Military Personnel
DOD's Predatory Lending Report Addressed Mandated Issues, but Support Is Limited for Some Findings and Recommendations Gao ID: GAO-07-1148R August 31, 2007Serious financial problems can adversely affect unit morale and readiness as well as servicemembers' credit histories and military careers. If servicemembers experience serious financial problems, they may be subject to adverse actions such as loss of security clearances, criminal or nonjudicial sanctions, or adverse personnel actions including possible discharge from the military. The Department of Defense's (DOD) Social Compact, which is part of its human capital plan, notes that mission readiness and quality of life depend on whether servicemembers use their financial resources responsibly. For these reasons, Congress and DOD officials have expressed concerns about servicemembers' financial conditions. DOD is particularly concerned about the use and effects of certain consumer loans that DOD identified as being predatory. The 2006 National Defense Authorization Act required DOD to issue a report on predatory lending directed at servicemembers and their dependents. The mandate required DOD's report to include: (1) a description of the prevalence of predatory lending practices directed at servicemembers and their families; (2) an assessment of the effects of predatory lending on servicemembers and their families; (3) a description of DOD's strategies and programs to educate servicemembers and their families about predatory practices; (4) a description of DOD's strategies and programs to reduce or eliminate the prevalence of predatory lending practices directed at servicemembers and their families, as well as the negative effects of such practices; and (5) recommendations for additional legislative and administrative action to reduce or eliminate predatory lending practices. Following the publication of DOD's 2006 report, private-sector groups associated with segments of the financial industry raised concerns about the report's preparation, quality, and recommendations. Congress requested that we review DOD's 2006 report on predatory lending practices. Specifically, we evaluated DOD's approach and support in preparing its mandated report on predatory lending practices. This report documents findings that we briefed to your offices on August 17, 2007.
DOD issued a report on predatory lending that addressed the mandated issues, but it contained limited support for some of its findings and recommendations. As required by the mandate in the 2006 National Defense Authorization Act, DOD issued its report in August 2006 addressing the five required elements after consulting with the organizations and groups specified in the act. Among the points that DOD made are that predatory lending practices are prevalent and target military personnel and that the department is exerting significant effort to educate servicemembers on the potential dangers of using predatory loans. All mandated organizations and groups stated that they had commented on DOD's report, although DOD appears to have consulted with military charity organizations and consumer groups more than with the federal agencies identified in the report. DOD's report did not describe the content and extent of the consultations or make note of any concerns raised by those groups. The report's authors indicated that they had to rely largely on previously gathered data and may have done some things differently if they had had more time. Additionally, representatives for one of the consulted federal agencies noted that DOD faced a short timeframe to prepare its report and basically met the legislative requirements. Even though DOD provided several sources illustrating the negative effect that predatory loans have on servicemembers, our evaluation of the DOD report revealed methodological problems in some of its analyses and in some of the studies cited in its report, particularly for the description of the prevalence and assessment of the effects of predatory lending practices. DOD's report also showed the percentages of servicemembers who use loans that it had characterized as predatory and the percentage of servicemembers who experienced financial difficulties. It did not include an analysis of the relationship between the two types of information. In its sections on education and strategies to reduce or eliminate the prevalence and negative effects of predatory lending practices, the DOD report documented the broad array of financial education classes and other programs. While the report linked the large numbers of financial education classes and materials provided to servicemembers and their families to increased awareness and reduced usage of predatory loans, DOD has not implemented procedures for evaluating outcomes from its training programs. While DOD's report addressed the requirements in the mandate, the shortcomings we identified in some of the methods and approach indicate that caution is necessary when interpreting the findings for some areas of DOD's report.
GAO-07-1148R, Military Personnel: DOD's Predatory Lending Report Addressed Mandated Issues, but Support Is Limited for Some Findings and Recommendations
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August 31, 2007:
The Honorable Tim Johnson:
Chairman:
Subcommittee on Financial Institutions:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Lindsey Graham:
Ranking Member:
Subcommittee on Personnel:
Committee on Armed Services:
United States Senate:
Subject: Military Personnel: DOD's Predatory Lending Report Addressed
Mandated Issues, but Support Is Limited for Some Findings and
Recommendations:
Serious financial problems can adversely affect unit morale and
readiness as well as servicemembers' credit histories and military
careers. If servicemembers experience serious financial problems, they
may be subject to adverse actions such as loss of security clearances,
criminal or nonjudicial sanctions, or adverse personnel actions
including possible discharge from the military. The Department of
Defense's (DOD) Social Compact, which is part of its human capital
plan, notes that mission readiness and quality of life depend on
whether servicemembers use their financial resources
responsibly.[Footnote 1] For these reasons, Congress and DOD officials
have expressed concerns about servicemembers' financial conditions. DOD
is particularly concerned about the use and effects of certain consumer
loans that DOD identified as being predatory.
In April 2005, we reported about problems servicemembers were
experiencing with personal financial management and the steps that DOD
was taking to address those issues.[Footnote 2] In another April 2005
report, we noted that DOD did not know the extent to which
servicemembers were using consumer loans that DOD considered to be
predatory, nor the effects of that usage.[Footnote 3] Our report noted
that DOD expressed concerns about four types of loans it labeled as
predatory--payday, rent-to-own, automobile title pawn, and tax refund
loans. These financial products are typically offered by lenders that
are outside the system of federally insured financial institutions.
Although "predatory lending" has no precise definition, some practices
(such as charging excessive fees or interest rates and repeatedly
refinancing loans without economic gain for the borrower) are widely
regarded as predatory. We also reported that DOD and active duty
servicemembers have not fully used DOD's existing tools for curbing the
use and effects of predatory lending practices. To correct identified
problems in DOD's programs for addressing predatory lending practices,
we recommended actions that would (1) clarify to servicemembers that
DOD does not endorse the advertisers in installation newspapers and (2)
make greater use of Armed Forces Disciplinary Control Boards which can
place businesses off limits to servicemembers if the businesses
adversely affect the servicemembers' health, safety, morals, welfare,
morale, and discipline. DOD concurred with the first recommendation and
partially concurred with our second recommendation, noting constraints
faced in using the boards.
