the entirety as a part of the record, but as the 

President of the Navy-Marine Corps Relief Society, I am a head of 

a military charity, one of the four that Secretary Chu mentioned, 

and for a hundred years, we have been providing support to sailors 

and Marines and their families. I would like to say that as I look 

at the history of our organization, this problem with predatory 

lending, with payday lending, is the most serious single financial 

problem that we have encountered in that hundred years, and we 

know that the industry has said that they don’t, in fact, target 

military personnel, but certainly our experience, we see it at the 

suffering end of these individuals that they are, in fact, a direct 

target. 

And I echo Senator Schumer’s comment about the ‘‘Navy Times’ 

and other similar publications having ads in them where the lending organizations state that, in fact, they are purposefully organized to target military personnel. We see every day in our offices 

around the country individuals who have come in and have fallen 

into the venus fly trap of the payday lending problem, and it has 

literally destroyed their lives, and we provided cases to the Department of Defense for them to use in their report and we see additional ones every day which are contained in my draft comments 

to you. 

I believe that it is a growing problem. Every year, we see more 

of these individuals coming in the door at our offices, and over the 

last 5 years, it has been in excess of 5,000 individuals in more than 

two and a half million dollars, and we also see the growing problem 

of the internet payday lending business and the effect that that is 

having on the problem more broadly. 

So we enthusiastically support the recommendations of the DoD 

report. I do believe that in addition to the interest rate limitation, 

that flipping of the loans is, in fact, one of the serious problems. 

It is, in fact, what causes the individuals to get caught in the trap. 


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There aren’t very many who simply get a single loan and that is 

the last time they were ever seen. There are statistics which show 

that the average number of loans is usually as high as about five 

for an individual, and it destroys lives. It destroys families. 

Senator SHELBY. It doesn’t help readiness either, does it? 

Admiral ABBOT. It does not, sir. We see that effect as the individuals come to us and they are removed from their duties to be able 

to deal with these problems, and then some, as Dr. Chu describes, 

in fact, lose their clearance and are unable to continue to serve in 

their assigned billets. 

So I thank you very much for the opportunity to appear before 

the Committee. 

Senator SHELBY. Thank you. 

Dr. Brown. 

STATEMENT OF WILLIAM O. BROWN, JR., ASSOCIATE PROFESSOR, DEPARTMENT OF ACCOUNTING AND FINANCE, 

BRYAN SCHOOL OF BUSINESS AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA 

Mr. BROWN. Yes. I will shorten my remarks that are in my statement, as you wish. I have conducted some research on payday lending and on payday lending in the military. 

Senator SHELBY. Have you published in that area too? 

Mr. BROWN. I have not published academic journal articles, but 

hopefully I will at some point. 

This research has focused on trying to figure out why it is that 

military personnel use payday loans and why payday loans are 

used by the broader sort of population and student population as 

well. As noted here, this business has expanded greatly in the last 

10 years. It almost went from a business that didn’t exist to a business that now has over 20,000 outlets. So I will summarize some 

of our key factors that found. 

We surveyed a list of personnel in the four service branches regarding their attitudes toward and uses of the short-term credit, 

including payday loans. Our analysis is based on the empirical data 

that we collected through a random sample of people who live on 

the military bases. 

The first finding is that a small percentage of enlisted personnel 

use payday loans. We found that roughly 13 percent of the 460 enlisted personnel that lived around the military bases that responded to our survey indicated that they had used a payday loan 

in the previous year. That number, I mean, 13 percent to some extent may seem high, but this is just enlisted personnel, which you 

already noted the people are often times 18, 19 years old. If you 

compare that to a similar group of population among the general 

population, you will find that that number is not out of line with 

people that are 18, 19 years old in terms of what they are doing 

with payday loans as well. 

Military borrowers report that they use payday loans for the 

same things as civilian borrowers do. They are paying bills that 

they otherwise can’t afford. They have unexpected automobile, 

home repairs, those kinds of things, and so they are reporting that 

they are using it for those purposes. 


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Despite this admonition that they should save, you know, spending a lot of time around young people, these admonitions don’t go 

very far. Right? You should also study for your exams. Right? With 

students, sometimes it takes a while to learn that. Right? So it is 

only after failing on occasion that sometimes you learn and stuff 

hits. 

So I think just admonishing them to save and not actually giving 

them the ability to fail in small steps—now, you want to prevent 

these serious egregious things that happen which you can make 

sure that you give people the ability to learn from their mistakes 

in some cases as well. 

What we also found is that the military enlisted personnel look 

much different from civilians using payday loans in that they tend 

to pay them back more quickly. We don’t see the same rollover 

problem that you see with the civilian users and the military of 

payday loans. Forty-nine percent of the military payday loans, borrowers had two or fewer loans in the last 12 years. I mean the last 

12 months. So it is not an indication that they are rolling these 

things over or rolling them over continuously. 

Again, there is a small group in the sample that do roll these 

over, and you should be concerned about those people and find better education for them, but given the overall low default rate on 

these loans to begin with, given the military personnel and the 

small fraction that are using them, and given that most of them 

aren’t using them and don’t have these serious rollover issues and 

are only using them once or twice a year, we indicate that there 

is not really a threat to military preparedness, and there is nothing 

in the DoD report that suggests, that gives anything other than 

this anecdotal evidence that these sometimes create problems. 

There is no large scale statistical evidence that this is a problem. 

Senator SHELBY. Ms. Drysdale. 

STATEMENT OF LYNN DRYSDALE, STAFF ATTORNEY, 

JACKSONVILLE AREA LEGAL AID 

Ms. DRYSDALE. Thank you, Honorable Chairman and Committee 

Members. 

I am a legal services attorney in Jacksonville, Florida, home of 

Naval Air Station Jacksonville and Mayport Naval Station. Based 

upon the increasing number of clients I represent and the military 

people I talk to, the DoD report is right on target, and I urge you 

to adopt the recommendations for statutory changes. 

In brief, the payday loans I see are generally short-term 2-week 

loans with interest rates ranging from 390 percent to well over 900 

percent. If I don’t have $300 today, it is unlikely that I am going 

to have $300 today plus 900 percent interest 2 weeks later. So they 

are destined to fail. 

Why do people sign these loans? Because even your mainstream 

payday lenders explain away the interest rate. They say, Well, the 

APR is 390 percent, but it is only a 2-week loan rather than a year 

loan, so don’t worry about the interest rate. Others use loan disguises. I am going to reference just a few. 

Senator SHELBY. How much do you say the APR was? 

Ms. DRYSDALE. Anywhere from 390 percent. 

Senator SHELBY. 390 percent? 


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Ms. DRYSDALE. 390 percent up to—the most recent I have seen 

is 906 percent. The lenders which do this get around Florida law 

by using loan disguises. I will describe very briefly several of my 

clients, and some of them I will have to refer by an initial. Please 

keep in mind that these are only representative of dozens of other 

clients with the same problems. 

Mr. B went to a payday lender which disguised its loan as rebates. In other words, he was getting not a loan, but a rebate in 

return for his paying for the right to use the internet on the small 

computer they had in their office that was not plugged in. When 

he could not repay the loan at a 400 percent interest rate, they 

took the loan amount plus hundreds of dollars directly out of his 

bank account, meaning that he did not have enough money to pay 

rent. He also not have enough money to put groceries on the table 

and not enough money to pay for diapers for the family’s small 

children. When this company had taken all of the money out of the 

bank account, they sent him an unauthorized letter on State Attorney letterhead threatening criminal prosecution if he didn’t pay the 

debt. 

Not only do these lenders illegally try to use our State Attorney’s 

Office for a law enforcement arm, but they also use the military 

chain of command as a collection enforcement tool. Because the 

members of the military are governed by the Uniform Code of Military Justice, the payday lenders contact the service members to 

harass them and they also contact their chain of command. 

You may have seen the Hubbells, a family represented in an 

ABC News story who started out by taking out one payday loan because Ms. Hubbell was stricken with a very aggressive form of 

breast cancer. They were both in the military, but she was forced 

to quit work. They took out a payday loan to address some of the 

financial stress involved with her illness. Over the years, they have 

borrowed about $10,000 in payday loans, most of which did not 

benefit them, but went to rollovers. They have paid tens of thousands of dollars back and still owe $12,2000. 

Mr. Hubbell once got a call when he was at work. He was an E– 

6 air traffic controller and got a call at work from a payday lender 

threatening and harassing him to pay. He told them he had an attorney, and so the call ended. Twenty-five minutes later, his superior officer called Mr. Hubbell and said, I have already had two 

phone calls from the same gentleman harassing me, ordering me 

to give him the name of your commanding officer so he could call 

him. Mr. Hubbell was terrified he was going to lose his security 

clearance, he was going to lose rank, he was going to lose pay and 

maybe even his job. 

Mr. G sent me an E-mail. He was stationed out in the middle 

of the Mediterranean in an undisclosed location. He was terrified 

because his wife had E-mailed him telling him that a payday lender was threatening to put her in jail which would mean their two 

children would not have a parent at home. 

Mr. Kahne was so frightened by all of these types of collection 

techniques that he spent his entire day off going from payday lender to payday lender, rolling over loans with nine different companies so that he would not bounce a check. 


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Mr. Wall sued Military Financial Network because they debited 

his account 11 times in 1 day, creating hundreds of dollars in 

bounced check fees with his financial institution. The lender also 

added additional fees and charges. Military Financial Network also 

put a clause in Mr. Wall’s contract that if he didn’t pay the debt, 

he would be subject to a court-martial, imprisonment, and dishonorable discharge. Also, if Mr. Wall wanted to sue this company because of all of these illegal actions, he was precluded from doing 

so even though this company had all rights of enforcement. They 

put a clause in his contract that if he didn’t like the way they were 

operating, he could not go to court; he had to go through expensive 

arbitration in Delaware despite the fact that he was located in 

Florida when he signed the loan. 

You will hear that the pay day lenders’ organization, the CFSA, 

has best practices that all of its members are required to follow. 

Well, let me comment on a women I started representing 2 weeks 

ago. She is a Navy wife who has taken out a loan with one of this 

industry organization’s founding members. In Florida, there is a 

prohibition to rollovers, but this company and other companies get 

around it by requiring the borrow to wait 24 hours before getting 

the rollover loan. 

Florida also allows a grace period with no additional penalties or 

fines or interest if you seek credit counseling. Ms. Griffin went to 

pay off her loan and was told that she needed to roll it over because she was $45 short, which she did. The next time she went 

back, she had obtained the required credit counseling from the 

Navy-Marine Corps Relief Society, which is an authorized credit 

counseling agency for the purposes of getting the grace period. 

They still refused the grace period, and ironically, in their contract, 

the lender stated it was a member of the CFSA and followed the 

best practices. 

The Director of the Navy-Marine Corps Relief Society, Retired 

Captain Dave Faraldo, called this company and said, ‘‘You are required to give her the grace period.’’ The employee said, ‘‘No, we 

don’t have to give her the grace period and, in fact, I have been 

a trainer of employees for 8 years and we have never had to give 

the grace period.’’ She refused to speak to him anymore, and would 

only speak to her attorney. 

I called them as her attorney. They refused to speak to me even 

if I did provide a written release. I said, I would like to speak to 

your supervisor. She said, I can’t give you the name or the number 

of that person, but I will have them call you. That is 2 weeks ago. 

I haven’t heard a word from them. 

And the real shame in this is that all of these people I have mentioned would have the alternative of the Navy-Marine Corps Relief 

Society, and even my credit union offers a similar short term loan 

for emergencies. They did a study and determined they could provide a similar product and they could feasibly do it at 14 percent 

APR. There is also a savings component in with the loan as well 

as credit counseling. My credit union is responsible to me to make 

sure it is making financially sound decisions. 

I have filed lawsuits against the internet lenders and am presently pursuing those cases, and also there have been enforcement 


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actions by other States against the internet lenders so they would 

not be immune to the type of legislation that has been proposed. 

Senator SHELBY. Thank you. 

Mr. Miller. 

STATEMENT OF HILARY B. MILLER, PRESIDENT, PAYDAY 

LOAN BAR ASSOCIATION 

Mr. MILLER. Thank you, Mr. Chairman and Members of the 

Committee. It is a pleasure and honor to be here today. My name 

is Hilary Miller and I am here both as an expert on subprime lending and also on behalf of the payday advance industry’s national 

trade association, the Community Financial Services Association of 

America or CFSA. 

Both the Payday Loan Bar Association, of which I am President, 

and CFSA subscribe to the highest principles of ethical and fair 

treatment of borrowers. CFSA represents the owners of approximately half of the estimated 22,000 payday advance retail outlets 

in the United States. CFSA has and, importantly, enforces among 

its members responsible industry practices and appropriate consumer rights and protections, including special protections for the 

benefit of military personnel. 

There are serious flaws in the Defense Department’s report. 

Those flaws involve both fundamental matters of methodology and 

policy. We think that decisions involving potentially far-reaching 

implications regarding the cost and availability of consumer credit 

should be reached only after a careful gathering of data from a variety of sources and even-handed analysis of such data. By failing 

to synthesize information from balanced sources and by systematically excluding any input from independent economists, from consumer credit experts, or from the industry itself, the DoD report 

presents the views only of opponents of the kind of lending that is 

discussed in the report. The result is a biased, inaccurate, and incomplete picture of the market for such credit. 

Our industry, contrary to some of the discussion of the abilityto-repay issue, has a vital interest in making sure that military 

borrowers can repay their loans, and for one simple reason: as 

lenders, we only make money when our borrowers repay us. If they 

do not pay, not only do we fail to collect their finance charges, 

which the DoD criticizes, but we also lose many times those finance 

charges in loan principal. In short, it is contrary to our interests 

to have service members get into trouble with their loans. 

The reason we lend to military borrowers at all is that the entirety of the available scientific data suggests that only a tiny percentage of military borrowers actually do get into trouble with payday loans. Anecdotes derived from a non-representative sample of 

this small group are now being used to drive public policy for the 

much larger numbers of military borrowers who use payday loans 

for their intended purpose and who repay their loans on time and 

without financial difficulty. 

There are serious flaws that I have mentioned, and here are 

some of them, in the report: First, the DoD report determines that 

payday loans are predatory solely by uncritically adopting eight 

factors used by an opponent of the industry, the Center for Responsible Lending, without making the independent determination that 


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such loans are unfair or abusive as required by the applicable statute. No other recognized authority has used these factors. 

Second, according to DoD’s own internal data, fewer than 5 percent of service members have had a payday loan. That is not indicative of a problem from my standpoint, and because fewer than 6 

percent of payday loans ultimately default, at most 6 percent of 

that 5 percent, or 0.3 percent, of all service members have experienced financial difficulty with a payday loan. In other words, 99.7 

percent of service members have either not had a payday loan or 

have not had financial difficulty with payday loans. There is simply 

no statistical evidence that payday loans contribute to military 

readiness problems to any measurable degree. 

Now, although some service members with financial problems 

have taken out payday loans, DoD data do not support the conclusion that payday loans cause financial problems. It is purely a correlation-is-causation argument in their report. Payday loans are intended to solve financial problems and the overwhelming majority 

of users employ them in that manner. 

DoD’s data regarding the asserted hardship related to payday 

loans consists of a mere 12 anecdotes drawn from the experience 

of 1,400,000 active-duty military personnel. We did a sample of 

service members who had a variety of different kinds of debts and 

who went into bankruptcy, which is the ultimate example of financial failure. Now, we looked at not only what kind of payday loans 

they had, but what all of their other loans were, and our experience 

was that the payday loans were the last loans that they got. They 

were not the first loans that they got. Most of those borrowers had 

mountains of credit card debt. They had automobile loans. They 

had student loans. They were not going ‘‘belly-up’’ because of payday loans. 

DoD’s principal recommendation is to reduce the maximum permissible charge on loans to 36 percent, which is below the lender’s 

marginal cost of producing the type of credit that the payday advance industry provides. The effect of that cap would be to drive 

legitimate regulated lenders out of the market and to compel borrowers to deal with illegal lenders such as overseas lenders. Those 

lenders will just as likely pursue illegal collection methods when 

the time comes to collect the loan. 

There are many other approaches to dealing with it. Our trade 

association, the CFSA, has proposed alternative approaches to the 

DoD, and for the most part, we have been spurned, but we look forward to having a dialog with the Defense Department and to working these matters out. 

Thank you very much for your time and for your patience. I look 

forward to answering your questions. 

Senator SHELBY. Thank you, Mr. Miller. 

Professor Peterson. 

STATEMENT OF CHRISTOPHER L. PETERSON, ASSISTANT PROFESSOR OF LAW, LEVIN COLLEGE OF LAW, UNIVERSITY OF 

FLORIDA 

Mr. PETERSON. Thank you, Mr. Chairman, Ranking Member Sarbanes, and other members of the Committee. It is a real honor and 


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a privilege for me to get to come and share some thoughts about 

this with you today. 

I spent a significant chunk of my life writing this study that Senator Dole showed some maps from along with my co-author, Professor Graves, and what we did is we looked at 109 military bases 

around the country and the State that those bases were in, and we 

analyzed every location of every payday lender in all of those 

States and every bank location in all of those States. 

Senator SHELBY. Do we have the study? Have you furnished that 

to the staff? 

Mr. PETERSON. Sure. Yes. I believe I have, but it is around. It 

is right here in the Ohio State Law Journal. Go Buckeyes. 

What we looked at were all the counties and all the ZIP Codes, 

and what we came up with was I think pretty irrefutable statistical 

evidence suggesting that payday lenders cluster around military 

bases, targeting military personnel. There are a lot of reasons for 

that. I think some of them Admiral Abbot and Dr. Chu explained, 

but I really don’t think there is any doubt about that. 

The one State that we didn’t find that, which was really sort of 

troubling to me when I realized it, was New York. Fort Drum in 

upstate New York, when we started trying to get the data, we 

couldn’t find any payday lenders up there. It troubled me so much 

that in the middle of January, I got on an airplane and flew all the 

way up there to the Canadian border, which is tough for a Florida 

boy. 

I drove around the entire base, every street to make sure that 

our data was right on this, and there were a couple that had sort 

of snuck up and were disguising it, but the Attorney General is 

shutting them down. The reason, clearly, was because New York 

had stuck by their guns in their traditional interest cap of 25 percent. 

That brings me to a historical point that I would like to make, 

that predatory lending to military personnel is nothing new. I have 

done a lot of reading of history, and it has happened in the Chinese 

Empire, in the Roman Empire. The first succession from the 

Roman Republic was a riot that spread all throughout the Roman 

society over abusive loans to military veterans. The Romans figured that out. Their emblems are here still adorning our room, and 

they put a 12 percent interest rate cap on. 

They were the first to do it. The very first comprehensive law in 

the history of our species, the Code of Hammurabi from 1750 B.C., 

the legend was that Hummurabi ascended the mountain where 

Shamash, the god of justice gave him this comprehensive code and 

they chiseled in on a rock, and we still have it. It is in the Louvre 

in Paris. It has an interest rate cap in it of 20 percent for loans 

made in bulk silver and 30 percent for loans in grain. This is before 

we figured out how to coin money. 

And it actually, if you translate it, it is almost exactly the same 

as the 18 percent interest rate cap that happens to still be on the 

books, although not enforced particularly well, in the great State 

of Florida. So the first law in still in the State of Florida now, but 

we have fallen away from that. Throughout the history of our country, our republic, we have always had interest rate caps. Thomas 

Jefferson and George Washington would have been pretty upset if 


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there were lenders lending at 500 percent to the Continental Army. 

They would not have tolerated that, those guys. 

And I don’t think General Eisenhower would have in World War 

II. Throughout the Great Depression and World War II, this was 

an illegal practice. We would not tolerate that. It is only in the past 

15 years or so, for the first time in the history of our republic, that 

we have come to the point where we could say something along the 

lines that the Congress will not stand up and stop 500 percent 

loans to the Marine Corps. Well, that is a very peculiar and troubling thing to me. 

And last, an economic point: I note that there is a profound difference between market competition, of which I believe in—free 

market is very important, but there is a difference between market 

competition and market anarchy. We don’t allow unregulated markets in any market. If somebody wants to sell weapons-grade plutonium, we won’t tolerate that. If they want to sell child pornography, we don’t tolerate that. If they want to sell 500 percent interest rate, loans to the Marine Corps, I don’t think that we should 

tolerate that. I think it is a bad idea for our national security and 

it is a bad idea for ourselves in our own moral sense of who we 

want to be as a country. 

So with respect, I would strongly urge the Committee and Senators to support providing some national limit to what I think is 

a tragedy. These soldiers are going over to Iraq and they are bleeding out on the desert floor, and the Congress can’t come up with 

a cap for the loans that they are being charged? It is time for us 

to do something about it. 

Thank you. 

Senator SHELBY. Thank you, Professor. 

I have a number of questions that I am going to submit them for 

the record to all of you, because we have just now been notified we 

have a vote on the floor and we are going to have to leave here in 

just a few minutes. 

I want to recognize Senator Sarbanes. He has been in another 

meeting. 

STATEMENT OF SENATOR PAUL S. SARBANES 

Senator SARBANES. Thank you very much, Mr. Chairman. I will 

be very brief. I just want to make some comments. 

First of all, I want to thank the panel for their contributions. I 

want to commend Chairman Shelby for holding this hearing on the 

’’Defense Department’s Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents‘‘. In 

my view, it portrays clearly unacceptable practices on the part of 

a number of short-term lenders. 

This report is a result of an amendment that Senator Dole included in the National Defense Authorization Act mandating a 

study on predatory lending. I think it provides a disturbing insight 

into how predatory lenders target military personnel. It details the 

disastrous effects of high-cost predatory lending on our military 

and outlines actions taken by the military to address predatory 

lending and makes recommendation for further statutory protection. 


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There are approximately 1.3 million members of the U.S. Armed 

Forces. Even 10 percent of those would be 130,000 people. These 

men and women play an important role in our defense, obviously, 

and the view that a number of these practices are directed at them 

in a whole range of ways, I think is a matter for the considerable 

concern. 

The DoD report cites a study showing that service members are 

three to four times more likely, actually, to have payday loan than 

are civilians. They are not typically based on the borrower’s ability 

to pay. I was interested in Mr. Miller’s comment that this is the 

loan of last resort, that they have been through all these other 

things showing a weakened financial condition and everything else. 

Why are you making this loan to someone who has got that kind 

of financial trouble? 

They carry annualized interest rates often of more than 400 percent, often extended through rollovers, which, of course, include additional high fees, no payment of the principal. Service members 

get trapped in the seemingly never ending cycle of debt. 

I have some examples here, but due to the shortage of time, I 

won’t put those in the record. I do want to commend the military 

for its efforts to address these predatory lending practices. I don’t 

think there is sufficient protection for service members. 

And, Mr. Chairman, I hope that we will be able to take a very 

careful look at the recommendations of the DoD report and other 

proposals that have been put forward in order to try to get this situation under control. Our men and women in the armed forces deserve better than this. Thank you. 

Senator SHELBY. Senator Martinez. I know you have a Floridian 

here. 

Senator MARTINEZ. I know, and I want to just welcome both of 

my Floridian friends here and commend both of you for your testimony. I know Senator Dole wanted me to welcome you. 

Senator SHELBY. Floridians. I said one. 

Senator MARTINEZ. There are two, actually. 

Senator SHELBY. You stacked the panel, didn’t you? No, you 

didn’t. 

Senator MARTINEZ. Well, we are concerned about this in Florida, 

sir. We have got Mayport and NAS in Jacksonville. They are very 

important to our national defense, and I know we have got to go 

vote. So I will be very brief, but I just can’t help but ask Mr. Miller. 

I just want you to know that I am not impressed that you are 

only destroying the financial lives of a small percentage of our service members; but understanding that, this agreement, what is the 

average percentage rate of your lenders in this business of average 

payday loans? I believe we heard a 390 percent to 906 percent. Do 

you dispute those figures? 

Mr. MILLER. I think there are probably relatively few operators 

who are in the 900 percent range. 

Senator MARTINEZ. Where would most of them be? Five hundred 

or so? 

Mr. MILLER. Standard pricing for a payday loan would be a finance charge of approximately $15 for a 2-week, $100 loan. 


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Senator MARTINEZ. Just do it in a percentage, in an APR. What 

would be the APR rate? We are all grown-ups and know what that 

means. 

Mr. MILLER. That would be equivalent to a 398 percent APR or 

390 percent APR. 

Senator MARTINEZ. What is your evidence that the cost of lending that—that is before they get in trouble, by the way, and could 

escalate then further with penalties and fees and so forth, but what 

is the financial basis for a 390 percent lending rate? Is there a 

sound basis that you can say these loans are so risky that we have 

to charge that high a rate? Because you on the other hand were 

telling us that very few actually are bad loans, that most of them 

are not bad loans. 

Mr. MILLER. Senator, that is a very good question, and I am 

happy to respond to it. The principal costs associated with making 

payday loans are real estate and personnel costs. They are not 

credit-related costs. The costs of keeping stores open generally on 

a 24–7 basis in some of the larger areas, of processing numerous 

very small transactions that involve a tremendous amount of back 

office activity is what generates the costs associated with this business, and there is a study done by two researchers at the FDIC 

that substantiates that the costs are primarily office-related costs 

rather than credit-related costs. 

Senator MARTINEZ. But you wouldn’t disagree that a 390 percent 

loan is unconscionable? 

Mr. MILLER. I would disagree with you. 

Senator MARTINEZ. You would disagree with me? That is a fair 

rate of lending and that that is not going to drive someone to financial ruin if they are paying that kind of an interest rate, particularly when they are working in a fairly modest salary scale in the 

first place? 

Mr. MILLER. Well, I respectfully disagree with you. 

Senator MARTINEZ. Do you think an 18-year-old taking a loan at 

390 percent is conscionable? You can look at me with a straight 

face and tell me that that is, in fact, what you believe? 

Mr. MILLER. I believe that used for its intended short-term purpose, that loan can be very helpful to bridge a financial problem 

that an 18-year-old might have. 

Senator MARTINEZ. Have you ever gone through a credit counseling place where people counsel folks on credit counseling and 

how to avoid financial difficulties such as that? Do you think anyone ever in a credit counseling session would recommend someone 

to go get yourself a loan with a 390 percent? 

Mr. MILLER. I don’t know. I am not familiar with how credit 

counseling operations act. 

