[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES NEEDS OF MILITARY
PERSONNEL AND THEIR FAMILIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 18, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-94
U.S. GOVERNMENT PRINTING OFFICE
31-040 WASHINGTON : 2006
_____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California DENNIS MOORE, Kansas
STEVEN C. LaTOURETTE, Ohio CAROLYN B. MALONEY, New York
MARK R. KENNEDY, Minnesota STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina EMANUEL CLEAVER, Missouri
TOM PRICE, Georgia DAVID SCOTT, Georgia
MICHAEL G. FITZPATRICK, DEBBIE WASSERMAN SCHULTZ, Florida
Pennsylvania GWEN MOORE, Wisconsin
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
----------
Page
Hearing held on:
May 18, 2006................................................. 1
Appendix:
May 18, 2006................................................. 31
WITNESSES
Wednesday, May 18, 2006
Dawson, Cutler, Vice Admiral USN (Ret.), President and Chief
Executive Officer, Navy Federal Credit Union................... 10
Melvin, Valerie C., Acting Director, Defense Capabilities and
Management Team, U.S. Government Accountability Office......... 8
Walter, Elisse B., Senior Executive Vice President, Regulatory
Policy and Programs, NASD...................................... 11
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 32
Kelly, Hon. Sue W............................................ 35
Wasserman Schultz, Hon. Debbie............................... 37
Dawson, Cutler............................................... 38
Melvin, Valerie C............................................ 41
Walter, Elisse B............................................. 67
FINANCIAL SERVICES NEEDS OF MILITARY
PERSONNEL AND THEIR FAMILIES
----------
Wednesday, May 18, 2006
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:15 a.m., in
room 2128, Rayburn House Office Building, Hon. Sue W. Kelly
[chairwoman of the subcommittee] presiding.
Present: Representatives Kelly, Barrett, Davis, Israel,
McHenry, Gutierrez, Moore of Kansas, Waters, and Cleaver.
Chairwoman Kelly. This hearing of the Subcommittee on
Oversight and Investigations will come to order. And without
objection, all members' opening statements will be made part of
the record.
Today's hearing is on financial services needs of military
personnel and their families. Since the terrorist attacks on
September 11th, the men and women of our armed forces have been
deployed around the world and here at home to defeat the
evildoers and guard our country against future attack. Active
duty, Reserve, and Guard forces have all been involved, often
being deployed overseas for more than a year at a time.
In my district, the 124th Airlift Wing of the New York Air
National Guard and Marine Reserve Refueling Squadron 542 at
Stewart National Guard Base have been deployed, along with many
other units. Each of the men and women deployed and their
families depend on knowing that their finances will be secure
when they return, and that criminals and fraudsters will not
steal the funds that they have earned in serving our country.
The Defense Department understands that financial issues
have an important impact on readiness and morale, and has taken
several steps to improve the quality of financial education and
services to military personnel and their families.
Every member of the military is now required to take
classes in personal finance management, and each command is
required to have a command financial counselor to turn to for
advice. Unfortunately, this over-reliance on the chain of
command gives many junior enlisted personnel the feeling that
they will hurt their careers if they come forward and ask for
help.
The DoD still does not seem to have a system for
determining the financial status of its personnel, or
calculating the impact of financial problems on recruiting and
retention. I believe that Congress has a duty to make sure that
our entire financial services regulatory system is geared to
making sure that military personnel and their families are the
primary focus of regulatory activity.
I am disappointed that the DoD recordkeeping is poor, that
the performance measurers are nonexistent, and that DoD has not
used its position on the Financial Literacy Education
Commission this committee authorized to develop systemic
programs for protecting its most vulnerable members. In that
gap, institutions like NASD, credit unions, and private
financial counselors and interested members of the public work
hard to overcome these problems.
Today's hearing will examine what is being done to address
these needs, and what challenges remain that need to be faced,
and where Congress needs to act. I look forward to hearing from
today's witnesses, and I am very pleased that we are able to
have all of you combined on this one panel today. I think it is
going to make this go more smoothly. I turn now to Mr.
Gutierrez.
Mr. Gutierrez. Good morning. Ever since I was elected to
Congress, I have served on this committee--but it was called
``Banking'' back then--and the Veterans' Affairs Committee.
Today's hearing is of particular interest to me because of my
work on both of these committees, and I thank Chairwoman Kelly
for calling this hearing.
At this time, I would also ask unanimous consent that our
colleague, Steve Israel, a member of the Full Committee, be
permitted to fully participate in this hearing, and at the
appropriate time, make an opening statement.
Chairwoman Kelly. So moved.
Mr. Gutierrez. Last year, this committee passed the
Military Personnel Financial Services Protection Act, designed
to prevent predatory companies from using the U.S. military to
prey on financially vulnerable service members by selling them
insurance and investment products with little or no value.
During consideration of the bill in the Financial Services
Committee, I offered an amendment to extend these protections
to abusive lenders who prey on our troops, such as payday
lenders. These payday loans are the most abusive financial
product being offered to our troops today. And according to
military personnel, payday loans threaten troop readiness.
The New York Times and other news outlets have reported
extensively on this problem. During last year's committee
markup, Chairman Oxley agreed to work with me to include
provisions regarding abusive lending in the amendment for Floor
consideration. Our work resulted in the inclusion of some basic
but important protections for our troops against payday lenders
and other abusive lenders who target our troops.
Under this legislation, lenders of both payday and other
small loans who target the military can no longer continue a
number of egregious practices, including: requiring the
involuntary assignment of military wages to secure payment of a
loan; contacting or threatening to contact the borrower's
commanding officer in the military chain of command in an
effort to collect a loan; requiring the borrower to waive any
rights under Federal or State law, including the Service Member
Civil Relief Act; or using any words or symbols that create the
impression that any department of the military endorses the
lender or any service or product of the lender.
I am sorry to say that all of these unconscionable
practices are currently used by certain payday and short-term
lenders.
In addition, extremely high-cost loans must be accompanied
by a disclosure notice that informs the consumer of these
protections. And there are other options available, including
grants and interest-free loans from the military relief
societies in the case of a family or other emergency.
It may not sound like a lot, and I do wish that it
contained additional limitations on loan amount and the number
of turnovers by payday lenders, similar to legislation recently
enacted in my home State of Illinois, but this is a good start,
since many of these payday and other short-term lenders
completely evade regulation by States and the Federal
Government.
I look forward to continuing to work on this issue, and I
hope that the Senate will pass this worthy legislation, perhaps
with these improvements, before we adjourn.
Some may say these protections are not enough. I couldn't
agree more. However, I am very pleased that we were able to
accomplish this first step in a bipartisan manner, and it
passed the House overwhelmingly, 505 to 2, putting us on the
record for the first time against exploitation of our troops by
these abusive lenders. And I believe that it is always better
to light a single candle than to sit and curse the dark.
I am disappointed that the Department of Defense is not
here to testify regarding any efforts they may be making in
this area, but I look forward to the testimony of the other
witnesses here today. Thank you, and I yield back the rest of
my time.
Chairwoman Kelly. Thank you. Mr. Davis, do you have an
opening statement?
Mr. Davis. Yes, Madam Chairwoman. Thank you, Chairwoman
Kelly, I appreciate your leadership on this issue. And this is
a personal priority for me, going back 30 years this June, and
the anniversary of my enlistment in the United States Army. As
a commissioned officer, as a unit commander, I dealt with troop
credit issues at a wide number of posts around the United
States and also overseas.
The military community fosters a sense of trust, and this
pervading value has led many service members, including myself
and my wife, many years ago, to fall victim to predatory sales
schemes. My goal in H.R. 458, The Military Personnel Financial
Services Protection Act, was to target the financial services
products offered by a number of predatory sales people that
were unfairly taking advantage of this military culture of
trust.
I think that one thing we need to keep in mind in the
process is the best and most practical pieces of legislation
are those that have a narrow focus. The broader a bill becomes,
the more difficult it becomes to get that bill passed. H.R. 458
is not a catch-all bill. It was specifically designed to do
certain things.
Last June, as my Democratic colleague noted, the House
resoundingly approved H.R. 458, 405 to 2, with only 2 members
voting against the bill. One can only conclude that the House
agrees that our service members should not be targeted by the
deceptive and predatory practices that H.R. 458 effectively
eliminates.
I think that one other thing that we want to keep in mind
as well is that the abuses, when we deal with payday lending--
one I have dealt with, firsthand, dealing with troop issues--
are not large financial services companies. One of the things
that I have personally seen in this process are competition for
market share that's taking place between financial services
providers that are very large in scope. And frankly, what I
don't want to see is DoD get caught in the middle of something
with fine-sounding language that actually would create a
tremendous problem for agencies participating directly with one
organization eliminating market share of others.
