[Senate Hearing 109-1081]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 109-1081
 
                A REVIEW OF THE DEPARTMENT OF DEFENSE'S 
                 REPORT ON PREDATORY LENDING PRACTICES 
      DIRECTED AT MEMBERS OF THE ARMED FORCES AND THEIR DEPENDENTS 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

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


                               ----------                              

                      THURSDAY, SEPTEMBER 14, 2006

                               ----------                              

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


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                            senate05sh.html

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













                                                       S. Hrg. 109-1081


                A REVIEW OF THE DEPARTMENT OF DEFENSE'S
                 REPORT ON PREDATORY LENDING PRACTICES
      DIRECTED AT MEMBERS OF THE ARMED FORCES AND THEIR DEPENDENTS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

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


                               __________

                      THURSDAY, SEPTEMBER 14, 2006

                               __________

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


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html
            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             William D. Duhnke, Staff Director and Counsel
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                        Jonathon Gould, Counsel
                 Patience Singleton, Democratic Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor


















                            C O N T E N T S

                              ----------                              

                      THURSDAY, SEPTEMBER 14, 2006

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Johnson..............................................     2
        Prepared statement.......................................    32
    Senator Dole.................................................     3
    Senator Reed.................................................     6
    Senator Allard...............................................     6
    Senator Schumer..............................................     7
    Senator Martinez.............................................     8
    Senator Sarbanes.............................................    27

                               WITNESSES

David S.C. Chu, Under Secretary for Personnel and Readiness, 
  Department of Defense..........................................     9
    Prepared Statement...........................................    34
    DoD Report on Predatory Lending Practices Directed at Members 
      of the Armed Forces and Their Dependents...................    41
Admiral Charles S. Abbot, Retired, President and Chief Executive 
  Officer, Navy-Marine Corps Relief Society......................    19
    Prepared Statement...........................................   133
    Response to written questions of:
        Senator Shelby...........................................   200
William O. Brown, Jr., Associate Professor, Department of 
  Accounting and Finance, Bryan School of Business and Economics, 
  University of North Carolina...................................    20
    Prepared Statement...........................................   143
    Response to written questions of:
        Senator Shelby...........................................   200
        Senator Crapo............................................   201
Lynn Drysdale, Staff Attorney, Jacksonville Area Legal Aid.......    21
    Prepared Statement...........................................   176
    Response to written questions of:
        Senator Shelby...........................................   201
Hilary B. Miller, President, Payday Loan Bar Association.........    24
    Prepared Statement...........................................   182
    Response to written questions of:
        Senator Shelby and Senator Johnson.......................   204
Christopher L. Peterson, Assistant Professor of Law, Levin 
  College of Law, University of Florida..........................    25
    Prepared Statement...........................................   195
    Response to written questions of:
        Senator Shelby...........................................   216

              Additional Material Supplied for the Record

Letter from Hilary B. Miller on behalf of Community Financial 
  Services Association of America................................   398


  A REVIEW OF THE DEPARTMENT OF DEFENSE'S REPORT ON PREDATORY LENDING 
 PRACTICES DIRECTED AT MEMBERS OF THE ARMED FORCES AND THEIR DEPENDENTS

                              ----------                              


                      THURSDAY, SEPTEMBER 14, 2006

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard Shelby, presiding.

         OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. The Committee will come to order.
    This morning, the Committee will hear testimony on the 
recently completed Department of Defense report on predatory 
practices directed at members of the armed forces and their 
dependents. The report draws attention to the problems of 
predatory lending around military communities and the plight of 
servicemen and women who are caught in what the report 
describes as debt traps.
    Although predatory lending schemes differ in their details, 
they share certain characteristics. For example, some lenders 
target financially inexperienced consumers and make loans 
without regard to the consumers' ability to repay. The lending 
products they offer also feature high interest rates and fees.
    These lenders often count on the fact that borrowers will 
be unable to pay the loan in full when it becomes due, forcing 
borrowers to seek additional loans which generate more fees. 
The end result is often the same: mounting debt, a 
deteriorating credit rating, and reduced availability of credit 
sources.
    Unfortunately, military personnel and their families are 
particularly attractive targets for this type of lending. They 
are often young and financially inexperienced, sometimes 
receiving their first steady paycheck. Because they fear 
military sanctions, including the loss of security clearance, 
servicemen and women are less likely to default entirely on 
loans and, therefore, represent a low credit risk to lenders. 
Finally, the fact that they are concentrated in large numbers 
on and around military bases makes them a readily accessible 
market for these types of loans.
    In addition to describing the most prevalent forms of 
predatory lending, the report that Secretary Chu will expound 
on also offers concrete legislative recommendations to reduce 
the impact and frequency of predatory lending. The Defense 
Department, is to be applauded for the effort it has made to 
promote financial literacy among service members and their 
families, but education can only do so much.
    As the Committee has learned in the cases and situations 
involving certain mutual funds and insurance products aimed at 
military personnel, stronger Congressional action may be 
required. As long as certain unscrupulous lenders continue to 
employ predatory practices, our servicemen and women suffer and 
the toll on our readiness will increase.
    I would like at this time to take a minute to commend 
Senator Dole, for her work to initiate this important study. It 
was through her efforts that this study was included in last 
year's Defense Authorization Act, and she has been very, very 
important to this cause.
    On our first panel today, we will have Dr. David Chu, Under 
Secretary of Defense for Personnel and Readiness; he will 
discuss the department's report. Our second panel will consist 
of: Admiral Charles S. Abbot, President and Chief Executive 
Officer of the Navy-Marine Corps Relief Society; Dr. William O. 
Brown, Associate Professor at the Bryan School of Business and 
Economics at the University of North Carolina in Greensboro; 
Ms. Lynn Drysdale, a staff attorney with the Jacksonville Area 
Legal Aid; Mr. Hilary B. Miller, President of the Payday Loan 
Bar Association; and Mr. Christopher L. Peterson, Assistant 
Professor of Law at the Levin College of Law, University of 
Florida.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Well, thank you, Mr. Chairman, for this 
hearing, and I appreciate the Committee is meeting today to 
discuss an issue of critical importance.
    Thousands of our military personnel are currently serving 
in harm's way in defense of our country. In my State of South 
Dakota, over 3800 military personnel and civilians are 
stationed at Ellsworth Air Force Base, 300 of which recently 
deployed in support of the Global War on Terror. As a father of 
an active duty soldier, an enlisted man who served combat tours 
in Iraq and Afghanistan, I am acutely aware of the very 
personal and financial challenges facing our men and women in 
uniform. I am proud of their courage and professionalism and am 
grateful for their service to our country.
    Financial stress can affect any soldier regardless of their 
marital or deployment status, but in particular younger or 
lower-ranked enlisted personnel. We all sympathize with the 
soldier who incurs debt because he is blind-sided by unexpected 
emergencies, auto repairs, personal or family illness, or is 
just struggling with basic living expenses.
    I share DoD's concern about service members falling into a 
cycle of debt whether through inappropriate use of credit 
cards, payday loans, or other forms of credit. I believe 
Congress and DoD must work together to improve the financial 
literacy of our service members and crack down on abusive and 
truly predatory practices by any lender.
    It is very clear that military personnel, like many other 
consumers, have a real and legitimate need for short-term small 
denomination credit products. According to the Federal Reserve, 
payday loans typically total $500 or less with fees ranging 
from $15 to $100. As the loans typically last for just 2 weeks, 
however, the annualized interest rates tend to be high.
    Now, one of the concerns that I have as we discuss this 
issue is that there are various steps that the committee and 
Congress could take relative to various sectors of the credit 
industry, but the underlying problem remains, and that is the 
problem of military personnel, particularly younger enlisted, 
but others as well, who are not able to make ends meet; and 
whatever we do with the various sources of credit, those 
problems remain. Obviously, one of the reasons that payday 
lenders have stepped into a vacuum is because the banking 
industry and the credit union industry have chosen not to 
pursue that level of lending with very much aggressiveness, and 
as a result, a vacuum has occurred.
    If we are to eliminate payday lending altogether and make 
it unviable in this niche, then the question I have is who 
fills then that niche, because the need remains. Do we then go 
to increasing use of pawnshops? Internet lenders? Loan sharks 
out of the back of their car? Where do we go next? That is one 
of the concerns that I have, is that we not jump from the 
frying pan literally into the fire in terms of abusive 
practices toward our military personnel.
    So I think we have some far-ranging questions that need to 
be answered. I know that the military is aware of the need for 
greater financial literacy, which is part of the problem. That 
is a national problem, not simply a military, but it is a 
national problem. We have got a long ways to go on that, but I 
am concerned that the underlying problem remains and I want to 
make sure that we don't have unintended consequences that are 
worse than the current illness that we may have.
    So as we continue to address the issue of predatory lending 
to the military, the primary goal, I believe, should be to 
develop meaningful solutions that will offer the greatest 
protections to our service members while avoiding measures that 
carry the potential for negative unintended consequences and 
driving service members into potentially far more abusive and 
more expensive and unregulated forms of credit. So, again, I 
thank you, Mr. Chairman, for holding this hearing and I hope 
that this leads us to a very constructive debate about how best 
to serve the needs of our American military personnel.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Mr. Chairman, I thank you for your interest 
in this subject and thank you for holding this hearing today. 
Secretary Chu, thank you so much for your excellent report. I 
appreciate the diligent efforts that have been made by those 
who assisted you in this effort. I also want to thank the 
witnesses who appear before us today in addition to Secretary 
Chu. I look forward to hearing from all of you.
    I have to say I am proud to have authored this legislation 
that directed the Department of Defense to prepare the report 
that we are focused on today, because this problem does provide 
a real threat to our national defense in my view. It is a real 
threat and it poses issues that need to be focused upon.
    Predatory lenders are blatantly targeting our military 
personnel, undermining their financial stability and tarnishing 
their service records. This practice not only creates financial 
problems for individual soldiers and their families, but also 
weakens our military's operational readiness. Military conduct 
codes stress financial solvency, and bad credit can prevent 
service members from having the security clearances they need 
to perform their duties. Unfortunately, all too many are 
reluctant to seek help until it is too late, resulting in 
disciplinary measures that can end a career.
    Let me focus on testimony from a commanding officer 
included in the DoD report, and I quote: ``Between 2000 and 
2005, revoked or denied security clearances for sailors and 
Marines due to financial problems have increased 1600 
percent.'' I find it telling that the report also shows that in 
the same time period, the number of payday lenders more than 
doubled from 10,000 in the year 2000 to 23,000 in 2005.
    Overall, predatory lending cost U.S. consumers more than 
$25 billion a year, and these lenders profit from the most 
vulnerable borrowers. As we see in this report, Mr. Chairman, 
several factors make our men and women in uniform particularly 
susceptible to this practice, as we have already heard this 
morning. For starters, many are young, and like most young 
Americans, they lack financial savvy and security. In fact, the 
Defense Department is the largest employer of young adults in 
the United States with nearly half of its enlisted members 
under the age of 25.
    In addition, service members have job security and steady 
incomes, and they are fashioned by a military culture that 
emphasizes financial responsibility and settling debts. 
Borrowing can be an alluring option for a young soldier to get 
cash fast and easy, but exorbitant interest rates can quickly 
send an individual into a downward spiral of debt.
    As the Pentagon's report mentions, my home State of North 
Carolina has been aggressively cracking down on predatory 
lenders, imposing a 36 percent small loan usury cap reinforced 
by a strong bank regulator. Other States also are active in 
combating this practice. While this is, indeed, encouraging, 
the report also mentions States where the problem continues, 
like Arkansas which has a low usury cap in its constitution, 
but still allows lenders to charge triple-digit interest rates 
to service members stationed at Little Rock.
    We need national standards that ensure that all of our 
courageous men and women in uniform are protected no matter 
where they are based. The DoD report states that as many as one 
in five service members are falling victim to predatory loan 
operations. Still, there are some who question whether these 
lenders are truly targeting our military even when many, 
specifically military and installment lenders, market 
themselves with names and logos that imply an official military 
connection. For example, you see here ``Armed Force Loans'', 
``Military Loans.com'', and ``Pioneer Military Lending''.
    In addition, the geographic evidence speaks for itself. Let 
us look at this February 2005 map of the State of North 
Carolina. This was prepared by Dr. Steven Graves from 
California State University, Northridge. Now, keep in mind that 
this map was created at a time when North Carolina had 612 
payday lenders. Today, because of our State's laws, these 
lenders no longer operate in North Carolina.
    This 2005 map shows us the most targeted ZIP Codes for 
payday lending in North Carolina. We can see that the larger 
population centers, like around Charlotte and Raleigh, have 
high concentrations of payday lenders, as would be expected. 