The 2006 National Defense Authorization Act required DOD to issue a
report on predatory lending directed at servicemembers and their
dependents.[Footnote 4] The mandate required DOD's report to include:
(1) a description of the prevalence of predatory lending practices
directed at servicemembers and their families; (2) an assessment of the
effects of predatory lending on servicemembers and their families; (3)
a description of DOD's strategies and programs to educate
servicemembers and their families about predatory practices; (4) a
description of DOD's strategies and programs to reduce or eliminate the
prevalence of predatory lending practices directed at servicemembers
and their families, as well as the negative effects of such practices;
and (5) recommendations for additional legislative and administrative
action to reduce or eliminate predatory lending practices. The act
further specified that DOD was to prepare its report in consultation
with the Secretary of the Treasury, the Chairman of the Federal
Reserve, the Chairman of the Federal Deposit Insurance Corporation, and
representatives from military charity organizations, and consumer
groups and submit it to Congress within 180 days of the legislation's
enactment. DOD issued the mandated report on August 9, 2006.[Footnote
5] Following the submission of DOD's report, Congress added a new
section to Title 10 of the U.S. Code which sets out a number of
limitations and requirements related to terms of consumer credit
extended to servicemembers and their dependents.[Footnote 6] Many of
the provisions in this section mirror the recommendations in DOD's
report. This statute required the Secretary of Defense to create
regulations to implement the new provisions, and, in response to that
requirement, DOD has published in the Federal Register some proposed
rule changes that would limit the terms of consumer credit extended to
servicemembers and their dependents.[Footnote 7] These proposed
regulations are expected to be effective October 1, 2007.
Following the publication of DOD's 2006 report, private-sector groups
associated with segments of the financial industry raised concerns
about the report's preparation, quality, and recommendations. You
requested that we review DOD's 2006 report on predatory lending
practices. Specifically, we evaluated DOD's approach and support in
preparing its mandated report on predatory lending practices. This
report documents findings that we briefed to your offices on August 17,
2007. Enclosure I contains the briefing slides we presented. This
briefing contributes to a larger GAO body of work on compensation and
financial conditions of military personnel (see the list of related GAO
products at the end of this report).
In conducting our review, we limited the scope of our work to the types
of loans that DOD identified as being predatory in its mandated 2006
report. We examined legislation that mandated the DOD report and
regulations such as governmentwide and DOD-wide standards for data
quality. In addition to reviewing DOD's predatory lending report and
the reports cited in that study, we reviewed GAO, Congressional
Research Service, and Federal Deposit Insurance Corporation Office of
the Inspector General reports on related issues. We developed a tool to
systematize our analysis of the quality of research studies and data
sources DOD used as support in its report. We interviewed
representatives and obtained documents from DOD and the federal
agencies, military charity organizations, and consumer groups involved
in the preparation of DOD's report as well as other groups whose
perspectives were different from those provided in the DOD report. As
an additional means for examining the support for DOD's report, we
conducted a site visit at one installation for each of the four active
duty services. Enclosure II describes our scope and methodology in more
detail. We performed our work between March 2007 and August 2007 in
accordance with generally accepted government auditing standards.
Summary:
DOD issued a report on predatory lending that addressed the mandated
issues, but it contained limited support for some of its findings and
recommendations. As required by the mandate in the 2006 National
Defense Authorization Act, DOD issued its report in August 2006
addressing the five required elements after consulting with the
organizations and groups specified in the act. Among the points that
DOD made are that predatory lending practices are prevalent and target
military personnel and that the department is exerting significant
effort to educate servicemembers on the potential dangers of using
predatory loans. All mandated organizations and groups stated that they
had commented on DOD's report, although DOD appears to have consulted
with military charity organizations and consumer groups more than with
the federal agencies identified in the report. DOD's report did not
describe the content and extent of the consultations or make note of
any concerns raised by those groups. The report's authors indicated
that they had to rely largely on previously gathered data and may have
done some things differently if they had had more time. Additionally,
representatives for one of the consulted federal agencies noted that
DOD faced a short timeframe to prepare its report and basically met the
legislative requirements. Even though DOD provided several sources
illustrating the negative effect that predatory loans have on
servicemembers, our evaluation of the DOD report revealed
methodological problems in some of its analyses and in some of the
studies cited in its report, particularly for the description of the
prevalence and assessment of the effects of predatory lending
practices. For example, the DOD report's prevalence section provided
several metrics that did not directly assess whether servicemembers
actually (1) used the loan type and (2) considered the associated
lending practices to be predatory. As we noted in our 2005 report on
predatory lending, the extent to which active duty servicemembers use
consumer loans considered to be predatory and the effects of such
borrowing are unknown, but some of the information provided in the DOD
report and obtained during our 2007 site visits suggests that some
servicemembers can pay substantial sums for the loans. DOD's report
also showed the percentages of servicemembers who use loans that it had
characterized as predatory and the percentage of servicemembers who
experienced financial difficulties. It did not include an analysis of
the relationship between the two types of information. In its sections
on education and strategies to reduce or eliminate the prevalence and
negative effects of predatory lending practices, the DOD report
documented the broad array of financial education classes and other
programs offered. While the report linked the large numbers of
financial education classes and materials provided to servicemembers
and their families to increased awareness and reduced usage of
predatory loans,. DOD has not implemented procedures for evaluating
outcomes from its training programs as we recommended in 2005. For
example, tools such as required personal financial management training
for all servicemembers arriving at their first duty station,
alternative loan programs from military charity organizations, and
financial counseling are readily available to servicemembers; however,
our 2005 report noted and our site visits in 2007 found that some
servicemembers underutilize these resources because, in part, they do
not want their command to know about their financial problems. DOD's
report included six recommendations for additional legislative and
administrative actions, such as setting a 36 percent annual percentage
rate cap for loans to military borrowers and requiring unambiguous and
uniform price disclosures. While these recommendations may have merit,
they were not directly linked to the report's findings, were based on
research studies that had some methodological problems, or did not
address implementation issues. Similarly, DOD proposed the
recommendations without discussing the feasibility of implementing and
enforcing the recommendations. While DOD's report addressed the
requirements in the mandate, the shortcomings we identified in some of
the methods and approach indicate that caution is necessary when
interpreting the findings for some areas of DOD's report.