I think the practicality here, as those of us who have been
platoon leaders, company commanders, and battalion commanders
understand, is the large community financial services provider,
the large financial services firms that are accountable and
have internal mechanisms, are not the problem. The problem is
the pawnshops, sole proprietorships, those who are not
accountable to any professional organization, and take
advantage of our troops are the ones who create the problems
for those in the command, and for young families.
And I think if we understand the isolation of that abuse,
and we focus on very practical and powerful results that give
local commanders, and local leaders, the opportunity to enforce
State law on post and also to eliminate those pernicious sole
proprietorships that really are the root of the problem, and
avoid this becoming a smoke screen for competition between
other financial services organizations, I think we will have a
great piece of legislation.
H.R. 458 effectively eliminates certain practices that have
been a problem. Colleagues of mine from the military have told
me that they would eliminate certain firms from coming on their
post now, were this a piece of legislation. And like
Representative Gutierrez, I am hopeful that the Senate will
take this up. I encourage all of my colleagues to urge the
Senate Committee on Banking, Housing, and Urban Affairs to act
on H.R. 458 in the coming weeks.
Thank you again, Chairwoman Kelly, and Ranking Member
Gutierrez. Thank you to the witnesses for coming today on both
panels, and I look forward to hearing your testimony today.
Chairwoman Kelly. Thank you, Mr. Davis. Mr. Moore?
Mr. Moore of Kansas. Thank you, Madam Chairwoman. And
welcome to the witnesses who will be testifying today. Making
decisions related to financial matters can be a difficult and
overwhelming undertaking for any person. For our military
service members and their families, this task can be especially
challenging.
With the service member away and often completely
unavailable, military families must deal with not only
separation from their loved ones, but increased financial
hardship as well. Added complexities and costs frequently arise
in household budgets with servicemen and women overseas, the
strain of which can affect both the deployed individual and
their families at home.
A recent study published by the GAO found that adverse
consequences resulting from service members' financial problems
include a negative effect on overall unit readiness. This is a
concern to me, as well as many of the people on this panel, and
our colleagues.
Increasingly, service members are faced with more frequent
and lengthy deployments, as a result of the involvement of the
United States in the war on terror, and our continued presence
in Iraq and Afghanistan. Congress and the Department of Defense
have taken steps in recent years to help decrease the
likelihood that deployed soldiers will experience financial
problems, including granting increases in basic military pay,
providing special pay increases for active service members
deployed to hostile environments, and mandating personal
financial management programs to provide service members with
financial literacy training and counseling.
Additionally, in November of 2003, I introduced legislation
with my colleague, Jim Ramstad, that would require the
Department of Defense to pay for domestic trouble for troops
home on R&R leave. I understand that this panel is dealing
primarily with the financial concerns and loans, things of that
nature, that military personnel may become involved in. But the
hearing notice said, ``The hearing will focus on the financial
services needs of U.S. military service members, including
active duty personnel as well as those serving in the Reserve
and National Guards, and their dependents,'' so I think it's
important to mention these things, as well.
While the DoD--and I'm talking about reimbursement for
troop travel, now--would cover the cost of flights from the
deployment sites to various hubs, namely Baltimore and Atlanta,
when they were brought back on R&R after 6 months in country,
they were brought back for 2 weeks of R&R, and I was just
really astounded when I learned that they were required to pay
for their own domestic travel.
In fact, I talked to soldiers after the fact who told me,
``Congressman, I didn't even come home for the R&R with my
family, because I didn't have $1,000 for the domestic travel.''
And what an insult to the people that we say we value.
Jim Ramstad and my bill never came up for a hearing, but I
did talk to Secretary Rumsfeld personally, and presented him a
copy of a letter that described the need here. And 3 weeks
later, it became law. I think that this is a military burden
that families should not have to bear, and I am glad that now
our government is paying for the service members' entire trip
home.
I also did a bill with my friend and colleague on this
committee--not here on this subcommittee, but on this
committee--Spencer Bachus. When I learned that young persons
killed in Afghanistan and Iraq and their families get three
things from the United States government--a letter of
condolence, ``We're sorry about the loss of your loved one,''
which is very appropriate; an American flag; and the third
thing was a so-called death gratuity benefit of $12,000, which
again, I thought was a slap in the face to a family who had
just made the ultimate sacrifice--I filed a bill and Spencer
and I got 243 House Members on the bill which would increase
the benefit to $100,000.
I contacted Senator Hagel's office in Nebraska, and he
filed our bill in the United States Senate. Again, this never
went through a committee, never got called up for a hearing,
but is now the law. We made a lot of noise about this, and
somebody in the Administration heard about this. And sometimes
things work in strange and wonderful ways, even if it's not
traditional.
And I think this is another area where we owe the people
who serve our country and their families, and I am glad that we
are able to accomplish this. And we will get on with the
hearing now. Thank you very much.
Chairwoman Kelly. Thank you very much. Mr. Israel, you have
been recognized.
Mr. Israel. Thank you, Madam Chairwoman. Let me thank you
and the ranking member for allowing me to sit in on this very
important hearing.
I am one of four members of the Financial Services
Committee who also serve on the House Armed Services Committee.
My friend, Mr. Davis, also has that distinction. And I am very
proud of the work that Congress did in passing the Military
Personnel Financial Service Protection Act. It is a very
important step.
I do have one concern, and that is what brings me to this
hearing today, with respect to the credit protections that our
service members have, which are not effectively enforced.
I had a town meeting in my district last year, and one of
the things that I heard consistently was that long and frequent
deployments are actually wreaking havoc on the credit reports
of our service members. Many of them are not aware of the
protections that they have under the Service Members Civil
Relief Act. In fact, some creditors are not aware of those
protections.
And so, you end up with situations that have been reported
in our media nationally, soldiers who are in Humvees having
their cars repossessed back home. Soldiers who have gone to
fight for our country having their homes foreclosed on back
home. Credit reports that are being seriously damaged.
You know, it's one thing to go and fight our country's
battles, but then when you have to come home and fight with a
creditor because your report was adversely affected because
somebody may not have known about the Service Member's Civil
Relief Act, that's completely unfair, and we can do better.
Mr. Davis and I have introduced the Service Members Credit
Protection Act. It was introduced in consultation with our
military, as well as folks who have been involved in the credit
industry. And it takes the following common sense steps.
Number one, it requires the Department of Defense to give
the national credit bureaus a detailed description of the
rights that a service member has under the Service Member's
Civil Relief Act.
Number two, it requires national credit bureaus to be
informed of the deployment of a service member to a combat
zone. The credit agencies would then make a notation on the
service member's--in the service member's file, so that when a
creditor contacts the agency, they are--they know, absolutely,
without any doubt, that the individual that they are looking
at, that they may want to file a complaint on, that they're
getting a credit history on, is in a combat situation and is
protected by Federal law in the Service Member's Civil Relief
Act. If they still violate that and go ahead and try to
foreclose on a property, or repossess a car, the penalty is
doubled.
Just a couple of final points, Madam Chairwoman. This does
not exempt our service members from having to pay their bills
and having to pay their bills on time. It doesn't stop
information from being reported to the credit agencies. All it
does is make sure that everybody knows what the Federal
protection is, who is under the Federal protection, and if they
still insist on violating that Federal protection by seeking to
repossess or foreclose, or adversely affect one's credit, they
have to pay a higher price.
And frankly, I know we all agree on both sides of the
aisle, if somebody is willing to pay the high price of going to
Iraq, Afghanistan, or elsewhere in defense of this country,
then unscrupulous creditors should have to pay a high price for
violating the law and ruining their credit, taking their
personal property away, their cars, and other things.
I am hopeful that our committee and the Armed Services
Committee will have hearings on this, and I appreciate the
chairwoman's indulgence in letting me come today.
Chairwoman Kelly. Thank you. We have been joined, and by
unanimous consent, would welcome any comment by Congresswoman
Waters.
Ms. Waters. Thank you very much. I appreciate the
opportunity to come today to share one of my concerns,
something that's been nagging me for a long time.
I am very concerned, angered even, about the payday loan
industry, and the fact that they are--have increasingly
targeted members of the military. They set up near the bases--
you must know about this; our service personnel don't make a
lot of money. I almost laugh when I see a lot of talk about
teaching them how to save and invest. They don't have a lot to
save or invest.
That's why they become the targets of these payday loan
operations, who realize that they run out of money, and they
lend them money at 400 percent interest rates. They are
basically robbing them of the opportunity to ever get a handle
on their finances. Because when they can't pay, they just roll
it over and charge more interest, and it never stops.
I have not seen any effort by the military to do anything
about this. And I think we can do something about it. Some
thoughts that have come to mind, Madam Chairwoman, is wondering
about the ability of the military to set up credit unions where
they could be responsible for assisting the military personnel,
and/or some way by which there is a warning about these
operations that set up near the bases and exploit military
personnel because they don't have a lot of money.
I have not seen anything that is being done to protect
them, or to educate them to basically serve as a buffer between
our military personnel and these predators with the payday loan
industry. So I wanted to put that on the record here today. And
Madam Chairwoman, I am hoping that one of our witnesses here
today can address that issue.