Senator MARTINEZ. You should become familiar. Your organization should become familiar, because our servicemen and women 

need to be become familiar, and part of avoiding this kind of unconscionable problem is for them to be better informed on issues of financial literacy, and I think that is one of the areas we really show 

focus, but I also don’t understand how a credible organization purporting to serve the public interest could suggest that loans at 

those rates of interest are really in the best interest of our servicemen and women. 


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Thank you. 

Senator SHELBY. Senator Carper. 

Senator CARPER. Thank you, Mr. Chairman. 

I spent some time at some of those bases that Senator mentioned, Jacksonville, Mayport, those places. I was in the Navy for 

23 years and active in the Reserves, and one of the things I was 

struck by in the training that I had and I suspect the training that 

given to our enlisted personnel down in Orlando and other places 

around the country, that apparently we don’t do a very good job of 

literacy training, financial literacy training, for the officers that 

were coming up and I am sure for enlisted men and women as well. 

Let me just ask our friends here from the DoD and maybe Admiral Abbot your own thoughts on the kind of financial literacy training we are providing to people that are in the armed services, especially with the enlisted ranks. 

Admiral ABBOT. Senator, the Navy and I believe all the services 

are doing a job good job at financial literacy training and it is getting better. It starts at boot camp and it continues on into the specialty schools afterwards. They have to start off at square one. As 

has been mentioned before, a lot of these young people haven’t ever 

had a paycheck, haven’t had a checking account. They are required 

to have a checking account in order to have their pay deposited. 

You have to start off by teaching them how to read an earning 

statement and how to balance a checkbook, and then they move on 

in subsequent sessions to give them more of an education on handling the basics of life, of buying an automobile and housing and 

paying for groceries and dealing with the family; but it requires a 

continuum of education and repetition, and the Navy and the Marine Corps I know are focused on that and getting better. 

Senator CARPER. Good. I know when I got to the Naval Air Station in Pensacola when I was a brand new enlisted man, one of the 

first things I did was I opened up an account at the Navy Federal 

Credit Union right there in Pensacola and used that to buy a car, 

and I know a lot of my colleagues did the same kind of thing. We 

have Federal Credit Unions. We have banks all over the country 

as well. The access to credit unions on the military base is pretty 

good, and the idea is that an enlisted man or woman or an officer 

can go into a credit union or a local community bank and get access 

to pretty low rates, especially in those credit unions. I am not sure 

why that are not better used. 

The other thing I would say—Senator Martinez has gone. What 

I find especially objectionable and concerning with respect to the 

kinds of loans that we are talking about here today is not so much 

they are paying $15 to get a loan for a transaction cost. The real 

problem is when the loans roll over and over and over and extend 

beyond a week or two. That is where the real problem lies and that 

is where I hope that we will focus our attention and the industry 

will focus its attention. 

The other thing is, Mr. Chairman, my hope is that when we go 

to the next year that we can come back and revisit this issue in 

the context of predatory lending in a broader sense that is going 

on in this country. I am very concerned, and I know you are in Alabama and other States, and this is one that we need to just keep 

our eye on the ball and do something responsible and soon. 


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Thank you. 

Senator SHELBY. We have a vote. We have got to conclude the 

panel. We thank you for your contribution. We appreciate what you 

are doing. This is something that I believe we have to address. 

Thank you very much. 

The Committee is adjourned. 

[Whereupon, at 11:43 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 


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PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Thank you, Mr. Chairman and Ranking Member Sarbanes. I appreciate that the 

Committee is meeting today to address this issue of critical importance. 

Thousands of our military personnel are currently serving in harm’s way in defense of this country. In South Dakota, over 3,800 military personnel and civilians 

are stationed at Ellsworth Air Force Base, 300 of which recently deployed in support 

of the Global War on Terror. 

As the father of an active-duty soldier who has served combat tours in Iraq and 

Afghanistan, I am acutely aware of the very personal challenges facing our men and 

women in uniform. I am proud of their courage and professionalism, and grateful 

for their service to our country. 

Congress has an obligation to ensure each soldier is combat ready before deployment. This includes equipping our troops with body armor, up-armored Humvees, 

night vision goggles, and other essential life-saving equipment. But our commitment 

to our servicemembers does not just involve protecting their personal safety. I hear 

much too often that our military personnel and their families are not equipped with 

the tools to adequately manage their personal finances. 

Financial stress can affect any soldier regardless of their marital or deployment 

status—in particular, younger or lower-ranked enlisted personnel. We all sympathize with the soldier who incurs debt because he was blindsided by unexpected 

emergencies, auto repairs, personal or family illness or is just struggling with basic 

living expenses. 

To ensure our servicemembers are capable of addressing their financial needs, we 

must first provide them with adequate compensation. To that end, I have consistently supported robust pay raises each year in the defense appropriations bill. 

At the same time, we must help our soldiers exercise financial responsibility. This 

has proven to be a challenge for many Americans and financial literacy remains a 

critical issue of importance. 

I share DoD’s concern about servicemembers falling into a ‘‘cycle of debt’’ whether 

through inappropriate use of credit cards, payday loans, or other forms of credit, 

and I believe Congress and DoD must work together to improve the financial literacy of our servicemembers, and crack down on abusive and predatory practices by 

any lender. 

It is essential that military personnel and their families have access to information and assistance and that DoD’s commitment to financial readiness extends from 

the top down and is consistent throughout all branches. I am concerned that DoD’s 

Financial Readiness Campaign that began in 2003 has not been fully embraced by 

all of the services. 

I look forward to hearing from our witnesses today, and I am especially interested 

in hearing from Secretary Chu regarding the report’s findings and recommendations. I am concerned that DoD is recommending a federal ceiling on the cost of 

credit to military borrowers and their families, capping the APR at 36%. This would, 

in effect, ban short term, high APR loans, but would do nothing to address predatory lending by ‘‘military lenders’’ that specifically target 100% of their loans to 

servicemembers, DoD employees, and retired servicemembers.While well intentioned, I am not convinced that this approach would solve the larger problem. 

It is very clear that military personnel like many other consumers have a real 

and legitimate need for short-term, small denomination credit products. And we 

must remain mindful of that fact as we address the issue of predatory lending. 

There are clear differences of opinion as to how those products should be structured, 

and how they should be delivered. I have a real concern that if these types of financial services products are pushed outside of a regulated environment or banned outright, it will open the door for abuse and inevitably result in less consumer protection. There is something to be said for striking the right balance between regulation, 

consumer protection, and effectively meeting consumers’ credit needs especially 

those of our service men and women. 

Our servicemembers, like all other consumers, should be afforded the benefit and 

opportunity to choose the financial services and products that best suit their needs. 

Additionally, the financial services industry must continue to develop and offer 

meaningful products, including short term credit products that will meet the needs 

of the military while also protecting all consumers, including servicemembers, from 

potentially abusive and predatory practices by lenders. And it is equally critical that 

the regulatory agencies foster a regulatory environment that supports short-term 

credit products and one in which such products can thrive while providing the greatest benefit to the consumer. 

As we continue to address the issue of predatory lending to the military, the primary goal should be to develop meaningful solutions that will offer the greatest proVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 E:\HR\OC\A303.XXX A303

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tections to our servicemembers, while avoiding measures that carry the potential for 

the unintended consequence of driving servicemembers into potentially abusive, and 

far more expensive forms of credit. 

Mr. Chairman, I would like to include with my statement a cost comparison chart 

of payday loan alternatives. 

Consumer groups and academic researchers comment on the cost of payday advance versus its alternatives: 

‘‘We find that fixed operating costs and loan losses justify a large part of the high 

APR charged on payday advance loans... These operating costs lie in the range 

of [payday] advance fees, suggesting that payday loans may not necessarily yield extraordinary profits.’’—Payday Lending: Do the Costs Justify the Price, Center for Financial Research, Federal Deposit Insurance Corporation, 2005 

‘‘Critics also contend that [overdraft] bounce protection fees, as high as $37 per 

transaction, are little more than high-priced credit. ‘If a bank lends you $100 and 

charges you a $20 fee—and then you pay the money back in two weeks—that’s an 

annualized interest rate of 520%,’ notes Jean Ann Fox, director for consumer protection at the Consumer Federation of America in Washington. ‘It’s worse than a payday 

loan’.’’—Business Week, May 2, 2005 

‘‘Unlike payday lending programs, the extraordinarily high APRs in fee-based overdraft programs are never disclosed as such, and none of the other consumer protections are provided. Moreover, fee-based overdraft programs are aimed at the very 

same customers that payday lenders are seeking . . . and the costs rival or exceed 

those of payday lending.’’—Comment letter to Board of Governors of the Federal Reserve System from 90 consumer group organizational signators, January 27, 2003 

‘‘Interviews and industry survey indicate that payday loan customers do make a 

cost analysis in comparing the price of a payday loan with the alternative costs of 

bouncing a check and/or incurring late fees... When used on a recurring basis 

for small amounts, the annualized percentage rate for fee-based bounce protection far 

exceeds the APRs associated with payday loans.’’—Low-Cost Payday Loans: Opportunities and Obstacles, Annie Casey Foundation Report, June 2005 

‘‘Courtesy pay is not marketed as an alternative to a payday loan, but it serves a 

similar function when used as credit. Credit unions charge fees ranging from $15 

to $35 to cover an overdraft.’’—Credit Union Payday Loan Alternatives, National Association of Community Credit Unions, December 2005 


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PREPARED STATEMENT OF DAVID S.C. CHU 

UNDER SECRETARY FOR PERSONNEL AND READINESS, DEPARTMENT OF DEFENSE

SEPTEMBER 14, 2006 

Mr. Chairman and members of the committee, it is a privilege to testify on the 

predatory lending DoD report. This report, required by Section 579 of the Fiscal 

Year 2006 National Defense Authorization Act, reviews the impact of lending practices that prey on Service members and their families, the efforts of the Department 

to ameliorate those impacts, and recommendations for legislative remedies to assist 

our military families. 

This Administration recognizes personal finance as a primary aspect of ‘‘quality 

of life’’ for Service members and their families. It has included payday lending as 

one of ten key issues requiring the assistance of state governments to protect their 

well-being. Permit me to summarize how we reached this conclusion as context for 

the report. 

Social Compact 

In 2001, the President directed the Secretary of Defense to ‘‘undertake a review 

of measures for improving the quality of life for our military personnel.’’ We collaborated with the Military Services to develop a ‘‘Social Compact’’ that describes the 

reciprocal nature of the commitments among Service members (to the defense of the 

nation), their families (to being part of that commitment) and the Department of 

Defense (to caring for their well-being). This bottom-up review articulated the linkage between quality of life programs as a human capital management tool and the 

strategic goal of the Department—military readiness. 

The Social Compact lays out long term strategic-level plans for key aspects of 

quality of life, of which financial readiness is one. The long-term vision for financial 

readiness is to develop a military culture that values financial competency and responsible financial behavior. Financial readiness is equally important as other military skills and attributes. 

Financially ready Service members seek out information to be proficient, and seek 

assistance when they encounter difficulty. Financially ready Service members would 

not seek to hide their financial problems by continuing to build debt to the point 

of destroying their finances, adversely impacting their family life and jeopardizing 

their military careers. 

The goals associated with this strategic plan focus on the benefits of financial 

readiness to the individual and to the Department. We seek to: 

• Reduce the stresses related to financial problems—the stress of out-of-control debt that can impact the performance of Service members and their 

family’s quality of life. 

• Increase savings—a personal and family goal of motivated Service members 

to control their finances and plan and prepare for their futures. 

• Decrease dependence on high interest rate or unsecured debt—the vulnerability associated with living from paycheck to paycheck. 

• Decrease the prevalence of predatory practices—protection from financial 

practices that seek to deceive Service members or that take advantage of 

them at a moment of vulnerability. 

These goals establish an environment and culture in which Service members can 

feel secure about their finances and are ready to engage in the military mission. To 

accomplish these goals, Service members need to be competent in dealing with finances, protected from financial predators and motivated to achieve financial readiness. The Department uses awareness media, education programs and assistance 

through counseling to help Service members conform their behavior to the goals. 

But these tools do not protect them from predators as they develop their financial 

competency. 

Financial Education Policy and Metrics 

The Military Services are expected to provide instruction and information to meet 

the needs of Service members and their families. To this end, the Department published in November 2004: DoD Instruction 1342.27, Personal Financial Management 

Programs for Service Member. 

As outlined in the Government Accountability Office Report 05–348, each Military 

Service tailors its programs for training first-term Service members on the basics 

of personal finance. These programs vary in terms of venue and duration, but all 

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petency necessary for first-term Service members to achieve financial readiness. The 

Department monitors the ability of Service members to pay their bills on time, as 

a reflection of their financial competency and ability to apply basic financial principles. The Department has tracked the performance of the first four enlisted ranks 

as a leading indicator for the rest of the force. Since 2002, these Service members’ 

self-reported assessments indicate they are paying better attention to keeping up 

with their monthly payments (graph at Table 1). 

The Department is adding another indicator this year to the performance measure 

for personal finance: enrollment in the Thrift Savings Plan. 

I review these metrics quarterly along with metrics that measure other important 

aspects of Service member and family quality of life. 

The Department is developing an evaluation tool that measures first-term Service 

members’ ability to apply basic principles to scenarios they may encounter. This tool 

will standardize the evaluation process throughout the Military Services and will 

help ensure that Service members can apply the instruction they receive. 

Financial Readiness Campaign 

To assist the Military Services in delivering financial messages, the Department 

established the Financial Readiness Campaign in May 2003. It is now supported by 

26 nonprofit organizations and federal agencies. In the past three years, Service 

members have benefited from the materials and assistance from: 

• Air Force Aid Society (AFAS)—provides financial counseling and emergency 

monetary support for airmen in need. 

• American Savings Education Council (ASEC)—provides over 60 award winning public service announcements that have been shown on American 

Forces Radio and Television Service (AFRTS). 

• Army Emergency Relief (AER)—provides counseling, education programs 

and emergency financial relief to soldiers. 

• Consumer Federation of America (CFA)—established the ‘‘Military Saves 

Campaign’’ as part of the CFA ‘‘America Saves’’ initiative, to encourage 

Service members to establish emergency savings and invest in the Thrift 

Savings Program. 

• Association of Military Banks of America (AMBA)—AMBA members provide educational programs to supplement programs offered by the Military 

Services, as part of the responsibility for residing on military installations. 

Additionally, AMBA assists the CFA in deploying the Military Saves Campaign. 

• Council of Better Business Bureaus—works with the Military Services to 

assist Service members and their families with a variety of consumer-related issues, along with providing education programs upon request. 

• Defense Credit Union Council (DCUC)—members of DCUC provide education programs to supplement programs offered by the Military Services, 

and assist in the deployment of Military Saves. 


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• Federal Deposit Insurance Corporation (FDIC)—made available their 

‘‘Money Smart’’ curriculum and train-the-trainer program to the Military 

Services, as well as AMBA and DCUC members. 

• Federal Reserve Board—studies the impact of the AER sponsored education 

course conducted at Fort Bliss, TX, to determine the effect of training on 

financial behavior. 

• Federal Trade Commission (FTC)—provides most widely disseminated materials available outside of DoD, on various topics concerning consumer protection. 

• Financial Literacy and Education Commission (FLEC)—consolidates the 

materials available through the federal agencies via the 

‘‘www.mymoney.gov’’ website, and accompanying toll-free number. It is 

widely advertised and linked to DoD and Military Service websites concerning personal finance. 

• InCharge Institute—provides access to credit counseling/debt management, 

and publishes a quarterly magazine ‘‘Military Money’’ in partnership with 

the National Military Family Association (NMFA). The magazine is designed primarily to reach out to military spouses on a variety of financial, 

spouse and family life topics. To accompany the magazine, InCharge also 

provides public service announcements called the ‘‘Military Money Minute,’’ 

on AFRTS, covering helpful financial tips on military pay, deployment preparation, etc. 

• Institute for Consumer Financial Education—helps individuals and counselors with credit questions and understanding credit reports. 

• Moneywise with Kelvin Boston—provides access to his syndicated television 

program for broadcast on AFRTS. 

• National Association for Credit Counseling—partners with military installations to provide educational classes and credit counseling services. 

• National Association of Securities Dealers (NASD) Foundation—funds a 

multi-year awareness and education program to supplement the programs 

provided by the Military Services. Included in the program are multimedia 

public service announcements (through sources such as AFRTS, Military 

Times magazines and local radio); an interactive website; sponsorship of a 

scholarship program for military spouses (through partnership with NMFA) 

to accredit them as Financial Counselors in return for volunteer hours in 

military communities; and education for Military Service Financial Counselors and Educators. 

• National Endowment for Financial Education (NEFE)—provides access to 

its ‘‘Project for Financial Independence,’’ to severely injured Service members, members of the Guard and Reserve, and their families. The Project 

for Financial Independence connects Certified Financial Planners with 

Service members (geographically separated from an active duty military installation where they can obtain financial counseling) to accomplish pro 

bono financial planning. 

• National Military Family Association (NMFA)—partners with several other 

organizations to facilitate reaching military spouses, a primary target of the 

Financial Readiness Campaign. 

• Navy-Marine Corps Relief Society—provides education, counseling and 

emergency financial support for sailors and Marines in need. 

• Securities and Exchange Commission—provides seminars at military installations, along with investor education materials in libraries on military installations. 

These partnerships allow the Military Services to choose the programs that can 

best supplement the education, awareness and counseling services they provide. 

Education and Predatory Lending 

Predatory lending practices are covered as topics in initial financial education 

training and in refresher courses offered at the military installations. As described 

in the report, the Military Services have provided over 11,800 classes and trained 

over 324,000 Service members (approximately 24 percent of the force), as well as 

19,400 family members. 

In addition to these classes, Financial Readiness Campaign partner organizations 

conducted 1,300 classes for a total of 60,600 Service members and family members. 

These classes were primarily provided by the staff of banks and credit unions located on military installations. These institutions provide these classes as part of 

their responsibilities outlined in the DoD Financial Management Regulation. Other 


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organizations involved include local Credit Counseling Agencies, state financial regulatory agencies, the InCharge Institute and the NASD Foundation. 

The Military Service financial educators, along with partner organizations, have 

also distributed over 223,000 brochures and pamphlets, with the Military Services 

and Federal Trade Commission the primary provider of these products. In addition, 

Military Money Magazine has run several articles, including two cover article editions, on predatory lending. The free distribution of the magazine is through military commissaries, family support centers, other service agencies on the installation. 

The magazine is sent to residents on the military installations and home addresses 

off the installation upon request. Approximately 250,000 copies are distributed per 

quarter. 

Predatory Lending Practices Considered 

The lending practices covered in education programs parallel those covered in the 

report: payday loans, Internet loans, military installment loans, tax refund anticipation loans and rent-to-own programs. Education programs also cover budgeting, the 

appropriate use of credit, credit cards, and other financial services. 

The loans covered in the report include those with high interest rates, little or 

no responsible underwriting, loan flipping or repeat renewals that ensure profit 

without significant payment of principal, loan packing with high cost ancillary products whose cost is not included in computing interest rates, a non-mortgage loan 

structure or terms that transform these loans into the equivalent of highly secured 

transactions; and loans that involve fraud or deception, waiver of meaningful legal 

redress, or operation outside of state usury or small loan protection law or regulation. These characteristics strip earnings or savings from the borrower, place the 

borrower’s key assets at undue risk, potentially deepen the borrower’s financial 

shortfall and trap the borrower in a cycle of debt. These loans take advantage of 

the borrower’s lack of understanding, vulnerability or both. 

The types of loans included in the report were chosen as a result of feedback from 

military financial counselors and legal assistance attorneys who have provided counsel to Service members with financial problems. The Military Services and Military 

Aid Societies provided 3,393 case studies providing information about incidents 

where Service members have requested assistance with their lending problems. 

These case studies showed that the typical scenario involved indebtedness resulting 

from a lack of financial control, a financial emergency, or both. Many of these cases 

involved military borrowers who owed money to installment lenders and payday 

lenders that created a cycle of debt. 

Efforts to Curb the Prevalence and Impact of Predatory Loans 

The Department has attempted to use the processes and resources available within the Department to curb the prevalence of payday lenders. But the Armed Forces 

Disciplinary Control Board (AFDCB) and command policy are not adequate to address the issue. The AFDCB is designed to address commercial entities providing 

services that are a detriment to good order and discipline, and in violation of federal 

or state statute. Without appropriate statute, commanders and AFDCBs have difficulty citing payday lenders as the focus of remedial action. Moreover, in states that 

authorize payday lending, AFDCBs must establish their own local guidelines in addition to the provisions of state law, ensure all affected businesses are aware of 

these new rules, and then require these businesses to comply. The Department has 

considered establishing guidelines that would ameliorate the concerns posed by 

lenders characterized above, but establishing these policies within DoD poses legal 

problems and raises the potential for troublesome litigation against the Department. 

There is no established authority for DoD to make rules governing off-base private 

business dealings. 

Military installment companies have also attempted to evade state usury limits 

and oversight. In 2005, the California Department of Corporations considered a complaint filed against one such company, alleging it operates without a license, charges 

usurious interest, collects prepaid finance charges which are not permitted in California, contracts for excessive dishonored check fees, and automatically adds various 

forms of credit insurance to loan agreements (98 percent of contracts include ‘‘voluntary’’ insurance purchases). 

Internet lenders claim jurisdiction in states with lax protections and unlimited 

rates and often attempt to bypass the state credit, usury or payday loan laws of the 

state where the borrower receives the loan. All military installment lenders cited 

in the report listed Nevada as their home state. State regulators have successfully 

enforced home-state law against Internet payday lenders making loans to consumers 


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in their states in Colorado, New York, Massachusetts, Kansas, Pennsylvania and 

the District of Columbia. 

The scope and methods of payday, military installment and Internet lenders are 

outside the capability of the Department to place ‘‘off limits’’ as a way of dealing 

with good order and discipline concerns associated with these lenders’ practices. It 

is also unrealistic to believe that the Department can adequately control these concerns through education alone. The recent survey accomplished by the Consumer 

Credit Research Foundation stated that the primary reason Service members choose 

payday loans is because they are convenient. Certainly, obtaining ‘‘fast cash’’ from 

a payday lender is far more convenient than debt counseling or addressing inherent 

overspending that creates situations where sub-prime loans are needed. The Department seeks your assistance in helping Service members find convenient, less costly 

options that build their financial future. 

Alternatives 

The Department would prefer Service members and their families seek out the 

alternatives available through Military Aid Societies, military banks and defense 

credit unions. These institutions have established programs and products designed 

to help Service members and their families resolve their financial crises, rebuild 

their credit and establish savings. 

The Military Aid Societies are strong advocates for limiting the cost associated 

with credit and for developing alternative products by financial institutions for Service members who cannot otherwise qualify for loans. Within their own resources 

they provided $87.3 million in no-cost loans and grants to Service members and 

their families in 2005. 

As described in the report, many military banks and defense credit unions have 

developed products and services to assist Service members recover from their financial problems. These alternative programs require Service members to commit to 

changing their financial behavior. The Department is seeking this outcome in its 

awareness campaigns, education programs, and the counseling services it offers, and 

supports reasonable alternative programs that help Service members recover their 

financial well-being. 

Legislative Recommendations 

For the reasons outlined above, the Department is requesting the Congress’ assistance in establishing limits that will help Service members seek out alternatives 

capable of motivating them to change their financial behavior. The report outlines 

several recommendations that are designed to curb the corrosive nature of predatory 

loans. Each recommendation seeks to limit the abuses articulated in the report: 

• Require that unambiguous and uniform price disclosures be given 

to all Service members and family members with regard to any extension of credit (excluding mortgage lending). All fees, charges, insurance premiums and ancillary products sold with any extension of credit 

should be included within the definition of finance charge for the computation and disclosure of the annual percentage rate (APR) for all loans made 

to military borrowers. As stated in the report, some loan companies pack 

loans with additional fees not included in the APR calculation. Additionally, 

many Internet lenders do not disclose their interest rates and fees on their 

websites, and are only disclosed after the borrower has committed to taking 

the loan. 

• Require a federal ceiling on the cost of credit to military borrowers, capping the APR to prevent any lenders from imposing usurious rates. Lenders should be prohibited from directly or indirectly imposing, charging, or collecting rates in excess of 36 percent APR with regard 

to extensions of credit made to Service members. This APR is expected to 

cover all cost elements associated with the extension of credit. This limitation is expected to affect all lenders referenced in the report (payday, installment, Internet, tax refund anticipation, and rent-to-own). This limit 

may affect payday lenders, but by their own statistics, the military represent only one to four percent of their market. True, a 36 percent APR 

may preclude some Service members from obtaining credit. The Department believes Service members who require loans with interest rates above 

36 percent APR should seek assistance and not consider further increasing 

their debt load. The 36 percent APR limit creates a barrier for installment 

lenders to refrain from packing fees and premiums onto the base interest 

rate they charge for a loan. The limit of 36 percent APR is considered apVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00044 Fmt 6621 Sfmt 6621 E:\HR\OC\A303.XXX A303

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propriate, since it mirrors the limitations found in several states for their 

small loan products. For those states where the cap is lower than 36 percent, the state limit and consumer protections would apply. • Prohibit lenders from extending credit to Service members and 

family members without due regard for the Service member’s ability to repay. Perhaps the most important limit that can be applied is assuring Service members are not provided loans they cannot repay in a timely manner. If they are in situations that require them to take loans to meet 

short-term obligations without considering their short- and long-term ability to repay, then they should be obtaining counseling and assistance to restructure their debt and develop long-term budgets that can help them recover from their financial concerns. Such a prohibition would also limit the 

use of high interest credit to make impulse and unnecessary purchases, 

since these outlays push Service members and their families deeper into 

debt. Lenders that require checks, access to bank accounts or car titles to 

secure obligations consider these essential assets to mitigate their risk and 

do not consider the ability of the borrower to repay the loan. Lenders that 

require allotments to repay loans deliver their products under the same expectations. Access to essential assets places the borrower in a position of 

undue duress, with no options but to pay according to the schedule, even 

if the borrower has no capability of doing so. Again, this is not of concern 

to the lender holding these assets. If this restriction precludes some Service 

members from obtaining credit, then they may consider the alternatives— 

counseling, assistance and a change in financial behavior. 

• Prohibit provisions in loan contracts that require Service members 

and family members to waive their rights to take legal action. Service members should maintain full legal recourse against unscrupulous lenders. Loan contracts to Service members should not include mandatory arbitration clauses or onerous notice provisions, and should not require the 

Service member to waive his or her right of recourse, such as the right to 

participate in a plaintiff class. Waiver is not a matter of ‘‘choice’’ in takeit-or-leave-it contracts of adhesion. To the contrary, Service members 

should be given the opportunity to hold lenders accountable for situations 

where they have violated their rights. 

