DOD officials have expressed concern that servicemembers are often the victims of predatory lending practices by certain types of lenders who typically lie outside the system of traditional financial institutions such as banks. These lenders offer alternative access to cash for consumers with low incomes or poor credit records, and generally do so without standard credit checks. The fees charged for these alternative loans are generally much higher than those charged by traditional financial institutions, and other terms and conditions of such loans are often unfavorable to the borrower. As a result, some federal, state, and consumer advocacy agencies have expressed concern that many of these alternative loans could include predatory practices. The most common of these loans include the following: Payday loans, according to the Federal Deposit Insurance Corporation, are small, short-term loans that borrowers promise to repay out of their next paycheck or deposit of funds. These loans typically have high fees and are often rolled over repeatedly, which can make the cost of borrowing—expressed as an annual percentage rate—extremely high. Rent-to-own loans, according to the Federal Trade Commission, provide immediate access to household goods (such as furniture and appliances) for a relatively low weekly or monthly payment, typically without any down payment or credit check. Consumers have the option of purchasing the goods by continuing to pay “rent” for a specified period of time—however; the effective cost of the goods may be two to three times the retail price. Automobile title pawns provide short-term loans to borrowers who give the lender the title to their car as collateral for the loan. Effective interest rates are generally very high. Tax refund loans provide cash loans against the borrower’s expected income tax refund. Senior DOD and service officials have noted that such loans may have associated predatory lending practices, which can be detrimental to servicemembers who choose these loans as a way to overcome immediate needs for cash. The fees for loans such as the payday loans provide a general indication of the loans’ potential detrimental financial effects on servicemembers’ finances. The Community Financial Services Association of America, a payday-advance trade association, which says that it represents more than half of the payday advance industry, developed a set of best practices for its member companies. Among other things, the association’s best practices limit the number of extensions for outstanding advances. Association representatives noted that borrowers select payday loans over other alternatives for a number of reasons. For example, in some instances, the officials stated that the individual may not have the good credit history required to borrow from a bank or credit union. In other instances, an individual might use a payday loan to avoid a bounced check fee, late payment penalty, or reconnection fees associated with the late payment of a utility bill. The Congressional Research Service estimated that the number of payday loan offices nationwide increased from approximately 300 in 1992 to almost 15,000 in 2002, and the total dollar volume of payday loans in 2002 was about $25 billion. The extent to which active duty servicemembers use consumer loans considered to be predatory and the effects of such borrowing are unknown, but many sources suggest that predatory lenders may be targeting servicemembers. While DOD has some data on servicemembers’ use of four types of loans, DOD is unable to quantify the extent to which these types of loans have associated predatory practices, the frequency of borrowing, the amounts borrowed, or the effects of the loans. Information from our focus groups, however, provided insights to some of these issues. Although DOD is unable to quantify usage and effects, consumer advocates, state government officials, DOD officials, and servicemembers in our focus groups indicated that military personnel are being targeted by some predatory lenders. DOD does not have comprehensive data for quantifying the extent to which servicemembers use consumer loans that are considered predatory in nature and the effects of such use on servicemembers’ finances or their units’ readiness. The only DOD-wide statistics on servicemembers’ use of loans are obtained from surveys. In the August 2004 DOD survey, 12 percent of servicemembers indicated that, during the last 12 months, they or their spouse had used at least one of the four specified types of financial loans that DOD says may have associated predatory practices. Seven percent of servicemembers indicated they (or their spouse) had obtained payday loans; 4 percent had obtained rent-to-own loans, 1 percent had obtained automobile title pawn loans, and 6 percent had obtained tax refund loans. While only 2 percent of the officers had used any of the four financial transactions, 14 percent of the junior and 13 percent of the senior enlisted servicemembers had used at least one such loan. Although not generalizable to all active duty servicemembers and their spouses, some of the more than 400 participants in our 60 focus groups reported encountering problems when they used the short-term consumer loans; while other servicemembers said such loans have positive elements such as being quick, easy, and obtainable even if servicemembers had a bad credit history (see app. II for example comments). DOD’s efforts to assess predatory lending are hampered by the lack of a precise definition of predatory lending—a problem shared with other organizations attempting to quantify the use and effects of predatory loans. The lack of precision in the definition is found in DOD’s acknowledgement that the four types of loans may (i.e., not always) contain predatory lending practices, but other DOD statements state that payday lending is predatory, without including a qualifier. Imprecision in the definition and the way the questions are asked on surveys can affect results. For example, the percentage of servicemembers who reported using the various types of loans may be larger than the percentage of servicemembers who would have said they obtained a predatory loan, had the question been oriented somewhat differently. Other important issues not addressed in the survey but needed to quantify the extent and effects of borrowing from lenders that may use predatory lending practices include questions on the frequency of use, amounts borrowed, negative and positive effects of the loans, and any problems encountered during the transactions. DOD, service, and installation officials maintained that obtaining data on the use and effects of predatory lending are also hampered because of privacy considerations and the reluctance of most servicemembers to discuss their financial difficulties with their command. Installation officials told us that they are likely to learn about servicemembers’ use of the previously cited types of loans only when a situation has become serious enough to warrant creditors contacting the command or servicemembers contacting either financial counselors or legal assistance attorneys on the installations. Because of general privacy concerns, it is unlikely that all contacts with attorneys and counselors could be provided in an installation-level statistic. According to some consumer advocates, state officials, DOD officials, and military personnel, servicemembers are targeted by predatory lenders. A 2003 National Consumer Law Center report stated that junior enlisted servicemembers are targeted because they have a relatively low but secure income (with military basic pay that currently ranges from about $1,200 to $1,900 per month) and tend to be young and financially inexperienced. The report further suggested that deploying servicemembers are more vulnerable targets than their nondeploying peers because the former often must get their finances in order quickly and leave behind spouses who may not know how to manage the family’s finances. The report noted several financial practices that it considered “consumer scams” aimed at servicemembers. These included payday loans, rent-to-own transactions, and automobile title pawns. Some state officials have also suggested that payday lenders—a type of predatory lending according to DOD—target servicemembers. For example, the Georgia General Assembly has recently determined as part of its new antipayday lending legislation that despite its illegality, payday lending was growing in Georgia and having an adverse effect on servicemembers and others in the state. Similarly, the Florida governor’s 2004 statement to the Committee on Senate Armed Services, Subcommittee on Personnel, noted that Florida had regulated activities of payday loan and check cashing businesses that traditionally target servicemembers. In 2004, the Under Secretary of Defense for Personnel and Readiness posted an issue paper on its Web site to the National Governors Association that addressed payday lending and other personnel issues. Regarding payday lending, the Under Secretary stated that “Payday lending practices have proven to be detrimental to servicemembers who have chosen these loans as a way of overcoming immediate needs for cash…Statutes that cap small loan interest rates and establish usury ceilings help protect vulnerable servicemembers from the usury nature of payday loans and their associated predatory practices.” According to a 2004 Consumer Federation of America study, 15 states prohibit or limit payday lending through laws on interest rate caps for small loans, usury laws, or specific prohibitions for check cashers. We did not independently verify that these 15 states, in fact, do prohibit this activity, nor did we review laws in the other 35 states. Figure 1 shows these 15 states identified by the Consumer Federation of America, along with information on the number of active duty servicemembers on installations in each state. Even in those states that prohibit or otherwise regulate payday loans, servicemembers may be able to obtain such loans. Another Consumer Federation of America report noted that a growing number of Web sites deliver small loans, with some lenders using anonymous domain registrations or residing outside the United States. DOD and servicemembers are underutilizing the tools that DOD has for curbing predatory lending practices and the effects of such lending.