Chairwoman Kelly. Thank you very much. We welcome your
presence here.
A couple of things have been said that I want to touch on
before I introduce the witnesses. There was some discussion
about pawn shops and sole proprietorships and MSB's, the payday
loans and check-cashing people. We all understand that not
everyone who is in those businesses is predacious. And they
serve a purpose for some people.
So, I want to make clear to the panel, that this is--we are
here to collect information, and in fact, a payday loan
sometimes is cheaper than a bounced check at a bank. I think
it's important that people understand that we're not here to
voice our own prejudice, but to hear the facts about what
actually is there, and what you think--we should be doing,
about rectifying a situation which can be badly abused.
Our first witness today is Valerie C. Melvin. Ms. Melvin is
currently acting director of military and DoD civilian
personnel issues within the U.S. Government Accountability
Office, Defense Capability and Management Team. She was
appointed to this position in October of 2005, after being
accepted into the GAO senior executive service candidate
development program. Prior to this appointment, she was an
assistant director in GAO's information technology team, where
she manages and reviews in the areas of social security,
veterans affairs, commerce, energy, and science and technology.
Ms. Melvin graduated from the University of Maryland, with
a bachelor's degree in business administration, and a master's
degree in management information systems. She is a certified
government financial manager. Ms. Melvin has received many GAO
awards during her career, including meritorious service awards,
and the excellence in human capital management award. Ms.
Melvin, we are honored by your presence, and we look forward to
your testimony. Please begin.
STATEMENT OF VALERIE C. MELVIN, ACTING DIRECTOR, DEFENSE
CAPABILITIES AND MANAGEMENT TEAM, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Ms. Melvin. Thank you. Madam Chairwoman, Ranking Member
Gutierrez, and members of the subcommittee, I am pleased to be
here today to discuss the financial management issues of
military personnel and their families.
The ability to understand and make informed decisions
regarding the management and use of financial resources is a
critical issue. DoD has noted that mission readiness, as well
as quality of life, in part, depend on whether service members
use their financial resources responsibly.
Over the past 4 years, GAO has conducted a number of
studies on financial management issues affecting service
members, both active duty and Reservists. Among these reports,
one issued in April 2005 highlighted some of DoD's efforts to
address service members' financial difficulties. At your
request, my testimony today will summarize the results of that
study, as well as selected findings from other reports.
In this regard, a fundamental message from our work is that
service members and their families face a number of challenges
that reflect an important and continuing need for assistance
and education on financial matters. DoD is the largest employer
and trainer of young adults in the United States, with many
entry-level service members having limited experience with
handling finances.
Moreover, many service members move frequently, and are
separated from their families during overseas deployments. A
2002 study noted that 20 percent of junior enlisted service
members reported that they struggled to make ends meet,
financially. And another 4 percent regarded themselves as in
over their heads with respect to their finances.
As further evidence of their difficulties, a 2003 DoD
survey, which asks service members whether they had experienced
three types of negative financial events, found: 19 percent of
deployed and 17 percent of non-deployed pressured by creditors;
21 percent of deployed and 17 percent of non-deployed behind in
paying bills; and 16 percent of deployed, and 13 percent of
non-deployed who had bounced 2 or more checks.
Both Congress and DoD, as you have noted, have taken
important steps to decrease the likelihood that service members
will experience financial problems. Since 1999, DoD has
requested, and Congress has granted, annual increases in basic
pay for all active duty service members that exceeded the
average increases in private sector wages, as well as increases
in special pays and allowances for deployed service members.
Also, as you have noted, the military has developed
personal financial management programs to provide service
members with training, counseling, and other assistance to
avoid and mitigate the adverse affects of financial problems.
However, while these actions have been a necessary step in
the right direction, achieving effective results will require
additional efforts by the Department and the service members.
Our study found, for example, that some service members had not
received the required financial management training, and only
one service, the Army, was maintaining data to show who had
actually completed the training.
At the same time, we found that some service members were
reluctant to seek assistance through the programs that exist,
often out of fear that doing so would limit their career
progression.
Underlying all of this is that DoD lacks an oversight
framework with results-oriented performance measures and
reporting requirements to evaluate the effectiveness of its
financial management programs across the services. Without such
a framework, neither DoD nor Congress will have the necessary
visibility into and oversight to ensure the most effective
delivery of financial training and assistance to service
members.
In closing, Madam Chairwoman, I would like to emphasize
that DoD has recognized the importance of financial literacy,
and the potentially adverse effects on military readiness when
service members experience serious financial problems.
Moreover, the programs that exist to assist service members
are positive. Nonetheless, more effort is needed to increase
awareness and use of these programs, and ultimately bring about
lasting solutions in this critical area. Your hearing today
will go far in focusing attention on this important matter.
This concludes my prepared statement. I would be happy to
respond to any questions that you may have.
[The prepared statement of Ms. Melvin can be found on page
41 of the appendix.]
Chairwoman Kelly. Thank you very much, and thank you very
much, Ms. Melvin, for staying within the 5-minute time line. I
neglected to mention, if you haven't testified before us
before, that the boxes there have three colored lights. Green
means you have 5 minutes. When it gets to be yellow, it means
there is one minute, sum-up period, and when it's red, that's
obvious.
We turn now to the--our second witness, Vice Admiral Cutler
Dawson, president of Navy Federal Credit Union, and Elisse B.
Walter, senior executive vie president, regulatory policy and
programs, for NASD.
Admiral Dawson is the president of Navy Federal Credit
Union, and it's the world's largest credit union, from what I
understand. Prior to his retirement from the Navy, ADM Dawson
was the captain of four different Navy ships, the USS
Enterprise Battle Group, and the United States Second Fleet.
Elisse B. Walter is the executive vice president of NASD,
and leads NASD's investor education foundation. Prior to her
service with NASD, Ms. Walter worked for the Commodities
Futures Trading Commission and the SEC. Ms. Walter is a
graduate of Yale University and Harvard Law. We welcome both of
you, and we look forward to your testimony. You may begin,
please, Admiral.
STATEMENT OF CUTLER DAWSON, VICE ADMIRAL USN (RET.), PRESIDENT
AND CHIEF EXECUTIVE OFFICER, NAVY FEDERAL CREDIT UNION
VADM Dawson. Thank you, Chairwoman Kelly. Chairwoman Kelly,
Ranking Member Gutierrez, and members of the subcommittee, as
mentioned, I am Vice Admiral Retired Cutler Dawson, and
president of Navy Federal Credit Union. I am here today on
behalf of Navy Federal, my credit union, to provide you with an
overview of the financial products and services we provide to
sailors and Marines and their families, worldwide.
In late 2004, I completed 34 years of service in the Navy,
and was chosen to take the helm at Navy Federal. During my time
on active duty, I saw what the credit union did and continues
to do for sailors and Marines. It is truly their credit union.
Navy Federal began operations over 70 years ago, with a
group of Navy Department employees, when they pooled their
surplus dollars to make emergency loans to fellow employees. At
the end of the first year, the credit union included 49
members, 18 borrowers, and assets of $450. We now serve sailors
and Marines worldwide with 112 branch offices, including 21
overseas. Our motto is, ``We serve where you serve.''
We have not strayed from our mission of serving those
members who share a common bond of military or civilian service
with the Department of the Navy.
While we provide a full range of financial products and
services to all of our members, we continue to focus
specifically on our core active duty members. We recognize that
military life is always unique, and even more so today,
especially for the families of our sailors and Marines.
To meet these unique requirements, we operate in overseas
locations, where our members are serving the Nation. We conduct
personal financial management training and pre-deployment
counseling through Navy and Marine Corps programs in our branch
offices. Last year, we conducted over 1,500 such sessions,
reaching almost 100,000 members.
We also assist members in financial difficulty through
budgetary counseling and debt management services at no cost to
the member. We assist survivors of deceased members, serving as
a liaison between family members, attorneys, and the military
service. And sadly, I will say that we have lost over 400
members in Iraq and Afghanistan since 2001.
We guarantee utility deposits and security deposits for
members in areas of major Navy and Marine Corps installations,
and we provide members remote access to their accounts, via the
Internet worldwide, even on ships at sea.
And we seek to offer financial alternatives to provide
lower loan rates and higher savings dividends than are
typically found outside the Navy and the Marine Corps
installations. And Ms. Waters, I have visited a payday lender,
just to see what they were all about.
Over the years, this steady focus on active duty members
and their families, and the affinity of our members have, for
the Navy and Marine Corps, resulted in a very loyal membership.
Recent member focus groups have reaffirmed that the vast
majority of our members believe that we do support our active
duty members, particularly in today's world.
In summary, Madam Chairwoman, Navy Federal Credit Union
recognizes that providing financial products and services
needed by our sailors and Marines and their families, wherever
they might be, is our mission. And I believe that we are
meeting that mission.