• Prohibit contract clauses that require Service members to waive 

any special legal protections afforded to them. These proposed protections, and those provided to Service members through the Servicemembers 

Civil Relief Act, were intended to strengthen our national defense by enabling Service members to devote their entire energy to the defense needs 

of the Nation. In the interest of our national defense, such protections 

should not be subjected to waiver (other than in circumstances stated in the 

Servicemembers Civil Relief Act), in writing or otherwise. 

• Prohibit states from discriminating against Service members and 

family members stationed within their borders, and prohibit lenders from making loans to Service members that violate consumer 

protections of the state in which their base is located. States should 

be prohibited from discriminating against Service members stationed within their borders and should be required to assure that such Service members are entitled to and receive the benefit of all protections offered to citizens of the state, including regulation of lenders located in the state or that 

provide loans via the Internet to Service members stationed there. States 

have a vested interest in assuring the financial safety and stability of Service members stationed within their borders. States should be prohibited 

from authorizing predatory lenders to treat ‘‘non-resident’’ Service members 

stationed within the state’s borders differently than the state would permit 

that lender to treat in-state residents. Lenders should be prohibited from 

charging Service members stationed within a state an APR higher than the 

legal limit for residents of the state, and should also be prohibited from violating any other consumer lending protections for residents of the state in 

which the base is located. 

Conclusion 

The Department appreciates the opportunity to report to the Congress on the 

issue of predatory lending. The report outlines the prevalence around military installations of payday lenders and the overt marketing of some installment and 

Internet lenders. The report and this testimony provide an overview of the efforts 

within the Department to educate, inform and influence Service members and their 


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families to take control of their finances, build wealth and escape the cycle of debt— 

for their own well-being and to enhance their military readiness. The Department’s 

strategic plan seeks to increase savings and decrease dependence on debt. The strategic plan also focuses on improving the protection afforded Service members and 

their families in the market place—again to help assure their military readiness. 

The vision for personal finance in the Department is to develop a military culture 

that values financial competency and responsible financial behavior, in other words, 

a system that values Service members addressing their financial problems, rather 

than perpetuating them through high interest loans. Service members inherently 

understand that limits on interest rates are appropriate, even if these limits would 

decrease the availability of credit. When asked in a recent survey conducted by the 

Consumer Credit Research Foundation if Service members strongly/somewhat agree 

or disagree with the statement: ‘‘The government should limit the interest rates that 

lenders can charge even if it means fewer people will be able to get credit,’’ over 

74 percent of the Service members surveyed agreed with the statement (with over 

40 percent strongly agreeing). Similarly when asked their position on the statement 

‘‘There is too much credit available today,’’ 75 percent of Service members not using 

payday loans and 63 percent of Service members using payday loans agreed (with 

51 percent of non-users strongly agreeing). 

Service members agree that there should be limits. Commanders have made their 

positions known that limits should be established. This issue is an important part 

of the Department’s social compact with commanders, Service members and their 

families, for their well-being and in support of military readiness. The Department 

asks for your assistance enacting the statutory language necessary to establish more 

effective limits. 

I thank you for this opportunity to share these concerns with you and the committee. The Department stands ready to assist the committee in developing effective 

limits on predatory lending. 


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PREPARED STATEMENT OF ADMIRAL CHARLES S. ABBOT, RETIRED 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, NAVY-MARINE CORPS RELIEF SOCIETY

SEPTEMBER 14, 2006 

Mr. Chairman, Senator Sarbanes, Members of the Committee on Banking, Housing, and Urban Affairs: I am honored to have the opportunity to testify this morning 

on the Department of Defense Report on Predatory Lending Practices Directed at 

Members of the Armed Forces and Their Dependents. The Navy-Marine Corps Relief Society was founded by President Theodore Roosevelt in 1904 to provide emergency financial assistance in the form of interest-free loans and grants to Sailors, 

Marines and their families. Through the decades, our organization has encountered 

various scams, but none as flagrant and serious as today’s predatory lending industry. As President of the Society, I have personally witnessed the downward spiral 

of debt suffered by our Sailors, Marines and their families who seek financial assistance from predatory lenders. This industry says it does not target the military, but 

pick up any edition of Army, Navy, Air Force or Marine Corps Times and you’ll see 

large, color advertisements with quotes like ‘‘Our entire focus is on the U.S. Military’’; or ‘‘We are dedicated exclusively to military personnel.’’ Instead of solving 

what may be temporary cash flow problems, these military families become overwhelmed and financially destroyed when they fall into the payday loan trap. The 

resulting low morale and pre-occupation with personal financial difficulties have a 

negative impact on military readiness. Their stories are heartwrenching: 

• A 21-year-old Active Duty Sailor in Virginia Beach, with four dependents 

was involved in payday loans for two years. He started in March 2004 by 

taking out three payday loans to take his family to visit his grandfather 

who was diagnosed with cancer. By October 2005, he had four payday loans 

totaling $2,300 that cost him $600 every month just to roll over. To cover 

all of this, plus the bounced checks that it caused, he also borrowed from 

his Thrift Savings Plan and took out additional loans. He routinely paid 

late charges for his rent and car payments. • An E–4 Active Duty Sailor with a wife and child in the Pacific Northwest 

was assisted by the Society with payment of 8 payday loans totaling $5,250 

in July 2005. The service member took out two payday loans to make a 

down payment on a car. His two loans grew to four, six, then eight as he 

rolled them over and continued to make up his budget deficit by taking out 

additional payday loans. His electricity was cut off. The family had to go 

and live with relatives. His car was repossessed, sold at auction, and he 

currently owes $12,000 on that automobile. • An E–6 Active Duty Sailor requested assistance in paying one month’s 

mortgage ($1,870.38) payment. The service member stated he got behind on 

his mortgage when his wife’s father became ill in Japan and he had to send 

her home to provide support. At that time, he turned to payday lenders. He 

took out 10 payday loans. During some months, he needed two payday 

loans to pay off earlier loans. He used his reenlistment bonus check to pay 

off the lenders and refinanced his house to pay off all of his other debts, 

but still required the Society’s assistance to catch up on his mortgage. 

• In Jacksonville, Florida, an E–5 Active Duty Sailor with a wife and three 

children accumulated nine payday loans totaling $5,409. The interest rate 

on these various loans varied from 121% to 421%. Having no credit cards, 

this military couple purchased furniture by using payday loans on the occasion of a permanent change of station move. There was a death in the family, followed by an ill relative. Each month they rolled the loans over, paying a fee to take out additional new loans. Finally, they sought assistance 

from our organization. 

These examples illustrate the ever-growing problem. Since August of 2001, the Society has assisted more than 5,500 Navy and Marine Corps clients victimized by 

predatory lenders in the amount of $2,597,881.19. The problem has been made more 

difficult to monitor and control now that these loans are easily accessible on the 

Internet. The web sites of these predators are as compelling as the neon signs that 

beckon unsuspecting Soldiers, Sailors, Airmen and Marines at establishments outside our military bases across the United States. If one reads the not so fine print 

at these web sites, one can learn that: 

• At Checkmate, you can borrow $150 for three days with a finance charge 

equivalent to an Annual Percentage Rate (APR) of 3,220 percent; 

• At Northway Financial Corporation, you can borrow $700 and the cost for 

your credit as a yearly rate is 758.08% APR; 


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• At ATMAdvance.com, you can borrow $170 for two weeks and the finance 

charge is equivalent to 460.16% APR; 

• At Cashcall, you can borrow $5,000, and if you make scheduled payments 

only (120 payments over ten years), you will end up paying back more than 

$30,000. 

It is a grim picture that is brought into sharp focus when destitute military clients come to the military aid societies to ask for help. The Department of Defense 

report does a commendable job of documenting the problem and its impact on our 

military families. Equally commendable is the Department’s aggressive education 

program designed to inform our military families about the perils of accepting financial assistance from predatory lenders. Education, consisting of effective personal financial management training, and an intensive, sustained publicity campaign can 

reduce the problems resulting from this legalized loan shark industry. It is an important first step, but education alone is not enough. 

Two additional requirements are critically important to solving this serious problem: responsible alternative sources of short term loans and, equally important, Federal legislation with teeth. There has been some success fighting this battle on the 

state level; but Federal legislation will be necessary that, at a minimum, provides 

the following: 

• Caps the interest rate at 36% (to include all fees and insurance). 

• Eliminates all loan roll overs or the ability for individuals to take out another loan to payoff the first loan which creates a vicious cycle of debt. 

• Requires all payday lending businesses to belong to a PDL association that 

will serve as a clearing house to ensure clients don’t have outstanding payday loans from other payday lenders, and allows monthly payment plans. 

• Regulates on-line payday loan transactions. 

Thank you for focusing attention on this significant problem that affects military 

readiness and the lives of our men and women in uniform. I appreciate this opportunity to share my concerns with members of this committee. I hope that Congress 

will take prompt and effective action by drafting and passing effective anti-predatory lending legislation. 

I would be pleased to answer your questions. 


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PREPARED STATEMENT OF WILLIAM O. BROWN, JR. 

ASSOCIATE PROFESSOR, DEPARTMENT OF ACCOUNTING AND FINANCE, BRYAN SCHOOL

OF BUSINESS AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA

SEPTEMBER 14, 2006 

Chairman Shelby, Senator Sarbanes and members of the Committee, thank you 

for the opportunity to speak to you today about the Department of Defense’s report 

on lending practices directed at members of the armed forces. I am currently an Associate Professor in the Department of Accounting and Finance at the University 

of North Carolina at Greensboro and an economist by training. Over the past two 

years I have conducted research on payday lending, military compensation and the 

use of payday loans by military personal. In June of this year, I released a study 

with my colleague, Dr. Charles B. Cushman, Jr. from The George Washington University, of payday loan attitudes and usage among enlisted military personnel. Our 

results are cited on several occasions in the Department of Defense Report. 

I would like to take this opportunity to share with you some of our key findings 

and then raise some of my concerns about the methodology and analysis in the recent Department of Defense report. Our study surveyed U.S. enlisted personnel in 

four branches of the armed service regarding their attitudes toward, and usage of, 

short-term credit, including payday loans. Our survey is the first systematic survey 

of enlisted military personnel regarding their economic circumstances and attitudes 

toward short-term credit. Our analysis is based on empirical data that we collected 

through a random sample of enlisted military personnel who live near military 

bases in the United States. 

I want to briefly discuss some of our findings that I believe are relevant to the 

discussion today. Our results indicate that 13% of the 460 enlisted personnel that 

lived around military bases and responded to our survey had obtained payday loans 

in the previous year. It is important to note that these numbers are only for enlisted 

personnel and not all military personnel. It is suggested in the Department of Defense report and elsewhere that our number indicates a higher incidence of payday 

loan use by members of the military than the general population. However, our results do not provide such a comparison. One would need to compare enlisted personnel with a civilian population of similar age and income in order to make such 

a comparison. Otherwise, it is an apples to oranges comparison. 

Military borrowers report that they use payday loans to help pay bills, for auto 

and home repairs, family emergencies, relocations and other short term cash flow 

disruptions. This usage is very similar to that reported by civilian users of payday 

loans. 

The military enlisted personnel who have had a payday loan repay them more 

quickly than their civilian counterparts. Forty-nine percent of military payday loan 

borrowers have had two or fewer loans in the last 12 months, and 78% have had 

four or fewer loans. A 2001 study indicated that only 35% of civilian payday loan 

users had fewer than four loans. There is little evidence that military users of payday loans use these loans as a substitute for longer term credit. Given the relative 

low overall default rate for such loans in general, the claims of some opponents to 

payday lending that payday loan are a threat to military readiness appear unsupported. 

Payday loans are but one form of short-term credit available to military personnel. Bounced-check fees, late fees and utility reconnect fees can be and are often 

more costly than a payday loan. The majority of military survey respondents reported that they choose a payday loan for convenience related reasons. In addition 

some military personnel reported a lack of alternative options or lack of knowledge 

about alternative sources of short term loans indicating that the military may need 

to do a better job of educating enlisted personnel about short term credit options. 

As potential decisions regarding the cost and availability of consumer credit by 

members of the armed services are considered today, I sincerely believe that our 

comprehensive study, which I have only briefly reviewed here today, would be a valuable body of information to inform your views on this topic. For this reason, I am 

submitting a copy of our full study for the record today. 

As to the Department of Defense report, I have several points of concern and disagreement with the conclusions drawn. 

From anecdotes portrayed in the news media and mentioned in the Department 

of Defense report, one could have the impression that the majority of military personnel are deep in debt, the victims of aggressive payday loan issuers. I am sure 

many on the anecdotal stories are true. However, anecdotes only tell us what can 

happen in some cases, they fail to give us a bigger picture view or tell us how often 


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these things happen. There is nothing in the Department of Defense report to give 

any indication of the prevalence of problem borrowing by military personnel. 

There are certainly some military personnel with financial problems and service 

members with financial problems may have obtained payday loans, but there is no 

evidence that payday loans are the cause rather than a symptom of these financial 

problems. This causation connection is completely missing in the Department of Defense report. 

Consumer make purchasing decisions based on a number of factors: price, convenience and opportunity being chief among them. This Department of Defense report 

fails to consider that service members either choose payday loans either because of 

they lack a better alternative or because they lack available information about better alternatives. In either case, the Department of Defense needs to do a better job 

of working with financial services firms to provide products that meet the needs of 

military personnel and educating military personnel about the availability and use 

of those products. 

Finally, the Department of Defense’s recommendation to reduce the maximum 

permissible charge on payday loans to 36% would likely drive lenders out of the 

market. The problem is that marginal cost of providing small consumer loans is 

high. This is why so many banks and financial service firms fail to provide such 

products. When you take choices away from consumers, prices go up, not down. 

Again, members of the military have a demonstrated need for access to short-term 

credit. The likely impact of such a rule would be to make military personnel with 

short term credit needs significantly worse off. 

Mr. Chairman and members of this Committee, I thank you for the opportunity 

to appear before you and will be happy to answer any questions you may have. 


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PREPARED STATEMENT OF LYNN DRYSDALE 

STAFF ATTORNEY, JACKSONVILLE AREA LEGAL AID

SEPTEMBER 14, 2006 

Introduction 

Chairman and members of the Committee, thank you for the opportunity to speak 

in support of the Department of Defense Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents and to illustrate the 

problems and proposed solutions in the report with the experiences of military families I represent in Florida. 

Since 1988, I have been a consumer protection attorney with Jacksonville Area 

Legal Aid, Inc. and represent low income consumers in Duval County. I am co-author of a law review article titled ‘‘The Two-Tiered Consumer Financial Services 

Marketplace: The Fringe Banking System and its Challenge to Current Thinking 

About the Role of Usury Laws in Today’s Society,’’ published in the South Carolina 

Law Review in 2000. This widely quoted article covers the high cost loan products 

detailed in the Department of Defense report to Congress. I serve on the Jacksonville Bankruptcy Bar Association Board of Directors and have been a trainer for 

Judge Advocates, legal officers and Senior Leadership at Naval Air Station Jacksonville. 

Duval County, FL is home to Jacksonville Naval Air Station and Mayport Naval 

Station where about thirty thousand service members plus their families and retirees live and work. Over the years I have represented many of these Sailors and 

their dependents as well as veterans who have fallen victim to the predatory loan 

practices described in the DOD Report to Congress. Today I will use their stories 

to put a face on the problems identified in the Department of Defense report and 

to support the recommended solutions to those problems. 

Why military consumers are ideal customers for quick cash lenders 

Despite their moderate incomes, many Service members are young and financially 

inexperienced, with young families and tight budgets. They are attractive to lenders 

because their pay is certain, their residence is easy to find and they live in concentrated areas. They have stable and steady employment and, as members of the 

Armed Forces, unlike civilian borrowers, they are easy to collect from because the 

lender routinely contacts their employer pre-judgment. Service members must comply with the Uniform Code of Military Justice and could lose rank, miss opportunities for advancement in rank and pay, and could lose their jobs for failure to honor 

their debts. 

Military pay arrangements benefit lenders 

Members of the Armed Forces are required to maintain bank accounts in order 

to receive direct deposit of their federal pay. This makes them attractive to payday 

lenders whose only qualifications for quick cash loans are a steady source of income 

and an open bank account. Because they must have a bank account, Service members have added incentive to pay additional sums to renew loans in order to keep 

the checks provided as security from being returned for insufficient funds. The Uniform Code of Military Justice penalizes a service member’s failure to make good on 

a check drawn on his or her bank account. Many, if not most, lenders can and do 

ask military borrowers to sign over electronic access to their bank accounts to repay 

loans. Some lenders require their loans to be repaid by allotment of military pay, 

which means that funds are taken out of their pay and sent to creditors before the 

Service member has an opportunity to use the money to pay rent or utilities. This 

is a form of payment that is supposed to be voluntary and a convenience to the 

Service member but has been turned into a way to ensure that high cost lenders 

get paid before funds are available to pay pressing bills or feed the family. A few 

lenders even require borrowers to sign wage assignments to insure payment is made 

timely, despite the federal prohibition on wage assignments in loans to enlisted 

Service members. 

While these Service members have unique features, such as needing to prove financial responsibility, to strive for advancement in rank and pay, and to preserve 

security clearances, their experiences with predatory lending are replicated in low 

to moderate income families in civilian life. The Department’s report, in many ways, 

describes the plight of all low to moderate income consumers who struggle to make 

ends meet in a predatory lending environment. 

In my testimony, I will highlight three main points: 

1. Predatory loan products and services are expanding rapidly, including quick 

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day, loans secured by the free and clear title to the family vehicle, and installment loans repaid by military allotments or electronic access to the bank accounts Service members are require to have. All of these loans place important 

assets at risk, come at a steep cost, and often trap borrowers in repeat borrowing or renewals. These products also do not provide even the compliant consumer with a credit history that helps them escape from this choice of borrowing. High cost predatory lenders target service members by location, affinity marketing, presence on the Internet, or because they are widely available 

in the communities where military families reside. 

2. Service members are not being protected by most states, either because high 

cost lenders have been carved out of usury or loan laws, or lenders claim that 

state credit laws do not protect nonresident borrowers such as Service members stationed in the jurisdiction, or because lenders have exploited every loophole to evade consumer protections. High cost loan contracts are grossly onesided and include unilateral, mandatory arbitration clauses to deprive Service 

members of their day in court and limit their remedies, both of which are the 

cornerstones of the American justice system they fight to preserve. Congress 

must step in to protect Service members. 

3. Service members are disproportionately targeted and punished by the products 

and practices of high cost lenders who harass them, their families and those 

in their command and who threaten criminal prosecution, court martial, loss 

of rank and pay, loss of security clearance and dishonorable discharge. Service 

members fear the consequences of failure to make good on checks used to get 

payday loans, and facing automatic and electronic withdrawal of money from 

their accounts are forced to juggle finances to stay afloat. They fear the loss 

of the family car whose title is pledged for loans. They fear the lender retaliation resulting from the cancelling of an allotment given to a lender. This struggle leads to stress, to loss of morale and impedes military readiness in addition 

to harsh financial consequences felt by the entire family. The practices and 

problems described in the DOD Report come alive in my clients’ stories. 

• Mr. Hubbell and his wife are both service members. You may have seen 

their story on a recent ABC News program. Due to the costs of his wife’s 

illness and her inability to work, they took out a payday loan which led to 

thousands of dollars in outstanding loans from both payday lenders and installment loan companies. The more they paid, the more they owed and 

have repaid tens of thousands of dollars. One loan led to another because 

they had to keep borrowing more money to avoid the threats of criminal 

prosecution and the consequences of the lender contacting Mr. Hubbell’s 

command. Over a five-year period of time, they were forced to borrow just 

over $10,000 and still have a monthly payday loan debt of just over $3,500. 

The Hubbells still owe over $12,000 on loans, most of which only went to 

pay off other loans and provided no benefit to the Hubbells except for 

digging them deeper into debt. Mr. Hubbell is an air traffic controller and 

felt he had no option but to stay on this debt treadmill because of his fear 

of the real danger of losing his security clearance and his rank. 

• Another of my clients borrowed from a sham lender who pretended to sell 

Internet access to cloak a criminally usurious loan. When he was unable 

to keep up with payments, the lender directly debited his account for more 

than the amounts needed to pay off his loan. The lender also harassed him 

on his ship and called his superior officers. He was faced with not having 

enough money for groceries and rent for his family, including three children. 

Problems Identified in the DOD Report 

1. Predatory loan practices and unsafe credit products are high risk for 

military borrowers 

The Report describes the same types of high-cost, high-risk loan products that we 

addressed in the law journal article about the two-tiered financial services market: 

Payday loans, rent to own, car title loans, high cost installment loans, and refund 

anticipation loans. From my experience helping low income and military consumers, 

I concur with the Report’s description of the lenders’ extreme high costs and their 

unsafe and unsound lending practices. I also concur with the description of the risk 

to borrowers’ assets. Lenders require borrowers to grant them electronic access to 

their bank accounts as a condition of getting a payday loan at a store or via the 

Internet or to borrow from a military installment lender. As a result, consumers lose 

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peated efforts to collect on the loan by electronically accessing their bank accounts 

multiple times in one day for just one loan. 

Predatory lending is not committed only by one class of lenders. Even banks have 

begun to join the fray of those lending at triple digit rates. Two banks are offering 

‘‘account advances’’ that work just like a payday loans: the bank advances up to 

$500 for a short, typically two week loan that must be paid back on the next payday, at annual rates up to 500%. In North Little Rock, Arkansas, near Camp Robinson and Camp Pike, ACE Cash Express partners with First Bank of Delaware to 

offer an installment loan at a 390% APR rate. The bank can violate Arkansas’ constitutional 17% usury cap because banks are exempt from state regulation. 

The high risks to military borrowers who must maintain bank accounts and who 

rely on their military pay are illustrated by a Navy borrower I represented. 

• Mr. M had an installment loan through a ‘‘military’’ lender that required 

automatic access to his bank account for electronic payment. When he did 

not make a timely payment, the lender ‘‘hit’’ his bank account eleven times 

in one day, causing hundreds of dollars in late fees, NSF fees and other 

bank charges. 

Lenders often require the borrower to sign a military allotment, which permits 

the lender to be paid directly by the Department of Defense out of the Service member’s pay before funds are deposited in the bank. Allotments to pay consumer debt 

are supposed to be a convenience for the Sailor, payday and installment lenders 

turn this convenience into a mandatory wage assignment which is prohibited by federal law for enlisted personnel. The allotment becomes another method used by the 

payday lender to put the Service member at risk. 

• Ms. W obtained a loan from a ‘‘military’’ lender that was marketed online. 

The lender required her to pay them through a military allotment check. 

They threatened to contact her Command if the allotment was redirected. 

This put Ms. W in a bind because the costs were so high for the loan that 

the allotment took away money she needed for food, transportation to and 

from work and utilities. 

Deceptively marketed car title loans have also been problematic for my clients. 

In these loans, borrowers sign over the free and clear title to their vehicle to secure 

loans for a fraction of the vehicle’s value. Typically these loans must be repaid in 

full at the end of the month to avoid repossession of the family’s transportation. We 

had a plague of title loan abuses in Florida until the Legislature finally imposed 

a reasonable 30 percent interest rate cap on these secured loans. Although Florida 

now caps these rates, the Report maps show that title loan sales outlets are still 

located in Jacksonville to channel customers to lenders across state lines in Georgia 

where title lenders are permitted to charge 300 percent annual interest. 

• I represented several Sailors who were in constant fear of losing the family’s only means of transportation and their only means of getting to work. 

In addition to being responsible for sound financial decisions, Service members must also be at work on time. The stress of a potential loss of transportation left one aircraft mechanic constantly distracted while trying to 

take care of Navy aircraft. 

2. Predatory Lenders Target Military Borrowers 

The Report includes a set of maps created by Professor Steve Graves from California State University at Northridge, illustrating the clustering of payday lenders, 

installment lenders and a few title loan outlets around military bases in Duval 

County. In addition, payday lenders that do not explicitly ‘‘target’’ the military have 

a big presence in the commercial areas of Jacksonville. For example, the largest national chain, Advance America has twenty-nine outlets in Jacksonville, Orange 

Park, and Atlantic Beach yet stated that only about five percent of its borrowers 

in Duval County are members of the military or their spouses. 

The Report also includes a brief survey of online lenders and notes there are millions of ‘‘hits’’ representing companies that appear when someone uses ‘‘military’’ 

and ‘‘loans’’ as their search terms. Some of these sites are designed to appeal to 

Service members with photos of Service people, flags, patriotic symbols, and military-sounding names. Other online lenders that appear in searches market to the 

general public but include ‘‘military’’ pages to attract more hits from Service members. 

The problems for military borrowers come from both lenders that wrap themselves 

in the flag and those that market generally to cash-strapped consumers either in 

communities where Service members and reservists’ families live or through 

websites available to Service members anywhere around the world where they have 


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access to the Internet. The loans are just as expensive and risky for Service members whether made by a lender with ‘‘military’’ in the title or by a national chain 

marketing to the entire community. 

My clients tell me that they are influenced by loan ads that include military 

trappings. They think advertisements appearing in local Navy papers have been approved by the military. 

• Mr. M and Ms. W are both in the Navy and are stationed at NAS-Jax. They 

each responded to advertisements in the local Navy newspaper and on the 

Internet by companies called Loans 4 Military and Military Financial Network, Inc. They both thought that the lenders were approved by the Navy 

because of their names, their patriotic web sites and because they were advertised in the Navy paper. The lender advertised a much lower rate than 

that which was actually provided. As a result, the borrowers were left with 

insufficient funds to pay their bills because these lenders required repayment by allotment. They had to take more loans to cover the bills that were 

not being paid because of the allotments. 

3. High cost loans, abusive collection practices, and the debt trap 

The Defense Report describes the high and deceptively marketed costs, illegal collection practices and repeat borrowing trap that results from predatory lending to 

Service members. 

• The cost of payday loans for my clients over the years has ranged from 390 

percent to 906 percent. • One of my clients had an installment loan with a disclosed interest rate of 

17% while the true but undisclosed interest rate was 102%. • Mr. N who is in the Navy obtained a title loan deceptively marketed as the 

sale and buy back of his motor vehicle. The lender hid the 300% rate 

charged because the Florida Legislature had reduced the interest rates that 

title lenders could charge from 264% to 30%. • I regularly see clients who have loans with an installment lender which deceptively markets its products to Service members and claims to provide 

low interest rates. For example, the disclosed rate in one $1,000 loan was 

19%. The lender also required the borrower to pay $475.95 for insurance 

that provided absolutely no real benefit for the borrower. The insurance 

was actually additional interest disguised as a real ‘‘insurance’’ product. 