Agency Comments and Our Evaluation:
On August 21, 2007, we provided a draft of this report to DOD for
review and comment. The Office of the Under Secretary of Defense for
Personnel and Readiness provided the following comments.
"The Department stands by the content and recommendations in its August
9th, 2006, Report to Congress on Predatory Lending Practices Directed
at Members of the Armed Forces and Their Dependents. While more
research is always a laudable objective, GAO's existing findings, as it
acknowledges, point to the same conclusion the Department and the
Congress reached: We need to act to protect our Service personnel from
predatory lending practices."
Contrary to DOD's comments, our report neither acknowledged nor
disagreed with DOD's conclusion stated above. While actions may be
needed to protect servicemembers from predatory lending practices, our
report did not endorse or reject any action recommended in DOD's
report. The scope of our work was limited to evaluating DOD's approach
and support in preparing its mandated report on predatory lending
practices.
Contrary to DOD's comments, our report neither acknowledged nor
disagreed with DOD's conclusion stated above. While actions may be
needed to protect servicemembers from predatory lending practices, our
report did not endorse or reject any action recommended in DOD's
report. The scope of our work was limited to evaluating DOD's approach
and support in preparing its mandated report on predatory lending
practices.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 4 days
after its issue date. At that time, we will provide copies of this
report to interested congressional committees and the Secretary of
Defense. We will also make copies available to others upon request.
This report will be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you have any questions about this report or need additional
information, please contact me at (202) 512-3604 or farrellb@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Key contributors
to this report are listed in Enclosure III.
Brenda S. Farrell:
Director:
Defense Capabilities and Management:
[End of section]
Enclosure I:
Briefing Slides:
Military Personnel: DOD‘s Predatory Lending Report Addressed Mandated
Issues, but Support Limited for Some Findings and Recommendations:
Briefing to Congressional Requesters:
August 17, 2007:
Outline of Briefing:
Introduction/Background:
Objective, Scope, and Methodology:
GAO Observations:
DOD Consultations during Report Preparation:
DOD Addressed Five Elements in Its Report:[Footnote 8]
Description of the prevalence of predatory lending practices,
Assessment of the effects of the practices,
Description of DOD‘s strategy and programs to educate servicemembers
and their families regarding the practices,
Description of DOD‘s strategy and programs to reduce or eliminate the
prevalence and negative effects of the practices, and:
Recommendations for additional legislative and administrative action to
reduce or eliminate the practices.
The Department of Defense‘s (DOD) Social Compact, which is part of its
human capital plan, notes that mission readiness and quality of life
depend on whether servicemembers use their financial resources
responsibly.[Footnote 9]
If servicemembers experience serious financial problems, they may be
subject to adverse actions such as loss of security clearances,
criminal or non-judicial sanctions, or adverse personnel actions
including possible discharge from the military.
Serious financial problems can adversely affect unit morale and
readiness as well as servicemembers‘ credit histories and military
careers.[Footnote 10]
In our April 2005 report that addressed predatory lending practices and
servicemembers,[Footnote 11] we noted:
’Predatory lending“ has no precise definition, but some practices (such
as charging excessive fees or interest rates and repeatedly refinancing
loans without economic gain for borrower) are widely regarded as
predatory.
DOD officials expressed concerns about four types of consumer loans
(payday, rent-to-own, automobile title pawn, and refund anticipation)
that DOD labeled as predatory. These loans are typically provided by
lenders that are outside the system of federally insured financial
institutions. These loans provide alternative access to cash for
consumers with low incomes or poor credit records, and generally do so
without standard credit checks. The fees charged for these types of
loans are generally much higher than those charged by traditional
financial institutions, and other loan terms and conditions are often
unfavorable to the borrower. Descriptive information on these four
types of consumer loans follows.
* Payday loans, according to the Federal Deposit Insurance Corporation
(FDIC), are small, short-term loans that borrowers promise to repay out
of their next paycheck or deposit of funds. These loans typically have
high fees and are often rolled over repeatedly, which can make the cost
of borrowing”expressed as an annual percentage rate”extremely high.
[Footnote 12]
* Rent-to-own loans, according to the Federal Trade Commission, provide
immediate access to household goods (such as furniture and appliances)
for a relatively low weekly or monthly payment, typically without any
down payment or credit check. Consumers have the option of purchasing
the goods by continuing to pay ’rent“ for a specified period of time;
however, the effective cost of the goods may be two to three times
higher than the retail price.[Footnote 13]
* Automobile title pawns provide short-term loans to borrowers who give
the lender the title to their car as collateral for the loan. Effective
interest rates are generally very high.
* Refund anticipation loans provide cash loans against the borrower‘s
expected income tax refund.
DOD did not know the extent to which servicemembers use consumer loans
that it considered to be predatory or what the effects of that
borrowing were, at the time of our April 2005 report.
Although DOD had tools in place to curb the use and effects of
predatory lending practices in 2005, DOD and active duty servicemembers
had not fully used its tools, such as a panel that can place a business
off-limits to servicemembers.
The National Defense Authorization Act for Fiscal Year 2006 mandated
DOD to submit a report on predatory lending practices directed at
servicemembers and their families and required: [Footnote 14]
Consultation with the Secretary of the Treasury, the Chairman of the
Federal Reserve, the Chairman of the FDIC, military charity
organizations, and consumer organizations;
Information on the following five elements regarding predatory lending
practices directed at servicemembers and their families:
* Description of the prevalence of predatory lending practices,
* Assessment of the effects of the practices,
* Description of DOD‘s strategy and programs to educate servicemembers
and their families regarding the practices,
* Description of DOD‘s strategy and programs to reduce or eliminate the
prevalence and negative effects of the practices, and:
* Recommendations for additional legislative and administrative action
to reduce or eliminate the practices; and:
Issuance of the report no later than 180 days after enactment of the
legislation.
DOD published its Report on Predatory Lending Practices Directed at
Members of the Armed Forces and Their Dependents on August 9, 2006.
Among the points made in the report were:
The report had been prepared with assistance from the specific agencies
and types of organizations specified in the mandate.