But look at the counties with the greatest number of payday 
lenders. These are areas with significant military presence. 
The county with the State's highest concentration was Wayne 
County, home of Seymour Johnson Air Force Base. Cumberland 
County, where Fort Bragg and Pope Air Force Base are located, 
has the third-highest concentration, and Craven County, the 
site of Marine Corps Air Station at Cherry Point, has the 
fourth.
    Let us specifically look at Fort Bragg and Pope Air Force 
Base. In 2005, statewide, there were roughly four banks to one 
payday lender, but in the entire three-mile zone surrounding 
the perimeter of Bragg and Pope, the ratio was four banks to 
every five payday lenders. Now let us look at the February 2000 
map of just the eastern side of Bragg and Pope. This map shows 
that seven of the thirty-six payday lenders in just this area, 
or about 20 percent, were within one mile of the bases while 
just five of the 68 banks are in the same area. And if we look 
between one and two miles of the base, there are six additional 
payday lenders and only one bank. In the two- to three-mile 
zone, the ratio of payday lenders to banks gets closer to the 
statewide average with three payday lenders and six banks.
    In reviewing the DoD report and other maps produced by Dr. 
Graves, it is apparent that some unscrupulous payday lenders 
are clustering around military bases across the nation.
    As a Senator representing more than 115,000 North Carolina-
based service members and as a member of both this committee 
and the Senate Armed Services Committee, this issue is one of 
my top priorities. With my support, the Senate approved an 
amendment to the Fiscal Year 2007 defense authorization 
sponsored by Senator Jim Talent to enact a 36 percent annual 
interest rate cap on abusive loans to service members. Last 
year, Mr. Chairman, you will remember I proposed a similar 
amendment to the Defense Authorization Bill, but I encountered 
jurisdictional objections.
    The interest rate cap provision now awaits consideration by 
a House Senate Conference Committee. I am hopeful that a 
provision on predatory lending that includes the rate cap as 
well as additional recommendations from the Pentagon report 
will be included in the final legislation. Should the 
conference report not properly address this problem, I will 
introduce legislation that incorporates recommendations made in 
the report.
    Supporting our service members means more than providing 
the equipment and training necessary for fighting the War on 
Terror, Mr. Chairman. We should also support their livelihood 
and their families, and predatory lending can seriously harm 
both.
    I look forward to working with this committee as we strive 
to put a stop to this egregious practice. Thank you, Mr. 
Chairman.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman. I 
commend you for holding this hearing and I commend Senator Dole 
for her efforts in this regard, and I don't represent North 
Carolina, but I used to command a parachute company in 
Fayetteville, North Carolina at Fort Bragg in the 504th 
Parachute Infantry Regiment, and I have seen young soldiers at 
payday who are financially strapped and willing to sign 
anything to get a few dollars, and I think this behavior, if it 
is targeted to exploit soldiers is absolutely reprehensible. We 
owe them a lot more than that.
    This is a command responsibility. I am glad the Secretary 
of Defense and the Defense Department are taking steps with 
this report. The commander at that base and every base in the 
country have to work hard to educate their soldiers. The 
community leaders of the Fayettevilles and all the other 
military towns had to step up to the box too, and we have to do 
our part.
    The provision that Senator Dole talked about, a 36 percent 
cap, I think is more than reasonable. Some of these loans have 
average annual percent rates of 470 percent. One of the 
advantages I had back in the 1970's commanding a company is 
most States had usury laws capping interest rates at 21 percent 
or so. That is a thing of the past now. We didn't have to 
worry, at least, in licensed agencies like this having soldiers 
pay a 470 percent interest rate.
    So I think we have to do more. I hope we can keep this 
provision in the bill, and I will not, I think, be here to ask 
questions. I have to go to the Armed Services Committee, I 
think along with Senator Dole, because of the military tribunal 
issue; but I would ask every witness to give their position 
with respect to that 36 percent cap, starting with Secretary 
Chu.
    Thank you, Mr. Chairman.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman, for holding this 
hearing to examine the ``Department of Defense's Report on 
Predatory Lending Practices Directed at Members of the Armed 
Forces and Their Dependents''. I am proud to represent a State 
with a significant military presence, and I am looking forward 
to the opportunity to learn more about this matter.
    We owe our military personnel a great debt. They 
volunteered to risk their lives to protect freedom and 
democracy; therefore, it is only reasonable to expect that we 
would protect them against predatory lending. Predatory lending 
is an abhorrent practice, especially when it takes advantage of 
our men and women in uniform.
    Earlier this year, I was pleased to support Senate Bill 
418, the Military Personnel Financial Services Protection Act. 
This is one way in which we can help prevent predatory 
practices aimed at those in uniform. During our hearings on 
that bill, it became obvious that financial literacy is key to 
preventing predatory practices and the Department of Defense 
has a serious need to fill regarding financial education. 
Unfortunately, too many people today lack basic financial 
literacy and skills, and military personnel face the same 
challenges. Therefore, it is important that the DoD help 
provide financial education that will enable personnel to make 
appropriate financial decisions.
    The DoD report includes information on their strategy to 
educate members of the armed forces and their families 
regarding predatory lending as well as programs to reduce or 
eliminate predatory lending. This is particularly important for 
my home State of Colorado where military personnel are four 
times more likely than civilians to have taken a payday loan. 
Military personnel make up 1.1 percent of the adult population, 
but they account for 4.6 percent of payday loan customers.
    While not all payday loans are necessarily predatory, these 
numbers do raise important concerns. First, why do military 
personnel account for a disproportionate share of payday loans? 
The second, do the personnel have other options? And third, do 
members of the armed forces understand the implications of the 
different alternatives?
    I am eager to learn more about these issues as we delve 
into the report. I would like to thank the witnesses for being 
here today. Their testimony will provide us with a better 
understanding of the issues. I look forward to their testimony.
    Thank you, Mr. Chairman.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Well, thank you, Mr. Chairman. Thank you 
for holding this timely hearing, and I want to praise my 
colleague, Senator Dole, for getting this report done and into 
the Defense Authorization Act. We may be at loggerheads on 
certain things outside the Capitol, but we can work well 
together inside the Capitol.
    Senator Dole. Thank you.
    Senator Schumer. Now, this is a topic that has been of 
great concern to me for a long time. I have heard of so many 
bad stories in New York State by Fort Drum near Watertown, our 
largest military installation, one of the largest in the 
country, in the capital region in Albany by Watervliet near the 
Stratton Air Force Base, and in western New York by Niagra Air 
Force Base. We are in a funny situation in New York. We have 
pretty strict usury laws. So you would think that payday 
lending wouldn't occur, these loans as high as 800 percent, 
just absolutely disgusting, ripping off service men and women 
and their families; but the banks find ways around so that at 
first, we had New York processing the loans through, say, 
Delaware or other banks, and we worked with the FDIC, and they 
finally shut that down.
    But in this new information society, the internet, 
newspapers, etc., still hold the service men and women, who we 
are so proud of in New York, they are holding us victim.
    So here, and I would like to point this to Secretary Chu's 
attention, the ``Army Times'', and you have fast cash, Force 
One lending from Albuquerque, New Mexico. A soldier in Fort 
Drum can read that, go on line, or whatever. ``Need a loan?'' 
This is one in Nevada.
    So unless we have a national law, we are not going to stop 
this no matter what we do at the State level, no matter what we 
do in terms of the FDIC, and one thing, Mr. Secretary, I would 
urge you to do is--I don't know if there is a way you can, but 
could you prohibit ads like this in the ``Army Times''? Maybe 
you will talk about that when you come before us and the other 
kinds of newspapers that DoD has a real hand in putting out and 
helping. There is freedom of speech, but I don't think if they 
put an ad, you know, join a bank robber, come join Joe Smith 
Bank Robbery Team, you would put that in. Well, this is sort of 
the same thing. So I would urge you to look into that.
    And I would ask unanimous consent that the rest of my 
statement be put in the record. I want to thank you, Mr. 
Chairman.
    Senator Shelby. Without objection, it will be made part of 
the hearing record.
    Senator Schumer. Thank you, Mr. Chairman, for the good work 
you have done with the Military Personnel Financial Services 
Protection act which we passed in June, and that did a good job 
about abusive sales practices. We need to do the same good job 
about abusive lending practices, and I know that we decided 
against including those lending practices in this bill so DoD 
would conduct a review, and now we don't have to wait. So I 
want to join with you and all of my colleagues to make sure we 
shut this down once and for all.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much. I 
would ask again, likewise, that my entire statement be made 
part of the record.
    Senator Shelby. Without objection, your entire opening 
statement will be made part of the record.
    Senator Martinez. Thank you. Also, a letter from Daniel 
Mica, President and CEO of CUNA, be made part of the record.
    Senator Shelby. It will be made part of the record. He is 
head of the credit union.
    Senator Martinez. Correct.
    Mr. Chairman, I would just comment along the lines of what 
Senator Schumer said, that this is an egregious practice. It is 
a terrible plight upon the lives of our service men and women 
and really to all people who fall prey to this kind of lending. 
When I was Mayor of Orange County in Orlando, Florida, we had a 
problem with payday loans, a very similar problem, more 
afflicting the civilian population, but nonetheless where they 
would take the security, a vehicle, and then people get a bunch 
of cash. Within 6 months after they have paid off a car, they 
no longer have a car. It has been repossessed from them. This 
is the kind of practices that take place.
    As the chairman well knows, during my time at HUD, we did a 
lot to try to work against predatory lending in home lending, 
which is a first cousin to this problem. So let me just commend 
you for holding the hearing and commend Senator Dole for her 
leadership on this issue, and I share my full support for 
whatever we can move forward to ensure that this egregious 
practice, particularly the plight upon our servicemen and women 
comes to a stop.
    Senator Shelby. Thank you, Senator Martinez.
    Secretary Chu, your written statement will be made part of 
the hearing record in its entirety. You can proceed as you 
wish. We appreciate your work in doing this report. Thank you 
very much.