The Department of Defense Report includes results of this year’s Defense Manpower survey and questions about payday loan use. Those Service members who admitted to using payday loans reported an average of 13 transactions last year (including new loans and loan roll-overs). This loan use pattern is at the top of the 

range for average transactions per borrower as reported by publicly-traded lenders 

and state regulators who collect that data, as noted in the Report. If a consumer 

pays for thirteen $350 two-week payday loans at a cost of $15 per $100, they would 

pay $682.50 in finance charges to use $350 for twenty-six weeks of the year. 

It isn’t just the high cost of payday loans that springs the debt trap. Failure to 

pay or renew a loan means that the check written to secure the loan will bounce 

and set off a cascade of bounced check fees charged by both the payday lender and 

the consumer’s bank, not to mention the adverse impact on the borrower’s credit report as a result of the perceived failure to maintain the bank account. 

• Mr. K spent his entire day off going from payday lender to payday lender 

to keep from having his checks bounce. At one time, he was trying to juggle 

nine loans. This is the same experience that a witness reported to Senator 

Lieberman at his 1999 forum on payday lending here in the Senate. 

Coercive collections are made easy due to the terms included in payday loans, car 

title loans and installment loans. 

• A payday lender sent one of my clients, who was required to allow electronic access to his bank account in the loan transaction collection, letters 

written by the lender on State Attorney letterhead. In these unauthorized 

and illegal collection letters, the lender threatened criminal prosecution 

when he did not have sufficient money to pay the loan in full. • Mr. W borrowed from Military Financial Network which included language 

in their documents threatening Court Martial, imprisonment and a dishonorable discharge if he did not pay. 

• Mr. G contacted me via email from an undisclosed location at sea. He was 

worried about his wife and family because of his outstanding payday loan 

debt. Due to threats she had received, he was afraid that the payday lender 

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4. Service members sign away their rights in the credit market 

Every contract I see includes a binding, unilateral pre-dispute mandatory arbitration clause which is especially burdensome to military borrowers who are not able 

to pay the costs associated with arbitration or travel to participate in arbitration. 

For example, Mr. W, who had the Military Financial Network loan while stationed 

in Florida, was prohibited from suing MFN and, if he thought they acted illegally, 

was required to arbitrate his dispute in Delaware. Therefore, he effectively had no 

remedy when MFN debited his account eleven times in one day, used a contract 

threatening Court Martial, and threatened him while at work. 

5. Consumer Protections are evaded, not enforced, or nonexistent 

Thirty-nine states have carved payday lenders out of usury or small loan rate 

caps or repealed their credit restrictions for all licensed lenders. Half the states permit title lenders to make short term cash loans at an average of 300% APR. In 

about half the states, installment lenders claim that state credit code or rate caps 

do not apply to nonresident service members stationed in that state. My home state 

of Florida is now in Federal court over the claim that Pioneer Military Lending is 

not licensed as a small loan company and does not comply with Florida protections. 

Installment lenders that make loans to military borrowers are not licensed or supervised in North Carolina or Virginia. Just recently California regulators withdrew its 

licensing waiver for one military lender, deciding that there was a public interest 

in supervising these companies. 

Over the years I have witnessed payday lenders use every trick in the book to 

escape real protections. 

Hiding behind the check cashing statute. In Florida, payday lenders tried for 

years to operate under the state check cashing law to avoid compliance with the 

state small loan law and credit protections. Eventually, Florida allowed payday 

lenders a safe harbor, permitting rates up to 390% APR for a $100 loan. Even with 

such generous rates, some lenders have attempted to evade Florida law. 

Rent-a-bank evasion of state limits were used by some of the largest payday 

lenders until the Federal bank regulatory agencies halted that tactic. Cash America, 

a publicly traded pawn and loan chain, used a series of out of state banks as a partner, claiming that they did not have to comply with Florida regulation. Jennafer 

Long borrowed money from ACE Cash Express while it partnered with Goleta National Bank to make loans at rates that exceeded Florida caps. The company repeatedly debited her bank account and harassed her supervising officers and threatened 

her with criminal prosecution when she was unable to repay on the due date. We 

sued and got a favorable ruling from the Federal court. Thankfully, the Comptroller 

of the Currency, the Office of Thrift Supervision, the Federal Reserve and the FDIC 

put a stop to the misuse of the charters of financial institutions through strict 

guidelines, safety and soundness enforcement and close examination of partner institutions. 

Sham transactions to cloak loans: There is no limit to the lengths some lenders will go to loan money to consumers at outrageous terms. Mr. B, a low-ranking 

Navy member, entered into a loan transaction with Florida Internet. The loan was 

characterized as the ‘‘sale of the right to use the Internet’’ for hourly increments. 

The loan was cloaked as a ‘‘rebate’’ for buying Internet time. The lender required 

direct electronic access to the borrower’s bank account. This company was hiding interest rates which exceeded 400%, which made the loans criminally usurious and 

well above the 18% general loan rate in Florida. The same lender used a ‘‘catalogue’’ 

sales model to avoid Florida usury and payday loan law and was sanctioned by the 

State Attorney in Pensacola, another Navy town. The lender has been convicted of 

racketeering charges and is awaiting sentencing after decades of predatory lending 

from Washington to New York’s Fort Drum. 

Claim to broker loans for other lenders under the credit service organization 

model: Cash America is claiming to be a credit services organization as a ruse to 

‘‘broker’’ payday loans in Florida for an Ohio-based finance company, which may be 

a Cash America subsidiary. Cash America guarantees repayment of the loans to the 

Ohio company, which should take them out of the definition of a credit services organization and put them in the category of a loan guarantor. Cash America’s loans 

cost $18 per $100 for the ‘‘broker fee,’’ plus interest charged by the purported lender. 

This makes Cash America loans even more expensive than Florida’s limits for payday loans. I believe that this arrangement does not comply with Florida’s Credit 

Services Organization Act and is simply done to charge Florida borrowers higher 

rates than even the state payday loan law allows. 

Attempt to avoid state protections by doing business online 

I recently filed a lawsuit against an Internet lender, Sonicpayday.com. This lender 

is available only on the Internet and charges interest rates as high as 900%. They 


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do not allow the grace period provided by Florida law and encourage rollover transactions (paying off an outstanding loan with another more expensive loan). Sonic 

also requires its borrowers to sign a ‘‘voluntary’’ wage assignment. When my clients 

were unable to pay these high cost loans, Sonic contacted their employers and demanded the employers pay Sonic directly. They also contacted the Service member’s 

chain of command when he told them he could not pay on time. Sonic loans have 

a term of two weeks or less. The short term makes the loan even harder to pay 

back. 

Noncompliance with protections. In July, Florida regulators took EZPawn to 

court over its failure to get a license to make payday loans. The Office of Financial 

Regulation alleged that EZPawn Florida, Inc. unlawfully blocked examiners from inspecting its loan papers and other records. This company, one of the large publicly 

traded payday loan and pawn chains, has at least eighteen locations in Florida 

The public record is replete with instances of large payday loan companies violating state consumer protection laws. This summer the Washington Department of 

Financial Institutions filed a case against Check’n Go for continued violation of state 

rules for payday lenders. Illinois Department of Financial Institutions fined Advance America earlier this year for violating the new Illinois law. West Virginia’s 

Attorney General settled a case against Advance America for debt collection tactics 

used by its Ohio stores with West Virginia consumers. Arizona’s Attorney General 

brought a case against a payday lender for threatening criminal prosecution for nonpayment. The Colorado Attorney General settled a case against an Internet payday 

lender that failed to comply with Colorado law. The North Carolina Banking Commissioner ruled that Advance America violated its small loan law while brokering 

loans through a series of out-of-state banks. 

Industry ‘‘best practices’’ voluntary codes fail to protect consumers 

Trade group ‘‘best practices’’ codes of conduct are more public relations than consumer protection. The CFSA ‘‘Best Practices’’ do not call on their members to cap 

interest rates, to stop enticing consumers to write checks without money in the 

bank, to consider ability to repay in extending credit, or to provide affordable repayment terms for their loans. Instead, the trade group’s voluntary guidelines call for 

lenders to obey the Truth in Lending Act and state law relating to disclosures, to 

refrain from threatening criminal prosecution if a check used to get a loan is returned unpaid, and calls for a 24–hour right to cancel the loan by returning the 

amount borrowed. Even where the guidelines appear to offer the protection of a four 

roll-overs limit (unless state law requires less), these companies do not consider 

back-to-back loans as roll-overs restricted by this limit. Their Best Practices call for 

borrower responsibility but says nothing about lender responsibility to make appropriate loans. 

One of my clients had a bad experience with a payday lender which bragged about 

being a member of CFSA in its contract and claimed that it followed CFSA’s Best 

Practices: 

• Ms. Griffin is a Navy wife who has a payday loan with Advance America 

in Florida, which, as stated above, is a state that requires licensed lenders 

to grant at least a 60–day grace period with no additional fees, charges or 

costs if a borrower seeks credit counseling. Despite the grace period and a 

prohibition on ‘‘roll-overs’’ in her contract, she was required to roll over her 

loan when she could not pay. When she went to pay it off, she was $45 

short, not realizing that she would be charged another fee to roll over the 

loan. Advance America refused the grace period even after she told them 

she already had the counseling at the Navy Marine Corps Relief Society, 

an authorized State of Florida Deferred Presentment Provider counseling 

agency. The director of NAS Jax NMCRS, Ret. Capt. Dave Faraldo, called 

the lender only to be told they did not have to talk to him and did not have 

to provide the grace period. You might think this was a matter of an inexperienced employee; however, the Advance America employee said she had 

been an employee trainer for eight years and they never had to provide the 

grace period. When I provided a signed release that I was Ms. Griffin’s attorney, the Advance America staffer refused to speak to me about the legally-required grace period on her account. 

The organization also promotes its ‘‘military best practices’’ as all the protection 

military borrowers need. A close examination reveals no cap on interest rates; no 

ban on check holding or electronic access to bank accounts; no prohibition on mandatory arbitration clauses, and no ban on waiver of rights or access to the courts. 

Instead, the code prohibits after-the-loan practices that are already largely addressed by Department of Defense rules, the Servicemembers Civil Relief Act, or are 

promises that sound good but deliver little. Payday lenders use the borrowers’ autoVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00187 Fmt 6621 Sfmt 6621 E:\HR\OC\A303.XXX A303

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1These protections and information resources for service members, which include prohibitions 

on garnishment and contacting the chain of command for collection assistance, can be viewed 

in their entirety at http://www.cfsa.net/genfo/MilBestPractie.html (visited September 2, 2006). 2 A copy of the report is available at http://www.defenselink.mil/pubs/pdfs/ReportltolCongresslfinal.pdf. 

matic access to bank accounts and checks to collect, not garnishment, in most cases. 

Federal law provides significant protections against garnishment of wages for enlisted personnel. Officers are directed by DOD not to assist creditors in collecting 

‘‘exorbitant’’ debts. The other weak provisions of the CFSA Military Best Practices, 

adopted in 2004, call for honoring repayment agreements negotiated by credit counselors, providing educational materials including a brochure, and maintaining a web 

site. Since these guidelines have been in effect for over two years, it is obvious their 

application did not prevent the serious problems identified by the Department of 

Defense in last month’s report. 

Solutions Needed 

I agree with the reforms urged by the Department of Defense to protect military 

borrowers and believe these protections are needed by all consumers struggling to 

make ends meet. 

1. Rate cap which the Senate has already enacted as part of the 2007 Defense 

Authorization bill, now in conference with the House. DOD calls for a 36% APR cap 

to include all fees, premiums, other charges. This is the typical state small loan rate 

cap and is double the federal interest rate cap for Federal credit unions. It is six 

times the interest rate for loans held by Service members prior to joining the military. The Talent-Nelson amendment places a federal ceiling on interest rates (helpful for those states that neglect to protect nonresident Service members who live in 

their states) but permits states to provide more protection. 

2. Loans should not be based on key assets for families. This puts too much risk 

into borrowing, fosters coercive collection tactics, and encourages consumers to take 

desperate steps to avoid losing those assets. S. 1878, introduced by Senator Akaka, 

would prohibit lending based on solicitation of unfunded checks or electronic access 

to bank accounts. It is already illegal for lenders to require consumers to pay debts 

through periodic electronic payments. This protection should be extended to single 

payment payday loans. No lender should be permitted to require a Service member 

to sign an allotment to military pay, providing a de facto wage assignment to lend- ers. 3. Service members deserve to have the full range of American rights when dealing with creditors. They should not be asked to waive their rights under state and 

federal law or be forced to accept binding, unilateral mandatory arbitration. No one 

should have to sign that they will not sue a lender for illegal practices and will not 

join a class action lawsuit. Often class litigation is the most efficient means for both 

parties to litigate illegal practices relating to hundreds of cases involving relatively 

small sums. Also, no one should be required to agree to pay the lender’s expenses 

to remove them from a class or promise they will not file for bankruptcy in the future. I agree with DOD that ‘‘waiver is not a matter of ‘choice’ in take-it-or-leaveit contracts of adhesion.’’ 

PREPARED STATEMENT OF HILARY B. MILLER 

PRESIDENT, PAYDAY LOAN BAR ASSOCIATION

SEPTEMBER 14, 2006 

Mr. Chairman and members of the Committee, it is a distinct honor to appear 

before you today. My name is Hilary Miller, and I am president of the Payday Loan 

Bar Association. I am here today as an expert in subprime lending, and I appear 

on behalf of the payday-advance industry’s national trade association, the Community Financial Services Association of America (‘‘CFSA’’). 

Our bar association and CFSA both subscribe to the highest principles of ethical 

and fair treatment of borrowers. CFSA represents owners of approximately half of 

the estimated 22,000 payday-advance retail outlets in the United States. CFSA has 

established—and, critically, enforces among its members—responsible industry practices and appropriate consumer rights and protections, including special protections 

for the benefit of military personnel.1

There are serious flaws in the Defense Department’s recent Report on Predatory 

Lending Practices Directed at Members of the Armed Forces and Their Dependents 

(the ‘‘DoD Report’’).2 Those flaws involve fundamental matters of both methodology 

and policy. 


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3 A flawed report was perhaps predictable in light of the original directive of Congress that 

the Secretary of Defense consult with ‘‘representatives of military charity organizations and consumer organizations’’ but not with industry representatives, economists or consumer-credit experts. Section 579 of the National Defense Authorization Act for Fiscal Year 2006, P.L. 109– 

163, 119 Stat. 3276–77 (the ‘‘2006 Act’’). 

Decisions having potentially far-reaching implications regarding the cost and 

availability of consumer credit used by members of the Armed Forces must be 

reached only after careful gathering of data from a variety of sources and evenhanded analysis of such data. 

By failing to synthesize information from balanced sources—and by systematically 

excluding any input from independent economists, consumer-credit experts or the 

industry itself—the DoD Report presents the views only of opponents of the kinds 

of lending discussed.3 The result is a biased, inaccurate and incomplete picture of 

the market for such credit, of the industry’s practices and, most importantly, of the 

likely impact on military consumers were the DoD Report’s recommendations to be 

adopted. 

The language of the report reveals the author’s bias. Instead of providing an objective explanation of his findings, the author frequently employs normative and 

emotionally charged terms to describe subprime lending, thereby suggesting—without a basis in research—that such lending is a societal evil. 

Our industry has a vital interest in making sure that military borrowers can 

repay their loans, for one simple reason: as lenders, we only make money when our 

borrowers repay us. If they do not pay, not only do we fail to collect their finance 

charges—which the DoD criticizes—but we also lose many times those charges in 

loan principal. In short, it is contrary to our interests to have service members get 

into trouble with their loans. And the reason we lend to military borrowers at all 

is that the entirety of the available scientific data suggest that only a tiny percentage of military borrowers actually do get into trouble with payday loans. Anecdotes 

derived from a non-representative sample of this small group are now being used 

to drive public policy for the much larger numbers of military borrowers who use 

payday loans for their intended purpose and who repay their loans on time. 

Here are some of the DoD Report’s principal flaws: 

• The DoD report determines that payday loans are ‘‘predatory’’ solely by 

uncritically adopting eight factors used by a vociferous opponent of the industry, the Center for Responsible Lending, without making an independent determination that such loans are ‘‘unfair’’ or ‘‘abusive’’ as required 

by the applicable statute. No other recognized authority has adopted these 

factors. 

• According to DoD’s own internal data, fewer than 5% of service members 

have had a payday loan. 

• Because fewer than 6% of payday loans ultimately default, at most 6% of 

that 5%, or 0.3%, of all service members have experienced financial difficulty with a payday loan. In other words, 99.7% of service members have 

either not had a payday loan or experience no financial difficulties with 

payday loans. There is simply no statistical evidence that payday loans contribute to military readiness problems to any measurable degree. 

• Although some service members with financial problems have taken out 

payday loans, DoD has presented no data showing that payday loans cause 

financial problems. Payday loans are intended to solve short-term financial 

problems, and the overwhelming majority of users employ them in that 

manner. 

• DoD’s data regarding asserted hardship relating to payday loans consist of 

a mere 12 anecdotes drawn from the experiences of 1,400,000 or more service members. 

• For a sample of service members with payday loans who have experienced 

bankruptcy, payday loans account for less than 4% of their total liabilities, 

and the financial difficulties suffered by such service members manifestly 

relate to preexisting (i.e., non-payday-loan) factors. 

• DoD’s data regarding ‘‘targeting’’ of service members by payday lenders are 

flawed because they do not control for demographics and fail to include 

tests of statistical significance. The ‘‘targeting’’ argument assumes, in defiance of logic, that the industry would commit disproportionate resources to 

customers who account for only 1% of revenues. 

• Service members appreciate the convenience and ease of obtaining a payday 

loan; 78% of service members with payday loans agree that ‘‘most people 

benefit from the use of credit.’’ 


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4DoD Report at pp. 13–14. 

5 A standard definition is an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. A predatory loan has one or more of the following features: charges more in 

interest and fees than is required to cover the added risk or cost of lending to borrowers with 

credit imperfections, contains abusive terms and conditions that surprise or trap borrowers and 

lead to increased indebtedness, does not take into account the borrower’s ability to repay the 

loan, or violates fair lending laws by targeting women, minorities and communities of color. Payday loans meet none of these criteria. See, generally, U.S. Dep’t of Treasury/U.S. Dep’t of Housing and Urban Development, Joint Report on Recommendations to Curb Predatory Home Mortgage Lending (2000), available at http://www.hud.gov/library/bookshelf12/pressre1/ 

treasrpt.pdf (visited August 29, 2006). 6Section 576(c)(2) of the 2006 Act defines a ‘‘predatory lending practice’’ as ‘‘an unfair or abusive loan or credit sale transaction or collection practice.’’ 

• DoD’s principal recommendation is to reduce the maximum permissible 

charge on such loans to 36%, which is below lenders’ marginal cost—thereby driving legitimate, regulated lenders out of the market and compelling 

borrowers to deal with illegal lenders. Those lenders would just as likely 

pursue illegal collection methods. 

• A 36% rate cap is not the only possible approach to addressing the needs 

of overburdened service members. The industry has suggested allowing 

service members a longer repayment plan similar to that offered by the 

banks highlighted in the DoD Report. Our proposal to DOD was to allow 

service members to repay their defaulted loans over a term of six months 

or longer, and to limit interest rates to 36% in the post-default period. It 

is hard to understand why the bank program is embraced by DoD and the 

payday-advance industry’s proposal is ignored. 

• Ironically, payday lending competes with bank and credit union overdraft 

charges and service fees and is often less expensive for the consumer. For 

example, if a service member is a Pentagon Federal Credit Union member, 

the charge for a $100 overdraft is $25; our industry typically charges only 

$15 for a $100 advance. Similarly, Pentagon Federal’s late charge on a credit card is $39, which explains why more than 70% of our customers use payday advances to avoid late fees. 

In a comprehensive submission attached to these remarks, we discuss the DoD 

Report as it addresses payday lending. However, many of our criticisms of the DoD 

Report are equally applicable to the other forms of credit addressed in the DoD Report. 

The DoD Report should be rejected, and the subjects raised by the report should 

be given appropriately balanced further study and analytical reflection by qualified 

experts. 

Thank you for your interest. I will be pleased to take any questions. 

Analysis 

I. Payday Loans Are Not ‘‘Predatory’’ 

The DoD Report adopts wholesale, and without critical analysis, a set of eight criteria promulgated by a vociferous opponent of the industry, the Center for Responsible Lending (‘‘CRL’’) , for determining whether a payday loan is ‘‘predatory.’’ 4 No 

political, regulatory or academic authority has adopted CRL’s criteria. There exists 

no principled rationale for the use of these criteria to the exclusion of more established notions of what constitutes a ‘‘predatory’’ loan.5

Although not clear from the DoD Report, it appears that both CRL and the author 

of the DoD Report believe that the CRL criteria should be applied disjunctively; i.e., 

that a loan that possesses any one of the eight criteria is ‘‘predatory.’’ Since all payday loans possess at least two of the CRL criteria (‘‘high’’ cost and the use of a 

check-repayment mechanism), the DoD Report effectively classifies all payday lending as ‘‘predatory’’—without making an independent determination, as required by 

Congress, of how payday loans are ‘‘unfair or abusive’’ (within the meaning of the 

2006 Act).6 By circularly defining payday loans to be ‘‘predatory,’’ the result of the 

DoD Report is a political statement, not science. 

We discuss these eight factors individually. 


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7DoD Report at pp. 13, 16–20. 

8 As a general matter, consumer credit experts understand the term ‘‘predatory’’ to be rooted 

in deceptive and/or illegal practices to coerce borrowers into unfavorable agreements. Stephen 

C. Bourassa, Predatory Lending in Jefferson County. University of Louisville 2003, http:// 

www.lul.org/?foreclosed.htm (visited August 29, 2006). See also, Remarks by Governor Edward 

M. Gramlich at the Housing Bureau for Seniors Conference, Ann Arbor, Michigan (2002): 

In understanding the problem, it is particularly important to distinguish predatory lending 

from generally beneficial subprime lending. Predatory lending refers to activities and practices 

just cited—asset-based lending, loan flipping, packing of unnecessary fees and insurance, fraudulent or deceptive practices. Subprime lending, on the other hand, refers to entirely appropriate 

and legal lending to borrowers who do not qualify for prime rates, those rates reserved for borrowers with virtually blemish-free credit histories. Premiums for extending credit to these borrowers compensate lenders for the increased risk that they incur and range several percentage 

points over rates charged on prime loans. Although some have argued that these premiums are 

excessive, market forces should eliminate inappropriate spreads over time.http:// 

www.federalreserve.gov/boarddocs/speeches/2002/20020118/default.htm (visited August 29, 

2006) (emphasis added). 9Mark Flannery and Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 

FDIC Center for Financial Research Working Paper No. 2005–09. http://www.fdic.gov/bank/ 

analytical/cfr/workingpapers.html#payday (visited August 29, 2006). 10 Roberto G. Quercia, Michael A. Stegman and Walter R. Davis, The Impact of Predatory 

Loan Terms on Subprime Foreclosures: The Special Case of Prepayment Penalties and Balloon 

Payments (2005), Center for Community Capitalism, University of North Carolina. http:// 

www.kenan-flagler.unc.edu/assets/documents/foreclosurepaper.pdf (visited September 29, 2006). 11The cost of overdraft-protection credit can be astronomical and generally exceeds the cost 

of comparable payday-loan credit. Banks are not required to disclose these costs as an annual 

rate. For unknown reasons, the DoD Report does not address them. 

Interest Rate 

The DoD Report’s principal objection to all of the types of loans it criticizes is 

their ‘‘high cost.’’ 7 Yet no other authoritative source has classified any form of consumer lending as ‘‘predatory’’ based solely on pricing.8

In the case of payday loans, the cost of credit, standing alone, is neither ‘‘unfair’’ 

nor ‘‘abusive,’’ even though the interest rates on such loans (expressed as an annual 

rate) are nearly universally in the triple digits. Rather, such pricing has been found 

to be justified by the fixed costs of keeping stores open and the relatively high initial 

default rates on such loans. To the extent that CRL—and the author of the DoD 

Report, by unquestioningly adopting CRL’s political views—claim otherwise, their 

views are inconsistent with the research of federal consumer credit regulators.9

In large measure, the perceived high cost of payday lending is driven by the small 

dollar amount of each loan, the high cost of maintaining stores in operation (both 

during and outside of traditional business hours), and the costs of marketing, originating and collecting such loans. Payday loans are thus ‘‘expensive’’ for the same 

reason that, for example, small quantities of food, available on a 24/7 basis from 7- 

Eleven, cost more than the same items purchased in bulk from Sam’s Club during 

regular business hours. Likewise, so-called ‘‘low-documentation’’ mortgage loans 

have higher default rates and are more expensive than those based on more timeconsuming credit investigations.10 Consumers who buy in small quantity and want 

it ‘‘right now’’ and with no ‘‘hassle’’ pay higher prices for those privileges. This is 

not an unfair or deceptive business practice; it is part of the American system of 

freedom of economic choice. 

There is no evidence that payday-loan pricing causes economic harm. Indeed, borrowers’ economic welfare is generally enhanced, rather than reduced, as a result of 

such borrowing. Any analysis of the cost of payday-loan credit must take into account the cost to the borrower of not obtaining such credit. For example, a consumer 

with limited credit alternatives may write a check drawn on insufficient funds. Even 

if the depository bank pays the overdraft, the cost of such credit is substantial, because the consumer is charged a service charge of $18 to $25 (or more) for the overdraft.11 But in most cases, middle-income consumers do not find that their banks 

are willing to pay overdrafts; rather, the checks are returned unpaid. When the 

check ‘‘bounces,’’ not only does the consumer’s bank impose its service charge, but 

the consumer is also subjected to a returned-check fee by the merchant to whom 

the check had been written—generally another $25 or more. Thus, the total cost of 

‘‘bouncing’’ a check, which may provide a consumer with a few days or weeks of 

credit until the check is paid is often $45 or more. Alternatively, a consumer with 

limited credit alternatives may engage in self-help to obtain an extension of credit 

in the form of a deferred payment of rent, a utility bill, or an installment due on 

a mortgage or a car loan. Such late payments will generally subject the consumer 

to late fees—penalties charged by the landlord or creditor which are very substantial relative to the true amount of temporary credit of which the consumer has 

availed himself. If the payment is made to a utility, often the consumer is subject 


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12Samuel Hanson and Donald P. Morgan, Predatory Lending? Federal Reserve Bank of New 

York working paper (2005), available at http://www.consumercreditresearchfoundation.org/ lfiles/FRBlMorganlHansonl5l2005.pdf (visited August 29, 2006) (no evidence that payday 

lending is ‘‘predatory’’). 