Predatory lending practices are prevalent and target military
personnel.
Efforts are on-going to persuade servicemembers ’not to fall victim to
the lure of easy credit to solve their financial concerns“ and to
consider better options.
The department is exerting significant effort to educate servicemembers
on the potential dangers of using predatory loans and better ways of
managing their finances.
Commanders are using the methods available to them (such as loans
available from military charity organizations) to curtail the
prevalence of predatory loans.
DOD is seeking protections for servicemembers by proposing six
recommendations for statutory controls.
Objective, Scope, and Methodology:
Objective:
For this report, we evaluated DOD‘s approach and support in preparing
its mandated report on predatory lending practices.
Scope:
We limited our work to the types of loans that DOD identified as being
predatory in its mandated report. We focused on active duty
servicemembers based on DOD‘s use of survey results and other data on
active duty servicemembers.
Methodology:
To address our objective, we:
Examined the 2006 legislation mandating the DOD report and regulations
such as government-wide and DOD-wide standards for data quality;
Reviewed reports on related issues from GAO, other agencies, and non-
governmental organizations;
Constructed and used an evaluation tool to systematically analyze the
methodological soundness of some research studies and data sources that
DOD used in its report;
Interviewed responsible DOD and service officials and representatives
from the U.S. Treasury, Federal Reserve, FDIC, military charity
organizations, and consumer organizations that were consulted by DOD in
its report preparation;
Held discussions with groups such as the Center for Regulatory
Effectiveness and a payday lending association to understand
perspectives that differed from those provided in DOD‘s report;
Conducted a site visit at one installation for each of the four active
duty services and used structured protocols to conduct individual
interviews and group discussions with personnel representing
installation leadership, legal assistance, finance, senior enlisted
supervisors, financial counselors and trainers, and the military
aid/relief unit representatives; and Performed our work between March
2007 and August 2007 in accordance with generally accepted government
auditing standards.
Observations:
Consultations:
DOD‘s 2006 report indicated and our follow-up discussions confirmed
that the mandated agencies and organizations were consulted, but the
report did not describe the content and extent of the consultations or
make note of any concerns raised by those groups.
The representatives for the mandated federal agencies stated that they
had reviewed a draft of DOD‘s report but did not participate during its
preparation.
* Federal Reserve representatives stated that DOD orally described the
report and gave them a whole draft to review. Federal Reserve staff:
- provided general comments, but did not help with the report‘s
content,
- had no official opinion on the report since it was based on DOD‘s
research and studies of predatory loans on servicemembers, and:
- did not help DOD formulate the recommendations nor did the Federal
Reserve endorse them.
* FDIC representatives stated they reviewed the whole draft report and •
- made general comments to DOD, and:
- suggested that DOD add information on both alternative loan products
and FDIC‘s conference, ’Meeting the Needs: Affordable, Responsible
Short-Term Lending,“ which DOD agreed to do.
* Treasury representatives stated that they reviewed the whole draft
report after DOD had developed it and:
- provided general rather than substantive comments on the draft report,
- commented on the potential negative effect that DOD‘s recommended
limitations on credit may have on overall credit availability to
servicemembers, and:
- asked DOD to document in its report that the recommendations apply
only to military servicemembers.
Military charity organizations‘ officials noted they provided input to
the report‘s authors during its preparation and generally supported its
content.
* Army Emergency Relief officials said their comments were editorial,
and they basically concurred with the draft.
* Navy/Marine Corps Relief Society officials said they agreed:
’wholeheartedly“ with DOD‘s recommendations.
* Air Force Aid Society official noted that the report reflected her
experience regarding the impact of predatory lending products on young
military families and concurred with the report‘s recommendations.
Consumer group representatives met with DOD officials and provided the
history of predatory lending products and research studies.
* A Consumer Federation of America representative stated she provided ^
- the information about Internet payday loan and installment lenders
contained in Appendix 3 of DOD‘s report.
- gave feedback about her areas of expertise (such as about payday
loans), and:
- did not comment on DOD‘s research.
* A Center for Responsible Lending representative stated that he was
very conscientious about not wanting to influence DOD and, therefore,
he and his staff:
- provided DOD with the history and definition of abusive lending
practices and a discussion on consumer protection and advocacy,
- had differences of opinion with DOD regarding lending products and
predatory practices, and:
- were concerned that the recommendations were so strict that the small
loan product (payday loans) could morph into something else or the
lenders could find loopholes.
* A National Association of Consumer Advocates representative provided
data to DOD and thought that the recommendations in DOD‘s report are
’completely appropriate.“
The 180-day requirement for issuing the DOD report may have contributed
to some of the concerns identified in this and later sections of our
evaluation.
* The authors of the DOD report indicated that they had to rely largely
on previously gathered data and may have done some things differently
if they had had more time.
* In addition, Treasury representatives noted that DOD faced a short
timeframe to prepare the report and basically met the legislative
requirements.
Observations:
Prevalence:
The DOD 2006 report‘s prevalence section discussed six types of loan
products with associated predatory practices and provided several
metrics that did not directly assess whether servicemembers actually
(1) used the loan type and (2) considered the associated lending
practices to be predatory.
DOD‘s 2006 report added two types of predatory loans”military
installment loans and Internet lending”to the four types”payday loans,
rent-to-own loans, automobile title pawn loans, and tax refund
anticipation loans”that the Department had identified when we published
our April 2005 report (see GAO-05-349) on predatory lending.
DOD does not have comprehensive data for quantifying the extent to
which servicemembers use any of the six types of loan products that DOD
considers predatory. DOD‘s report identified limitations such as the
difficulty in ascertaining the use of payday loans by active duty
servicemembers and their families. We noted similar concerns in our
2005 report on predatory lending and found similar data limitations
during our 2007 site visits.
DOD‘s report inferred the prevalence of predatory lending practices by
using at least three types of metrics. The accuracy of the inferences
associated with these metrics is unclear.
* Servicemembers‘ self-reported usage of a loan product: DOD survey
results, like those we examined in 2005 (GAO-05-349), illustrate the
percentages of servicemembers who had payday loans, which may not be
the same thing as the percentage of servicemembers who would have
characterized their loans as predatory. However, during our 2007
discussions with installation leaders and servicemembers, they
emphasized negative experiences with these types of loans.