I thank you for the opportunity of being here today, and I
look forward to your questions.
[The prepared statement of VADM Dawson can be found on page
38 of the appendix.]
Chairwoman Kelly. Thank you very much, Admiral.
Ms. Walter?
STATEMENT OF ELISSE B. WALTER, SENIOR EXECUTIVE VICE PRESIDENT,
REGULATORY POLICY AND PROGRAMS, NASD
Ms. Walter. Thank you. Madam Chairwoman, Ranking Member
Gutierrez, members of the subcommittee, and of the committee,
good morning. I am Elisse Walter, of NASD, and I am grateful to
the committee for inviting us to testify about our efforts to
protect members of the armed forces from abusive and misleading
sales practices.
We have prepared a comprehensive written statement, and
with your permission will submit it for inclusion in the
record.
My focus today is on a recently launched NASD effort to
educate service members and their families. The program is
designed to help them make better financial decisions and avoid
fraudulent and inappropriate products and sales pitches.
As you know, Madam Chairwoman, America's men and women in
uniform make great personal sacrifices to protect our Nation's
security. They should not have to worry about the honesty and
integrity of those who offer to help them make sound financial
decisions for themselves and their families. In 2003, NASD
learned that a Texas broker-dealer was targeting members of the
armed forces with misleading sales pitches and improper sales
tactics.
As a result, more than a half-million of complicated and
often extremely expensive products called systematic investment
plans, or periodic payment plans, were sold to service persons.
Not surprisingly, most of the service persons who bought the
plans were young and inexperienced.
Since this matter has come to light, as Mr. Davis stated,
the House has passed legislation outlying the plans. We
responded forcefully to end these practices, sanctioned those
responsible, and ensured that victims were being compensated
for their losses. We also are taking action to educate military
personnel broadly about saving and investing.
We did this first by bringing an enforcement case against
the firm selling these plans. The firm was censured and fined
$12 million in December 2004. That amount included restitution
to thousands of customers who had terminated plans after
January 1, 1999, and had paid effective sales charges greater
than 5 percent. As of today, more than $4.4 million has been
returned to these customers, and we are currently working with
the Department of Defense to locate additional service members
owed reimbursement.
The remaining funds from our enforcement settlement, about
$6.8 million, were transferred to the NASD Investor Education
Foundation to be dedicated to the development and deployment of
comprehensive financial education programs for members of the
armed services and their families. Working closely with the
Department of Defense, the NASD foundation has launched a
campaign to help service members and their families manage
their money with confidence by helping them to understand basic
financial concepts, including saving, investing, and the
markets.
This program is being implemented online and in military
installations worldwide. It encourages members of the armed
forces to take control of their financial futures, by providing
them and their spouses with financial information to help them
make more intelligent saving and investing decisions.
The multi-faceted program includes: an online resource,
saveandinvest.org, which has had over 280,000 visitors since it
was launched in February of this year; on-the-ground training
to support the military's current personal financial management
program; a spousal fellowship program that will train a corps
of military spouses to provide financial counseling and
education within the military community; and for our first
training session with 200 slots--we received over 2,600
applicants.
A printed online publication--see it right here--which we
put out, in combination with the National Endowment for
Financial Education and the National Military Family
Association, to help service members and their families deal
with the financial issues surrounding deployment and duty
station changes. We are working in partnership with DoD, the
SEC, the National Military Family Association, and other
organizations.
In the last 2 months, NASD has conducted a series of free
education forums at bases and duty stations around the world. I
should add as an aside, we do financial forums for the general
public at large, and I am pleased to see that we have done them
with several members of the committee who are here today.
The first of our military education forums took place in
Honolulu. It was closely followed by three programs at two
bases in Japan, and aboard the USS Ronald Reagan, now on a tour
of duty in the Arabian Gulf. These events have been well
attended. In Honolulu, we drew almost 500 members of the
military and their families from all branches of the armed
services.
The other programs have drawn almost 1,300 additional
members of the military and their families. The programming
that we offer is designed to meet the needs of both officers
and enlisted personnel. Our programs have included seminars on
stock scams, predatory lending--a terribly important issue for
members of the military--saving for retirement and investing in
mutual funds, 529 college savings plans, bonds, and annuities.
These events give us valuable insight into what issues are
important to members of the military. In both Okinawa and
Yokosuka, for example, there was a great deal of interest in
predatory lending, and how to dig out of debt. We have also
found there is a lack of clear knowledge about 529 plans.
And importantly, it has become clear, from audience
questions, that the thrift savings plan is not well understood.
And we plan to create additional content to explain the TSP
clearly and concisely to military personnel.
The NASD Investor Education Foundation continues to
schedule on-base events. The next two are at the Naval
submarine base in Kings Bay, Georgia, in June. Madam
Chairwoman, this concludes my statement. I thank you again for
the opportunity to testify, and would be happy to answer any
questions you and the committee members may have.
[The prepared statement of Ms. Walter can be found on page
67 of the appendix.]
Chairwoman Kelly. Thank you so much, Ms. Walter. Yes, I--
Ms. Walter brought to my mind that I neglected to say that,
without objection, your full written statements will be made
part of the record. And I appreciate the fact that you did
that, Ms. Walter.
Ms. Melvin, I am going to start my questioning with you. I
was distressed when I noticed that you had said that in--and
I'm reading from the GAO report--based on DoD pay data for
January 2005, almost 6,000 of 71,000 deployed service members
who had dependents did not obtain their family separation
allowance in a timely manner.
I would like you to talk to us about this problem, and what
has taken place to avoid a repetition of this kind of thing.
Ms. Melvin. At the time that we did our work, what we found
was that in talking to service members--we went to 13
installations in the United States and in Germany--that a
number of them had encountered problems in receiving the family
separation allowance, difficulties that resulted largely from
the fact that there were no procedures in place, necessarily,
to make sure that the proper forms could get entered, the
proper information, I should say, could be entered into DoD's
pay systems.
Beyond that, we also found that, in some cases, the service
members themselves simply didn't know enough about the
separation allowance to have taken all of the necessary steps
to have their paperwork in order, and to make sure that their
information was provided to DoD.
So, it was a situation in terms of both DoD not having
taken some steps through its policies and procedures, as well
as the service members not having sufficient awareness in all
cases. And I think some of that goes back to the issues that I
have heard mentioned in the statements relative to the fact
that many of these service members are junior enlisted
personnel who don't have the financial literacy or the
financial know-how necessary, to address these matters.
In our report, we did make a recommendation--make
recommendations, I should say--asking that DoD take steps
toward making sure that the service members' family separation
allowances were computed, and that they receive them. DoD did
agree with our recommendation, and indicated that it was taking
measures to actually have policies and procedures in place that
would address that particular issue.
Chairwoman Kelly. Thank you. I want to know if you can tell
us what the DoD needs to get a results-oriented, department-
wide database put together, so that they can assess the
effectiveness of their--the PFM's, the personal financial
management programs. That's another thing you pointed out down
at the bottom of one of your pages.
I am concerned about this, because if we're doing things we
have no metric to find out if they're effective. Can you talk
to us about that, and tell us what you think can be a
comprehensive approach by the DoD to cover the problem?
Ms. Melvin. You're exactly right, that the oversight issue
is very significant, and it is one that we take very seriously
in looking at DoD's actions. It's pervasive across a number of
programs that DoD has.
In this case, our position is that DoD does need to have
performance-based metrics, evaluation tools, and measures that
it can use across its systems to, in fact, make more results-
oriented decisions relative to the programs that it has.
As far as what DoD can do, I think there are a lot of steps
that the Department will have to figure out, relative to how it
wants to address it. One of the things I can say, though, is
that there are a number of ways in which DoD can take some
immediate steps toward that, through looking at some metrics,
perhaps, that already exist, perhaps going to looking more at,
for example, what service members have their paychecks
garnished. There are a number of ways in which they might start
to take incremental steps toward putting in place a framework
that would have results-oriented measures.
But the Department itself will have to look at this
closely. It will have to make decisions relative to what will
constitute the types of measures that it needs to have, and
ultimately, to have the mechanisms, the framework, the measures
there to make sure that it can have a results-oriented
approach.
Right now, much of what the Department does is output-
oriented, versus outcome-oriented.
Chairwoman Kelly. Thank you. I would like to ask the whole
panel what--my colleague, Ms. Waters, brought up predatory
lenders. And I would like to ask the whole panel to answer the
question about how the DoD and the individual services
themselves can approach, especially the young and newly
enlisted personnel, to help them protect themselves from
predatory lenders and from people who are doing similar things.
I will start with you, Ms. Walter.
Ms. Walter. Well we, of course, are working with DoD on
these issues. And as I noted in my opening statement, predatory
lending is a very big concern among the audience members that
we have seen at our onsite forums. And I guess that's the bad
news and the good news. Bad news, obviously, because this is a
terribly important issue, and it's frequently abused, but good
news because it shows that people really are interested in
learning more.