The notion that the borrower engages in his own welfare-enhancement calculus is likewise 

suggested by Thomas E. Lehman of Indiana Wesleyan University: 

In all likelihood, the borrower cares not what the ‘‘effective APR’’ is on the loan. The real price 

signal to which the borrower responds is the flat fee that is charged to hold the postdated check. 

If the value attached by the borrower to the immediate cash advance exceeds the value of the 

[principal] plus the fee one or two weeks hence, then the borrower will undertake the transaction . . . . 

‘‘In Defense of Payday Lending,’’ The Free Market, Ludwig von Mises Institute, Vol. 23, No. 

9 (2003). 

See also, James J. White, ‘‘The Usury Trompe L’Oeil,’’ 51 S.C. L. Rev. 445, 466 (2000) (‘‘Contrary to those who claim to befriend the impecunious consumer, . . . even the poorest consumers 

are quite savvy. They understand the alternatives and make choices about borrowing that are 

wise for them even when the decisions seem foolish or wasteful to middle-class observers’’). 13Dean S. Karlin and Jonathan Zinman, Expanding Credit Access: Using Randomized Supply 

Decisions to Estimate the Impacts (2006). http://www.dartmouth.edu∼jzinman/Papers/ 

Karlan&Zinman%20Consumer%20Credit%20Impacts.pdf (visited August 29, 2006). 14Philip Bond, David K. Musto and Bilge Yilmaz, Predatory Lending in a Rational World, 

Federal Reserve Bank of Philadelphia Working Paper No. 06–092 (2006). http://ideas.repec.org/ 

p/fip/fedpwp/06-2.html (visited August 29, 2006). 15See also, ‘‘Let competition curb payday lending excesses,’’ Crain’s Chicago Business (May 17, 

2004). 16See, generally, Banking on the fringe, Federal Reserve Bank of Minneapolis (July 2004), 

http://minneapolisfed.org/pubs/fedgaz/04-07/banking.cfm (visited August 29, 2006). 17 ‘‘The letters from the regulators recognize that a practice that can be abusive in some contexts can also—in absence of fraud or deception—be highly beneficial to consumers.’’ Report of 

the Staff to Chairman Gramm, Committee on Banking, Housing and Urban Affairs, Predatory 

Lending Practices: Staff Analysis of Regulators’ Responses (August 23, 2000) available at 

http://banking.senate.gov/docs/reports/predlend/predlend.htm (visited August 29, 2006). 

to disconnect and/or reconnect fees. These charges have also risen to the point that 

consumers will almost always find it less expensive to employ a payday advance instead. Academic literature supports this welfare-enhancing view of payday lending.12

The pricing of payday loans is thus not ‘‘unfair’’ because, among other reasons, 

given the costs of providing credit, such pricing does not result in a grossly disproportionate exchange of value with the consumer or excess profitability to the 

lender. 

A recent study by Karlan and Zinman (2006) provides the best and most complete 

scientific answer to the question, ‘‘Do high-interest short-term loans harm consumers?’’ The authors used a lender to conduct a large-scale, randomized trial in 

which marginal borrowers who would not ordinarily receive access to short-term 

loans were granted loans. Those who received these loans were, one year later, less 

likely to be poor, unemployed or hungry.13 There is no comparably rigorous study 

showing a contradictory result. 

Both Hanson and Morgan (2005), fn. 12, and Bond, Musto and Yilmaz (2006) 14

conclude that predatory lending is effectively eliminated through robust competition.15 There can be no more perfectly competitive industry than the payday-loan 

business.16

In summary, there is no authoritative or theoretical support for the DoD Report’s 

conclusion that the ‘‘high’’ interest rates traditionally charged on payday loans, 

without more, render them ‘‘predatory.’’ 

—Short Minimum Loan Term 

The DoD Report asserts—again adopting, without analysis or question, the CRL 

view—that the short-term nature of the loan, without more, renders a payday loan 

‘‘predatory.’’ 17

The sole support for this claim is the unsubstantiated statement that ‘‘75% of payday customers are unable to repay their loan within two weeks.’’ There is no factual 

basis for this statement. 

Both CRL (and the author of the DoD Report) assume, without factual basis, that 

the reason all payday loans that have been renewed, or ‘‘rolled over,’’ is that the 

borrowers were unable to repay them. This conclusion is but one of many possible 

conclusions why borrowers may choose to extend the maturity of their loans. None 

of the academic literature in this field addresses the reason for ‘‘rollovers.’’ 

Even assuming that the average number of rollovers cited for non-military users 

were correct, the rate of repeat usage of payday loans among military borrowers is 

known to be much lower. In a recent independent study, 49% of military enlisted 


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18William O. Brown, Jr. and Charles B. Cushman, Payday Loan Attitudes and Usage Among 

Enlisted Military Personnel (2006). Available at http:// 

www.consumercreditresearchfoundation.org/lfiles/060628MilitaryPDLSurvey.pdf (visited August 29, 2006). 19Many ‘‘mainstream’’ forms of consumer credit are payable in a single balloon payment, such 

as the currently popular interest-only home mortgages and certain home equity lines of credit. 

The DoD Report fails to explain how, if at all, these credit vehicles are distinguishable in predation from payday loans. 20 E.g., Nevada, Utah, Louisiana and Virginia. 21See, Comptroller of the Currency, Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices, O.C.C. Advisory Letter 2003–2, available at http:// 

www.occ.treas.gov/ftp/advisory/2003-2.doc (visited August 29, 2006). 

payday-loan borrowers reported they have used a payday loan no more than twice 

in the last year (compared to 16% of the general population of payday borrowers); 

79% said they had no more than four loans in the last year (compared to 65% of 

the general population).18

Finally, there is no theoretical support for the supposition that a loan, the duration and cost of which are fully disclosed to the consumer, and which (as noted in 

the preceding paragraph) military borrowers actually repay in accordance with the 

original schedule, is ‘‘predatory’’ within the meaning of the 2006 Act. The cost of 

renewal credit is neither ‘‘unfair’’ nor ‘‘abusive’’ for the same reasons (supra, pp. 2– 

4) that the cost of the original loan is not predatory. The mere fact that a minority 

of military borrowers may find it necessary to renew their loans likewise does not 

render such loans ‘‘unfair’’ or ‘‘abusive’’ because the consequences of renewal do not 

result in either a meaningful reduction in consumer economic welfare nor excess 

profits to the lender. 

—Single Balloon Payment 

The DoD Report again incorporates, without examination, a CRL criterion for 

‘‘predatory’’ lending that the entire balance of a consumer loan is repayable in a single balloon payment.19 The report incorrectly states that payday loans do not allow 

for partial installment payments to be made during the loan term; in fact, nearly 

all payday lenders permit partial payments, and such prepayments are required to 

be accepted under the laws of many states.20

The DoD Report fails to set forth any principled reason why a requirement for 

repayment in a single balloon payment is evidence of predation. As with the ‘‘short 

minimum loan term’’ issue discussed above, the nature and terms of the loan are 

fully disclosed to, and understood by, the borrower at the time the loan is entered 

into—perhaps more than any other aspect of any loan’s terms. There is no fraud 

or deception regarding the consequences to the consumer of being unable to make 

partial repayments or of failure to make the single required repayment. There is 

no material economic difference to the borrower, ceteris paribus, in being required 

to make a single payment in two weeks instead of two payments at one-week intervals; indeed, because payday loans generally have a ‘‘bullet’’ maturity date at or immediately after the borrower’s next payday, the single-installment nature of the loan 

benefits the borrower by allowing payment coincident with his employer’s payroll 

practices. 

—Loan ‘‘Flipping’’ 

The DoD Report adopts the CRL terminology of ‘‘loan flipping’’ to refer to ‘‘rollovers,’’ or loan renewals. Neither CRL nor the DoD Report correctly utilizes the 

term ‘‘flipping,’’ although use of the term gives the issue more of a political charge, 

as CRL hopes and expects; and in this respect, the author of the DoD Report is likely an unwitting dupee. 

‘‘Loan flipping’’ is a ‘‘predatory’’ practice by mortgage lenders where the lender induces the borrower to refinance an existing, favorable mortgage (often serially) by 

falsely representing the benefits of the new loan, and ultimately providing little or 

no economic benefit for the consumer because the manifest benefit is consumed by 

additional loan points, loan fees, prepayment penalties and fees from financing the 

sale of credit-related products such as life and disability insurance.21 For example, 

some homeowners are pressured by lenders into refinancing existing subsidized 

mortgage loans in exchange for commercial loans at higher interest rates, but with 

slightly lower monthly payments and substantial fees rolled into an increased principal balance. These tactics, because the consumer is actively deceived into believing 

that the transaction produces a net economic benefit for him, are clearly ‘‘abusive’’ 

within the meaning of the 2006 Act. 

In contrast, renewals of payday loans are initiated not by the lender but rather 

by the borrower. The borrower fully understands at the outset of the original loan 


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22 Community Financial Services Association, Best Practices for the Industry, http:// 

www.cfsa.net/genfo/egeninf.html (visited August 29, 2006). 23 Alabama, Florida, Illinois, Indiana, Michigan, North Dakota and Oklahoma have state 

‘‘database’’ requirements that limit or proscribe multiple loans to a single borrower from multiple payday lenders and provide for an electronic means to determine the existence of an outstanding loan from a competitor. 

and of any renewal loan what the costs and benefits are to him of repayment or 

renewal. Pricing of a payday loan is straightforward and does not involve complex 

computations to determine the cost of credit. There is no opportunity for the lender 

to conceal costs or to confuse the borrower regarding the economic benefits of extension. 

The payday lender’s ‘‘default setting’’ is that the loan must be repaid in full on 

the original due date. Because payday-loan renewals are initiated by the borrower, 

the harms sought to be avoided by federal and state anti-‘‘flipping’’ regulations are 

simply absent from this arena. 

Under the Best Practices for the Industry of the CFSA, CFSA members limit payday-loan renewals to the lesser of four or the number permitted by applicable state 

law.22 Applicable state laws in Arizona (for military borrowers), California, District 

of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, 

Minnesota, Mississippi, Montana, Nebraska, New Hampshire, Ohio, Oklahoma, 

South Carolina, Tennessee, Virginia, Washington and Wyoming proscribe all rollovers whatsoever. State laws in Alabama, Colorado, North Dakota and Rhode Island 

limit the permissible number of rollovers to one. Laws in the other 12 states which 

permit payday lending have variable limits on the number of rollovers permitted. 

There is no factual or authoritative support for the DoD Report’s conclusion that 

merely permitting rollovers, to the very limited extent allowed by law or by CFSA’s 

Best Practices, is a predatory practice. 

—Simultaneous Borrowing from Multiple Lenders 

It is theoretically possible for a borrower to incur substantial amounts of debt by 

contracting simultaneously with multiple payday lenders—just as a borrower may 

have multiple credit cards, mortgages, car loans and doctors’ bills. Neither CRL nor 

the author of the DoD Report explains how this possibility is the result of a predatory practice by lenders. Virtually any consumer good or service holds risks if it is 

over-consumed. To the extent that a borrower can become indebted to multiple lenders simultaneously, consumer activists like CRL (and, by wholesale adoption, the 

author of the DoD Report) appear to expect lenders to protect borrowers not from 

predation by lenders but rather from the results of the borrowers’ own improvident 

financial decisions. 

It is ironic that the proponents of such protections expect sellers of credit services 

to ascertain whether the buyers have relationships with competitors, and, if so, to 

refrain from doing business with those buyers. In any other field of endeavor, the 

Sherman Act would be loudly invoked, and the Justice Department would be vitally 

concerned about the anticompetitive nature of these behaviors. 

Once again, the author of the DoD Report does not explain how it is ‘‘unfair’’ or 

‘‘abusive’’ for a lender to extend credit to a borrower who has existing credit relationships with others—especially, as is usually the case, if the lender is unaware 

of those relationships.23

—No Consideration of the Borrower’s Ability to Repay 

CRL’s language, which is once again adopted unquestioningly and verbatim by the 

DoD report, asserts that ‘‘payday lenders encourage consumers to borrow the maximum allowed, regardless of their credit history.’’ The notion that payday lenders 

extend credit regardless of the likelihood of repayment by borrowers is preposterous 

and reveals the utter ignorance of the DoD Report’s author regarding how the industry operates. 

Every payday lender employs a credit-scoring system to make credit decisions regarding individual borrowers. Such systems are ubiquitous in the consumer credit 

industry and are employed equally for credit cards, car loans, store credit and mortgages; the models vary from lender to lender and by type of loan. The largest and 

most sophisticated payday lenders employ computer-based models that are tested 

against large databases of actual experience and that are continually refined over 

time. Smaller lenders often use paper-based ‘‘check the box’’ systems to ensure that 

borrowers meet their credit criteria. The systems take into account such factors as 

whether the borrower has a telephone at his residence, whether he has a steady 

source of income, his prior credit history with the lender and others, and his legal 

ability to contract. The factors vary by lender. 


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24See, e.g., Cal. Fin. Code §§ 23035(c)(3) and (d)(1). 25The DoD Report incorrectly states (at p. 21) that the Federal Arbitration Act ‘‘eliminates 

the borrowers’ opportunity to obtain legal recourse’’ and improperly suggests that arbitrators 

‘‘paid for by the lender’’ will be biased in favor of the lender. These statements are patently 

false. 26Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629, 105 S.Ct. 3345, 

87 L.Ed.2d 444 (1985). 27Michael T. Burr, The Truth About ADR, 14 Corporate Legal Times 44, 45 (2004); Ernst & 

Young, Outcomes of Arbitration—An Empirical Study of Consumer Lending Cases (2004), 

http://www.adrforum.com/rcontrol/documents/ResearchStudiesAndStatistics/ 

2005ErnstAndYoung.pdf (visited August 29, 2006). 

All of these systems have one goal, and one goal only: to screen out borrowers who 

are unlikely to repay their payday loans. 

Lenders make money only if borrowers pay them; if they do not repay, lenders 

go out of business. It is beyond silly to suggest that lenders are unconcerned about 

the possibility that a borrower will default. 

—Deferred Check Mechanism 

A universal feature of a payday loan is that the borrower gives the lender a check 

or other authorization to debit the borrower’s checking account on the maturity date 

of the loan. If the borrower has not prepaid the loan in cash or otherwise, on the 

maturity date, the lender deposits the check. If the check is returned unpaid, the 

borrower may be subjected to a service charge by his bank because the borrower 

failed to arrange to have sufficient funds in his checking account at loan maturity. 

Once again, the DoD Report fails to explain how it could be predatory from the 

standpoint of the lender when a third party charges the borrower for returning a 

check unpaid. The lender does not control such charges and is a stranger to the relationship between the borrower and his depository bank. The borrower, but not the 

lender, had the power to avoid the charge by assuring that adequate funds were in 

the borrower’s account. 

Automatic charges to the borrower’s checking account are a routine feature of 

many ‘‘mainstream’’ forms of consumer credit. The DoD does not suggest how a 

lender’s right to initiate such charges, standing alone, is ‘‘unfair’’ or ‘‘abusive.’’ 

The DoD Report also improperly suggests that a borrower ‘‘may fear criminal 

prosecution’’ for such returned checks. Any such fears are unfounded. CFSA, 

through its Best Practices (supra, fn. 22), forbids its members from threatening or 

pursuing criminal action against a borrower as a result of the borrower’s check 

being returned unpaid. This proscription is codified in most of the state laws that 

permit payday lending.24

—Mandatory Arbitration Clauses 

Many consumer and non-consumer contracts contain arbitration clauses. Parties 

to arbitration clauses do not waive their substantive rights or, as the DoD Report 

erroneously states, eliminate the borrower’s right to sue for abusive lending practices.25 Congress enacted the Federal Arbitration Act to promote the expeditious and 

inexpensive resolution of both contractual disputes and statutory claims. Longstanding federal public policy strongly supports arbitration of disputes. As the U.S. 

Supreme Court has held: 

By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution 

in an arbitral, rather than a judicial, forum. It trades the procedures and 

opportunity for review of the courtroom for the simplicity, informality, and 

expedition of arbitration.26

Arbitration permits the vindication of consumer claims for abusive and other improper lending practices. An analysis of actual awards and results suggests that 

consumers fare better in arbitration than in the judicial system and are satisfied 

with the results.27

The DoD Report’s statements regarding arbitration are simply unfounded. 

II. The DoD Report Fails to Demonstrate the Existence of a Problem Warranting Legislative Action 

The DoD Report presents what is at best a confused, inconsistent and anecdotal 

picture regarding the prevalence of payday-loan use among service members. It is 

impossible to draw any conclusion from the report regarding (a) what percentage of 

military borrowers have experienced extreme financial difficulties while having payday loans outstanding, or (b) whether, and in what percentage of cases, payday 

loans were themselves a material factor in causing or contributing to the financial 


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28DoD Report at p. 39. 29The DoD Report does not disclose how the ‘‘financial counselors and legal assistance attorneys’’ were instructed to select the ‘‘case studies.’’ 30Department of Defense, Directorate for Information Operations and Reports (2006). Military 

Personnel Statistics. http://www.dior.whs.mil/mmid/military/rg0601.pdf (visited August 30, 

2006). 31DoD Report at pp. 39–42. 32DoD Report at p. 13. The author of the DoD Report insists that his own data must be incorrect because such data are is inconsistent with a study by the Consumer Credit Research Foundation (fn. 18, supra) that found the incidence of payday-loan use by enlisted military personnel 

at 13%. But the Foundation only surveyed personnel who live on and in the immediate vicinity 

of military bases in the continental United States; if deployed and otherwise stationed personnel 

—who generally will not have access to payday loans at retail locations—were included in the 

denominator, the result would likely be much lower and consistent with the DoD Report’s 5% 

figure. 33 Id. 34 Center for Responsible Lending, Fact v. Fiction: The Truth about Payday Lending Industry 

Claims. http://www.responsiblelending.org/issues/payday/briefs/page.jsp?itemID=29557872 

(visited August 30, 2006). 35DoD Report at pp. 37–38. 

difficulties. Without such information, Congress cannot make an informed decision 

regarding the legislative action, if any, to be taken. It may indeed be the case that 

some change is warranted, but it is impossible to draw any conclusions from the 

haphazard presentation of data contained in the DoD Report. 

—No Meaningful Percentage of Service Members Appear to be ‘‘In Trouble’’ with Payday Loans 

The author’s methodology in drafting the DoD Report is highly problematic. Although a quantitative survey of military personnel was undertaken to determine 

what actual percentage of service members make use of payday loans, that study 

was not used as a vehicle to determine how such loans have contributed to (or deterred) the service members’ economic welfare. Instead, the Defense Department 

now discredits its own survey and substitutes, for quantitative data, a number of 

‘‘case studies’’ culled from reports by ‘‘financial counselors and legal assistance attorneys’’ in instances where assistance had been rendered to service members after 

‘‘being trapped in high interest loans.’’ 28

These ‘‘case studies’’ were not chosen at random from all financial-assistance 

files.29 The ‘‘case studies’’ are not asserted to be a representative cross-section of all 

military families, of all military payday-loan users, or, indeed, of all users of military financial counseling. Rather, they are the product of the author’s attempt to 

extract the most sympathetic (and possibly most egregious) examples of personal financial mismanagement by service members and then to hold them out as the ‘‘evidence’’ of the need for legislative relief. 

It is impossible to determine the prevalence of personal financial problems from 

the anecdotes presented in the DoD Report. Assuming, in the light most favorable 

to the DoD Report’s author, that the 3,393 ‘‘case studies’’ are drawn only from a single short time period, they represent a mere 0.2% of the 1,379,879 active duty personnel; 30 if the ‘‘case studies’’ were collected over a longer period, possibly of years— 

during which the armed forces experienced considerable turnover—then the incidence of such ‘‘cases’’ is much lower than 0.2%. The DoD Report simply does not 

disclose enough information to be able to fix the proper denominator. 

The ‘‘case studies’’ were distilled into 17 anecdotes in the DoD Report. A mere 12 

of these anecdotes involved payday loans.31 Twelve anecdotes should not be deemed 

sufficient evidence to warrant extraordinary legislative action. 

The best evidence of the absence of a ‘‘problem’’ is contained in other, inconsistent 

aspects of the DoD Report itself: 

First, according to the Defense Department’s own data, only 5% of service members 

use payday loans at all.32

Second, the DoD Report states that ‘‘payday loans carry very low risk of loss’’; 33

in other words, the default rate—the best proxy for the rate at which payday-loan 

borrowers ‘‘get in trouble’’—is low. CRL claims the default rate to be 6%.34 Assuming this rate to be accurate, or even in the ballpark, the percentage of all service 

members who ‘‘get into trouble’’ while having payday loans outstanding is about 6% 

of 5%, or 0.3%. In other words, 99.7% of service members either do not use payday 

loans or are unaffected by ‘‘troubled’’ payday loans. 

Finally, the DoD Report itself suggests that the ‘‘problem,’’ if one exists at all, is 

diminishing substantially without legislative action—a 20% decline from 2004 to 

2006—through, among other things, education and command attention.35


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36See, generally, ‘‘MarketWatch: Illness And Injury As Contributors To Bankruptcy,’’ Health 

Affairs (February 2, 2005) (available at http://content.healthaffairs.org/cgi/content/full/ 

hlthaff.w5.63/DC1 [visited August 31, 2006]). 37Details available on request. 

A problem which is not experienced by 99.7% of all service members, and where 

usage is declining to immaterial levels, cannot be said to be worthy of immediate 

legislative action. 

—There Is No Evidence That Payday Loans Cause Financial Hardship or Affect 

Military Readiness 

As noted above, in a very small percentage of cases—0.3% of all service members—there is a default or ‘‘trouble’’ with a payday loan. 

The data do not show whether payday loans caused the service members’ financial 

difficulty, or whether—as is far more likely—the payday loan was merely an unsuccessful attempt to find a solution to a preexisting financial problem. 

The 12 anecdotes presented in the DoD Report involving payday loans fail to 

present, in a balanced way, the totality of the financial circumstances of the borrowers. It is impossible to determine from those anecdotes how the service members 

fell on hard times, whether they sought payday loans before or after experiencing 

other financial reversals, the other obligations they had outstanding, and why they 

were ultimately unable to repay their debts. 

The author of the DoD Report wishes readers to believe that payday loans were 

the cause of the service members’ difficulties in those cases where the service members (a) had outstanding payday loans, and (b) experienced financial difficulties. In 

other words, he concludes that the mere coincidence of payday loans and financial 

difficulties means that payday loans must be the cause of the financial difficulties. 

This post hoc, ergo propter hoc reasoning—that correlation is causation—is a tempting logical fallacy for an author whose conclusion had been reached before the research began. 

Such an explanation is not supported by DoD Report’s data and, more importantly, is inconsistent with what is known generally about how consumers behave 

with payday-loan borrowings. Although the vast majority of payday-loan borrowers 

use such credit responsibly, for its intended short-term purpose and under circumstances where repayment is likely, a small minority of borrowers seek payday 

loans when they are already in serious financial difficulty and when their repayment prospects are poor. Such borrowers may hold a good-faith expectation that 

their circumstances will improve if they can temporize, or they may simply seek to 

postpone the day of reckoning. Either way, this small minority of borrowers is generally operating under an enormous debt load before incurring payday-loan debt. 

Often, the debts have been caused by circumstances beyond the borrower’s control, 

such as unforeseen medical expenses (medical expenses are a factor in approximately half of all personal bankruptcies, even among fully insured debtors 36). In 

such circumstances, a payday loan will have postponed, but ultimately made little 

difference to, the debtor’s financial failure. 

This analysis is borne out by a random sample conducted by CFSA of service 

members’ bankruptcy petitions in cases where payday loans were discharged, which 

provide the details of their debts on a creditor-by-creditor basis.37 Payday-loan debt 

comprises less than 4% of such bankrupt service members’ total liabilities. Perhaps 

more interesting is that none of such petitions reveals either a judgment or garnishment for payday-loan debt, while such judgments and garnishments for other debts 

were commonplace. 

It is likewise difficult, because of the lack quantitative data, to accept at face 

value the DoD Report’s implicit (and unexamined and unexplained) conclusion that 

high-interest-rate lending, without more, adversely affects military readiness. While 

being ‘‘in financial trouble’’ may result in loss of a security clearance, there is no 

logical causation chain that connects merely having access to payday loans to being 

‘‘in trouble.’’ As noted above, the vast majority of payday-loan borrowers repay their 

loans without ‘‘trouble.’’ To the extent that these borrowers are ‘‘in trouble,’’ the 

data available show that they were universally ‘‘in trouble’’ before obtaining paydayloan credit. In the vast majority of cases, payday loans are a solution to a problem, 

not the problem—and there is no objective evidence to the contrary. 

Finally, if it is assumed—as CRL posits—that some military borrowers make use 

of multiple payday loans, the total amount they pay in interest is extremely unlikely, without more, to give rise to a ‘‘readiness’’ problem. A borrower with ten 

loans over a two-year period who pays $600 in interest will have paid less in payday-loan interest than the cost of a twice-weekly cup of coffee from Starbucks. 


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38 ‘‘Predatory Lending and the Military: The Law and Geography of ‘Payday’ Loans in Military 

Towns.’’ 66 Oh. St. Law Rev. 653 (2005). 39Graves and Peterson’s study does not follow customary social science protocols by controlling for, for example, characteristics of the nearby non-military populations such as income, unemployment, home ownership and education levels. Their paper implicitly assumes that all 

those characteristics are distributed equally across each state, and that military bases are 

placed in random locations. Graves and Peterson calculate the ‘‘predicted’’ number of payday 

lenders by calculating a statewide number of payday outlets per person and multiplying that 

number by the population in the military installation’s ZIP Code. Their theory assumes, effectively, that Detroit and Grosse Point should have the same number of payday lenders per person. They fail to provide t-statistics from which a reader can determine whether the difference 

between the ‘‘predicted’’ and ‘‘actual’’ number of lenders is statistically significant. For these reasons, the study cannot be accorded any scientific weight. 40Letter from Penn, Schoen & Berland Associates, Inc., Results of Poll Determination Payday 

Loan Usage Among Active Duty Members of the US Military (January 2005), available at http:// 

www.cfsa.net/genfo/Military-Polling-Results-Memo.pdf (visited September 5, 2006). 