* Geographic proximity of storefronts: DOD also inferred prevalence
using findings from a research study that examined the geographic
proximity of loan storefronts to military installations. Our evaluation
of that study suggests that its descriptive analyses did not provide
sufficient evidence to support DOD‘s perceptions and conclusions that
(1) concentration of storefronts around installations suggest
servicemembers were being targeted more so than other groups of
potential customers at other locations or (2) proximity implies only
servicemember usage. Alternatively, civilians working on or near the
installations could be targets also. While the study did not
definitively prove that lenders are targeting servicemembers, we
observed during our 2007 site visits that some lender storefronts are
in close proximity to bases and their advertising was often targeted to
servicemembers.
* Estimated number of active-duty servicemembers with predatory loans:
DOD used industry data to estimate that servicemembers are three times
more likely than civilians to have taken out a payday loan, but there
is no way to verify the accuracy of the industry data. However, our
analysis of DOD‘s calculations using the industry data found that DOD‘s
analysis was reasonable with the limitation that industry estimates of
payday borrowers were not examined.
As we reported in 2005 (GAO-05-349), DOD‘s efforts to assess the
prevalence of predatory lending practices directed at servicemembers
and their families are hampered by:
* the lack of a precise definition of predatory lending”a problem
shared with other organizations attempting to quantify the use and
effects of predatory loans;
* imprecision in the way questions are asked on DOD‘s surveys; and:
* privacy considerations and the reluctance of most servicemembers to
discuss their financial difficulties with their command.
Observations:
Effects:
Although DOD‘s 2006 report did include an analysis of predatory loan
use and financial difficulties among servicemembers and their families,
it did not include an analysis of the relationship between the two.
Analytical and methodological limitations constrain the conclusions
that can be drawn from the DOD-wide survey results and the case studies
detailed in the effects section.
Using the survey results, DOD separately analyzed the percentages of
active duty servicemembers who had (1) experienced financial problems
such as bouncing checks and having utilities shut off and (2) used four
types of predatory loan products.[Footnote 15] However, the report did
not address the relationship between financial problems and predatory
loan usage by showing
* the percentages of servicemembers reporting financial problems who
had predatory loans as compared to those that did not have predatory
loans, or:
* the percentages of servicemembers with predatory loans who reported
financial problems as compared with those that did not report financial
problems.
Seventeen anecdotal case studies gathered specifically for the report
via an installation-level data call were used to provide context on the
effects of predatory loan use among servicemembers. However, the case
selection methodology for choosing these 17 cases from the 3,000+ case
studies was limited in that it provided for only one scenario of
predatory loan use.
* Specifically, the installation-level data call requested only "detail
about a servicememmber and/or a family member who has suffered from a
predatory loan" rather than requesting examples of both negative and
positive effects.
* The report authors acknowledges that the:
- installation-level data call was not a statistical, generalizable
sample and:
- 17 cases studies were selected because they told the "full story" of
using a predatory loan.
* Despite these methodological limitations, the case studies do
illustrate that some servicemembers can pay substantial sums for the
loans-money that could be used to meet other financial needs.
As we reported in 2005 (see GAO-05-349), the DOD's inability to
quantify the effects of using the loan products is due in part to the
data problems that we discussed earlier in the prevalence section of
this briefing. Being able to identify the population of servicemembers
who use the products is essential for determining the negative as well
as positive effects of using the loans that DOD has characterized as
predatory.
Observations:
Education:
DOD‘s 2006 report linked the large numbers of financial education
classes and materials provided to servicemembers and their families to
increased awareness and reduced usage of predatory loans, but DOD”like
other federal agencies”has a continuing need to implement procedures
for evaluating outcomes from its training programs.
The report provided statistics documenting the services‘ efforts in
2005 to educate servicemembers and their families about financial
issues that included predatory lending. For example,
* The services offered more than 10,000 classes in which predatory
lending topics were covered, and external organizations such as on-
installation banks and credit unions offered more than 1,000 additional
courses on these topics.
* Together, the services and the external organizations distributed
nearly 225,000 pieces of financial education materials.
* The services delivered nearly 1,000 news articles addressing
predatory lending to local base papers and base bulletins, and they
promulgated more than 150 policy memos addressing financial issues.
The report emphasizes that financial education occurs throughout the
military.
* DOD requires all servicemembers to take personal financial management
training within 3 months of arriving at the first permanent duty
station.
* Prior to assuming a leadership role as a supervisor, officers and
noncommissioned officers receive financial training and are expected to
demonstrate a basic understanding of related policies and practices
designed to protect junior servicemembers.
* The DOD report shows that while servicemembers‘ families are also
offered financial training, they attended at much lower levels than did
servicemembers. During our 2007 site visits, installation personnel
noted that it is difficult to get family members to attend the
voluntary financial management classes.
Since May 2003, DOD‘s Financial Readiness Campaign has partnered with
approximately 20 federal agencies and nonprofit organizations to
provide materials and assistance to the services and, among other
things, increase financial awareness and abilities, increase savings,
and reduce dependence on credit.
As we reported in 2005 (GAO-05-348), some junior enlisted
servicemembers are not receiving the required personal financial
management training.
* Our 2007 site visits found that the services do not consistently
track attendance to ensure that all servicemembers attend the required
training.
* Our discussions with senior noncommissioned officers and other
program officials at four installations visited in 2007 found that
financial education training may not occur because of competing needs
such as completing deployment-related training.
We also noted in our 2005 report (GAO-05-348) that DOD does not have
outcome-related measures to determine whether personal financial
management training helps servicemembers manage their finances better.
* We therefore recommended that DOD:
- develop and implement, in conjunction with the services, a DOD-wide
oversight framework with a results-oriented evaluation plan for the
personal financial management programs and formalize DOD‘s oversight
role by including evaluation and reporting requirements in the personal
financial management instruction; and:
- require the services to develop and implement a tactical plan with
time-based milestones to show how the appropriate service policy office
will monitor financial management training and thereby ensure that
junior enlisted servicemembers receive the required training.