In fact, in terms of our online resources, the page that we
have that's entitled, ``Stay Away From Payday Lenders,'' has,
in fact, received--it is the most popular page, other than the
homepage on our site. So there is a great deal of interest
among military service members in learning more about the
practices of payday lenders, and we are more than happy to
continue to work and to expand our efforts on that important
subject.
Chairwoman Kelly. Thank you. I am out of time, so I turn to
my--I'm sorry, I asked the whole panel that, right. Good thing
Mike reminded me. Admiral?
VADM Dawson. I have offices in Hampton Roads, branches in
Hampton Roads. As I mentioned to Ms. Waters, I was visiting
them last year, and three doors down from one of our branches
was a payday lender. I had never been in a payday lender office
before, so I went over there to check it out.
It was a nice office. It was clean. The people in there
were very courteous and nice. I couldn't get up to the counter
to talk to anyone, because there was a line.
I read the disclosure while I was there, and it wasn't 400
percent APR, it was 782 percent APR for a $500 payday loan. At
my credit union, we talk about payday lending, and we say that
payday lending is the spiral of doom for people who get
involved with it. We do what we can to offer alternatives, so
people do not have to take payday loans. But 782 percent is a
big bite.
But I also would like to say that financial education is
not unique to the military. It's unique to our whole country.
We talk about this at credit unions all the time, that we all
need to do a better job at financial management education. And
that's one of the ways that we can all get there.
One last thing. I mentioned that I saw a very nice message
that went out to everyone in the Navy the other day. They
even--sometimes retired people get those. But it was from the
chief of naval personnel, and he was discussing payday lending.
And he was instructing all those in the Navy that counsel
individuals to do so.
And so, Ms. Waters, there are some things that are starting
to be done, the Navy being one of them. And I hope that it
continues.
Chairwoman Kelly. Thank you. Ms. Melvin?
Ms. Melvin. Yes. I would reiterate the financial education
as a large piece of what can be done to help our service
members, making sure that they're aware of what their options
are, and having the choices to make that don't necessarily
include going to a particular type of creditor that might take
advantage of them in that way.
Beyond that, I would also go back to the oversight issue
that I spoke to earlier. I think it's important for DoD to have
a full awareness of what types of situations exist on and off
its bases, relative to the use of creditors and resources of
that nature.
And then thirdly, there is a mechanism that DoD could use,
and that's the Armed Services Disciplinary Control Boards. And
while they don't exist solely to perform that function, they
are a valuable resource.
When we did issue our report on predatory lending, one of
the things we noted, however, was that those boards weren't
meeting routinely to make the types of assessments of the
businesses that the service members were using. One option and
a recommendation that we made was that DoD, in fact, increase
the use of such boards to have more oversight and more insight
into what the businesses are, and to be able to provide
information to service members, to help them make more informed
decisions regarding their use.
Chairwoman Kelly. Thank you. My time is up. Mr. Gutierrez?
Mr. Gutierrez. Thank you very much. I want to, first of
all, thank Congressman Davis for working with me on getting the
minimum changes and protections into the law, and hoping the
Senate will take up the legislation, as we have heard from the
witnesses here, including the vice admiral, about the state of
predatory lending and payday loans.
I am always astonished at how difficult it is to get
action, either in this committee or the Congress, to protect
the public in general, but in this case particularly the
military, against those who wish to charge 700, 750, 800
percent interest rates.
I know that we live in a free market system, but sometimes
those free markets need to be curbed in when there are abuses,
especially when they look like they're from the military, and
they use military logo and are right outside military bases.
Anyway, let me follow up. I want to follow up on the
chairwoman's questioning, because she is right on, and headed
in the right direction. I would like to ask Ms. Melvin from
GAO. In its report on predatory lending, the GAO recommended
that the armed forces' disciplinary control boards meet at
least semi-annually to determine whether to put offices of
payday lenders off limits. DoD's response says it would be
ineffectual. Do you accept the DoD response?
Ms. Melvin. Actually, in the response that DoD made to us,
they actually agreed with our recommendation, and at least
informing us what their actions would be, stated that they
would actually do more meetings--I believe our recommendation
was that they meet at least semi-annually. And their response
to us was that they would take action to meet at least
quarterly, I believe.
So, that was their intent. We have not gone back--we have
actually gone back and followed up on a routine basis, but we
have not seen evidence, I should say, yet as to how routinely
they are meeting at this point.
Mr. Gutierrez. Okay. So DoD responded that they thought
they should meet quarterly on this issue?
Ms. Melvin. Yes, they--
Mr. Gutierrez. Have they ever met, to your knowledge, on
this issue with the Armed Forces Disciplinary Control Board?
Ms. Melvin. We have not looked at that at that level. And
I'm sorry, but I am not able to respond to that at this
particular--
Mr. Gutierrez. So they said they would meet quarterly as to
whether or not they should put the offices of payday lenders
off limits?
Ms. Melvin. They said that their boards would meet
quarterly to consider the businesses, and the other practices
of payday lenders, and also other businesses which have adverse
effects for the military.
Mr. Gutierrez. Does the DoD have a single point of contact
for Federal and State enforcement officials who are
investigating predatory lenders?
Ms. Melvin. No, there is no single--
Mr. Gutierrez. Do you think the DoD should have a point of
contact so that Federal and State enforcement officials who
have investigated predatory lending would have a communications
level with them?
Ms. Melvin. One of the things that we have noted in our
work is that, especially across States, when it comes to
certain types of lending and insurance there are concerns
relative to the differences among States. Our work has actually
talked to the need for more coordination across the different
States, and with State regulators, and in that regard, to make
sure that there are some designated offices or individuals who,
in fact, can hear the complaints of consumers, military
consumers, in this case and be able to share that information
with the regulatory agencies.
Mr. Gutierrez. So, in response to the GAO's report on
financial product sales, DoD concurred in the GAO's
recommendation that the DoD solicitation policy be revised to
require that service members' complaints related to financial
products be provided to relevant State and Federal financial
regulators.
DoD provided you with an estimated completion date of
January 1, 2006. Did they meet that date? Are complaints
actually being referred?
Ms. Melvin. It's our understanding that the policy is still
in draft and hasn't been issued yet.
Mr. Gutierrez. So they didn't meet the completion date of
January 1, 2006?
Ms. Melvin. Yes.
Mr. Gutierrez. Okay.
Ms. Melvin. That's correct.
Mr. Gutierrez. So no complaints can be referred since they
haven't done that. I think it's going to be pretty quick--still
got a green light--it's going to be pretty critical to get the
DoD in here, so that we can hear from them, especially hearing
from the vice admiral, who said that the admiral went around
telling people--that's why I'm going back to the Armed Forces
Disciplinary Control Board, because if they do make this an
issue, then commanders at all levels can speak to those under
their command about not going and forming them, actually
instructing them not to go to payday lenders, not to go here,
and what places they should or shouldn't go.
I have one last question, and this one is for Elisse
Walter. Has the DoD established a single point of contact for
NASD to discuss enforcement and disciplinary actions? If you
want to notify DoD that a particular individual or firm that
targets military personnel has been subject to disciplinary
action by your agency, who would you contact in the DoD?
Ms. Walter. Well, we have a number of contacts in DoD that
we could inform. What we have done, really, relates--we have
taken action with respect to the flow of information in the
other direction. We want to encourage complaints that come in,
either through personal financial managers or otherwise to be
referred either to us or to the governmental securities
regulators for investigation.
And we have facilitated that on our end by assuring--we
have a centralized process for looking at complaints. So we
have a single point of contact, a single office to contact at
our end, and that is open and available. I'm not aware that DoD
has established a particular point of contact with respect to
this matter, but I think we feel that we have good channels of
communication to provide them with information.
Mr. Gutierrez. So the DoD hasn't established a single point
of contact for you, in terms of enforcement and disciplinary
actions?
Ms. Walter. Not that I am aware of.
Mr. Gutierrez. Okay. And if you want to discuss the matter,
in terms of a particular targeting of personnel, you contact
various people at DoD?
Ms. Walter. Well, we would either--
Mr. Gutierrez. I mean, I guess--and I will just--I guess my
point is because you do what you do, and you protect people by
taking action and you've got a $12 million judgement, I just
want to know how it is when you do your work, you communicate
to DoD so that all the--so that then DoD can do its job and
inform all the members of our armed forces that, you know, you
found somebody corrupt, fined them $12 million. You said
they're still looking to distribute approximately $7 million of
the $12 million to armed services personnel.
So, I--it's not about you, I assure you it's not about you.
I'm just trying to figure out, for future hearings, what kinds
of things we might want to ask DoD to do to better do their
job.
Chairwoman Kelly. If the gentleman would yield, I would
like to ask if anyone on the panel knows whether the DoJ--I'm
sorry, DHS--the DHS, does anybody know if the Coast Guard is
having a similar kind of problem as the DoD?