41William O. Brown, Jr. and Charles B. Cushman, Compensation and Short-Term 

Credit Needs of U.S. Military Enlisted Personnel (2006). 

http://www.consumercreditresearchfoundation.org/lfiles/060427MilitaryCredit.pdf (visited August 31, 2006). 

In summary, the DoD Report fails to set forth any evidence from which Congress 

may logically conclude that payday loans cause or contribute to financial difficulties 

for service members. To the contrary, the data suggest that the vast majority of borrowers repay their payday loans without difficulty, as intended, and use them as 

the short-term ‘‘bridge’’ for which they are designed. 

—Alleged ‘‘Targeting’’ of Military Customers is Not Meaningful to this Analysis 

The DoD Report cites at length a study (Graves and Peterson, 2005) 38 purporting 

to show that payday lenders concentrate their retail locations near military institutions in order to ‘‘target’’ potential military borrowers. Even assuming the correctness of this analysis, such putative ‘‘targeting’’ is irrelevant if (a) payday loans are 

not ‘‘predatory’’ (within the meaning of the 2006 Act), or (b) payday loans do not 

materially cause or contribute to a decrease in economic welfare for borrowers. As 

noted above, the DoD Report sheds heat, but no light, on these matters. 

Moreover, even if the concentration data are credited, there are innocent as well 

as sinister explanations for such concentration. For example, areas around military 

bases universally contain large numbers of support businesses, the employees of 

which are often more squarely within the demographic profile of payday-loan users 

than service members themselves. 

Graves and Peterson also assume that demographics alone explain retailers’ storelocation decisions. They do not consider, and thus do not include in their analysis, 

other factors that may explain these decisions. For example, rental costs, payroll 

costs, zoning regulations and proximity to other retail outlets (‘‘agglomeration effects,’’ in economic terms) are all factors in store-location strategy.39

The ‘‘targeting’’ argument also defies common sense. Military customers account 

for a very small percentage of all users of payday loans.40 It is illogical that paydayloan companies would devote disproportionate resources to marketing to such a 

small percentage of their customer base. 

Finally, the unspoken message of both the DoD Report and of Graves and Peterson is that it is somehow wrongful for businesses to address their services directly 

to groups of their potential customers. Yet military borrowers have legitimate needs 

for short-term credit, based on their age, their stage in the economic lifecycle and 

the high value to them of immediate consumption of certain kinds of goods and services: 

While military compensation tends to be stable, the household cash expenditures of military enlisted personnel can be irregular because of features of the military lifestyle and rules governing service. Enlisted personnel, because of their young age, general standard of living and historical 

low incomes, are not likely to have amassed significant precautionary savings to address these issues. However, they are able to smooth these irregularities in cash outflows by taking on debt, and they can repay that indebtedness through their stable incomes. 

Because of their youth, military enlisted personnel tend to be at the stage 

in life where the acquisition of durable goods can provide a stream of perceived economic benefits that substantially exceeds the cost of consumer 

credit.41

In the final analysis, however, there is simply no analog for Graves and Peterson’s 

‘‘targeting’’ analysis in any other field of endeavor. Public policy regarding the servVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00198 Fmt 6621 Sfmt 6621 E:\HR\OC\A303.XXX A303

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42 Rationing and under-the-table payments are common results of statutory price ceilings. 

‘‘Loan sharking’’ is the most prevalent result of artificially low usury ceilings. 43Steven M. Crafton, An Empirical Test of the Effect of Usury Laws, 23 J.L. & Econ. 135, 

145 (1980); James E. McNulty, A Reexamination of the Problem of State Usury Ceilings: The 

Impact in the Mortgage Market, 20 Q. Rev. Econ. & Bus. 16, 26–27 (1980); Loretta J. Mester, 

Why Are Credit Card Rates Sticky?, 4 Econ. Theory 505, 505, 521 (1994); Usury Laws: The Bad 

Side of Town, Economist, Nov. 28, 1998, at 30. 

ices offered by fast-food stores, convenience stores, gasoline stations, supermarkets, 

liquor stores or casinos is not derived from studies of the concentration of their outlets around military bases. Rather, an objective and quantitative determination 

must be made regarding the nature of the services offered and their value to society. 

The DoD Study fails to provide a scientific and factual basis for such a determination. 

III. The DoD Report’s Conclusions Are Not Supported by Economic Theory 

or Sound Public Policy 

The DoD Report fails to provide quantitative and scientific evidence to demonstrate the existence of a ‘‘problem’’ requiring a legislative solution. But even if the 

DoD Report’s deeply flawed analysis were credited, the principal recommendations 

of its author find little theoretical support in economic literature or public policy. 

Although apparently well intentioned, implementation of the author’s recommendations will not provide a meaningful benefit to service members and will materially 

diminish the economic choices available to military personnel, while creating unintended consequences and problems. These recommendations should therefore be rejected. 

—36% APR Ceiling 

The DoD Report’s principal and most dramatic recommendation is a 36% acrossthe-board federal interest-rate ceiling on all lending to military borrowers. If this 

interest rate were to be applied to payday lending, it would fix the consumer price 

below the lenders’ marginal costs and well below the lenders’ average costs (Flannery and Samolyk, 2005, fn. 9). The practical effect of such a rate cap would be to 

eliminate the legitimate market for such lending altogether. 

The economic effects of price controls of any kind are notorious. While affordability and consumer protection are generally cited as the goals of price ceilings, 

price controls invariably become a wealth-redistribution mechanism. This mechanism evolves into a system of implicit subsidies, under which some rates are maintained at levels that are artificially high so that others can be restrained. Usury 

ceilings erode service quality, as lenders reduce the expenses of their operations and 

weed out all but the most creditworthy borrowers; pricing to the most desirable customers is invariably increased so that the least desirable customers can be subsidized, if they are served at all. The distortion of market forces that occurs with 

rate caps will deprive the most desperate of borrowers of the opportunity to borrow 

from legitimate, regulated lenders and instead compel marginal borrowers to deal 

with lenders who are willing to lend illegally42 and who, more likely than not, will 

pursue just as illegal collection practices when the loans come due. 

The DoD Report assumes, without any theoretical or practical foundation, that: 

(a) payday loans will continue to be available in a legitimate market, even if rates 

are fixed below lenders’ costs; or (b) if such loans are unavailable, borrowers will 

behave in a manner deemed more ‘‘responsible’’ financially. 

History teaches that Congress has vast powers, but it cannot suspend the laws 

of economics; needy borrowers will obtain the credit that they need, even if they can 

only do so illegally. 

The effect of a legitimate and regulated market for payday loans has been salutary. As noted above, CRL claims that at least 94% of payday-loan borrowers repay 

their loans without default; approximately 99.7% of all service members appear to 

be unaffected by payday-loan defaults. There is no meaningful black market for 

military credit, so that the opportunities for a wide range of criminal behaviors simply do not exist—yet. 

Consumer credit experts, even those who favor usury ceilings, recognize the bluntness of usury as a tool for regulating consumer credit policy.43 Other tools, while 

less direct, may have a consumer-friendly effect while allowing the market itself to 

create the proper pricing. For example, liberalized bankruptcy exemptions and restrictions on creditor remedies (such as on garnishment and collection) force lenders 

to internalize the costs of improvident credit decisions while not restraining prices 

artificially. Likewise, as the DoD Report recommends, enhanced disclosures may be 

useful to promote informed shopping and to eliminate the effects of unintended 

transactions. Finally, there are a variety of approaches that are gaining popularity 


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44See, e.g., Commission of the European Communities, Proposed Directive on Consumer Credit Agreements (2005), available at http://ec.europa.eu/consumers/conlint/finalserv/ consldirective/2ndproposallen.pdf (visited August 31, 2006). 45See, generally, Baxter, W.F., ‘‘Section 85 of the National Bank Act and Consumer Welfare,’’ 

1995 Utah L. Rev. 1009, 1023: 

‘‘Finally, notwithstanding the familiar populist politics of usury laws, the greatest gains from 

federal preemption are likely to accrue to the least well-off consumers in society. Regulatory restrictions in credit markets hurt highest-risk borrowers the most. Based on a review of the empirical literature estimating the impact of restrictive interest rate ceilings before Marquette, one 

study concludes that ‘lower-income families and families headed by younger persons would seem 

to be among those most likely to be denied credit as a result of such [interest rate] ceilings.’ 

[footnote omitted] In credit card markets in particular, both the Credit Research Center survey 

data and a New York State study echo this result. These studies indicate that pre-Marquette 

rate ceilings affected the probability that a low-income or lower-middle-income family would 

hold a credit card but did not affect the probability of cardholding for higher-income families.’’ 46 Id. at 1022. 47DoD Report at p. 44. 48 ‘‘Payday lenders have grown dramatically in the past few years precisely because they 

are meeting both a need and a service banks and credit unions have failed to provide—convenient, small loans on a short-term basis . . . Payday lenders are fast, friendly and have convenient hours; they are open until 6 p.m. and on Saturdays . . . They have a good business model; 

they fill a need and provide a service that people want.’’ National Association of Community 

Credit Unions, Credit Union Alternatives to Payday Lending (January 2006), available at 

http://www.naccu.coop/whitelpapers.html (visited August 29, 2006). 

in Europe but have not been attempted in the United States, such as requiring lenders to give advice regarding appropriate forms of credit and so-called ‘‘responsible 

lending’’ rules.44 (The CFSA Best Practices, fn. 22, are a form of ‘‘responsible lending’’ principles.) There is thus sound scholarly support for the notion that usury regulations should be the last resort, not the first, in regulating credit markets. Evidence of need for such crude re-regulation is simply absent from the DoD Report. 

The DoD Report proposes to reverse years of enlightened deregulation of credit 

markets. This deregulation has resulted in unprecedented access to credit for lowincome borrowers.45 Moreover, deregulation has caused the average cost of credit to 

existing borrowers todecline. 46

Service members obviously appreciate the convenience and ease of obtaining a 

payday loan; 78% of service members agree that ‘‘most people benefit from the use 

of credit.’’ 47 Other authorities are in accord.48

The state legislatures of 37 states have performed this calculus and reached conclusions that are directly contrary to those of the author of the DoD Report. Recognizing that it is better to have a robust and competitive but regulated market for 

the kinds of credit that borrowers actually demand, these states have, after careful 

study, both enabled such lending and set interest-rate ceilings at levels that exceed 

lenders’ costs. The DoD Report discounts the decisions of these state legislatures entirely. 

Throughout, the DoD Report notes that many borrowers turn to payday lending 

because they already have bad credit. The DoD Report’s ‘‘solution’’ is to eliminate 

a borrowing option when the damage (i.e., bad credit) has already been done. The 

most appropriate and effective policy response would be one that addresses the root 

cause, not one that eliminates a possible, albeit temporary, solution. Education and 

the fostering of sound personal finances would create more financial options for 

households than any other solution. 

The DoD Report gives no attention to the possible harm caused by eliminating 

lawful access to payday-loan credit for the 99.7% of service members who either do 

not payday loans at all, or who use them responsibly and for their intended purpose. 

Further study of this issue is warranted prior to material legislative change. 

—Ability to Repay 

As noted above, the DoD Report discusses the extension of credit without regard 

to ability to repay. Payday lenders never extend credit without consideration of the 

borrower’s ability to repay. An essential feature of any positive credit decision is 

that the borrower has a steady source of income, and that income can be used to 

make loan payments. This is the same criterion that is employed by providers of 

both secured and unsecured credit of virtually every kind (with the possible exception of pawn lending). 

The overarching unique feature of a payday loan is that the borrower provides the 

lender with a check for the aggregate of the loan principal and finance charge at 

the inception of the relationship; the lender knows that the check is likely to be honored because the borrower’s checking account is periodically replenished by the borrower’s employer. It is this very check that provides the lender with the borrower’s 

assurance of repayment. The DoD Report stands logic on its head by recommending 


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49This law protects not only those on active duty but also Reservists and activated members 

of the National Guard. 50 U.S.C. App. § 501 et seq. The U.S. Supreme Court has said that the 

predecessor statute should be read ‘‘with an eye friendly to those who dropped their affairs to 

answer their country’s call,’’ Le Maistre v. Leffers, 333 U.S. 1, 6 (1948), and its provisions are 

generally considered to be non-waivable. 

that this check be dispensed with, thereby eliminating the lender’s assurance of the 

borrower’s ability to repay. 

If taking the borrower’s check were proscribed, a payday loan would have very 

different economic characteristics, because the lender’s collection costs and overall 

credit experience would be dramatically and adversely affected. Elimination of the 

check would drive lenders’ costs up to the point were it would no longer be economic 

to extend credit at current market rates; such credit would be unthinkable at the 

proposed ceiling rates. 

—Arbitration 

The DoD Report recommends that arbitration clauses in loan contracts with military borrowers be forbidden. As noted earlier in this letter, there is no evidence of 

a ‘‘problem’’ to which this ‘‘solution’’ purports to be responsive. Overall complaint 

rates to regulators regarding payday loans are extremely low: on the order of magnitude of one complaint per million loans. Other than litigation involving the nowdefunct ‘‘bank model,’’ there have been only a handful of reported cases relating to 

the payday-loan industry. 

As noted above, agreeing to arbitration does not amount to the waiver of any substantive rights. By agreeing to arbitrate, a consumer submits his claims to an impartial tribunal that is authorized to award any remedy that a court might award, 

including injunctive relief, attorneys’ fees and costs. Arbitration is more expeditious 

and less expensive than litigation and produces results with which consumers are 

nearly universally satisfied. 

This recommendation is inconsistent with federal public policy that encourages 

non-judicial resolution of disputes and should be rejected. 

—Other Recommendations 

CFSA takes no position regarding the remaining recommendations of the DoD Report. 

Although the report makes the uncontroversial suggestion that uniform cost-ofcredit disclosures be given to military borrowers, in fact such disclosures are already 

being made to all payday-loan borrowers because they are required under the Truth 

in Lending Act, 15 U.S.C. § 1601 et seq., and the Federal Reserve Board’s implementing Regulation Z, 12 C.F.R. Part 226. The requirement for such disclosures is 

likewise incorporated in many of the state-law provisions that enable payday lending. It is unclear whether this recommendation is intended to remedy a perceived 

deficiency in payday lending or in some other form of credit. 

The report also makes the recommendation that lenders be precluded from contracting for waivers of the protections provided by the Servicemembers’ Civil Relief 

Act.49 Such waivers are unenforceable in any event, and it is once again not clear 

what wrong is sought to be remedied by the author’s recommendation. 

Conclusion 

The DoD Report is biased, unscientific and fails to follow the routine social-science 

protocols that enable policy makers to reach informed decisions regarding consumercredit law. The report makes recommendations that are unsound from a policy 

standpoint, and those recommendations are intended to address problems that have 

not been proven to exist with any demonstrated rate of incidence. The overwhelming 

evidence is that payday loans are employed by borrowers for their intended shortterm purpose, and nearly all borrowers repay them as agreed, without financial distress. 

The DoD Report should be rejected in its entirety. 

PREPARED STATEMENT OF CHRISTOPHER L. PETERSON 

ASSISTANT PROFESSOR OF LAW, LEVIN COLLEGE OF LAW, UNIVERSITY OF FLORIDA

SEPTEMBER 14, 2006 

It is an honor to appear today before this Committee. Thank you for the opportunity to share some thoughts on predatory lending practices directed at military 

personnel and their dependents. My name is Christopher Peterson and I am a law 


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1. ‘‘For example, Franklin once wrote: Think what you do when you run in Debt; You give 

to another Power over your Liberty. If you cannot pay at the Time, you will be ashamed to see 

your Creditor; you will be in Fear when you speak to him; you will make poor pitiful sneaking 

Excuses, and by Degrees come to lose your Veracity, and sink into base downright lying; for, 

as Poor Richard says, The second Vice is Lying, the first is running in Debt. . . . Poverty often 

deprives a Man of all Spirit and Virtue: Tis hard for an empty Bag to stand upright . . . . The 

Borrower is a Slave to the Lender, and the Debtor to the Creditor, disdain the Chain, preserve 

your Freedom; and maintain your independency: Be industrious and free; be frugal and free.’’ 

David M. Tucker, the Decline of Thrift in America: Our Cultural Shift From Saving to Spending 

9–10 (1991); 7 The Papers of Benjamin Franklin 342–49 (Leonard W. Labaree ed., 1963). 

professor at the University of Florida where I teach commercial law and consumer 

law classes. I commend you, Mr. Chairman, Senator Sarbanes, and other members 

of the Committee for organizing these hearings and for providing an opportunity to 

discuss this important and timely national issue. 

As you know, the Department of Defense recently released a large report on predatory lending to military personnel. I have been asked to share my reactions to this 

report. In short, I believe that deceptive and onerous credit is a significant problem 

for both the military and for many middle and lower income Americans. The Department of Defense’s report does an excellent job of compiling the various predatory lending threats to its personnel and in recommending an appropriate policy response. In this testimony, I will briefly discuss some historical, economic, geographic, and legal considerations which may be of assistance to you in deliberating 

on the meaning and significance of this report. 

Military Personnel Have Historically Been Vulnerable to Oppressive Credit 

Predatory lending is not a new phenomenon either in American or world history. 

Since humanity’s earliest recorded history, some creditors have always been willing 

to take advantage of desperate, incautious, or naive borrowers by making loans with 

ruinous interest rates and remedies. While today’s borrowers wonder whether they 

will have sufficient funds in their account to cover a check post-dated two weeks 

in advance, ancient debtors dreaded ‘‘the end of the moon’’ when their high cost 

loans came due. 

Moreover, government and religious leaders of virtually all complex civilizations 

have tried to limit the harsh consequences these contracts can have both for borrowers and for their communities and institutions. It is no coincidence that humanity’s very first recorded comprehensive legal system, the Code of Hammurabi (c.1750 

B.C.E.), includes aggressive consumer protection rules. According to legend, the 

Babylonian Emperor Hammurabi ascended a mountain where Shamash, the Babylonian God of Justice gave him a comprehensive code which was used to govern that 

civilization for over a thousand years. Included in the statute was a usury law that 

limited interest rates to 20% per annum for loans of silver and 33% on loans of 

grain. The text of the code bears a remarkable similarity to interest rate caps adopted thousands of years later, including the interest rate cap purporting to limit interest rates to 18%, which is still in the State code in my home state of Florida. Ironically, the loans offered by companies that surround virtually all of our military 

bases would have been illegal in ancient Babylon. 

History books are full of evidence suggesting military personnel have tended to 

be especially vulnerable to oppressive moneylenders. For example, violent riots 

broke out in the early Roman Republic (before they adopted a usury law) when the 

public learned of an oppressive credit contract between a military veteran and a 

money lender. When the veteran was unable to pay his debt the moneylender took 

his farm and imprisoned him. The resulting riots, usually called the ‘‘First Secession’’ by Roman historians, threatened to undermine the entire emerging Roman Republic. Public resentment of oppressive credit contracts was stabilized when the government adopted an interest rate cap in the twelve tables, a law which served as 

the foundation of Roman law and still influences civil legal systems in Europe and 

the state of Louisiana. Throughout most of the Roman Empire and eventually the 

Byzantine Empire, the government capped interest rates at 12% per annum. 

All throughout our national history—with the exception of the past decade or 

two—we have attempted to protect military and non-military borrowers alike with 

usury laws. The founding fathers brought over English interest rate caps when they 

arrived in America. When the U.S. Constitution was ratified, low usury ceilings and 

a frontier thrift ethic were nearly universally agreed upon by America’s first leaders. It is extraordinarily unlikely that George Washington, Thomas Jefferson, or Alexander Hamilton would have tolerated 500 percent interest rate loans to members 

of the Continental army. Certainly Benjamin Franklin, who frequently wrote on the 

subject and was a strong proponent of usury law, would have been outraged at today’s military loans.1


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2. Although the government has attempted to assist in this respect by passing the Truth 

in Lending Act, most people agree that there are serious problems with this statute as it is currently written. TILA disclosures are difficult to understand, come far too late in negotiations 

(after a loan applicant has already decided to borrow), and are riddled with exceptions that distort the usefulness of disclosures. Moreover, inflation has outdated the dollar limits to the scope 

Continued 

During America’s rise to international power in the twentieth century federal and 

state governments relied on usury laws to deter, educate, and exercise symbolic 

moral leadership on predatory lending. During the years when so-called ‘‘greatest 

generation’’ governed our country, very few states or leaders were willing to depart 

from our traditional usury laws. Our military, along with our allies (all of which, 

incidentally, did not tolerate predatory lending to their troops either), managed to 

win the Second World War without the assistance of triple digit interest rate loans 

in whatever form those loans might take. In the economic boom years following the 

war, our country became more comfortable with using credit to finance a middle 

class lifestyle. But it was not until much later that loopholes in our law, including 

the Supreme Court’s historically dubious interpretation of the National Bank Act, 

allowed lenders to begin marketing loans with terms that in past generations would 

have been associated with illegal loansharks. 

A long term historical perspective suggests that the Department of Defense’s recent report on predatory lending is actually quite conservative in substance and 

modest in proposals. Any responsible look at our national history reveals that at no 

other time would the Pentagon have been forced to implore the Congress to protect 

its personnel from triple digit interest rate loans. In every previous American generation, the Department of Defense’s substantive legal recommendations would have 

been accepted with little or no debate. 

The Department of Defense Report is Economically Sound 

Free and competitive enterprise is one of the backbones of American society. And, 

no institution is more responsible for preserving our freedom to conduct business 

than the Department of Defense. However, I would respectfully counsel the Senate 

to recall the great difference between a competitive market and market anarchy. 

In a competitive market, self-interested, autonomous commercial behavior creates 

better policy outcomes than government intervention, because each individual can 

be trusted to make their own resource allocation decisions. As each individual 

makes decisions about where to invest their time, services, and funds, competitive 

markets naturally evolve into a result that is better than could have been achieved 

had government intervened. Adam Smith famously compared this process of individual, self-interested decision making to an ‘‘invisible hand’’ that guides social policy to the optimal outcome. 

Unfortunately, sometimes the invisible hand alone does not work. Responsible 

leaders uniformly agree that the government must intervene in the market for some 

goods and services. We can all agree that the U.S. government should ban free markets for weapons grade plutonium, child pornography, or heroin. These products 

have characteristics associated with them that make an unregulated market unacceptable. The sale of plutonium to terrorists would likely impose the highest 

externalities on those killed by a bomb made as a result of the contract. We ban 

child pornography because contracts to purchase it create an incentive to assault 

our children, and because we refuse to recognize economic demand for that product 

as morally legitimate. We ban the sale of heroin because buyers of this product tend 

to make non-rational decisions by virtue of the product’s addictive characteristics. 

Our ancient (and only recently relaxed) laws against predatory loans are evidence 

of analogous market imperfections associated with credit contracts. 

At least three market imperfections prevent the market for high cost short term 

loans from resolving to an efficient equilibrium: (1) imperfect information, (2) behavioral distortion, and (3) externalities. First, consumers have great difficulty comparing the prices of credit. Despite the best efforts of our educational system, many 

people in our society still have (and likely will always have) difficulty learning to 

read or make simple mathematical calculations. The ‘‘invisible hand’’ cannot create 

efficient outcomes when individual borrowers do not compare the price of a loan to 

its opportunity cost. In markets that are targeted by predatory lenders, it is likely 

that a large percent of the served population have little or no idea how to compare 

credit prices. Moreover, because creditors can hide and obscure those prices through 

inaccurate disclosure, hidden fees (including contingent charges such as late fees, 

over-the-limit fees, attorney fees, etc.), and worthless add-on products that even rational borrowers will not attempt to shop, since doing so is likely to be an unproductive use of time.2


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of the statute and the remedial damage awards that deter non-compliance. Besides, predatory 

lenders consistently disregard and obscure TILA disclosure rules anyway. See generally CHRISTOPHER L. PETERSON, TAMING THE SHARKS: TOWARDS A CURE FOR THE HIGH COST CREDIT MARKET (U. Akron Press, 20034) 3Steven M. Graves & Christopher L. Peterson, Predatory Lending and the Military: The 

Law and Geography of ‘‘Payday’’ Loans in Military Towns, 66 Ohio St. L.J. 653–832 (2006). 

Second, Consumers, including military personnel, do not always make economically rational decisions. As the nobel prize winning research of Daniel Kahneman 

and Vernon Smith demonstrates, people often fail to match their estimation of the 

value of the a product to the utility they actually receive from it. For example, consumers often unreasonably discount the value of future income. Sometimes, for better or worse, people want today, what they should wait for until tomorrow. That is 

why it is difficult to save for retirement and it is one reason why many people borrow more money than they should. Similarly, consumers tend to overestimate their 

own ability to control financial outcomes and underestimate factors outside their 

control, such as unexpected car repairs, illness, payroll mistakes, job loss, etc. This 

common tendency leads borrowers into believing they can quickly repay high cost 

loans, when in reality, they cannot. Predatory lenders understand how these behavioral distortions operate in the credit market, and intentionally exploit them. This 

is why advertisements for ‘‘fast cash’’ or ‘‘easy credit’’ can tempt people, including 

soldiers, sailors, airmen, and marines, into making unreasonable financial decisions. 

Third, predatory loans have significant costs—usually referred to as 

externalities—born by those not privy to the contract. For example, when a predatory loan does not only hurt the borrower, it can also lead to deprivation of resources that would have otherwise gone to the borrower’s children or other dependents. Neighborhoods that host predatory lenders often suffer from lower property 

values. Utilities, hospitals, land lords, and mainstream financial service providers 

all have greater difficulty obtaining timely payment from consumers who become 

mired in high cost debt. Because they tend to be more aggressive than other creditors, predatory lenders frequently skip to the head of the line obtaining payment 

before others with less questionable debts. 

The Department of Defense report should be seen as an emphatic example of the 

externalities associated with predatory loans. Military leaders are speaking out, explaining that predatory lending is eroding the military readiness of our armed 

forces. Who better to know whether this is true than the Pentagon along with the 

many generals, admirals, and other officers who have spoken out on this issue? By 

trapping military borrowers in high cost predatory loans, lenders are disrupting the 

family lives and emotional well being of those who are protecting us in a complex 

and dangerous world. The evidence cited by the Pentagon on the thousands of service members who have suffered revoked security clearances as a result of predatory 

lending should be seen as concrete, unimpeachable evidence of a market distorting 

externatility associated with high cost consumer loans. 