* Although DOD concurred with these recommendations, it has not
implemented them.
Shortcomings in training evaluation are not unique to DOD. In a 2006
GAO letter [Footnote 16] to Congressional leadership suggesting high
priority areas of oversight for the 110th Congress, we noted a need to
enhance and improve all federal agencies‘ abilities to evaluate
financial literacy programs and determine if they promote positive
behavioral change.
Observations:
Strategy:
DOD‘s 2006 report describes a broad array of tools provided to
servicemembers to help reduce or eliminate the prevalence and effects
of predatory lending practices; however, some of the tools may be under-
utilized.
The report noted that DOD has worked with the military charity
organizations and on-installation banks and credit unions to provide
alternatives to predatory loans. For instance,
* The military charity organizations indicated that they provided about
100,000 grants and no-interest loans worth nearly $90 million to
servicemembers in 2005.
* 24 on-installation financial institutions documented examples of
small, short-term, and lowered interest alternatives that they made
available specifically for servicemembers.
* Despite these substantial efforts and available resources, our 2005
report (GAO-05-349) as well as site visits in 2007 found that
servicemembers may choose to use non-DOD resources if, for example,
they do not want the command to be aware of their financial conditions.
Free credit counseling and debt management services are another part of
DOD‘s strategy to reduce or eliminate the prevalence and effects of
predatory lending practices.
* Installations provide credit counseling through family support
programs.
* DOD also makes confidential, 24-hour, 7-days-a-week credit counseling
available through toll-free telephone and Web access to DOD‘s Military
OneSource.
* Although not mentioned in DOD‘s report, information obtained in our
2007 site visits also indicated that military charity organizations may
similarly help servicemembers with tasks such as developing budgets as
a step in awarding a grant or no-interest loan.
* The DOD report additionally cites special emphases that Navy and
Marine Corps leaders have placed on eliminating any stigma that might
have formerly been associated with servicemember financial problems.
During our 2007 site visits, several installation leaders stated that
they are encouraging servicemembers to use available installation
resources, such as command personal financial specialists and military
charity organizations, without fear of repercussions.
The DOD report reiterates a point previously made in our 2005 report
(GAO-05-349)”Armed Forces Disciplinary Control Boards have been used in
a limited number of instances to place or threaten to place a lender
off- limits to servicemembers. One reason for this infrequent use is
that the boards may have little basis to take actions against lenders
that DOD considers as predatory if the lenders operate within state
laws.
Even though DOD has a robust set of tools for curbing predatory lending
practices and their effects, our 2005 report (GAO-05-349) concluded
that servicemembers under-utilize those resources.
* We found that free legal assistance”a useful tool that was not
mentioned in the DOD report”is available to review contracts and other
financial documents, but servicemembers might not use this assistance.
* We identified multiple reasons for the under-utilization, such as
servicemembers‘ desires to make purchases immediately.
Observations:
Recommendations:
DOD‘s 2006 report included six recommendations for additional
legislative and administrative actions; while these recommendations may
have merit, they were not directly linked to the report‘s findings,
were based on research studies that had some methodological problems,
or did not address implementation issues.
In the DOD report section that preceded the recommendations, DOD
concluded that it cannot prevent predatory lending without assistance
from Congress, the state legislatures, and federal and state
enforcement agencies. DOD also commented on issues such as rollover of
loans and usury laws.
DOD‘s report provided six recommendations that it concluded will
protect servicemembers and their families from predatory lending abuses:
* Require unambiguous and uniform price disclosure for extension of
credit,
* Require a federal ceiling on the cost of credit to military
borrowers,
* Prohibit extending credit without regard to ability to repay,
* Prohibit provisions in loan contracts that require servicemembers and
their families to waive their rights to take legal action,
* Prohibit contract clauses that require servicemembers and their
families to waive any special legal protections, and
* Prohibit states from discriminating against servicemembers and their
families stationed within their borders and prohibit lenders from
making loans to servicemembers that violate state consumer lending
protections.
There is limited transparency to show the basis for some of the
recommendations in the DOD report.
* After being unable to identify a clear link between reported findings
and recommendations, we asked the DOD authors to identify the portions
of the report supporting each recommendation.
* Although DOD subsequently provided us with a list of pages containing
information purported to support each recommendation, we were still
unable to link some recommendations to supporting documentation.
Methodological problems in some of DOD‘s analyses and in some of the
studies cited in DOD‘s report suggest that some recommendations may not
be grounded in sound research.
* Throughout this evaluation, we have noted some methodological
concerns such as those associated with the measurement of prevalence
and effects.
* Other methodological problems were also present. For example,
- DOD based some of its recommendations on Appendix 3 of its report;
however, the methodology used to select the Web sites of lenders listed
in this appendix was not statistically representative of a defined
universe of such lenders. For example, Appendix 3 notes that the 18
listed are a small sample of Internet lenders. DOD‘s report states that
an on-line search for ’military loans“ got more than 38 million hits.
Therefore, the findings based on this appendix cannot be generalized
beyond the 18 sites that were reviewed.
- DOD combined information from two samples and drew generalizations
that were not methodologically sound about payday loan use by all
enlisted personnel.
Financial markets specialists at GAO examined the six recommendations
and noted DOD‘s report did not address the feasibility of implementing
and enforcing the recommendations, which could cause challenges.
While DOD‘s report included a strategy for personal finance to increase
servicemembers‘ awareness, it did not identify any additional changes
that could be made to DOD‘s current financial education programs that
would make these programs more beneficial.
[End of section]
Enclosure II:
Scope & Methodology:
Scope:
In conducting our evaluation of DOD's report on predatory lending, we
limited the scope of our work to the types of loans that DOD identified
as being predatory in its mandated report. This includes payday loans,
rent-to-own loans, automobile title pawns, tax refund loans, and
military installment loans, and Internet lending. Our work focused on
active duty servicemembers as in our April 2005 reports. While DOD's
report does not specify that some parts of its report pertain to only
active or reserve personnel, we focused on active duty servicemembers
based on DOD's use of survey results and other data on active duty
servicemembers.