Ms. Melvin. I'm not aware of any problems in that area, but
we have not looked at that.
Chairwoman Kelly. Well, perhaps in addition to getting the
DoD, we should perhaps bring in DHS to find out if both--if
that service, as well, is affected.
Mr. Gutierrez. Yes, I think that's important. I wanted to--
and I want to thank you, Vice Admiral, for all you do and the
credit union does to help service our military with good
financial products. Thank you very much.
Chairwoman Kelly. Thank you. Mr. Davis?
Mr. Davis. Thank you, Madam Chairwoman. I could speak as a
multiple decades member of what's now Pentagon Federal Credit
Union, and also dealing with these issues.
I hear a lot about, you know, these issues. Payday lending,
for some reason, has come up repeatedly over and over again.
And I think the fundamental issue that we're dealing with, the
command is dealing with the rule of law at State level. A
business, a legitimate business that's off post can do
business--there are certain prescriptions--the reason that we
tried to pass H.R. 458, dealing with insurance and mutual
funds, is to make sure that we gave that ability to allow State
enforcement on the Federal jurisdiction, and also to identify
businesses for the command.
But I hear these numbers of interest rates in the hundreds
of percent. And I'm just curious, from having dealt with many,
many organizations, what the basis of that is, what was the
basis of that 782 percent insurance rate that you quoted when
you went into the payday lending operation?
VADM Dawson. It was simply the interest that was charged if
someone were to borrow $500 cash advance for payday and have it
for a week. That was the annual percentage rate that they were
charged.
Mr. Davis. So what you were doing was taking all of the
fees that were associated--
VADM Dawson. I was just reading from their disclosure
statement on their wall of what they did at the payday lender.
And it was quite plain. It was well disclosed, that it would be
782 percent, with everything rolled in to what they charged for
that $500.
Mr. Davis. I would appreciate it if you would possibly
submit that information for the record, so that we could see
that.
One of the reasons that I want to bring this up is a little
bit deeper. When my family was hurt by a military financial
services provider who became the subject of H.R. 458, what
caused that hurt was not the practices that were disclosed, I
want to make that very clear. What caused the problem was a
perceived inter-relationship between retired military personnel
who served as executives, as salespeople, as managers in that
firm, and it--that was what breached the trust barrier in such
a big way here.
And you know, my question would come back, are you going to
do away with ATM's? Because under the proposed--you know, we
hear this 36 percent interest rate that's thrown around in so
many of these dialogues around this, if you go to an out-of-
network ATM and a soldier borrows $100 a week, which I used to
do things like that, even though ATM's were kind of a new
concept before I was commissioned, and it was $2 a transaction
for that out-of-network fee, you're dealing with 100 percent
interest, automatically, on that loan on an APR basis.
But one would come back from a bank and say that's a fee.
And I think the thing that we need to clarify very much,
because nobody with common sense is going to take a loan out at
500 or 1,000 percent, or something, you know, like that. What
they're going to do is they're going to be dealing with fees.
And the reason that I bring this up is a question that I
would like to ask Ms. Walter. You know, it seems that there is
a little bit of a question on my mind. We're talking about
payday lending. But are you aware of DoD's relationship with
other financial services providers who have many, many fees
that technically are not interest rates and aren't talked about
in a lot of competing legislation, but actually if you lay that
out side by side on the table, what you end up actually having
is a higher fee from a firm that is allowed, publicly, to
associate with the DoD organizations?
Ms. Walter. I'm not specifically aware of particular
entities. But in general, as you know, we're a securities
regulator. One of the most important things to be disclosed to
investors--and the same is true in consumer situations that do
not involve securities--are not just interest rates in terms of
payback for loans, but also the fees associated with it.
Because, obviously, from the point of view of the consumer,
the payment is the same. It is money that they have to pay in
connection with the transaction. So all of that is really
terribly important, and is something that people have to
understand before they enter into a transaction.
VADM Dawson. And sir, I would like to add that Navy Federal
has a little over 300 ATM's that we own and provide a service
to our members. And we charge no fee at all for any of our
members that use those ATM's.
Mr. Davis. How about for out-of-network members that use
it?
VADM Dawson. It's $1.50 for out-of-network--
Mr. Davis. So 75 percent APR?
VADM Dawson. It depends on how much they take out. But
these are non-members. In other words, these are members that
do not belong to our credit union. I think the industry
standard for those charges is probably between $1.50 and $4. It
is a fee to withdraw their own funds. It is not a loan.
Mr. Davis. My point, Admiral, is not to challenge your
ability to operate in the free market, it's simply when we
bring this issue up I think it's important that we--you know,
when we talk about these alleged high interest rates--and I am,
again, intimately familiar with this issue, having dealt with a
number of credit issues--that there is a difference between
fees that are fully disclosed in a market environment, and then
the true predatory lender--you know, like I can think of
Victory Pawn and Gun, or whatever, on Victory Drive, outside of
Fort Bragg, you know, other types of organizations.
And the reason that I bring this question of breach of
trust up, as a faithful credit union member--it has nothing to
do with your organization, but the more pernicious aspect of
this is what I am seeing right now in DoD is being drawn into a
very dangerous aspect on this credit issue of true monopolistic
competition between a very large financial services provider,
which is, you know, seeking to avoid these types of protections
we talk about putting in in order to gain market share.
And that's what concerns me with former military members on
the board, disorganization showing up at the AUSA convention,
when in fact, the Community Financial Services Association,
which is the legitimate payday lending open market businesses
have sought full cooperation with DoD, and yet those--that
cooperation has been rejected. And I personally met with Dr.
Chu on this issue to incorporate all changes and questions.
And I would like to just make it a matter of the record
that the deeper issue here in credit probably ought to be
devoted to a separate hearing. And I would ask Chairwoman Kelly
that perhaps we consider a separate hearing on that issue
alone, so that we can focus on the more broad-based financial
needs.
I think, at the end of the day, what we're dealing with
here are issues of cash flow for families, learning to manage
that, and often times, in the emotion of the media or those not
connected with the service, we want an immediate scapegoat,
somebody that we can hang something on, without necessarily
solving the problem. And I think that what I don't want to see
is a set of laws passed that gives unfair market advantage to
one firm over another that actually charges the same alleged
high fees, but it's just disclosed in a slightly different way.
And if you would like to have some private discussion at a
later time, we would be glad to share this information with
you, that I think you would find particularly disturbing. I
yield back my time.
Chairwoman Kelly. I thank you, Mr. Davis. I agree. I think
what we're discovering here this morning indicates that we
should be having follow-up hearings. I would like to bring in
DHS and the DoD. And we should look at a much more broad
picture here. I think it would serve us well, in trying to
figure out what needs to be done to help and protect our
service people. I turn now to Mr. Cleaver.
Mr. Cleaver. Thank you. My concerns are related to
foreclosure; is there any tracking system in place whereby you
would know the number of, or the percentage of, members of the
military who end up in foreclosure?
Ms. Melvin. I don't have any information that I could share
with you, sir, regarding that.
VADM Dawson. At my credit union I have that information. I
don't have it with me today in that detail. But yes, we track
delinquency. And in worst case, when it goes to foreclosure,
our numbers are very small. Our membership--we have very few
foreclosures. But we track it, and I would be happy to provide
you that data from our credit union, if you would like, at any
time.
Mr. Cleaver. I think I would like that information. The
Civil Relief Act prohibits an increase in the interest rates
and the foreclosures. And I'm wondering--I was looking through
the--this is very good, incidentally. I was looking through
here, but I couldn't find any information related to either the
interest rates issue or foreclosures. And I'm just wondering
how many service men and women would even know that they are a
victim if they don't know that the Civil Relief Act exists.
VADM Dawson. I understand your question. It's possible they
would probably know, but foreclosures are not conducted if they
fall under the Serviceman's Civil Relief Act. I don't think--we
don't do it, and I don't know about other institutions, but
that's--members are protected under that, should they know that
they're protected.
Chairwoman Kelly. We would be very happy--and I just made a
note of this, and I think it's a very good point--we will make
sure that point gets picked up in our programs on a going
forward basis, and so we can help to play a role in educating
people about the rights that are available to them.
Mr. Cleaver. Yes. I don't know if it's anecdotal or not,
but many Members of Congress, from time to time, hear from
servicemen and women that, after they were called up to duty,
after a certain period of time they ended up losing their
homes.
And if it's happening because there is a lack of
information going out--you know, it's an injustice in the first
place, but I think that the second level of injustice--and
maybe the first--is that they don't have the information.
VADM Dawson. Sir, maybe I can give you some information
that might be helpful to you. Just to put it in perspective, I
ran some numbers from my credit union on how many folks fell
under the--how many people that we have right now who have the
protections of the Servicemen's Civil Relief Act, and it's
about 980. And we track them very closely, and that number has
gone down over the last couple of years. We have been running
about an average of maybe 1,000 to 1,200.