The Department of Defense Report is Empirically Sound 

A previous study conducted by Professor Stephen Graves, of California State University, Northridge, and myself examined the location patterns of one type of predatory lender in relation to military installations around the country.3 In our study 

we examined 20 states, 1,516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases. We found high concentrations of predatory lending businesses in counties, zip codes, and neighborhoods in close proximity to military bases. 

Our study controlled our observations by comparing the density of payday lender 

locations in military areas to statewide averages and also by comparing payday 

lender locations to bank locations. We could find no statistically reasonable explanation for these location patterns except for the presence of military personnel living 

on or in close proximity to military bases. 

This pattern existed in every state we looked at, except for New York, which had 

consistently and aggressively enforced its 25 percent per annum interest rate cap. 

Unlike every other major military installation we studied, Ft. Drum (home to the 

Army’s 10th Mountain Division) in upstate New York was not surrounded by payday loan outlets. While other credit options were available, including finance companies, credit unions, banks, thrifts, and pawnshops, there was not a large on the 

ground force of triple digit interest rate lenders surrounding the base. In contrast, 

voluntary trade association guidelines, or so-called ‘‘best practices’’ agreements, did 

not create any demonstrable influence on the geographic patterns associated with 

payday lenders and military installations. Similarly, a variety of ancillary state consumer protection rules, such as rollover limitations, internet databases, and licensing requirements, did not deter payday lender clustering around military bases. We 


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4 A bibliography of my research is available at http://www.law.ufl.edu/faculty/peterson/ 

.. 

concluded that usury laws—the time tested, conservative, historical American response to predatory lending—appeared to be the best legal tool for addressing concerns about predatory lending to military personnel. 

The Department of Defense report further corroborates our findings. It uses a variety of quantitative and qualitative data to establish the existence of a significant 

predatory lending problem. The report makes realistic estimates of the percent of 

service members using payday loans. The report also accurately summarizes a variety of other potentially predatory credit products used by military personnel. The 

report accurately describes Department of Defense financial education efforts, as 

well as the inherent limitations to this approach. The report accurately summarizes 

the many better alternatives to predatory loans available to military borrowers, and 

pragmatically explains that these alternatives are not likely to prevent service members from falling into predatory debt traps. The report persuasively presents compelling qualitative narratives of service members and their families who have suffered 

real personal, financial, emotional, and professional lossses as a result of predatory 

lending. And the report compiles a useful list of suggestions for policy reform—all 

of which would meaningfully improve the lives of military service members. 

In conclusion, I do have one reservation with the Department of Defense report. 

I am afraid the comprehensive nature of the report might be used as a tool to prevent immediate reform of credit laws. While I believe comprehensive reform is necessary, reestablishing our traditional, time-tested usury law should be a necessary 

first step on the path to comprehensive reform. Accordingly, I strongly urge Congress to take the opportunity presented by the Talent-Nelson amendment to this 

year’s defense authorization bill. This amendment reasonably re-establishes a cap 

on allowable interest rates charged to military personnel at a generous 36 percent 

per annum. Loans in excess of this amount have proven historically dangerous, economically inefficient, and geographically targeted at the military. For additional information on these issues I invite the Committee members and their staff to review 

my prior published writing.4


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ADM. CHARLES S. ABBOT (RET.) 

Q.1. While military relief societies seem to present a means to help 

soldiers in financial distress, a recent Washington Post article 

claimed that these societies have cumbersome procedures and require referrals from a ranking officer prior to obtaining financial 

assistance. Do these procedures create obstacles for service members and if so, what can be done to reduce or eliminate them? 

A.1. The mission and charter of each service’s Military Aide Society 

(MAS) are designed to best support the requirements of the service. 

Each provides a different level and variety of services to their clients. All the MAS have an agreement that allows them to provide 

assistance to service members and families from the other military 

services. 

The Navy-Marine Corps Relief Society was established in 1904 

and has been dedicated to the financial health and welfare of Sailors, Marines and families since. Though a private non-profit, volunteer service organization, we work in partnership with the Navy 

and Marine Corps to support the financial readiness of the service 

member and family. With 53 full service offices on Navy and Marine installations around the world, we provide financial, educational and other assistance to those in need. The majority of our 

assistance is provided for basic living expenses, vehicle repair, and 

emergency travel. 

As a charity supported by the generosity of active duty and retired Sailors and Marines, the Society has a responsibility to provide assistance based on valid needs. In every case, we require 

verification of eligibility, and in non-emergency cases we verify financial need. Our caseworkers are well trained, case management 

records are automated, and our procedures well refined and efficient. We require no referral by the service member’s chain of command. Many of our clients are ‘‘walk-ins’’ at our offices. Every client’s case is thoroughly reviewed by a qualified caseworker. 

We have a policy of confidentiality and do not involve the clients 

command unless there is misconduct or criminal activity. If a client’s request is denied at the local level, the client may decide to 

involve the command and request an appeal from the Society’s 

leadership. 

I am proud to say that during our most recent (2006) client satisfaction survey, the Society received a 98% satisfaction rate. 

RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY 

FROM WILLIAM O. BROWN, Jr. 

Q.1. You criticize the Department of Defense Report methodology 

on several grounds. One of these grounds is that the Report fails 

to show how payday loans cause financial problems, rather than 

being a mere symptom of larger financial problems. Could you explain this lack of causation argument? 

A.1. The Department of Defense Report only provides anecdotes of 

military members that had financial difficulties and acquired payday loans. The Department of Defense does not conduct a study of 

bankruptcy filings by military personnel in order to determine if 

there is any systematic relationship between payday lending and 


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bankruptcy. The Report provides no evidence that financial problems among military personnel are caused by their usage of payday 

loans. Payday loans are small denomination loans intended to solve 

short-term financial problems and my research indicates that most 

members of the military use them for that purpose. The rate of default on payday loans is in the neighborhood of 5% indicating that 

few individuals with payday loans have larger financial problems 

that would prevent the repayment of the loans. Most individuals 

that declare bankruptcy or experience severe financial problems 

have a variety of financial problems caused by unexpected negative 

life events or overspending. These problems are usually far larger 

in scale than the amount borrowed through payday lending. To the 

extent that those with severe financial problems use payday loans, 

they already have these problems when they obtain the payday 

loans and using them as a last attempt to pay off other creditors. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM WILLIAM O. BROWN, Jr. 

Q.1. What would be the potential unintended consequences of price 

caps on individuals seeking access to the growing demand for 

short-term, small denomination credit? 

A.1. There was a study in 2005 by two economists at the FDIC that 

found that the current price of payday loans just cover the cost of 

providing this service. If prices are capped, then the industry will 

no longer be able to profitably provide these loans and legitimate 

providers will no longer offer them. There is a demonstrated need 

for such products by military personnel. These military personnel 

will no longer be able to use what they consider as a valuable 

source of short-term credit and will likely turn to alternative 

sources for their short term borrowing needs. These may include 

legal lenders such as pawn shops where borrowers risk forfeiting 

personal possessions or credit cards where borrowers are more likely to carry an ongoing credit balance. Some former payday loan 

customers will almost certainly turn to lenders that are willing to 

violate both the legal interest rate cap and legal collection practices 

when dealing with borrowers. Studies indicate that countries with 

more stringent interest rate caps on consumer loans have larger 

and more active illegal lending markets. As a result, the price caps 

may have the ultimate result of sending military borrowers to legal 

credit products that are less well fit for their needs or illegal credit 

products that come with much higher costs than the existing legal 

products. A combined program of encouraging more competition in 

the market for short-term loan products and better education about 

financial products among military personnel would be more beneficial than the proposed interest rate caps. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM LYNN DRYSDALE 

Q.1. The Report discusses coercive actions that are often employed 

by lenders to collect on debts, such as garnishment of wages or attempting to collect when a customer has been deployed. The Report 

also mentions that many loan contracts require borrowers to waive 


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their rights to legal action or any special legal protections afforded 

to them. What evidence have you seen of either coercive collections 

actions or mandatory waivers of important legal rights? 

A.1. In Florida payday lenders are called deferred presentment providers. I see many varieties of coercive collection practices and all 

lenders include clauses in their contracts prohibiting consumers 

from filing lawsuits against the lenders and cutting off other consumer rights. These contracts and practices are particularly harmful in these high cost, short-term loans because the loans are almost impossible to timely pay and are deceptively marketed. I have 

seen coercive collection techniques lead to the payment of payday 

loans before other essential household bills exacerbating rather 

than alleviating financial emergencies. Also, the coercion leads to 

stress which affects individuals and their families. 

Representative samples of coercive collection techniques and 

mandatory waivers of important legal rights follow: 

• Mr. Hubbell and his wife are both service members. Due to the 

costs of his wife’s illness and her inability to work, they took out 

a payday loan which eventually led to thousands of dollars in outstanding loans from both payday lenders and installment loan companies. Over a five year period, the more they paid, the more they 

owed. They have repaid tens of thousands of dollars and still owe 

over $12,000, a monthly payday loan debt of just over $3,500. Most 

of the repaid sums went to pay off other loans and provided no benefit to the Hubbells except for digging them deeper into debt. 

Mr. Hubbell is an air traffic controller. Therefore, he felt he had 

no option but to stay on the debt treadmill because of the fear created by threats of criminal prosecution and the inevitable consequence of lenders’ contacts to Mr. Hubbell’s command which 

would lead to loss of his security clearance and his rank. Lenders 

were harassing him on base and at home. One day a lender called 

him while on the ship, cussed at him and threatened him. Mr. 

Hubbell told the collector to contact his attorney. Twenty-five minutes later his superior officer called and said the lender had called 

him twice in the short period of time since he hung up from speaking with Mr. Hubbell. The collector harassed the superior officer 

and demanded the name and number of the base Commanding Officer. 

Each of the lenders required either payment by allotment or electronic assess to his bank account as additional security, required 

him to allow them to debit his account more than once in one day, 

and one required him to sign an illegal wage assignment. See Exhibit ‘‘A’’ attached. 

Each of the loan contracts contained a unilateral, mandatory arbitration clause. The required arbitration was expensive and prevented Mr. Hubbell from suing them for illegal actions while the 

lenders retained the right to take money directly from his account 

without prior notice. 

• Mr. Bartholomew borrowed from a sham lender who pretended 

to provide ‘‘rebates’’ instead of loans when a person purportedly 

purchased Internet access. The disguise was used so the lender 

could hide criminally usurious loans, ignore the Florida anti-rollover laws and ignore Mr. Bartholomew’s right to a grace period. 


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This lender required electronic access to his account as additional 

security for his loan. When he was unable to keep up with payments, the lender directly debited his account for more than the 

amounts needed to pay off his loan. The lender also harassed him 

on his ship and called his superior officers. He was faced with not 

having enough money for groceries and rent for his family, including three small children; they debited his account multiple times 

in one day. When he closed the account because the lender’s actions 

rendered the account overdrawn, the lender sent him a letter which 

was copied on to the official letterhead from our local State Attorney’s Office threatening to put him in jail for failing to pay the 

loan. 

Mr. Bartholomew’s contract also contained a unilateral, mandatory arbitration clause. The arbitration required was expensive and 

attempted to prevent Mr. Bartholomew from suing them for illegal 

actions while the lender retained the right to take money directly 

from his account. The clause contained in his contract also limited 

the remedies he could seek in arbitration. See Exhibits ‘‘B’’ (Loan 

Document) and ‘‘C’’ (unauthorized letter using State Attorney letterhead) attached. • Mr. Wall had an installment loan through a ‘‘military’’ lender 

that required automatic access to his bank account for electronic 

payment and required him to allow multiple debits in one day for 

a single loan. When he did not make a timely payment, the lender 

‘‘hit’’ his bank account eleven times in one day. The lender then 

charged him $525.00 in late and bad check fees and his credit 

union charged him $275.00 in NSF charges. See Exhibit ‘‘D’’ attached. 

The lender also included provisions in his contract preventing 

him from suing the lender for illegal actions and requiring him to 

take all claims to an expensive arbitration process in Delaware 

even though he was solicited and signed the loan in Florida. Lastly, 

his contract contained the following phrase: ‘‘I understand that 

persuant (sic) to Art 134 and Art 123a of the Uniform Code of Military Justice that failure to comply with the terms of this agreement may result in a maximum penalty of a bad conduct discharge, 

6 months confinement and forfeiture (sic) of all pay and allowances.’’ See Exhibit ‘‘E’’ attached. 

• Ms. Worrow obtained a loan from a ‘‘military’’ lender that was 

marketed online. The lender required her to pay through a military 

allotment check. They threatened to contact her Command if the 

allotment was redirected. This put Ms. W in a bind because the 

costs were so high for the loan that the allotment took away money 

she needed for food, transportation to and from work and utilities. 

See Exhibit ‘‘F’’ attached. 

Her lender also prevented her from suing them for illegal practices and required her to sign a unilateral, mandatory arbitration 

clause. Therefore, she could not sue them but they could take 

money directly from her pay check or bank account. 

• Mr. K spent his entire day off going from payday lender to payday lender to keep from having his checks bounce. At one time, he 

was trying to juggle nine loans. Each time a payday loan became 

due he felt compelled to take out another, more expensive loan because the lenders were harassing him with illegal threats of crimiVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00209 Fmt 6602 Sfmt 6602 E:\HR\OC\A303.XXX A303

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nal prosecution. They also contacted his superiors at work and required him to agree to automatic withdrawal from his bank account. • Mr. G contacted me via email from an undisclosed location at 

sea. He was worried about his wife and family because of his outstanding payday loan debt. Due to threats she had received, he was 

afraid that the payday lender would put his wife in jail, leaving 

their two babies without a parent. • Ms. Griffin is a Navy wife who has a payday loan with Advance America in Florida. In its contract, Advance America claimed 

it was a member of the Community Financial Services Association, 

a payday lender trade association. It also claimed it followed the 

Best Practices of this association published on its Web site such as 

promises to follow state law. Florida law requires lenders to grant 

at least a 60-day grace period with no additional fees, charges or 

costs if a borrower seeks credit counseling and prohibits ‘‘rollovers.’’ Instead of providing the grace period, Advance America required her to roll over her loan when she could not pay. When she 

went to pay it off, she was $45 short, because of the ‘‘roll over’’ fee. 

Advance America refused the grace period even after she told 

them she already had the counseling at the Navy Marine Corps Relief Society, an authorized State of Florida Deferred Presentment 

Provider counseling agency. The director of NAS Jax NMCRS, Ret. 

Capt. Dave Faraldo, called the lender only to be told they did not 

have to talk to him and did not have to provide the grace period. 

The Advance America employee added she had been an employee 

trainer for eight years and they never had to provide the grace period. When I contacted Advance America as Ms. Griffin’s attorney 

and provided a signed release, the employee refused to speak to me 

about the legally-required grace period on her account. 

RESPONSE TO WRITTEN QUESTIONS OF SENATORS SHELBY 

AND JOHNSON FROM HILARY B. MILLER 

Q.1. Although the Report acknowledges that many payday lenders 

voluntarily adopt a set of best practices, it criticizes the lack of a 

mechanism to monitor and enforce them. Is there more the industry could be doing to make sure lenders are complying with these 

best practices? 

A.1. The industry’s principal trade association, Community Financial Services Association of America (‘‘CFSA’’), seeks to enforce its 

Best Practices by causing them to be enacted into positive state 

law and by assuring that state regulators have appropriate information, authority and enforcement powers. To date, CFSA member 

companies have dedicated millions of dollars to this activity, and 

37 states and the District of Columbia have enacted laws that incorporate CFSA’s Best Practices in some part. Compliance with 

CFSA’s Best Practices is also mandatory for CFSA’s members, and 

the association investigates and takes appropriate enforcement 

steps with respect to violations. Because of both the transparency 

and simplicity of loan terms, consumers are highly unlikely to be 

misled by non-compliant lenders. The industry continues to work 

with legislators and regulators to assure consistent and, to the 

greatest extent possible, uniform regulation of these loan products. 


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1William O. Brown, Jr. and Charles B. Cushman, Payday Loan Attitudes and Usage Among 

Enlisted Military Personnel (2006). Available at http:// 

www.consumercreditresearchfoundation.org/lfiles/060628MilitaryPDLSurvey.pdf (visited August 29, 2006). 

Q.2. In your testimony you state that it is contrary to the interests 

of the payday lending industry to have service members get into 

trouble with their loans. But if borrowers can not pay in full when 

the loan is due and choose to roll over the current loan into another, larger loan, don’t lenders benefit from the additional fees 

that result? How frequently are loans rolled over? 

A.2. As noted in my prepared statement, a recent independent 

study showed that 49% of military enlisted payday-loan borrowers 

have used a payday loan no more than twice in the last year, and 

79% had had no more than four loans in the last year.1 Of the 38 

states that have permitted payday lending, 36 have strict statutory 

limitations on rollovers, and there is an outright ban in 22 of those 

states. CFSA’s Best Practices ban rollovers unless they are allowed 

by state law, in which case rollovers are limited to the lesser of 

four or the state-law limit. While rollovers are frequently mentioned as an issue with payday loans, the reality is that military 

borrowers very rarely experience repayment problems with their 

loans and, as a group, are in debt for much shorter periods than 

their civilian counterparts. Payday lenders do not earn more in fees 

from a loan rollover than from a new loan. While payday lenders 

charge a fee for rollovers, every lender (including bank overdraft 

lenders, as well as mortgage lenders, credit card lenders and auto 

lenders) benefits to some extent when a borrower pays a fee for the 

privilege of paying late. This is the inherent nature of consumer 

lending, and it is not fundamentally wrongful or misleading. Moreover, the consequences to a borrower of not being able to extend— 

on a limited and responsible basis—the maturity of a payday loan 

may often be more costly to the borrower than the small extra fee 

for this service; those consequences may include adverse credit-bureau entries, bounced checks, overdraft fees, late-payment fees and 

other vendor charges. 

Q.3. Did your industry seek to work with DoD and give it input 

on this study? What, if anything, has the industry proposed to DoD 

to stop specific abusive practices that may occur when payday 

loans are made? 

A.3. CFSA made repeated good faith attempts to work with DoD, 

but DoD clearly had no interest in doing so. First, over a year ago 

before the study was prepared, CFSA representatives met with key 

DoD representatives—including some whom we understand were 

directly involved in preparing the report—and requested that DoD 

work with CFSA to address concerns with respect to payday lending to military personnel. These DoD officials showed no interest 

in working with CFSA and failed to follow up with any further contact. Then, while the study was being conducted, CFSA became 

concerned that DoD had not contacted the association or its members for information or input. Accordingly, CFSA made a number 

of requests for meetings with relevant DoD officials; DoD staff 

would schedule meetings with CFSA but subsequently cancel those 

meetings. Finally, again at CFSA’s initiative and request, about a 

week before the study was released, Dr. Chu and several of his asVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00211 Fmt 6602 Sfmt 6602 E:\HR\OC\A303.XXX A303

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sociates met with CFSA representatives. During the meeting, 

CFSA sought to educate DoD regarding the fundamental fallacies 

of certain arguments and factual assertions by opponents of the industry like the Center for Responsible Lending (‘‘CRL’’). CFSA also 

proposed amending federal law to include over a dozen additional 

safeguards for military borrowers, including a total ban on rollovers and a payment plan, but DoD had no interest in these proposals and proceeded to issue its report a few days later. I am attaching a separate memorandum summarizing CFSA’s proposals to 

DoD. I trust that you and other Committee members will see from 

this memorandum that CFSA was proposing tough measures that 

would have prevented abuses while at the same time preserving 

payday loans as a credit option for service members. DoD unfortunately had no interest in adopting such responsible measures and 

instead continued to follow its course of blindly accepting erroneous 

CRL contentions and flawed studies and of recommending unwarranted measures. 

Q.4. Wouldn’t the use of a properly constructed payment plan resolve most of the ‘‘cycle of debt’’ problems some military customers 

may have in repaying their loans? If so, will industry support such 

a plan? 

A.4. Absolutely. The industry supports such plans and would support them for military borrowers. In states where payment plans 

have been required by law, such plans have enabled tens of thousands of customers to defer payment in accordance with a plan that 

meets their individualized cash-flow requirements. Such plans give 

borrowers options rather than, as the DoD report urges, taking 

them away. As noted above, CFSA proposed banning rollovers and 

requiring an extended payment plan. The effect of such a plan 

would be to provide military borrowers with an interest-free, longterm principal-reduction plan that would make it just as easy to 

repay a payday loan as it is to obtain one. 

Q.5. On pages 14 and 15, the report states as a fact that the twoweek loan cited by payday lenders ‘‘is virtually nonexistent.’’ It 

then says that Center for Responsible Lending research shows that 

only 1% of loans go to borrowers who take out only 1 loan a year 

and 91% of payday loans go to borrowers with 5 or more loan 

transactions per year. It says that it is the rule, not the exception, 

that payday loans catch the borrower in a debt trap with the average borrower paying back $834 for a $339 loan. Are these statements accurate? 

A.5. No. Unfortunately, the Center for Responsible Lending generally is not responsible or accurate when making most of its contentions regarding payday lending. It repeatedly puts forth erroneous ‘‘facts’’ and reaches unsupportable and misleading conclusions based on faulty and biased analyses. To date, there have been 

only a handful of legitimate academic studies regarding the rate of 

repeat payday loan usage, and these studies do not support CRL’s 

assertions with respect to military borrowers. Among service members—which is the only relevant population for purposes of the 

DoD Report, not the general population—the correct facts are as 

set forth on page 2 above. DoD’s own statistics show that the rate 

of usage, including repeat usage, of payday loans among military 

borrowers is extremely low. These low rates of usage and repeat 


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usage were not demonstrated to be sufficiently problematic to warrant extraordinary legislative action. DoD proceeded to reject its 

own data and disregarded other readily available information—including independent third-party data—contrary to CRL’s positions, 

and adopted CRL’s inaccurate contentions and inappropriate ‘‘solutions’’ without critical or responsible analysis. 

ATTACHMENT 

A Case Against Prohibition of Regulated Storefront Payday 

Lenders as a Short-term Credit Option for Military Personnel 

Most public policy debates revolve around a perceived problem 

and a proposed solution. 

In this case, the Department of Defense (‘‘the Department’’, or 

‘‘DOD’’) has determined that an increasing number of military personnel have become sufficiently concerned about their domestic financial obligations, to cause an adverse effect on military readiness. In response to this problem, the DOD has recommended, as 

one primary solution, that Congress prohibit the offering of payday 

advances that charge a fee exceeding 36% when annualized over 

365 days (‘‘APR’’). 

The Community Financial Services Association of America 

(‘‘CFSA’’) does not question the DOD’s analysis of its military’s 

state of readiness to defend our country. In fact, no fair-minded 

critic of the payday advance industry has ever suggested that the 

owners and employees of this industry do not unequivocally support our military and the DOD’s duty to protect the men and 

women who serve our nation. 

The focus of this discourse is not on the problem, but instead, on 

the proposed solution. It is our intention only to illustrate the inherent flaws in the proposed 36% APR cap, which would effectively 

apply to just one small segment of the short-term, unsecured consumer credit market and, most certainly have unintended consequences to the very ones it is intended to protect. 

A DISPASSIONATE ANALYSIS OF THIS SHORT-TERM, UNSECURED CREDIT MARKET INDICATES THAT PROHIBITION OF ONE SEGMENT WILL LIKELY EXACERBATE, NOT REMEDY, THE PROBLEM. 

Virtually every commentator who has opined upon the payday 

advance issue, has agreed upon at least one fact—there is an enormous demand for short-term access to money in small denominations. Consumers define short-term to mean until their next influx 

of cash, typically occurring on their next payday. 

The market satisfying this demand is estimated at approximately 

$100 billion and is supplied by a number of financial and quasi-financial services, none of which are traditional loan products. All of 

the diverse providers in this short-term, unsecured credit market 

offer the same end product—the ability of a consumer to access 

credit by entering into a fee transaction to be ‘‘settled up’’ at the 

customer’s next receipt of income. In decreasing order by size, this 

market volume is composed of the following credit products: 


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1. Late fees—paying one creditor, or funding an immediate 

cash need, by delaying a payment to another creditor; 

2. Bank non-sufficient funds fees—using an unfunded check, 

either unintentionally or intentionally, to pay a creditor by 

forcing your bank to ‘‘front’’ the payment until funds are available to replenish your account; 

3. Courtesy overdraft, or ‘‘bounce’’, protection fees—using 

your bank’s permission to overdraw your account, thereby creating immediate cash funds; 

4. Payday advance fees at storefront lenders—using regulated payday advance lenders to ‘‘cover’’ your unfunded check 

until payday; 

5. Payday advance fees at offshore Internet lending sites or 

from other subterfuge products—satisfying your need for shortterm cash through lenders who are immune to state or federal 

regulation. 

A common mistake when evaluating the cost of a payday advance 

is to compare it to traditional loan products. Such a comparison 

serves no useful purpose, since the comparison would be of products that occupy very different segments of the financial services 

market and, accordingly, fill very different needs of consumers. A 

fair analysis of the payday advance service must be made in the 

context of the actual products and services with which it competes, 

and with an understanding of the real alternatives available to its 

customers. Below is a comparison of the costs and the total fee volumes for these market segments. 

COSTS AND MARKET FEE VOLUME OF CONSUMERS’ SHORT-TERM UNSECURED CREDIT OPTIONS 

Credit option Cost per $100 loan 

or Occurrence Total fee volume State Regulation 

Storefront Payday Advance $15 $6 billion 38 States 

Offshore Internet Payday Advance $10–$40 Unknown None 

Bounced Check Fees $54 $22 billion NSF 

+ Unknown Merchant 

Fees 

None 

Overdraft Protection Fees $27 $10 billion None 

Late Fees (credit card, landlord, utilities, 

etc.) $39 $57 billion None 

THE DOD’S PROPOSED 36% APR CAP WILL ELIMINATE 

ONLY THE SMALLEST SEGMENT OF SHORT-TERM 

CREDIT OPTIONS AVAILABLE TO MILITARY PERSONNEL. 