Methodology:
To address our objective, which was to examine the approach and support
for DOD's report, we examined legislation that mandated the DOD report
and regulations such as governmentwide and DOD-wide standards for data
quality. In addition to reviewing DOD's predatory lending report and
the reports cited in that study, we reviewed and analyzed findings and
perspectives contained in publications on related issues by GAO, the
Congressional Research Service, Federal Reserve Board staff in
Washington, D.C., Federal Deposit Insurance Corporation's Office of
Inspector General, consumer groups (Consumer Federation of America and
Center for Responsible Lending), and an association (Community
Financial Services Association of America) that says it represents more
than 50 percent of payday lenders. DOD, service, and installation
officials also provided additional views and documents pertaining to
the prevalence and effects of predatory lending practices, programs and
current strategies to educate servicemembers and their families about
those practices, current strategies and programs for reducing or
eliminating the prevalence and effect of predatory lending practices,
and recommendations for legislative and administrative actions to
reduce or eliminate the prevalence and effects of predatory lending
practices.
In addressing our objective, we conducted interviews with and obtained
documents from the officials in DOD's Office of the Under Secretary of
Defense for Personnel and Readiness who were responsible for preparing
the report, and service policy officials. We also interviewed
representatives from organizations that DOD consulted while developing
its report (see table 1), and in some cases obtained related
documentary evidence concerning their input during DOD's preparation of
its report. We also held discussions with groups such as the Center for
Regulatory Effectiveness and Community Financial Services Association
of America, a payday lending association, to understand perspectives
that were different from those provided in the DOD report. Additional
perspectives were obtained from the public comments that other groups
(e.g., other consumer groups and the lending industry) provided in
response to proposed regulations that DOD published in the Federal
Register proposed regulation submitted by DOD on April 11, 2007.
Table 1: Organizations Supplying Information about Their Consultations
with DOD during the Preparation of Its Mandated Report:
Type of organization: Federal agencies;
Organization and location of the representative(s): Federal Reserve,
Washington, D.C.
Type of organization: Federal agencies;
Organization and location of the representative(s): Treasury
Department, Washington, D.C.
Type of organization: Federal agencies;
Organization and location of the representative(s): Federal Deposit
Insurance Corporation, Washington, D.C.
Type of organization: Military charities;
Organization and location of the representative(s): Army Emergency
Relief, Alexandria, , Virginia.
Type of organization: Military charities;
Organization and location of the representative(s): Navy/Marine Corps
Relief Society, Arlington, Virginia.
Type of organization: Military charities;
Organization and location of the representative(s): Air Force Aid
Society, Arlington, Virginia.
Type of organization: Consumer groups;
Organization and location of the representative(s): Consumer Federation
of America, Washington, D.C.
Type of organization: Consumer groups;
Organization and location of the representative(s): Center for
Responsible Lending, Washington, D.C.
Type of organization: Consumer groups;
Organization and location of the representative(s): National
Association of Consumer Advocates, Washington, D.C.
Type of organization: Consumer groups;
Organization and location of the representative(s): National Consumer
Law Center, Boston, Massachusetts.
Source: GAO.
[End of table]
To further address our objective, we conducted site visits at the four
installations shown in table 2. The team decided to select a
nonprobability sample of four military installations--one per active
duty DOD service. The criteria for selection included (1) installations
with high personnel tempo; (2) installations from different services in
the same geographic area for comparison between services; and (3) at
least one installation that GAO visited during prior work on predatory
lending for comparison across time.[Footnote 17] Our findings from
these site visits cannot be generalized to the population of all
military personnel; however, these site visits provided us with
additional information for our evaluation. During these site visits, we
requested documents (such as training materials) pertaining to DOD's
current efforts to minimize or eliminate the use and effects of
predatory lending practices. We conducted individual interviews with
seven types of officials at each base: installation leaders, personal
financial management program managers, installation finance officials,
command financial counselors, legal assistance attorneys, public
affairs staff, and military charity organization officials. We used a
structured protocol for conducting group discussions with more than 60
senior enlisted personnel at the four installations to gather anecdotal
data from servicemembers about their experiences with the types of
loans DOD identified as predatory.
Table 2: Locations Where GAO Conducted a Site Visit:
Service: Army;
Location: Fort Lewis, Washington.
Service: Navy;
Location: Navy Region Southwest, San Diego, California.
Service: Marine Corps;
Location: Camp Pendleton, California.
Service: Air Force;
Location: McChord Air Force Base, Washington.
Source: GAO.
[End of table]
Part of our assessment of DOD's report involved a review of the overall
report methodology as well as a review of the methodology of key
research studies and data sources cited in the report. Specifically, we
focused our review on research studies that were critical to the
report's message and the data sources used by DOD. We discussed these
data sources with the DOD report authors to gain a better understanding
of how and why they were selected for use. At least two internal
methods experts, with support from statisticians as appropriate,
reviewed these reports and data sources for the reasonableness and
rigor of their data collection and analysis methods. Our review focused
on the validity of the results and conclusions in relation to how they
were used in the DOD report.
We performed our work between March 2007 and August 2007 in accordance
with generally accepted government auditing standards.
[End of section]
Enclosure III:
GAO Contact and Staff Acknowledgments:
GAO Contact:
Brenda S. Farrell, (202) 512-3604 or farrellb@gao.gov:
Acknowledgments:
In addition to the individual named above, Jack E. Edwards, Assistant
Director; Pat L Bohan; Nora Boretti; Renee S. Brown; Cody Goebel; K.
Nicole Harms; Ron La Due Lake; Charles W. Perdue; S. Andrew Stavisky;
Elizabeth W. Wood; and Yiling Wong made key contributions to this
report.
Related GAO Reports:
Guard and Reserve Personnel: Fiscal, Security, and Human Capital
Challenges Should be Considered in Developing a Revised Business Model
for the Reserve Component. GAO-07-984. Washington, D.C.: June 20, 2007.
Military Personnel: DOD Needs to Establish a Strategy and Improve
Transparency over Reserve and National Guard Compensation to Manage
Significant Growth in Cost. GAO-07-828. Washington, D.C.: June 20,
2007.
Military Personnel: DOD Has Taken Steps to Address Servicemembers'
Financial Needs, but Additional Effort is Warranted. GAO-06-749T.