STATEMENT OF DAVID S.C. CHU, UNDER SECRETARY FOR PERSONNEL AND 
                READINESS, DEPARTMENT OF DEFENSE

    Secretary Chu. Thank you, Mr. Chairman, members of the 
Committee. It is a privilege to be here this morning to testify 
on the report that we rendered at the direction of the Congress 
on this issue of predatory lending practices directed at 
military personnel. It certainly is a special privilege to be 
here with Senator Dole whose actions led to that direction and 
to which we were delighted to respond.
    Financial readiness in our judgment equates to mission 
readiness. It was my privilege in May of 2003 to join with the 
Treasury Department in launching our broader financial 
readiness campaign. That campaign encourages service members to 
achieve good credit standing and to save on a regular basis for 
emergencies, to watch their borrowing practices, including the 
interest rates they accept, to take advantage of the Thrift 
Savings Plan and the Service Members and Veterans Group Life 
Insurance Program. Through these diverse efforts, we focus on 
the issue of personal financial stability. We hope to develop a 
culture that focuses on sound financial decisions by our 
military personnel. That culture will encourage service members 
to reduce reliance on credit cards, to implement short-term and 
long-term savings plans, and to resist predatory lenders.
    The department, as we reported, is concerned about 
predatory lending because it is detrimental to mission 
readiness and because it can have disastrous consequences on 
the quality of life and for the careers of service members. It 
is one of the reasons that we have made this issue, predatory 
lending, one of the 10 key issues the department and the 
Secretary of Defense is addressing with the Governors of our 
Nation and other State officials to seek their assistance as 
well.
    We do recognize that it is the first responsibility of the 
Department of Defense to prepare our service members through 
education and counseling, and as the report indicates, the 
military services have devoted considerable time and talent to 
educating service members and, to the extent possible, their 
spouses so that they do, indeed, become better stewards of 
their finances. To enhance the educational capability of the 
military services, several prestigious nonprofit agencies and 
members of the Federal Financial Literacy Commission have 
joined our financial readiness campaign, and they will help us 
increase awareness, understanding, and knowledge of the 
assistance that is available to our military personnel.
    Commanders at every echelon, from the Chiefs of Staff down 
to the unit commanders, as Senator Reed testified, have been 
involved in emphasizing this important message to our troops. 
It was my privilege this week to invite the service department 
secretaries to endorse a campaign that we will be initiating 
next February called ``Military Saves'', which asks everyone 
associated with the Department of Defense to consider reducing 
his or her debt, and save for the future. This campaign is part 
of ``America Saves'', which has been endorsed by the Chairman 
of the Federal Reserve Board.
    It is through these diverse efforts, we believe, that we 
will keep our current focus on the issue of personal finance in 
place and develop the intended culture within the military that 
encourages service members to seek assistance when they need it 
rather than burying their financial concerns in additional 
debt. The report we provided to Congress gives an overview of 
the efforts within the department to educate, inform, and 
influence service members and their families to take control of 
their finances, to build wealth, and to escape the cycle of 
debt for their own well-being and to enhance their military 
readiness.
    The department has, indeed, recommended--specifically to 
Senator Schumer's question, the department has recommended 
establishing an interest rate cap of 36 percent for service 
members and their families. The department believes service 
members who acquire loans with interest rates above 36 percent 
should seek assistance and not consider further debt load. The 
36 percent limit creates a barrier for installment lenders to 
refrain from packing fees and premiums--and others have alluded 
to this this morning--onto the base interest rate that is 
charged for a loan. The limit of 36 percent is considered 
appropriate since it mirrors the limitations found in several 
States, actually a majority of States, for their small loan 
products. It is an amount that has been proven reasonable for 
consumers and the industries that serve them.
    To accelerate this process, we have recommended in our 
report to the Congress that limits be placed on the credit 
opportunities that do not consider service members' ability to 
repay their debt, and that is the subject you mentioned, Mr. 
Chairman. We want service members to take the tough steps 
necessary to get themselves out of debt rather than the quick 
cash solutions that lead them to much worse circumstances. It 
is our job to give them the tools they need to resolve their 
debt. We are continuing to improve the already substantial 
system of support available to them, but we need your 
assistance in limiting the availability of loans that fail to 
consider the ability of the borrower to repay so that service 
members can and will consider other alternatives.
    As long as these options are legal, we have little to no 
control over how much and how often service members access 
these options. By the time commanders are aware of their 
troops' financial problems, that damage is done.
    Service members inherently understand that limits on 
interest rates are appropriate even if these limits will 
decrease the ability of credit. When asked in a recent survey, 
74 percent of service members agreed with the statement, and I 
quote it, The Government should limit the interest rates that 
lenders can charge even if it means fewer people will be able 
to get credit, end quote.
    Service members are in agreement that there should be 
limits. Commanders have made their positions known that limits 
should be established. The department sees this as an important 
issue as part of our compact with our commanders, service 
members, and their families for their well-being and in support 
of military readiness. The department asks for your assistance 
in adopting the statutory steps necessary to establish more 
effective limits.
    I am very grateful for this opportunity to appear, Mr. 
Chairman, to share our concerns with you and the members of the 
Committee. The department is ready to assistant your committee 
in developing effective limits on predatory lending that 
affects military readiness. Thank you, sir.
    Senator Shelby. Senator Dole, you are the leader here. We 
will recognize you first.
    Senator Dole. Thank you, Mr. Chairman.
    Secretary Chu, I thank you very much for your testimony 
this morning.
    In a June article in ``Sea Power Magazine'', Master Chief 
Petty Officer of the Navy Terry Scott is quoted as saying: 
``The No. 1 reason our sailors are forced from one job to 
another is because they lose their security clearance, and the 
No. 1 reason they lose their security clearance is because of 
financial difficulties.'' Do you know this statement to be 
accurate and are these financial difficulties due to predatory 
lending?
    Secretary Chu. Ma'am, my understanding is that Master Chief 
Scott's statement is based on an internal Navy analysis and, 
therefore, I would accept it as a good description of the 
challenge we face in this arena. And, yes, an important part of 
that problem is the result of predatory lending.
    Senator Dole. Now, in your report, you included testimony 
from a commanding officer stating that revoked or denied 
security clearances for sailor and Marines due to financial 
problems have increased 1600 percent between the year 2000 and 
the year 2005. Is predatory military lending a leading cause of 
these financial problems and do you expect this trend to 
continue without legislative action?
    Secretary Chu. We need legislative action, to get to the 
bottom line, because without it, and I think members of this 
committee have spoken to that, we cannot curtail the migration 
of this set of predatory practices to other products. The 
advantage, I think, of the Senate amendment that you co-
sponsored is that it does shut it off. It shuts it off by 
including fees within the cap. It shuts it off by making 
internet-based loans unenforceable across State lines. So even 
if State A fails to curb the internet lender, the contract is 
null and void across the country. You can't enforce it if you 
are a military person.
    So, yes, ma'am, we do need legislative assistance to curb 
this problem. We do think we are making progress in the 
awareness of our people about their situation and how they 
should conduct themselves, but education and preparation alone 
are not enough given the practices that you so eloquently 
described with the maps that you showed just a few moments ago.
    Senator Dole. Now, you reported the strong actions--I think 
this is page 47 of your report--that North Carolina has taken 
to combat predatory lending. Can you tell the committee how 
this has affected personnel who are stationed at bases in North 
Carolina? Have the actions taken by North Carolina eliminated 
the threat of predatory lending or are there further actions 
the State should take?
    Secretary Chu. First of all, I want to commend North 
Carolina for its actions. They have had a dramatic affect. They 
have substantially reduced the problem. At least that is what 
our commanders tell us at the important bases in that State. 
They do not--this gets to your issue, ma'am, of do we need 
national legislation. Our view is, yes, it would be very 
beneficial, and I particularly value the provisions in the 
Senate amendment you co-sponsored because of their effect in 
curbing the internet interstate lending operation by making 
those contracts unenforceable. That is a key provision.
    Moreover, it helps us in other States. I don't want to in 
any way denigrate what North Carolina has done, but we need 
national action on this as far as military personnel are 
concerned.
    Senator Dole. You cite a Center for Responsible Lending 
report as follows: ``Active duty personnel are three times more 
likely than civilians to have taken out a payday loan and that 
predatory payday lending costs military families over $80 
million in abusive fees every year.'' Do you believe this 
analysis is correct, Secretary Chu?
    Secretary Chu. We have done our internal estimates. They 
are not precisely the same, but they are in the same ballpark. 
You would get similar results from other methodologies. Yes, 
ma'am.
    Senator Dole. And the report on page 14 states that: ``The 
Uniform Code of Military Justice penalizes service members for 
deliberately writing a check not covered by funds on deposit.'' 
Can you describe the penalties that the service members are 
subjected to?
    Secretary Chu. First, let me emphasize the important 
provision of the Code, because it makes personal financial 
responsibility something that is governed by our military 
justice system, and so it calls it to the attention of all our 
personnel. What the penalties are depends, of course, upon the 
seriousness of the offense, and as you appreciate, ma'am, we 
administer it on a decentralized basis where commanders decide 
the immediate courts-martial, or other administrative 
authorities decide what the penalties should be. So there will 
be a range of penalties depending upon the seriousness of the 
infraction.
    Senator Dole. Thank you.
    The final question, Mr. Chairman, the report states: 
``Lenders who only lend to nonresident military personnel in 
about half the States have either been granted formal exemption 
from State regulation or have not been required to be licensed 
or supervised by State regulators under a variety of legal 
arguments.'' Secretary Chu, can you describe in greater detail 
how these lenders circumvent regulation and are they able to do 
this in North Carolina?
    Secretary Chu. As you suggest, ma'am, and this is another 
reason for national legislation, a number of States have taken 
the position that if you are lending to a non-State resident, 
the State law does not apply. We do not like that rule. We are 
advocating the States to change that position, but it is 
essential, I think, to have national legislation. That is also 
an issue in North Carolina, I would acknowledge.
    Senator Dole. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Shelby. Senator Johnson.
    Senator Johnson. Thank you, Secretary Chu.
    I think it is easy for us to sit here in a committee room 
and say that, Well, these military personnel should just forego 
getting credit; they have a funeral to go to; they have no 
cash; the heck with them. That isn't a very satisfactory answer 
and I don't think it is very realistic either. I think that 
they are going to continue to seek credit for low denomination 
short-term debt. I think that is a given.
    The question is if we eliminate--if we place a 36 percent 
cap, that means you cannot borrow $250 for airfare for a $25 
fee because that would, annualize, exceed the cap. Where do you 
suggest these guys go? What should they do?
    It seems to me that it's saying, Well, just don't borrow 
money. That is a good thing to say, but these needs do arise. 
They have arisen, and that is the reason we have this vacuum 
that has been filled by this particular industry, because the 
credit unions, the banks have not stepped in. And so I just 
wonder what do you say to that young soldier. He wants to go to 
his mother's funeral. What are you going to do?
    Secretary Chu. Nothing we propose, Senator, and nothing 
that has been advanced is about broadly denying credit to 
military personnel. Many, if not most, military personnel have 
credit cards to help them pay for airline tickets, not cash. 
Cash: I believe the Transportation Security Agency views it as 
a signal that perhaps you are not a person we want on our 
airlines.
    So I don't think that is the issue, Senator. The issue is 
predatory lending, getting people in over their heads, and the 
maps Senator Dole displayed, are, in fact, the indictment of 
this practice and the reason we need to curb it. These people 
are taking military people into a debt load that they cannot 
sustain. It is not about the airline ticket to a funeral.
    For that purpose specifically, if a military person has a 
pressing need, that is why we have and why we encourage the 
Military Aid Societies. I have talked with every military 
service about this. They have energetic programs to make sure 
that if there is a legitimate emergency, the Military Society 
is there to step forward, is eager to step forward. A major 
fraction of what they do these days is make sure that those 
kinds of needs are covered. We are also talking with the credit 
unions and other agencies of that type that offer regular 
banking products to be sure that they are responsive to these 
needs as well.
    So I don't think the example that you offered, sir, is, in 
fact, the situation. That is not what we are confronting here. 
We are confronting people in over their heads on a long-term 
basis. This is the rollover issue.
    Senator Johnson. Well, that is somewhat my point, is that 
it seems to me the problem here is not so much a fee on a 
particular low denomination loan as it is the rollover problem 
and how many rollovers are going to go on, and it seems to me 
that that is the larger issue than a fee that a credit card 
company charges or a bank charges for an overdraft and so on. 
It is how deep you go and how long you stretch out the loan, it 
seems to me, the greater problem than the 36 percent issue.
    But in any event, I appreciate your observations. It just 
seems to me that the need for low denomination short-term loans 
is not going to go away. I hope that there are mechanisms to 
deal with it.
    One of other points that it has brought out to me that I 
think we need to have some discussion as this goes forward is 
that two of the lenders that Senator Dole has focused on would 
not be affected by the 36 percent rate cap because their fees 
are not subject to the Truth-in-Lending Act. So I think we have 