A payday advance cannot be offered at a 36% APR. The typical payday advance customer is charged $15 for a $100, 14-day advance, resulting in an annualized rate of 391% (use of the APR assumes the customer takes out the loan every two weeks for 52 

weeks—in reality, this virtually never occurs as most states prohibit such constant rollovers, as do our mandatory industry Best 

Practices). At a 36% APR, the total fee charged for that same $100 

advance would be $1.38, representing a 91% reduction in gross 

revenue. The public filings of publicly traded payday advance companies indicate that the average net profit, after taxes, is between 

10%–20% of gross revenue, well in line with, and often below, other 

financial services companies. No serious policy maker believes that 


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the payday advance product can be offered with a 36% APR, a belief shared by thoughtful commentators as exhibited in this excerpt 

from an August 14, 2006 editorial in the St. Louis Post Dispatch: 

—‘‘Sen. Talent’s proposal, tacked on as an amendment to a 

defense bill (SB 2766), would limit the annual percentage 

rate to 36% percent for military members and dependents. 

That works out to about $1.38 on a two-week loan of $100. 

Payday lenders argue that’s less than it costs to service 

such loans, and that the industry couldn’t stay in business 

at rates that low. There’s truth to that argument, and payday loans—if they’re [not] allowed to snowball out of control—do serve a legitimate purpose. While the Talent/Nelson amendment has the support of the Center for Responsible Lending, a nonpartisan research center in Washington, and the Consumer Federation of America, there are 

other approaches. Mr. Talent might take a look at the new 

reforms in Illinois.’’ 

Economists, academicians and state policy makers have substantiated the fact that this restrictive APR would not be feasible for 

payday advance lenders. Researchers representing many of the nation’s credit unions and the Federal Deposit Insurance Corporation 

(FDIC), neither of which are advocates for the payday advance 

product, have studied the issue of cost and profitability and come 

to the conclusion that the costs largely justify the price. Below are 

two references from such studies. 

The Economics of Payday Lending, John P. Caskey, 

Filene Research Institute & The Center for Credit Union 

Research, Madison, WI, 2002. 

—‘‘Another possible approach to the rise of payday lending 

would be for credit unions to undercut payday lenders by 

offering low-cost small-value loans to payday loan customers. But this approach is unlikely to be successful. If a 

credit union were to find good loan candidates and charge 

them its top loan rate of 18% APR for a short-term smallvalue loan, this would not cover its costs.’’ 

—‘‘For example, a $200 two-week loan at 18% APR would 

generate $1.38 in interest, not enough to cover even the 

origination cost. In other words, the high cost of payday 

loans substantially reflects the high cost of making smallvalue, short-term loans.’’ 

Payday Lending: Do the costs justify the price?, Mark J. 

Flannery and Katherine Samolyk, for the Center for Financial Research, FDIC, 2005. 

—‘‘The payday advance product’s structure makes it costly 

to originate these short-term loans, whose default rates substantially exceed the customary credit losses at mainstream 

financial institutions.’’ 

—. . .‘‘an important reason why advance fees are high is 

that the loan is short-term and non-amortizing.’’ 

—‘‘We find that fixed operating costs and loan losses justify 

a large part of the high APR charged on payday advance 

loans . . . These operating costs lie in the range of [payday] 


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advance fees, suggesting that payday loans may not necessarily yield extraordinary profits.’’ 

—‘‘These APRs substantially exceed the rates associated 

with mainstream consumer credit products, although some 

mainstream services (e.g., overdraft protection fees or credit 

card late payment fees) might translate into similar APRs 

if providers were required to report such information.’’ 

Additionally, policy makers in 37 states (plus D.C.) have studied 

the rate issue and passed legislation allowing an average fee of 

$17.50 per $100. In fact, Indiana, Kansas and Rhode Island, having 

previously enacted restrictive fees averaging about $12.50 per 

$100, repealed those rates in favor of a $15 per $100 fee. Policymakers in these states found that rates below $15 per $100 had restricted competition and forced consumers to more expensive, less 

desirable and even unregulated alternatives. 

AVAILABILITY OF MARKET ALTERNATIVES MAKES IT 

UNLIKELY THAT ELIMINATION OF THE STOREFRONT PAYDAY ADVANCE OPTION FOR 

SERVICEMEMBERS WILL DECREASE THE READINESS PROBLEM. 

On the surface, it might seem reasonable to assume that reducing the annual percentage rate (from 391% to 36%) paid by military personnel for a storefront payday advance might correspondingly reduce the DOD’s military readiness problem. Given the current market short-term credit alternatives discussed previously, 

the reality must be that it will either have no effect, or intensify 

the problem. What is clear is that the expected result of lowering 

the APR of a storefront payday advance to 36% will not occur— but the unintended result of forcing the military to more expensive, 

or more dangerous alternatives, surely will. As noted earlier, there exists a $100 billion demand for financial 

services that provide immediate access to needed money or credit. 

Storefront payday advances comprise about 6% of the supply side 

of that market. The remaining 94% of the market will not be subject to the 36% rate cap. Since prohibition of the storefront payday 

advance service option will not eradicate the demand for the service by the 6% of customers in the market that currently use it, 

those customers will simply shift to one of the other alternative 

products available. 

Case studies of consumers who had unfortunate, and sometimes dire, experiences with these other sources of higher cost credit are plentiful. Consider just these few recent examples. 

—Mark Keil, of Dayton, OH, stopped at a convenience store 

for $19.45 worth of cigarettes. The expense cleared his 

debit card, along with several others over the next several 

days, but he didn’t know his bank had automatically covered these overdrafts. He paid $198 to his bank for covering $59 in overdrafts. Six months later he had amassed 

$1,194 in overdraft fees. (AARP Magazine, September & 

October 2006) 

—Carolyn Russell, of Fort Worth, TX and living on a fixed 

income, called her bank and was told she had $2.32 available in her checking account. She immediately bought that 


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amount of gas for her car. Eight days later she received a 

notice from her bank that she was overdrawn by two cents 

and required to pay a $36 fee. After calling to inquire, she 

went to the bank the next day to pay the overdraft, which 

by then had grown to more than $70, due to daily penalties. (Star Telegram, July 7, 2006) 

—Unidentified customer from Bristol, TN, signed up for a 

payday loan on the Internet and it ‘‘turned into a nightmare. They were debiting my bank account, so months 

later I was still getting deductions from my bank account 

. . . On the whole run I lost about three or four hundred 

dollars.’’ (Briston Herald Courier, January 4, 2006) 

—Fatemeh Hosseini, of Sunnyvale, CA, worked a second job 

to try to keep up with her credit card payments. Although 

she had stopped using her cards to buy anything, in two 

years her debt nearly doubled. ‘‘That’s because Hosseini’s 

payments sometimes were tardy, triggering late fees ranging from $25 to $50 and doubling interest rates.’’ She eventually filed for bankruptcy. (The Washington Post, March 

6, 2005) 

These readily available alternatives have raised the ire of consumer advocates, credit union officials and state regulators 

of financial services: 

—Paying overdraft fees ‘‘can be as costly as payday loans . . . $80 one week overdraft loan with a $26.90 fee equals 

1,753% interest.’’ (Center for Responsible Lending issue 

paper on bank overdraft fees, April 2006) 

—‘‘Critics also contend that bounce-protection fees, as high as $37 per transaction, are little more than high-priced 

credit. ‘‘If a bank lends you $100 and charges you a $20 

fee—and then you pay the money back in two weeks— 

that’s an annualized interest rate of 520%,’’ notes Jean 

Ann Fox, director for consumer protection at the Consumer 

Federation of America in Washington. ‘‘It’s worse than a 

payday loan.’’ (Business Week, May 2, 2005) 

—‘‘These products [overdraft ‘‘bounce’’ protection] are worse 

than payday loans. With payday loans at least you get a 

disclosure, which is required by federal law, so you know 

how much they’re gouging you,’’ says Chi Chi Wu with the 

National Consumer Law Center. (AARP Magazine, September & October 2006) 

—‘‘About 80% of our members are using courtesy pay the 

way it was intended just a few times a year here and 

there,’’ explained First Financial Federal Credit Union 

CEO Rob Windsor. ‘‘But 20% were paying us a lot more 

than they should be . . . Our courtesy pay fee is $15, 

which is pretty low, but even with that low fee, we see people who are paying thousands in courtesy pay fees.’’ (Banking Wire, March 2, 2006) 

—‘‘A common complaint against online payday lenders is 

that the customer is required to give banking information, 

whereas if they walk into a payday lender store they give 

them a postdated check. But what’s happening online is 

the payday lender uses the bank information to make unVerDate Nov 24 2008 03:40 Nov 20, 2009 Jkt 050303 PO 00000 Frm 00217 Fmt 6602 Sfmt 6602 E:\HR\OC\A303.XXX A303

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authorized withdrawals from the consumer’s account. They 

say they’re collecting funds owed to them. They can make 

these withdrawals in a way they can’t with a postdated 

check,’’ said Karolyn Klohe, financial legal examiner, WA 

Department of Financial Institutions. (Bankrate.com, September 12, 2005) 

—‘‘People who use online payday lenders risk losing money, 

paying excessive fees and having their identities stolen, 

the Nebraska Department of Banking and Finance warned 

Tuesday. ‘Using the Internet for this type of transaction 

puts the borrower back into an unregulated electronic 

alley, possibly dealing with lenders from foreign countries,’ 

said John Munn, director. (Omaha World-Herald, April 12, 

2006) 

The previously discussed alternative short-term credit products 

each fill a niche and may be, depending on the circumstances, a 

better or worse choice for a consumer than a payday advance. But 

no one can deny that, if a consumer is seeking a payday advance 

from a storefront lender, it will in many cases be: 

1. less expensive than NSF/merchant fees, overdraft protection fees, most internet lending fees and some late fees; 

2. safer than a transaction with an internet lender located 

overseas; 

3. void of any negative impact on the customer’s credit score, 

unlike NSF or late fees. 

It is ironic that storefront payday advances represent 

—the smallest segment of a distinct market 

—often the least expensive supplier in that market 

—an industry that fully discloses all costs associated with 

the transaction and seeks responsible regulation from 

state policy makers 

. . . and, yet, is the only significant supplier in the market subject 

to prohibition by the DOD proposed 36% rate cap. 

TRADITIONAL, LOWER COST ALTERNATIVES TO PAYDAY 

ADVANCE LOANS, BOUNCED CHECK FEES AND LATE 

BILL PAYMENTS CANNOT FILL THE DEMAND FOR 

THIS SHORT-TERM, LOW DENOMINATION CREDIT. 

Even with the best intentions and advocacy efforts, the DOD and 

other organizations are not equipped to provide enough alternative 

financial resources to eliminate the $100 billion short-term credit 

market in the foreseeable future. Given the level of consumer demand, if business enterprises could offer them at 36% APR, traditional financial institutions would already be doing so. Even nonprofit entities—with well-funded operating resources, tax-exempt 

status and a mission to provide affordable financial aide to those 

in need—have found it difficult, if not impossible, to offer low-cost 

alternatives to payday advances. 

While a number of institutions have talked about providing low 

cost alternatives to payday advance loans, there has been little real 

progress made in offering similar, viable products that are attractive to consumers. In fact, there is one school of thought that traditional financial institutions may have little incentive to do so. 


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The Annie E. Casey Foundation has recently released a report, 

authored by former Assistant Secretary of the U.S. Department of 

the Treasury and current Chairman of the FDIC Sheila Bair, entitled, ‘‘Low-Cost Payday Loans: Opportunities and Obstacles.’’ 

(http://www.aecf.org) The report underscores the importance of 

small-denomination, short-term loans and encourages banks and 

credit unions to offer lower cost payday loan alternatives to their 

customers. But the report points out that banks and credit unions 

may be reluctant to do so, saying: 

—‘‘Though depository institutions have the means to offer 

low-cost payday loan alternatives, the proliferation of feebased bounce protection programs represents a significant impediment to competition.’’ 

—‘‘. . . fee-based bounce protection programs are functionally equivalent to payday loans when used by customers as a form of credit. When used on a recurring 

basis for small amounts, the annualized percentage rate 

for fee-based bounce protection far exceeds the APRs associated with payday loans.’’ 

—‘‘To the extent so many depository institutions are relying on bounce protection for significant fee income, they 

may view it as against their own interests to cannibalize 

profits through development of other, lower-cost forms of 

small dollar credit.’’ 

The report goes on to say that payday loans can be the lowestcost option available to some consumers: 

—‘‘Interviews and industry survey indicate that payday 

loan customers do make a cost analysis in comparing the 

price of a payday loan with the alternative costs of 

bouncing a check and/or incurring late fees.’’ 

—‘‘When used on a recurring basis for small amounts, 

the annualized percentage rate for fee-based bounce protection far exceeds the APRs associated with payday 

loans.’’ 

—‘‘. . . APR disclosure of fee-based bounce protection 

might help payday loan vendors, since for some consumers, their product will be less expensive.’’ 

CFSA supports the exploration and encouragement of payday advance alternatives. The entry of traditional financial institutions 

into the payday advance market would accelerate overall acceptance of the service and provide more consumer choices—both having positive effects on consumers and the industry. In the interim, 

consumers need to have viable and safe credit options. And while 

a payday advance isn’t the best choice for consumers in every situation, increasing evidence shows it is often the lower cost, more desirable alternative. 

THE CFSA PROPOSAL 

CFSA has continually worked with legislators, regulators, policymakers, customers and critics around the country to resolve concerns about the payday advance product. To that end, 37 states 

have passed legislation that balances consumer protections with 


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the consumer’s right to continued access to the product. After passage of such legislation, it is common to see the number of complaints filed with the state regulator, statistically disappear. 

It is also important to note that, while thousands of legislators 

have participated in hundreds of hearings in which the rate issue 

has been debated and votes have been taken, no legislature has 

passed a fee cap that results in a 36% APR for payday advances. 

There are two reasons that such attempts at 36% APR caps fail. 

First, it is understood that such a cap is implicit prohibition of 

the product, thereby taking a choice away from consumers instead 

of empowering the consumer with options. Legislators’ sentiments 

seem to echo remarks made by Jeffrey M. Lacker, president of the 

Federal Reserve Bank of Richmond, at the Conference of State 

Bank Supervisors May 18, 2006: 

—‘‘Much of the popular response to consumer credit expansion and its byproducts has been less about prudential supervision, however, and more about consumer protection. 

Many proposals amount to calls for lending restrictions or 

the outright prohibition of some lending practices. This 

strikes me as a dangerous approach. In the long run, it 

would tend to slow innovation and constrain the availability of financial products to a broad range of consumers 

in order to protect the relatively few who use a credit product inappropriately or unadvisedly.’’ 

Second, nearly all policy informed makers understand that rate 

is not the issue on which to focus. 

The first reason serves as the basis for why a 36% rate will not 

help the DOD solve its problem. The second reason forms the foundation of CFSA’s proposal to help do so. 

It is not a $15 fee that causes some consumers to struggle with 

a payday advance, but, rather, the repayment of the $100 principal 

amount—which is a common issue for all the products serving this 

market. While customers are able to repay a $15 payday advance 

fee, or the $25 overdraft fee or even the $39 late fee, some will 

have difficulty repaying the underlying principal balance. It is 

those customers that need a safety net to help them manage their 

obligations, without making their situation any worse. 

CFSA would be willing to discuss a payment plan option that 

would allow military customers to repay their principal balance 

due, over many months, without the accumulation of any interest 

or charges. A military customer would be eligible for the plan 

under either of two conditions: 

1. the customer has completed a DOD-approved financial 

readiness program; or 

2. the customer has entered into 4 or more consecutive payday advances. 

Under either condition, the customer would be able to unilaterally convert his payday advance into a longer term, less expensive 

installment loan, which, when adding in the initial payday advance 

fee, would result in an overall APR of 36% or less. The dual conditions would require payday advance companies to provide this special assistance to those members of the military who have either 

chosen to help themselves through financial readiness programs or 


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have exhibited the need to be helped by their demonstrated repeated use of the service. At the same time, however, DOD would 

be allowing continued access to the product for all others, who neither seek nor need such assistance. 

CFSA Is Willing to Discuss a Number of Consumer Protections for 

the Military, Many of Which Have Been Promoted and Implemented in Various States: 

■ Provide military customers the unfettered opportunity to 

convert payday advance transactions into longer term, 

cost-free payment plans (resulting in a 36% APR), if either of the following events occur: 

• The customer completes a DOD-approved financial 

readiness program; or 

• The customer enters into 4 or more consecutive payday advance transactions. 

■ Prohibit the rollover of payday advances by military customers. 

■ Require unambiguous and uniform price and term disclosures. 

■ Require payday advance companies to provide information 

to the military customer concerning appropriate use of the 

service, counseling options and alternative programs and 

products available to the customer. 

■ Prohibit prepayment penalties and require the rebate of 

unearned fees. 

■ Prohibit mandatory arbitration clauses which are unconscionable, oppressive, unfair or substantially in derogation 

of the rights of the military customers. 

■ Prohibit the garnishment, or allotment, of military wages. 

■ Prohibit the payday advance company from contacting, or 

threatening to contact, the customer’s commanding officer 

or any other person in the customer’s military chain of 

command, in effort to collect on an advance. 

■ Prohibit the waiver of a military customer’s rights under 

the Servicemembers Civil Relief Act or under any other 

federal or state law. 

■ Prohibit the use of any representations or symbols that 

suggest, give the appearance of, or provide reasonable 

cause to believe, that any component of the Armed Forces, 

the Department of Defense, or any other federal entity 

sponsors or endorses the payday advance company. 

■ Require payday advance companies to defer all collection 

activity and halt the accrual of interest or any other fees, 

upon the deployment of a military customer to a combat, 

combat support or combat service support posting. 

■ Provide military customers the right to rescind a payday 

advance, without cost, within 2 business days of entering 

into the transaction. 

■ Prohibit payday advance companies from threatening or 

pursuing criminal action against a military customer as a 

result of the customer’s check being returned unpaid or 

the customer’s account not being paid. 


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■ Consider the use of payday advance locations as platforms 

for the dissemination of DOD approved financial readiness materials. 

Conclusion 

The Department of Defense has voiced its concern—the financial 

obligations of our military men and women should not escalate into 

a distraction from their duties, nor should it impair the country’s 

military readiness. In addressing this concern, the Department 

may: 

1. Attempt to eliminate the storefront payday advance option, and naively hope that its personnel choose not to use 

the unrestricted alternative products, or 

2. Allow CFSA to work with the Department in designing 

and implementing real, effective solutions regarding payday loans for the military personnel who need assistance. 

We are prepared to offer you a list of references from across the 

country that will confirm that CFSA has successfully resolved the 

concerns of many of its critics and, in doing so, has demonstrated 

its integrity and good faith. We respectfully request the opportunity to enter into such discussions with the Department of Defense. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM CHRISTOPHER L. PETERSON 

Q.1. It is my understanding that you conducted a study that found 

that payday lenders were disproportionately located near military 

installations. How many locations did you examine as part of your 

study and what do you think are the implications of these findings? 

A.1. Steven Graves, a Geography Professor at the University of 

California at Northridge, and I recently published a study on predatory lending to military personnel. The full citation to the study 

is Steven M. Graves & Christopher L. Peterson, Predatory Lending 

and the Military: The Law and Geography of ‘‘Payday’’ Loans in 

Military Towns, 66 OHIO STATE LAW JOURNAL 653–832 (2005). 

It should be available in the Library of Congress and any other law 

library around the country. Moreover, a copy of the study accompanies this correspondence. We would be honored to have the study 

or any portion thereof accompany the written record of this hearing. 

In conducting our study, we examined 20 states, 1,516 counties, 

13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military 

installations. Our study found high concentrations of payday lending businesses in counties, ZIP codes, and neighborhoods in close 

proximity to military bases. In order to assure that this pattern of 

‘‘clustering’’ around military bases was not caused by factors unrelated to the presence of military personnel, we controlled our observations by comparing the density of payday lender locations to that 

of bank locations. Even when accounting for commercial development patterns and zoning ordinances with bank locations, payday 

lender location patterns unambiguously show greater concentrations per capita near military populations. We believe our findings 


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stand as conclusive proof that the payday lending industry targets 

members of the armed forces and their families. 

In addition to our empirical findings, our research included an 

extensive discussion of sociological and historical literature on the 

financial well being of military families. We concluded that clustering of payday lenders around military installations was the most 

recent incarnation of an ancient history of predatory lending to 

military personnel both in our country and around the world. Payday loans, which typically have interest rates of between 300 and 

900 percent, are extremely dangerous financial products that can 

trap consumers with modest income in a ruinous cycle of high cost 

borrowing. 

Our study recommended reestablishing the traditional American 

response to predatory lending: usury law. For the great majority of 

the past century, the American government protected service members from high-cost predatory loans with usury laws limiting interest rates to between 18% and 42% per annum. Through federal 

preemption and state legislative change, these laws have given way 

to an environment in which service members are literally surrounded by lenders clamoring to charge annual rates averaging 

around 450%. Military personnel both in ancient history and contemporary America have chronic financial vulnerabilities owing to 

their demanding and semi-nomadic lifestyles. Inevitably, many 

struggling military personnel and their families find the temptation of short term financial quick fixes advertised as ‘‘easy,’’ ‘‘no 

hassles,’’ ‘‘no credit check,’’ or ‘‘quick cash’’ too difficult to pass up. 


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1Mark Flannery and Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 

FDIC Center for Financial Research Working Paper No. 2005–09. http://www.fdic.gov/bank/ 

analytical/cfr/workingpapers.html#payday (visited August 29, 2006). 2William O. Brown, Jr. and Charles B. Cushman, Payday Loan Attitudes and Usage 

Among Enlisted Military Personnel (2006). Available at http:// 

www.consumercreditresearchfoundation.org/files/060628MilitaryPDLSurvey.pdf (visited August 

29, 2006). 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

HILARY B. MILLER, ATTORNEY AT LAW

Greenwich, CT, September 20, 2006 

Hon. MELQUIADES R. MARTINEZ, 

317 Hart Senate Office Building 

Washington, DC. 

Re: Predatory Lending Practices Directed At Members of the Armed Forces and Their 

Dependents 

Dear Senator Martinez: 

In the limited time available for last Thursday’s hearing, it was not possible to 

provide complete information regarding the finance charges applicable to payday advances. On behalf of Community Financial Services Association of America, I write 

to supplement my responses at the hearing. 

The finance charge for a payday advance is largely a function of the lender’s costs 

(principally occupancy and personnel expenses). An FDIC study cited in my prepared remarks estimates that the these costs are approximately $13–$14 per $100 

of loan principal advanced. 1 Thus, a finance charge of $15 per $100 to the consumer is, to use your term, entirely ‘‘conscionable’’ and results in a very normal 

profit margin to the lender. 

There is considerable evidence that the industry’s margins are not exorbitant, insofar as most of the largest operators are public companies and have readily ascertainable, audited profit figures. The absence of inappropriate profits makes sense 

when you consider that, unlike an installment or mortgage lender—which is able 

to recoup its costs through finance charges collected over a period of three, five or 

even thirty years—a payday lender must recover its entire costs of origination and 

servicing over the initial two-week typical loan term. 

Moreover, the industry is nearly perfectly competitive. With over 22,000 retail 

outlets (and innumerable Internet-based providers), and very low barriers to entry, 

prices would be expected to converge toward lenders’ marginal costs—and indeed 

that is precisely what has occurred. To phrase it differently, if the payday lending 

business were ‘‘unconscionably’’ profitable, lenders would be expected to flood the 

market and drive interest rates down. 

Consumers can (and do) readily comparison shop because the industry universally 

quotes pricing both as a finance charge in dollars and as an annual percentage rate 

(as required by the Truth In Lending Act). 

Finally, you asked why it might be appropriate for a young service member to borrow at the seemingly high annual percentage rates charged by payday lenders. Just 

as commuters understand that taxicabs are valuable and convenient when used for 

short-term travel needs but too expensive for extended trips, consumers understand 

that payday advances are useful when utilized for short-term needs but inappropriate for long-term borrowings. To America’s working middle class, the payday-advance product serves as a dignified, discreet and cost-efficient ‘‘financial taxi’’ to tide 

the borrower over to his next payday when faced with an unexpected cash need. 

Although it is tempting to cite high annualized interest rates as problematic, the 

use of annualized rates is inappropriate when comparing extremely short-term credit options. The vast majority of military borrowers have payday-loan credit outstanding for only a few weeks per year.2

Rollovers were mentioned at the hearing as a potential problem, but 36 of the 38 

states that permit payday lending have strict statutory limitations on rollovers. For 

example, Florida forbids all rollovers. Fla. Stat. Ann. § 560.404(18). In contrast to 

this reality, the technical APR computation requires an assumption that the loan 

will be rolled over 25 times (even though the permitted number of rollovers is zero). 

The actual interest rate on the loan is 15%, but the theoretical APR figure is 391%. 

Thus, I am sure that you can understand how we believe that focusing on the APR 

is extremely misleading and typically presents a distorted picture of the real cost 

of payday loans. 

As noted in my prepared remarks, analysis of the cost of payday-advance credit 

must take into account the cost to the borrower of not obtaining such credit. Faced 


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399 

3 ‘‘Critics also contend that [overdraft] bounce protection fees, as high as $37 per transaction, 

are little more than high-priced credit. ‘If a bank lends you $100 and charges you a $20 fee— 

and then you pay the money back in two weeks—that’s an annualized rate of 520%,’ notes Jean 

Ann Fox, director for consumer protection at the Consumer Federation of America in Washington. ‘It’s worse than a payday loan.’ ’’—Business Week, May 2, 2005. 

with the alternative of writing a check that may ‘‘bounce’’ or of a utility disconnect— 

often with implicit annualized costs in excess of 1,400% when expressed in APR 

terms for purposes of comparison—or being unable to afford repairs to a car needed 

for commuting to work, the modest cost of a short-term payday advance will almost 

always represent a good tradeoff for the borrower.3

The following table shows how a payday loan may be advantageous when compared with other forms of credit that a middle-income military consumer may 

choose: 

Credit alternative 

$100 

Payday 

advance 

$100 

Overdraft 

protection 

Credit card 

late fee on 

$100 bill 

Late/Disconnect 

fee on $100 

utility bill 

$100 Bounced 

check 

NSF/merchant 

Fee ..................................................... $15.00 $26.90 $32.61 $46.16 $53.68 

Effective APR ..................................... 391% 701% 850% 1,203% 1,400% 

Against this backdrop, a payday loan may be a very wise choice for a service 

member. 

We respectfully urge you that there are two sides to this issue, and the DoD report contains only one of them. We will work diligently with you and your staff to 

make sure that you can make an informed and principled decision regarding this 

matter. 

Thank you for you courtesies at the hearing and for your efforts on behalf of our 

service members and our nation. 

Very truly yours, 

/S/ HILARY B. MILLER


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