Washington, D.C.: May 18, 2006.
Financial Product Sales: Actions Needed to Protect Military Members.
GAO-06-245T. Washington, D.C.: November 17, 2005.
Financial Product Sales: Actions Needed to Better Protect Military
Members. GAO-06-23. Washington, D.C.: November 2, 2005.
Military Personnel: DOD Needs Better Controls over Supplemental Life
Insurance Solicitation Policies Involving Servicemembers. GAO-05-696.
Washington, D.C.: June 29, 2005.
Military Personnel: DOD's Comments on GAO's Report on More DOD Actions
Needed to Address Servicemembers' Personal Financial Management Issues.
GAO-05-638R. Washington D.C.: May 11, 2005.
Military Personnel: More DOD Actions Needed to Address Servicemembers'
Personal Financial Management Issues. GAO-05-348. Washington, D.C.:
April 26, 2005.
Military Personnel: DOD Tools for Curbing the Use and Effects of
Predatory Lending Not Fully Utilized. GAO-05-349. Washington, D.C.:
April 26, 2007.
Credit Reporting Literacy: Consumers Understood the Basics but Could
Benefit from Targeted Educational Efforts. GAO-05-223. Washington,
D.C.: March 16, 2005.
Highlights of a GAO Forum: The Federal Government's Role in Improving
Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004.
Military Personnel: DOD Needs More Data Before It Can Determine if
Costly Changes to the Reserve Retirement System Are Warranted. GAO-04-
1005. Washington, D.C.: September 15, 2004.
Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-911. Washington, D.C.:
August 20, 2004.
Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-990T. Washington, D.C.:
July 20, 2004.
Military Personnel: DOD Has Not Implemented the High Deployment
Allowance that Could Compensate Servicemembers Deployed Frequently for
Short Periods. GAO-04-805. Washington, D.C.: June 25, 2004.
Military Personnel: Active Duty Compensation and Its Tax Treatment. GAO-
04-721R. Washington, D.C.: May 7, 2004.
Military Personnel: Observations Related to Reserve Compensation,
Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.
GAO-04-582T. Washington, D.C.: March 24, 2004.
Military Personnel: Bankruptcy Filings among Active Duty Service
Members. GAO-04-465R. Washington, D.C.: February 27, 2004.
Military Pay: Army National Guard Personnel Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-413T. Washington, D.C.:
January 28, 2004.
Military Personnel: DOD Needs More Effective Controls to Better Assess
the Progress of the Selective Reenlistment Bonus Program. GAO-04-86.
Washington, D.C.: November 13, 2003.
Military Pay: Army National Guard Personnel Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.:
November 13, 2003.
Military Personnel: DOD Needs More Data to Address Financial and Health
Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.:
September 10, 2003.
Military Personnel: DOD Needs to Assess Certain Factors in Determining
Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions.
GAO-03-554. Washington, D.C.: April 29, 2003.
Military Personnel: Management and Oversight of Selective Reenlistment
Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: November
25, 2002.
Military Personnel: Active Duty Benefits Reflect Changing Demographics,
but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.:
September 18, 2002.
Footnotes:
[1] DOD's Social Compact is a long-term quality of life strategy for
the department. It promotes the advancement of the military community
through the reciprocal ties that bind servicemembers, the military
mission, and military families by responding to their quality of life
needs as individuals and as members of a larger community. See DOD,
Office of Military Community and Family Policy, A New Social Compact: A
Reciprocal Partnership between the Department of Defense, Service
Members and Families (July 2002).
[2] GAO, Military Personnel: More DOD Actions Needed to Address
Servicemembers' Personal Financial Management Issues, GAO-05-348
(Washington, D.C.: Apr. 26, 2005).
[3] GAO, Military Personnel: DOD's Tools for Curbing the Use and
Effects of Predatory Lending Not Fully Utilized, GAO-05-349
(Washington, D.C.: Apr. 26, 2005).
[4] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163, § 579 (2006).
[5] DOD, Report On Predatory Lending Practices Directed at Members of
the Armed Forces and Their Dependents (Washington, D.C.: Aug. 9, 2006).
[6] The John Warner National Defense Authorization Act for Fiscal Year
2007, Pub. L. No. 109-364, § 670 (2006), added Section 987 to Title 10
of the U.S. Code.
[7] Limitations on Terms of Consumer Credit Extended to Service Members
and Dependents, 72 Fed. Reg. 18157 (proposed Apr. 11, 2007) (to be
codified at 32 C.F.R. pt. 232).
[8] The mandate required DOD to report on predatory lending practices
directed at servicemembers and families for each element. Our
observations are typically applicable to both servicemembers and
families, except for some unique points about education training for
family members.
[9] DOD, Office of Military Community and Family Policy, A New Social
Compact: A Reciprocal Partnership between the Department of Defense,
Service Members and Families (July 2002).
[10] GAO, Military Personnel: More DOD Actions Needed to Address
Servicemembers‘ Personal Financial Management Issues, GAO-05-348
(Washington, D.C.: Apr. 26, 2005).
[11] GAO, Military Personnel: DOD‘s Tools for Curbing the Use and
Effects of Predatory Lending Not Fully Utilized, GAO-05-349
(Washington, D.C.: Apr. 26, 2005).
[12] According to the Federal Reserve Bank of Philadelphia, fees for a
payday loan range from $15 to $30 for each $100 advanced. If the fee is
$15 to borrow $100 for 14 days, the annualized percentage rate for that
loan is 391 percent. If the borrower extends the 14-day loan four times
beyond the initial loan, the 70-day loan of $100 would result in the
borrower paying $75 in fees in addition to repaying the borrowed $100.
[13] Survey of Rent-to-Own Customers, Federal Trade Commission Bureau
of Economics Staff Report (undated).
[14] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163, § 579 (2006).
[15] The active duty survey gathered information about the four types
of lending products DOD identified as predatory in 2005.
[16] GAO, Potential Oversight Issues: Suggested Areas for Oversight for
the 110th Congress, GAO-07-235R (Washington, D.C.: Nov. 17, 2006).
[17] GAO-05-348 and GAO-05-349.
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