some other issues that we need to work together on as well as 
we go forward with this.
    But I want to see all of our soldiers treated fairly, and I 
think we are all on the same page with that. The only 
reservations I raise are we are going to wind up denying short-
term credit for people who have a legitimate need that is not 
rolled over time and time and time again and are we going to 
wind up putting a lot of our military personnel in a uniquely 
difficult circumstance that the other citizens of America don't 
have. So that is the issue I raise. I think we all are in good 
faith trying to do what is right for our men and women in 
uniform, but these are things I think we need to talk through 
in the committee.
    Secretary Chu. If I may, Senator, respond very briefly to 
two important points you made, first of all, we agree that you 
need a broad set of legislative restrictions. That is why we 
like the Talent-Nelson amendment to the Senate Defense 
Authorization Bill. It accomplishes that purpose in our 
judgment.
    The second issue of need for cash on an emergency basis, 
that is one of the reasons we have emphasized in our financial 
readiness campaign the importance of saving; you need to start 
setting the money aside. We pay adequately in the military 
these days. It is not the Army of 30 years ago. So one of the 
points is you need to start setting aside some money yourself 
for a rainy day.
    Senator Johnson. Well, I would say that we on the 
Congressional side think some of our enlisted personnel would 
maybe disagree with you that the military, particularly if they 
have children, is paying at a level that doesn't occasionally 
cause some financial stress; but one last question, and I know 
nothing about this proposal myself. It was called to my 
attention that the CFSA has made a proposal to DoD relative to 
an alternative approach to managing these loans. Have you had 
any opportunity to review that at all?
    Secretary Chu. We have the proposal from them. We will look 
at their proposal. I think our preliminary assessment is it 
doesn't fully deal with the issues at hand. I think, again, we 
believe that the Senate Authorization Bill, Section 666, if I 
recall, Senator, correctly does do a good job in that regard.
    Senator Johnson. Well, thank you for testimony.
    Secretary Chu. Thank you, sir.
    Senator Shelby. Senator Martinez.
    Secretary Chu. Good morning.
    Senator Martinez. Good morning. How are you, sir?
    Secretary Chu. Fine. Thank you.
    Senator Martinez. We had the pleasure to work together a 
little bit on some of these issues, frankly, relating to our 
servicemen and women when we began this war. We worked at 
little bit on the Sailors and Seamen's Relief Act, which I 
think is a very good thing, and I appreciate your working with 
me at that time.
    Mr. Chairman, I am pleased that there are some Floridians 
on the second panel today: Lynn Drysdale, Staff Attorney with 
the Jacksonville Area Legal Aid, and Christopher Peterson, 
Associate Professor of Law at the University of Florida. I 
don't know if I will be here, but I want to make sure the 
Committee will issue a welcome to them from myself.
    The issue of rollover has come up, and I wanted to ask you 
whether you thought a prohibition of these rollovers and loan 
flipping would address many of the practices that we see as the 
most egregious.
    Secretary Chu. That type of prohibition would, indeed, be 
helpful, sir, because that is part of the problem, people 
taking one loan. Then when it comes due, they can only pay it 
off by taking the next loan, and, of course, the fees and the 
interest rate build on that total. That is partly how you get 
these high numbers and you get people in a kind of trouble 
which they find tough to extricate themselves from.
    Senator Martinez. One of the things that I notice in your 
report is that this industry particularly advertises and preys 
upon our military personnel. Why is that? And if you can 
explain and articulate that, what is it that causes our folks 
in the military to be so vulnerable and at the same time to be 
such a target of these unscrupulous lenders?
    Secretary Chu. It is a very important question, sir. I 
agree. I think there are several reasons. First of all, as 
Senator Dole brought out, we insist people pay their debts. So 
you have got the power of our leadership behind making good on 
the loan eventually.
    Second, they have a steady paycheck, and so as you know, 
many payday loans are, indeed--just as the name implies, they 
predate a check. They know, unlike perhaps might be true in the 
private sector where sometimes you get paid--sometimes you 
don't get paid--they know that paycheck is going to show up in 
the bank account the first of the month. They are certain to 
get the money back.
    Second, or third I should say, our people have started to 
accumulate assets. Some have cars. So another version of this 
is the car title. They have an asset that can secure the loan. 
So our people do have collateral often, and they, 
unfortunately, for whatever reason, give it up for what is 
really a terrible financial deal. Of course, that is an 
educational issue for us, to make sure they understand, no, you 
really shouldn't go there; that is not the way to handle your 
situation; come to one of the other possible sources of 
assistance instead.
    Senator Martinez. I understand that at times people may 
have an emergency and they need short-term financial 
assistance. Is there not a network of assistance to our 
military families and the personnel in the event of a family 
death or bereavement sort of trip, things of that nature that 
can be available to them through governmental and 
nongovernmental sources?
    Secretary Chu. I think this is another example of the great 
volunteer spirit in our nation. We have a set of military aid 
societies, essentially one per military department. They have 
made it a priority to devote a substantial fraction of their 
resources to this issue of short-term cash needs. As Senator 
Johnson indicated, we need to lecture people and encourage them 
to save, but if you do get to the point where you need the 
cash, we ask that you come to the military aid society. That is 
why they are there. I reviewed with them just very recently 
what fraction of their portfolios are they devoting to this, 
and it is a high number in each case.
    They are trying to do that job. They are willing to do more 
if that is necessary. So there is a safety net out there. We 
are also asking our credit unions--we have credit unions on our 
military installations--to be sure they offer appropriate small 
loan products to our personnel as well.
    So I think there are several avenues of assistance. 
Ultimately what is needed is the military member or family 
member needs to get control of their finances, whatever pressed 
them to the wall.
    Senator Martinez. Financial literacy, in other words.
    Secretary Chu. Right. The loan is a Band-Aid. It is not a 
solution.
    Senator Martinez. I understand payday loans are now 
available on the internet from off-shore lenders, and if 
Congress acts to curb unethical lending practices at home, what 
more can we do to protect the Nation's military personnel from 
online lenders outside the country?
    Secretary Chu. Well, I think the important provision that 
is in this, as I understand the Senate Authorization Amendment, 
is to make internet contracts as far as military personnel are 
concerned unenforceable, and that means we can go--I am not 
trying to encourage inappropriate behavior, but if we 
faithfully execute that provision as Congress might desire, it 
will essentially make it unattractive for any internet lender 
to lend to a military person.
    Senator Martinez. Often times, subprime lending, 
particularly longer-term loans, can be confused with predatory 
lending. There is a difference between the two, is there not? 
There can be people with a credit rating that may not be as 
worthy as another or their loan might be at a higher interest 
rate, still within the law, still within reason, but a higher 
interest rate. That is not what we are talking about here 
today, is it?
    Secretary Chu. You are absolutely correct, sir. That is not 
what we are talking about. That is why we have endorsed the 36 
percent limit. That is a high number. It is a high number, but 
we think it allows for subprime lending. It does cutoff a 
source of credit that might be important to people. It is 
consistent with the laws of a majority of States of our nation.
    Senator Martinez. Speaking of State laws, in 2001, 
partially in reaction to what Orange County had done in 
Florida, the State passed a very comprehensive law to prohibit 
the abuse of payday loans and by both licensed providers and 
consumers, and some say that the Florida laws are some of the 
strictest in the country. Are there aspects, if you are 
familiar with Florida law, that you believe would be a good 
basis for a national model? And perhaps our next panel might be 
better to answer this question, but I wanted to put it before 
you.
    Secretary Chu. Thank you, sir. I should probably turn to 
them. I am not an expert on Florida law, but I do know that 
across the board, Florida has been a leader in trying to 
support our military families in this area and in several other 
arenas as well.
    Senator Martinez. Thank you, Mr. Chairman.
    Senator Shelby. Thank you, Senator Martinez.
    Dr. Chu, it is my understanding that the Armed Forces 
Disciplinary Control Board can place commercial entities off 
limits to military personnel. Can you explain why this 
mechanism is not being used more frequently to ban specific 
predatory lenders from accessing military personnel? First, it 
that true? Can the Armed Forces Disciplinary Control Board 
place commercial entities off limits to military personnel?
    Secretary Chu. Yes, sir, it can.
    Senator Shelby. Have you done that? Has the Pentagon done 
any? If not, why not or do you plan to?
    Secretary Chu. It is a responsibility at the local level, 
installation level, as you can appreciate, sir.
    Senator Shelby. Is that by commander?
    Secretary Chu. By commanders. The difficulty, as I believe 
you are aware, is that as a matter of law, and I am not a 
lawyer, but as I understand the situation, basically, the way 
they place them off limits is because the establishment is 
violating the law. Of course, that is the essence of the issue 
here. These practices in many States are not illegal. We have 
looked at using this mechanism. Our counsels, plural, advise it 
is legally problematic to do that for this and other reasons.
    So in our judgment, the Disciplinary Control Board 
mechanism placing establishments off limits, at least under the 
present statutory construct, will not be effective for this 
purpose.
    Senator Shelby. For this purpose, but it could help, could 
it not?
    Secretary Chu. It is doubted by our legal staff that we can 
get very far with that instrument.
    Senator Shelby. In other words, the base commander can to 
some extent restrict who is coming on that base. Is that right?
    Secretary Chu. That is a different statement, sir, but in 
terms of patronizing off-base establishments--
    Senator Shelby. Off base.
    Secretary Chu. He is, as I appreciate the law and I ought 
to let the lawyers speak to this, he is restricted to those 
establishments that are violating a law. If the product is 
legal, and that is our central problem, if the product is 
legal, however much we may find it distasteful, that 
establishment is not violating the law and he can't reach it 
with this mechanism.
    Senator Shelby. I believe Senator Dole said something to 
the effect that over half of the service people are under 25 
years of age. A lot of them are 18 and 19 years of age.
    Secretary Chu. Yes, sir, and some of their spouses are 
younger.
    Senator Shelby. Do you know what percentage are 18 or 19 
years of age?
    Secretary Chu. Not of the top of my head, sir. I can get 
those numbers for you.
    Senator Shelby. Could you do that for the record?
    Secretary Chu. I would be delighted to, sir.
    Senator Shelby. I just believe that we should, working with 
you and the Administration, do everything we can to protect the 
young soldiers because they are highly vulnerable, are they 
not?
    Secretary Chu. We agree, sir. They are early in their 
careers. Our nation's educational establishments, I think you 
and others noted this morning, do not give a large amount of 
education on financial management. That is something that is 
worth looking at, I think as a country, but, of course, people 
come to us with the preparation that our country gives them, 
and they often don't have the preparation. That is why we are 
investing in their preparation starting in basic training, but 
it does take time for those lessons to sink in.
    So yes, sir. We would appreciate the kinds of steps that 
Congress is considering to put temptation aside.
    Senator Shelby. Most of these young people, most of them or 
a great percentage of them, this is their first steady 
paycheck. I believe Senator Dole mentioned that I, as well 
Senator Martinez. Is that correct?
    Secretary Chu. Yes, sir. That is true.
    Senator Shelby. So people know that they have got a steady 
paycheck. So they know where the potential is often times for 
exploitation.
    Secretary Chu. Yes, sir.
    Senator Shelby. Does the report that you are talking about 
today indicate any trends concerning the prevalence and the 
impact of predatory lending on our service members? I think it 
does, but I would like to hear from you.
    Secretary Chu. Yes, sir. We have seen a growth, and Senator 
Dole's maps are eloquent in the North Carolina case, a growth 
in predatory lending institutions near military bases. I was 
struck just yesterday that a citizen with no connection to the 
problem, unaware that the department had done a survey, raised 
with me why when he was in the White Sands Missile Base did he 
see a clustering of these kinds of payday lenders right outside 
the gate. He thought that was shameful and a blot on our 
national reputation.
    Senator Shelby. Your report makes clear that loopholes and 
State laws or exemptions granted by State authorities are often 
abused by predatory lenders to avoid interest rates caps, 
disclosure requirements, and other consumer protections. Has 
the Defense Department approached the States with its concerns, 
with your concerns, and if so, what kind of response have you 
seen from the States in this regard?
    Secretary Chu. Yes, sir, we have. As I indicated, it is one 
of the issues the Secretary is personally engaging the 
Governors on, and as a broad matter, we are pleased with the 
Governors' willingness to listen to us. That does not, of 
course, always mean they can get the necessary legislation 
enacted in their States. That is why I think all of us pulling 
together can make a difference here, and I think national 
legislation will send a strong signal to every State that this 
is where the country wants us to be.
    Senator Shelby. Dr. Chu, we appreciate your work as the 
Under Secretary of Defense for Personnel and Readiness and 
especially in this issue. We will continue to work with you to 
try to resolve a real problem that we have on the bases. Thank 
you very much.
    Secretary Chu. Thank you, Mr. Chairman. Thank you for the 
opportunity. Thank you for your questions.
    Senator Shelby. I am going to call up now our second panel: 
Admiral Charles S. Abbot, Retired, President and Chief 
Executive Officer, Navy-Marine Corps Relief Society; Dr. 
William O. Brown, Jr., Associate Professor, Department of 
Accounting and Finance, Bryan School of Business and Economics, 
University of North Carolina; Ms. Lynn Drysdale, Staff 
Attorney, Jacksonville Area Legal Aid; Mr. Hilary Miller, 
President of the Payday Loan Bar Association; Mr. Christopher 
Peterson, Assistant Professor of Law, Levin College of Law, 
University of Florida.
    If you will all take your seats.
    Senator Shelby. All of your written testimony, as I have 
previously said, will be made part of the hearing record in its 
entirety, and what we would like to do, because we are going to 
have a vote on the floor in a little bit and we will have to 
move on, is let you sum up your top points that you want to 
make orally as fast as you can.
    Admiral Abbot, we will start with you. Welcome to the 
Committee.