And we are very meticulous in following the tenets of the
Act in regard to their rights. And we even go one step further.
If they apply for relief, it's granted unconditionally, without
even an explanation if it's a--if they're under a hardship,
which the Act calls for. So they send their documentation in of
their orders that brought them to military service, which they
all have, and then they fall under the tenets of the Act, and
we would not foreclose anyone while they were under that
relief.
Chairwoman Kelly. Would the gentleman yield for a comment?
Mr. Cleaver. Yes.
Chairwoman Kelly. If a service member is not in this
country, and there is an action, a proceeding, if the family
doesn't know to notify the local sheriff, or whatever, that
they are protected by the Act, then the proceeding could go on
because they don't know. And I think that's part of your point,
is it not?
VADM Dawson. Well, let's take our case in point, I mean,
just what we do, if you're interested in that. Let's say they
fail to notify us, in the very worst case. As soon as we found
out that they were eligible, we would tell them how to do it,
we would make everything retroactive to the date that they
entered the service, and--or were called up, and take care of
them.
Mr. Cleaver. I'm not sure it's that simple, because people
in Afghanistan and Iraq, and 122 other places around the globe,
and I'm just not sure the information is reaching the people
who need to know it, whether it's the military person or the
families.
And as I said, maybe there has never been an incident, and
I'm just going in the wrong direction. But you hear that, you
know. It may be like the thing that, you know, everybody--there
is something going around the Internet that Members of Congress
receive their salaries for life, I think, or--and so maybe it's
one of those things. But it is out there, and it bears some
attention.
And if I could just close out with a question, I--before I
was in Congress, I did a radio show on NPR, and I guess one of
the things I kind of campaigned on the air against was the
payday loans. One of the things I did eventually discover, and
that is because of circumstances, people felt that was the only
place they had to go to get financial help. And I'm wondering
if the Navy has a payday loan program. I mean, they're going to
go somewhere if they're in a crunch.
VADM Dawson. I can answer that from experience.
Mr. Cleaver. Yes.
VADM Dawson. I suppose that it is--all service members are
offered the opportunity--and we refer to it in the Navy as,
``to take a dead horse.'' What that is, is you remember advance
pay, when you make a PCS change of station, and then you pay it
back over 2 years, and it's an interest-free loan of up to 3
months of your base pay.
The reason it's called a dead horse is back in the days of
sailing ships, it was like sailing into horse latitudes where
there was no wind, and it felt like it took forever to pay it
back. That's why it's called a dead horse. But that's--and
that's the expression, ``beating a dead horse.'' But that's a
form of a loan that I think you're talking about.
Mr. Cleaver. Well, it's not quite. I know my time is
running out. Thank you, Madam Chairwoman.
Chairwoman Kelly. Thank you. Mr. Barrett?
Mr. Barrett. Thank you, Madam Chairwoman. Ladies and
Admiral, thank you for being here today. We greatly appreciate
it.
Ms. Melvin, let me address this first question to you. I
was reading in your report about personal financial management,
PFM--love these acronyms, you Army guys, I'll tell you--the
Army requires about 12 hours of PFM; the Navy 16; Marines and
Air Force, I think at their first duty station.
If this is a problem--and obviously, it might be--does it
make sense to have a standard throughout all the services,
whether it's at their first duty station, whether it's every
time they change duty stations, something that is similar
across the board, so we know that each service member is
getting adequate training on personal financial matters?
Ms. Melvin. Certainly it's possible that, you know, having
a standard form of training would provide that. I think the
bigger issue, though, is in terms of DoD needing to make sure
that it emphasizes what the services need to do and that it has
the mechanism to make sure that, regardless of whether the
training is standardized or whether it's given at different
points by different services, that it has an oversight, a means
of knowing that that training is taking place.
So, on the one hand, you could say that standardization
would, in fact, provide at least an element of information that
says it's occurring at a certain point in time. But the reality
is that, given the circumstances that are in play and the
number of people involved, I think it would still be
questionable as to whether, in fact, even with standardized
training, unless there is a reporting mechanism and a tracking
mechanism in place to ensure that--to see that that training is
actually taking place, it may not necessarily solve the
problem.
Mr. Barrett. But if you had some type of tracking mechanism
where you followed up, I mean, I'm looking here. I was in the
Army 12 hours, the Navy 16. I'm probably not that much smarter
than the Navy guys--I'd like to think maybe I am--but I mean,
it doesn't matter, I think, whether you're in the Navy or
Marines or Air Force.
Ms. Melvin. Exactly.
Mr. Barrett. Financial training is financial training.
Wouldn't you agree with that?
Ms. Melvin. Yes, I do.
Mr. Barrett. Okay, great. Thank you. Admiral, let's talk a
little bit about payday lending. And I know the interest can be
high. Let's look at a $200 loan for 2 weeks with a $30 fee.
That's about a 391 percent APR.
But when you weigh that versus the cost of bounced checks,
the problems it could have with your career and other things,
what would these service men and women do, what alternatives do
they have--and I know you mentioned one, and I don't know if
that is applicable in every situation, because I think you said
when you change a duty station, and you certainly don't change
all the time--if payday lending is outlawed, what option do
these service men and women have? I mean, where can they go for
help from week to week if they get in a bind, or something like
that?
VADM Dawson. A couple of things, sir. If they are really in
distress, the answer to your question of where they can go, in
the Navy and Marine Corps we have a wonderful organization
called the Navy and Marine Corps Relief Society that is
headquartered here in Washington, but has offices throughout
where sailors and Marines serve.
The head of that organization, ADM Abbot, would tell you
that they're probably the lender of last resort. And that's a
place that sailors and Marines and their families can turn to.
And they can get a grant or a loan from them, if they're in
distress. That's one place.
I did a data--I asked my people recently to put together
some information for me on how much could an E-4 borrow from a
credit union, specifically, our credit union. And they ran some
numbers for me. And essentially, let's say that they--if they
have a good credit rating, an E-4 can essentially borrow pretty
much up to a year of his salary.
Mr. Barrett. Which is how much?
VADM Dawson. About $24,000.
Mr. Barrett. $24,000?
VADM Dawson. Yes.
Mr. Barrett. Okay.
VADM Dawson. And if he bought a home and had a mortgage, it
could be up to much higher than that, $180,000 to $200,000.
Mr. Barrett. Sure.
VADM Dawson. That's a lot of money. And--but what's the
safety net after that? That's the question. And the safety net
after that would be a payday lender, which as I mentioned
earlier, is--I consider to be a spiral of doom, or the Navy
Marine Corps Relief Society for, really, when they're in
distress.
Mr. Barrett. Well, and I'm not going to agree--I mean, I am
going to agree with you that there probably are some payday
lenders or some organizations out there that are not doing it
like they're supposed to be doing. I think that's a given, and
I think that's one of the reasons why we're here today.
Would you agree, Admiral, that in any legislation that
moves forward we need to make sure that we cover how to deal
with, for lack of better words, unscrupulous payday lenders, or
organizations that are trying to really take advantage of
servicemen and women?
VADM Dawson. For sure. But 782 percent APR is pretty high.
And I have no idea whether that office that I went into was
scrupulous or unscrupulous. It's just the way it was.
I would like to make another point, though. I have made
some discoveries over this year. I didn't know anything about
payday lenders before I started looking at it this year. We
have 27 financial budget counselors. If our members are in
trouble, they can call these folks, and they will work them
through their difficulties. And they will help them work with
other creditors and organize their affairs. And we do that at
no charge to the member.
I talked to my folks about payday lenders one day, and I
said, ``How do you find them to deal with when you go to
organize someone's debts?'' And they--very interesting
observation. They said, ``We find that folks have multiple
payday lenders that they use. And when we go to call them, we
end up talking to a back shop that covers a whole network of
different storefronts that have different names.''
And also, we find that they very much know their members.
They know who they're dealing with. They know them by name, and
they know them by situation. But it's still a very high
percentage that people have to pay when they go into that path.
Mr. Barrett. And--
Chairwoman Kelly. Mr. Barrett?
Mr. Barrett. Yes, ma'am?
Chairwoman Kelly. I'm sorry, but you're out of time.
Mr. Barrett. Thank you.
Chairwoman Kelly. You may submit that in writing, or if we
have time, we will try to go back to it. Mr. McHenry?
Mr. McHenry. Thank you, Madam Chairwoman. Thank you so much
for having this committee hearing, and thank you for your
leadership on this issue.
And thank you for your testimony. I was able to listen to
your testimony before I had to step out. And so I have missed
some of the questions. So just nod and smile if I ask a similar
one. That never happens on Capitol Hill, of course, asking
similar questions.
But I want to commend my colleague, Geoff Davis, for the
legislation he has filed--and I am proud to be a co-sponsor of
it--dealing with predatory lending of sorts against military
personnel.