 STATEMENT OF ADMIRAL CHARLES S. ABBOT, RETIRED, PRESIDENT AND 
   CHIEF EXECUTIVE OFFICER, NAVY-MARINE CORPS RELIEF SOCIETY

    Admiral Abbot. Mr. Chairman, members of the Committee, 
thank you very much.
    I am grateful for the opportunity to appear here and to 
comment on the Department of Defense report, and I will 
abbreviate my remarks to leave the entirety as a part of the 
record, but as the President of the Navy-Marine Corps Relief 
Society, I am a head of a military charity, one of the four 
that Secretary Chu mentioned, and for a hundred years, we have 
been providing support to sailors and Marines and their 
families. I would like to say that as I look at the history of 
our organization, this problem with predatory lending, with 
payday lending, is the most serious single financial problem 
that we have encountered in that hundred years, and we know 
that the industry has said that they don't, in fact, target 
military personnel, but certainly our experience, we see it at 
the suffering end of these individuals that they are, in fact, 
a direct target.
    And I echo Senator Schumer's comment about the ``Navy 
Times' and other similar publications having ads in them where 
the lending organizations state that, in fact, they are 
purposefully organized to target military personnel. We see 
every day in our offices around the country individuals who 
have come in and have fallen into the venus fly trap of the 
payday lending problem, and it has literally destroyed their 
lives, and we provided cases to the Department of Defense for 
them to use in their report and we see additional ones every 
day which are contained in my draft comments to you.
    I believe that it is a growing problem. Every year, we see 
more of these individuals coming in the door at our offices, 
and over the last 5 years, it has been in excess of 5,000 
individuals in more than two and a half million dollars, and we 
also see the growing problem of the internet payday lending 
business and the effect that that is having on the problem more 
broadly.
    So we enthusiastically support the recommendations of the 
DoD report. I do believe that in addition to the interest rate 
limitation, that flipping of the loans is, in fact, one of the 
serious problems. It is, in fact, what causes the individuals 
to get caught in the trap. There aren't very many who simply 
get a single loan and that is the last time they were ever 
seen. There are statistics which show that the average number 
of loans is usually as high as about five for an individual, 
and it destroys lives. It destroys families.
    Senator Shelby. It doesn't help readiness either, does it?
    Admiral Abbot. It does not, sir. We see that effect as the 
individuals come to us and they are removed from their duties 
to be able to deal with these problems, and then some, as Dr. 
Chu describes, in fact, lose their clearance and are unable to 
continue to serve in their assigned billets.
    So I thank you very much for the opportunity to appear 
before the Committee.
    Senator Shelby. Thank you.
    Dr. Brown.

   STATEMENT OF WILLIAM O. BROWN, JR., ASSOCIATE PROFESSOR, 
DEPARTMENT OF ACCOUNTING AND FINANCE, BRYAN SCHOOL OF BUSINESS 
          AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA

    Mr. Brown. Yes. I will shorten my remarks that are in my 
statement, as you wish. I have conducted some research on 
payday lending and on payday lending in the military.
    Senator Shelby. Have you published in that area too?
    Mr. Brown. I have not published academic journal articles, 
but hopefully I will at some point.
    This research has focused on trying to figure out why it is 
that military personnel use payday loans and why payday loans 
are used by the broader sort of population and student 
population as well. As noted here, this business has expanded 
greatly in the last 10 years. It almost went from a business 
that didn't exist to a business that now has over 20,000 
outlets. So I will summarize some of our key factors that 
found.
    We surveyed a list of personnel in the four service 
branches regarding their attitudes toward and uses of the 
short-term credit, including payday loans. Our analysis is 
based on the empirical data that we collected through a random 
sample of people who live on the military bases.
    The first finding is that a small percentage of enlisted 
personnel use payday loans. We found that roughly 13 percent of 
the 460 enlisted personnel that lived around the military bases 
that responded to our survey indicated that they had used a 
payday loan in the previous year. That number, I mean, 13 
percent to some extent may seem high, but this is just enlisted 
personnel, which you already noted the people are often times 
18, 19 years old. If you compare that to a similar group of 
population among the general population, you will find that 
that number is not out of line with people that are 18, 19 
years old in terms of what they are doing with payday loans as 
well.
    Military borrowers report that they use payday loans for 
the same things as civilian borrowers do. They are paying bills 
that they otherwise can't afford. They have unexpected 
automobile, home repairs, those kinds of things, and so they 
are reporting that they are using it for those purposes.
    Despite this admonition that they should save, you know, 
spending a lot of time around young people, these admonitions 
don't go very far. Right? You should also study for your exams. 
Right? With students, sometimes it takes a while to learn that. 
Right? So it is only after failing on occasion that sometimes 
you learn and stuff hits.
    So I think just admonishing them to save and not actually 
giving them the ability to fail in small steps--now, you want 
to prevent these serious egregious things that happen which you 
can make sure that you give people the ability to learn from 
their mistakes in some cases as well.
    What we also found is that the military enlisted personnel 
look much different from civilians using payday loans in that 
they tend to pay them back more quickly. We don't see the same 
rollover problem that you see with the civilian users and the 
military of payday loans. Forty-nine percent of the military 
payday loans, borrowers had two or fewer loans in the last 12 
years. I mean the last 12 months. So it is not an indication 
that they are rolling these things over or rolling them over 
continuously.
    Again, there is a small group in the sample that do roll 
these over, and you should be concerned about those people and 
find better education for them, but given the overall low 
default rate on these loans to begin with, given the military 
personnel and the small fraction that are using them, and given 
that most of them aren't using them and don't have these 
serious rollover issues and are only using them once or twice a 
year, we indicate that there is not really a threat to military 
preparedness, and there is nothing in the DoD report that 
suggests, that gives anything other than this anecdotal 
evidence that these sometimes create problems. There is no 
large scale statistical evidence that this is a problem.
    Senator Shelby. Ms. Drysdale.

 STATEMENT OF LYNN DRYSDALE, STAFF ATTORNEY, JACKSONVILLE AREA 
                           LEGAL AID

    Ms. Drysdale. Thank you, Honorable Chairman and Committee 
Members.
    I am a legal services attorney in Jacksonville, Florida, 
home of Naval Air Station Jacksonville and Mayport Naval 
Station. Based upon the increasing number of clients I 
represent and the military people I talk to, the DoD report is 
right on target, and I urge you to adopt the recommendations 
for statutory changes.
    In brief, the payday loans I see are generally short-term 
2-week loans with interest rates ranging from 390 percent to 
well over 900 percent. If I don't have $300 today, it is 
unlikely that I am going to have $300 today plus 900 percent 
interest 2 weeks later. So they are destined to fail.
    Why do people sign these loans? Because even your 
mainstream payday lenders explain away the interest rate. They 
say, Well, the APR is 390 percent, but it is only a 2-week loan 
rather than a year loan, so don't worry about the interest 
rate. Others use loan disguises. I am going to reference just a 
few.
    Senator Shelby. How much do you say the APR was?
    Ms. Drysdale. Anywhere from 390 percent.
    Senator Shelby. 390 percent?
    Ms. Drysdale. 390 percent up to--the most recent I have 
seen is 906 percent. The lenders which do this get around 
Florida law by using loan disguises. I will describe very 
briefly several of my clients, and some of them I will have to 
refer by an initial. Please keep in mind that these are only 
representative of dozens of other clients with the same 
problems.
    Mr. B went to a payday lender which disguised its loan as 
rebates. In other words, he was getting not a loan, but a 
rebate in return for his paying for the right to use the 
internet on the small computer they had in their office that 
was not plugged in. When he could not repay the loan at a 400 
percent interest rate, they took the loan amount plus hundreds 
of dollars directly out of his bank account, meaning that he 
did not have enough money to pay rent. He also not have enough 
money to put groceries on the table and not enough money to pay 
for diapers for the family's small children. When this company 
had taken all of the money out of the bank account, they sent 
him an unauthorized letter on State Attorney letterhead 
threatening criminal prosecution if he didn't pay the debt.
    Not only do these lenders illegally try to use our State 
Attorney's Office for a law enforcement arm, but they also use 
the military chain of command as a collection enforcement tool. 
Because the members of the military are governed by the Uniform 
Code of Military Justice, the payday lenders contact the 
service members to harass them and they also contact their 
chain of command.
    You may have seen the Hubbells, a family represented in an 
ABC News story who started out by taking out one payday loan 
because Ms. Hubbell was stricken with a very aggressive form of 
breast cancer. They were both in the military, but she was 
forced to quit work. They took out a payday loan to address 
some of the financial stress involved with her illness. Over 
the years, they have borrowed about $10,000 in payday loans, 
most of which did not benefit them, but went to rollovers. They 
have paid tens of thousands of dollars back and still owe 
$12,2000.
    Mr. Hubbell once got a call when he was at work. He was an 
E-6 air traffic controller and got a call at work from a payday 
lender threatening and harassing him to pay. He told them he 
had an attorney, and so the call ended. Twenty-five minutes 
later, his superior officer called Mr. Hubbell and said, I have 
already had two phone calls from the same gentleman harassing 
me, ordering me to give him the name of your commanding officer 
so he could call him. Mr. Hubbell was terrified he was going to 
lose his security clearance, he was going to lose rank, he was 
going to lose pay and maybe even his job.
    Mr. G sent me an E-mail. He was stationed out in the middle 
of the Mediterranean in an undisclosed location. He was 
terrified because his wife had E-mailed him telling him that a 
payday lender was threatening to put her in jail which would 
mean their two children would not have a parent at home.
    Mr. Kahne was so frightened by all of these types of 
collection techniques that he spent his entire day off going 
from payday lender to payday lender, rolling over loans with 
nine different companies so that he would not bounce a check.
    Mr. Wall sued Military Financial Network because they 
debited his account 11 times in 1 day, creating hundreds of 
dollars in bounced check fees with his financial institution. 
The lender also added additional fees and charges. Military 
Financial Network also put a clause in Mr. Wall's contract that 
if he didn't pay the debt, he would be subject to a court-
martial, imprisonment, and dishonorable discharge. Also, if Mr. 
Wall wanted to sue this company because of all of these illegal 
actions, he was precluded from doing so even though this 
company had all rights of enforcement. They put a clause in his 
contract that if he didn't like the way they were operating, he 
could not go to court; he had to go through expensive 
arbitration in Delaware despite the fact that he was located in 
Florida when he signed the loan.
    You will hear that the pay day lenders' organization, the 
CFSA, has best practices that all of its members are required 
to follow. Well, let me comment on a women I started 
representing 2 weeks ago. She is a Navy wife who has taken out 
a loan with one of this industry organization's founding 
members. In Florida, there is a prohibition to rollovers, but 
this company and other companies get around it by requiring the 
borrow to wait 24 hours before getting the rollover loan.
    Florida also allows a grace period with no additional 
penalties or fines or interest if you seek credit counseling. 
Ms. Griffin went to pay off her loan and was told that she 
needed to roll it over because she was $45 short, which she 
did. The next time she went back, she had obtained the required 
credit counseling from the Navy-Marine Corps Relief Society, 
which is an authorized credit counseling agency for the 
purposes of getting the grace period. They still refused the 
grace period, and ironically, in their contract, the lender 
stated it was a member of the CFSA and followed the best 
practices.
    The Director of the Navy-Marine Corps Relief Society, 
Retired Captain Dave Faraldo, called this company and said, 
``You are required to give her the grace period.'' The employee 
said, ``No, we don't have to give her the grace period and, in 
fact, I have been a trainer of employees for 8 years and we 
have never had to give the grace period.'' She refused to speak 
to him anymore, and would only speak to her attorney.
    I called them as her attorney. They refused to speak to me 
even if I did provide a written release. I said, I would like 
to speak to your supervisor. She said, I can't give you the 
name or the number of that person, but I will have them call 
you. That is 2 weeks ago. I haven't heard a word from them.
    And the real shame in this is that all of these people I 
have mentioned would have the alternative of the Navy-Marine 
Corps Relief Society, and even my credit union offers a similar 
short term loan for emergencies. They did a study and 
determined they could provide a similar product and they could 
feasibly do it at 14 percent APR. There is also a savings 
component in with the loan as well as credit counseling. My 
credit union is responsible to me to make sure it is making 
financially sound decisions.
    I have filed lawsuits against the internet lenders and am 
presently pursuing those cases, and also there have been 
enforcement actions by other States against the internet 
lenders so they would not be immune to the type of legislation 
that has been proposed.
    Senator Shelby. Thank you.
    Mr. Miller.

   STATEMENT OF HILARY B. MILLER, PRESIDENT, PAYDAY LOAN BAR 
                          ASSOCIATION

    Mr. Miller. Thank you, Mr. Chairman and Members of the 
Committee. It is a pleasure and honor to be here today. My name 
is Hilary Miller and I am here both as an expert on subprime 
lending and also on behalf of the payday advance industry's 
national trade association, the Community Financial Services 
Association of America or CFSA.
    Both the Payday Loan Bar Association, of which I am 
President, and CFSA subscribe to the highest principles of 
ethical and fair treatment of borrowers. CFSA represents the 
owners of approximately half of the estimated 22,000 payday 
advance retail outlets in the United States. CFSA has and, 
importantly, enforces among its members responsible industry 
practices and appropriate consumer rights and protections, 
including special protections for the benefit of military 
personnel.
    There are serious flaws in the Defense Department's report. 
Those flaws involve both fundamental matters of methodology and 
policy. We think that decisions involving potentially far-
reaching implications regarding the cost and availability of 
consumer credit should be reached only after a careful 
gathering of data from a variety of sources and even-handed 
analysis of such data. By failing to synthesize information 
from balanced sources and by systematically excluding any input 
from independent economists, from consumer credit experts, or 
from the industry itself, the DoD report presents the views 
only of opponents of the kind of lending that is discussed in 
the report. The result is a biased, inaccurate, and incomplete 
picture of the market for such credit.
    Our industry, contrary to some of the discussion of the 
ability-to-repay issue, has a vital interest in making sure 
that military borrowers can repay their loans, and for one 
simple reason: as lenders, we only make money when our 
borrowers repay us. If they do not pay, not only do we fail to 
collect their finance charges, which the DoD criticizes, but we 
also lose many times those finance charges in loan principal. 
In short, it is contrary to our interests to have service 
members get into trouble with their loans.
    The reason we lend to military borrowers at all is that the 
entirety of the available scientific data suggests that only a 
tiny percentage of military borrowers actually do get into 
trouble with payday loans. Anecdotes derived from a non-
representative sample of this small group are now being used to 
drive public policy for the much larger numbers of military 
borrowers who use payday loans for their intended purpose and 
who repay their loans on time and without financial difficulty.
    There are serious flaws that I have mentioned, and here are 
some of them, in the report: First, the DoD report determines 
that payday loans are predatory solely by uncritically adopting 
eight factors used by an opponent of the industry, the Center 
for Responsible Lending, without making the independent 
determination that such loans are unfair or abusive as required 
by the applicable statute. No other recognized authority has 
used these factors.
    Second, according to DoD's own internal data, fewer than 5 
percent of service members have had a payday loan. That is not 
indicative of a problem from my standpoint, and because fewer 
than 6 percent of payday loans ultimately default, at most 6 
percent of that 5 percent, or 0.3 percent, of all service 
members have experienced financial difficulty with a payday 
loan. In other words, 99.7 percent of service members have 
either not had a payday loan or have not had financial 
difficulty with payday loans. There is simply no statistical 
evidence that payday loans contribute to military readiness 
problems to any measurable degree.
    Now, although some service members with financial problems 
have taken out payday loans, DoD data do not support the 
conclusion that payday loans cause financial problems. It is 
purely a correlation-is-causation argument in their report. 
Payday loans are intended to solve financial problems and the 
overwhelming majority of users employ them in that manner.
    DoD's data regarding the asserted hardship related to 
payday loans consists of a mere 12 anecdotes drawn from the 
experience of 1,400,000 active-duty military personnel. We did 
a sample of service members who had a variety of different 
kinds of debts and who went into bankruptcy, which is the 
ultimate example of financial failure. Now, we looked at not 
only what kind of payday loans they had, but what all of their 
other loans were, and our experience was that the payday loans 
were the last loans that they got. They were not the first 
loans that they got. Most of those borrowers had mountains of 
credit card debt. They had automobile loans. They had student 
loans. They were not going ``belly-up'' because of payday 
loans.
    DoD's principal recommendation is to reduce the maximum 
permissible charge on loans to 36 percent, which is below the 
lender's marginal cost of producing the type of credit that the 
payday advance industry provides. The effect of that cap would 
be to drive legitimate regulated lenders out of the market and 
to compel borrowers to deal with illegal lenders such as 
overseas lenders. Those lenders will just as likely pursue 
illegal collection methods when the time comes to collect the 
loan.
    There are many other approaches to dealing with it. Our 
trade association, the CFSA, has proposed alternative 
approaches to the DoD, and for the most part, we have been 
spurned, but we look forward to having a dialog with the 
Defense Department and to working these matters out.
    Thank you very much for your time and for your patience. I 
look forward to answering your questions.
    Senator Shelby. Thank you, Mr. Miller.
    Professor Peterson.