You know, Ms. Walter described cracking down on a company
that was putting into practice some unethical behavior that was
really going beyond the bounds with military personnel, and I
want to commend you for doing that. That's a proper role that
you play, and I appreciate you stepping up to do that.
It's also come to my attention that certain lending
institutions, or certain financial institutions, are requiring
service members to waive their rights under the Servicemembers'
Civil Relief Act. And I wanted to see if any of you three could
address that as something that is ethical or legal. Any of you
three?
Ms. Melvin. I am not aware of the circumstances of them
waiving their rights. What I would say, though, is that my
understanding of the Servicemembers' Civil Relief Act is that
there are specific rights that they do have, and I believe that
the legislation that is being put forward to attempt to
strengthen that hopefully would go a long way toward, in fact,
preventing that type of situation from occurring.
As I understand, the intent is to achieve more awareness,
more information on the part of both the service member, as
well as the actual lender. And in that case, hopefully that
would lead to those kinds of circumstances not occurring.
Mr. McHenry. Admiral?
VADM Dawson. I discussed this with my folks before I came
here, and to the memory of everyone in the credit union, we
have never had an issue with the SCRA. And I just don't--I'm
not aware of other instances where it's occurred. I just don't
have any knowledge on that. But we meticulously follow the
tenets.
Mr. McHenry. Ms. Walter?
Ms. Walter. I don't have any specific information about
that, either. I will say that in the securities industry, which
of course is of limited scope, we have a rule that requires
people who operate in the securities industry to adhere to high
standards of commercial honor and just and equitable principles
of trade.
And the advantage to having that kind of standard applied
is that if people behave in a way that violates it, we have the
ability to fine them, or in the extreme, to actually kick them
out of the industry entirely. And I don't think, in other
industries, there are comparable protections, so you would be
relying more on common law principles in those kinds of
situations.
Mr. McHenry. Okay. Ms. Melvin, actually, if I could come
back to you about this, if this were occurring--how about I
approach the subject this way--if this were occurring, where a
financial institution is asking a service member to waive their
rights under this Act, is that lawful?
Ms. Melvin. I would suspect not, but I would respectfully
like to defer to our attorneys to make sure that I understood
all of the requirements. My understanding is that there are
specific rights that the service members have, and that the law
protects them against violations of those rights.
Mr. McHenry. And so it's something that's really protecting
a class of people, and as an individual you can't simply waive
that right?
Ms. Melvin. I'm sorry, waive the right to be protected?
Mr. McHenry. Yes.
Ms. Melvin. Again, I would want to consult with our legal
attorneys on whether, in fact, they would. I'm not sure I
would--
Mr. McHenry. Perhaps I could send that to you in written
form, and you and your staff could respond.
Ms. Melvin. Most certainly. We would be glad to.
Mr. McHenry. I would appreciate that. You know,
additionally, as the chairwoman said, this isn't really about
payday lending, this hearing, but you know, I do have concerns
that some institutions, non-payday lenders, for instance, are
able to get around the APR limits, or in order to get around
disclosing what the APR is for a member of the military or the
general public, but specifically the military, that by getting
around that, they have all these hidden fees in there, such as
insurance policies you have to purchase in order to gain
lending.
And I wanted to see if you could address that in any way,
shape, or form. Admiral, you made a fatal error at testifying
on Capitol Hill. You actually acknowledged my question. So I
will direct it towards you.
VADM Dawson. I don't really have any experience on that. I
read some material the other day that said the average bank
makes 50 percent of its income on fees. And--but as far as
schemes to move around and manipulate people, I'm just not
familiar with it.
Mr. McHenry. Well, it's probably a helpful thing, running
your credit union.
VADM Dawson. Well, we don't do it. And as Mr. Davis said,
the biggest thing that we hold of value is our trust of our
members. And if you violate that trust, it would be a terrible
thing. So we work very hard at that.
Mr. McHenry. Thank you, Congresswoman Kelly.
Chairwoman Kelly. Thank you. Ms. Waters, would you like to
ask some questions?
Ms. Waters. Yes.
Chairwoman Kelly. We recognize you for 5 minutes.
Ms. Waters. I have a number of questions. Let me ask VADM
Cutler Dawson whether or not credit unions are afforded space
on every base.
VADM Dawson. I believe probably they are. There are a
variety of credit unions that serve DoD, and there may be some
exception to that, but I would say that on the majority of
installations, a credit union is welcomed and has a
relationship on the base.
Ms. Waters. And are the new service members given this
information when they first come to the base, to let them know
that there are credit unions on the base and financial services
assistance to help them to understand lending and interest. Is
something disseminated to them that would help them to know
where to go to get help?
VADM Dawson. I don't know for sure. I would say that it
probably varies from base to base. We participate with many
bases where we're located. We're on 22 Navy and Marine Corps
bases, and we participate in financial seminars to answer those
questions you just posed.
Ms. Waters. Well, let me just say this, Madam Chairwoman
and Members, the payday loan operations and other sharks and
predators that operate around bases usually have big, gaudy
flashing signs. They are called green money stores, they are
called, ``Rapid Money,'' I mean, all kind of names that attract
attention. They have neon lights and sometimes they will offer
a few other services to go along with it, to attract business.
What I find is, oftentimes, people don't know where the
credit union is, but some bases have 50 payday loan operations
surrounding the base. And they can't miss them, even if they
tried. And so, it becomes very attractive to someone who is
making $24,000 a year, who runs out of money, to go to one. And
when they find out how they operate, they may go to one, two,
three, or four and pick up this $100 or this $200. And when
they can't pay it back, it gets rolled over, and it gets rolled
over, and it gets rolled over again.
And while our chairwoman made it quite clear we're not here
to criticize anybody--I, of course, appreciate the opportunity
to be here, but I reserve the right to criticize anybody that I
want to criticize. And I criticize payday loan operations and
the way that they operate, and the amount of interest that they
charge.
Now, having said that, I am talking about any predatory
lender. I don't care what shape or form it comes in, whether
it's rent to own, or these people who allow, you know, people
to pawn their automobile titles or these tax refund loan types.
I think it's the responsibility of the military to protect our
servicemen and women, and I don't think we're doing a good
enough job of it.
We have young people who leave home at 18 or 19 years old.
They've never had a checking account. They don't know anything
about borrowing money or managing money. And so, I think it's
the military's responsibility to not only embrace credit unions
and to--these boards, disciplinary control boards have to get a
little bit stronger.
I think they should make it off limits some of these
predatory operations, and I think they should be very
aggressive in doing so. In addition to the disciplinary boards
exercising their power and meeting and understanding what's
going on around them, I really do believe that the military can
be more aggressive in helping to protect these young men and
women from predators.
I don't care what shape or form they come in. I don't care
about limiting competition with these predators. If the credit
unions are able to take over all of these financial services
operations and literally close out these predators, I don't
care. I mean, you know, free market only goes so far.
And to say that you have somebody who is exploiting and
undermining the very people that we say we care so much about,
who are preparing to go off to war, or who may be returning
from war, or may be on active duty, to say, ``Well, you know,
let the market place work.'' I think that's irresponsible.
So, I am pleased to be here today, and I am awfully
appreciative for the opportunity, Madam Chairwoman, to be able
to voice my opinion and to raise these questions. It's an area
that I am going to spend a little bit more time studying.
And let me just close by saying we discovered that these
predatory lenders come in all shapes, forms, fashion, and
they're more creative. One veteran, we read, received $80,000
in exchange for 10 years of his benefits worth $300,000,
according to the Law Center Study. Somebody found a way to buy
the benefits of a veteran.
So, you have people who don't give a darn about the future
of these people, they don't give a darn about these young
people who come with very little knowledge or understanding.
And I'm not talking about young people from any one area of
the country. We have young people from the urban areas, but God
bless some of those who come from the rural area, I mean, who
have never interacted with some of these operations.
So, I just want my members to feel a little bit more
passionate about it, as we talk about these things, and I want
the military to feel more responsible and take stronger steps
to do something about these issues.
And having said that, Madam Chairwoman, I will thank you
for the time, and I yield back the balance of my time.
Chairwoman Kelly. We welcome your being here. When I opened
this hearing, I spoke of the fact that we were focused on
getting information. We need information from you about whether
or not we should take a deeper look. I think that question has
been answered. The needs of the service people are there. And
the things we're talking about are the needs for the very
people who are at the margins of what--of being involved in a
standardized financial service in this Nation.
So, I believe we will probably be holding a second hearing
on this. So right now, let me just note that some members have
additional questions for this panel, and they may wish to
resubmit them in writing.
So, without objection, the hearing record will remain open
for 30 days for the members to submit their written questions
to these witnesses, and to place the responses in the record.
And with that, we thank you. We are very grateful for your
presence here today. And thank you for being here. This hearing
is adjourned.
[Whereupon, at 4:35 p.m., the subcommittee was adjourned.]
A P P E N D I X
May 18, 2006
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