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

    Mr. Peterson. Thank you, Mr. Chairman, Ranking Member 
Sarbanes, and other members of the Committee. It is a real 
honor and a privilege for me to get to come and share some 
thoughts about this with you today.
    I spent a significant chunk of my life writing this study 
that Senator Dole showed some maps from along with my co-
author, Professor Graves, and what we did is we looked at 109 
military bases around the country and the State that those 
bases were in, and we analyzed every location of every payday 
lender in all of those States and every bank location in all of 
those States.
    Senator Shelby. Do we have the study? Have you furnished 
that to the staff?
    Mr. Peterson. Sure. Yes. I believe I have, but it is 
around. It is right here in the Ohio State Law Journal. Go 
Buckeyes.
    What we looked at were all the counties and all the ZIP 
Codes, and what we came up with was I think pretty irrefutable 
statistical evidence suggesting that payday lenders cluster 
around military bases, targeting military personnel. There are 
a lot of reasons for that. I think some of them Admiral Abbot 
and Dr. Chu explained, but I really don't think there is any 
doubt about that.
    The one State that we didn't find that, which was really 
sort of troubling to me when I realized it, was New York. Fort 
Drum in upstate New York, when we started trying to get the 
data, we couldn't find any payday lenders up there. It troubled 
me so much that in the middle of January, I got on an airplane 
and flew all the way up there to the Canadian border, which is 
tough for a Florida boy.
    I drove around the entire base, every street to make sure 
that our data was right on this, and there were a couple that 
had sort of snuck up and were disguising it, but the Attorney 
General is shutting them down. The reason, clearly, was because 
New York had stuck by their guns in their traditional interest 
cap of 25 percent.
    That brings me to a historical point that I would like to 
make, that predatory lending to military personnel is nothing 
new. I have done a lot of reading of history, and it has 
happened in the Chinese Empire, in the Roman Empire. The first 
succession from the Roman Republic was a riot that spread all 
throughout the Roman society over abusive loans to military 
veterans. The Romans figured that out. Their emblems are here 
still adorning our room, and they put a 12 percent interest 
rate cap on.
    They were the first to do it. The very first comprehensive 
law in the history of our species, the Code of Hammurabi from 
1750 B.C., the legend was that Hummurabi ascended the mountain 
where Shamash, the god of justice gave him this comprehensive 
code and they chiseled in on a rock, and we still have it. It 
is in the Louvre in Paris. It has an interest rate cap in it of 
20 percent for loans made in bulk silver and 30 percent for 
loans in grain. This is before we figured out how to coin 
money.
    And it actually, if you translate it, it is almost exactly 
the same as the 18 percent interest rate cap that happens to 
still be on the books, although not enforced particularly well, 
in the great State of Florida. So the first law in still in the 
State of Florida now, but we have fallen away from that. 
Throughout the history of our country, our republic, we have 
always had interest rate caps. Thomas Jefferson and George 
Washington would have been pretty upset if there were lenders 
lending at 500 percent to the Continental Army. They would not 
have tolerated that, those guys.
    And I don't think General Eisenhower would have in World 
War II. Throughout the Great Depression and World War II, this 
was an illegal practice. We would not tolerate that. It is only 
in the past 15 years or so, for the first time in the history 
of our republic, that we have come to the point where we could 
say something along the lines that the Congress will not stand 
up and stop 500 percent loans to the Marine Corps. Well, that 
is a very peculiar and troubling thing to me.
    And last, an economic point: I note that there is a 
profound difference between market competition, of which I 
believe in--free market is very important, but there is a 
difference between market competition and market anarchy. We 
don't allow unregulated markets in any market. If somebody 
wants to sell weapons-grade plutonium, we won't tolerate that. 
If they want to sell child pornography, we don't tolerate that. 
If they want to sell 500 percent interest rate, loans to the 
Marine Corps, I don't think that we should tolerate that. I 
think it is a bad idea for our national security and it is a 
bad idea for ourselves in our own moral sense of who we want to 
be as a country.
    So with respect, I would strongly urge the Committee and 
Senators to support providing some national limit to what I 
think is a tragedy. These soldiers are going over to Iraq and 
they are bleeding out on the desert floor, and the Congress 
can't come up with a cap for the loans that they are being 
charged? It is time for us to do something about it.
    Thank you.
    Senator Shelby. Thank you, Professor.
    I have a number of questions that I am going to submit them 
for the record to all of you, because we have just now been 
notified we have a vote on the floor and we are going to have 
to leave here in just a few minutes.
    I want to recognize Senator Sarbanes. He has been in 
another meeting.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I will 
be very brief. I just want to make some comments.
    First of all, I want to thank the panel for their 
contributions. I want to commend Chairman Shelby for holding 
this hearing on the ''Defense Department's Report on Predatory 
Lending Practices Directed at Members of the Armed Forces and 
Their Dependents``. In my view, it portrays clearly 
unacceptable practices on the part of a number of short-term 
lenders.
    This report is a result of an amendment that Senator Dole 
included in the National Defense Authorization Act mandating a 
study on predatory lending. I think it provides a disturbing 
insight into how predatory lenders target military personnel. 
It details the disastrous effects of high-cost predatory 
lending on our military and outlines actions taken by the 
military to address predatory lending and makes recommendation 
for further statutory protection.
    There are approximately 1.3 million members of the U.S. 
Armed Forces. Even 10 percent of those would be 130,000 people. 
These men and women play an important role in our defense, 
obviously, and the view that a number of these practices are 
directed at them in a whole range of ways, I think is a matter 
for the considerable concern.
    The DoD report cites a study showing that service members 
are three to four times more likely, actually, to have payday 
loan than are civilians. They are not typically based on the 
borrower's ability to pay. I was interested in Mr. Miller's 
comment that this is the loan of last resort, that they have 
been through all these other things showing a weakened 
financial condition and everything else. Why are you making 
this loan to someone who has got that kind of financial 
trouble?
    They carry annualized interest rates often of more than 400 
percent, often extended through rollovers, which, of course, 
include additional high fees, no payment of the principal. 
Service members get trapped in the seemingly never ending cycle 
of debt.
    I have some examples here, but due to the shortage of time, 
I won't put those in the record. I do want to commend the 
military for its efforts to address these predatory lending 
practices. I don't think there is sufficient protection for 
service members.
    And, Mr. Chairman, I hope that we will be able to take a 
very careful look at the recommendations of the DoD report and 
other proposals that have been put forward in order to try to 
get this situation under control. Our men and women in the 
armed forces deserve better than this. Thank you.
    Senator Shelby. Senator Martinez. I know you have a 
Floridian here.
    Senator Martinez. I know, and I want to just welcome both 
of my Floridian friends here and commend both of you for your 
testimony. I know Senator Dole wanted me to welcome you.
    Senator Shelby. Floridians. I said one.
    Senator Martinez. There are two, actually.
    Senator Shelby. You stacked the panel, didn't you? No, you 
didn't.
    Senator Martinez. Well, we are concerned about this in 
Florida, sir. We have got Mayport and NAS in Jacksonville. They 
are very important to our national defense, and I know we have 
got to go vote. So I will be very brief, but I just can't help 
but ask Mr. Miller.
    I just want you to know that I am not impressed that you 
are only destroying the financial lives of a small percentage 
of our service members; but understanding that, this agreement, 
what is the average percentage rate of your lenders in this 
business of average payday loans? I believe we heard a 390 
percent to 906 percent. Do you dispute those figures?
    Mr. Miller. I think there are probably relatively few 
operators who are in the 900 percent range.
    Senator Martinez. Where would most of them be? Five hundred 
or so?
    Mr. Miller. Standard pricing for a payday loan would be a 
finance charge of approximately $15 for a 2-week, $100 loan.
    Senator Martinez. Just do it in a percentage, in an APR. 
What would be the APR rate? We are all grown-ups and know what 
that means.
    Mr. Miller. That would be equivalent to a 398 percent APR 
or 390 percent APR.
    Senator Martinez. What is your evidence that the cost of 
lending that--that is before they get in trouble, by the way, 
and could escalate then further with penalties and fees and so 
forth, but what is the financial basis for a 390 percent 
lending rate? Is there a sound basis that you can say these 
loans are so risky that we have to charge that high a rate? 
Because you on the other hand were telling us that very few 
actually are bad loans, that most of them are not bad loans.
    Mr. Miller. Senator, that is a very good question, and I am 
happy to respond to it. The principal costs associated with 
making payday loans are real estate and personnel costs. They 
are not credit-related costs. The costs of keeping stores open 
generally on a 24-7 basis in some of the larger areas, of 
processing numerous very small transactions that involve a 
tremendous amount of back office activity is what generates the 
costs associated with this business, and there is a study done 
by two researchers at the FDIC that substantiates that the 
costs are primarily office-related costs rather than credit-
related costs.
    Senator Martinez. But you wouldn't disagree that a 390 
percent loan is unconscionable?
    Mr. Miller. I would disagree with you.
    Senator Martinez. You would disagree with me? That is a 
fair rate of lending and that that is not going to drive 
someone to financial ruin if they are paying that kind of an 
interest rate, particularly when they are working in a fairly 
modest salary scale in the first place?
    Mr. Miller. Well, I respectfully disagree with you.
    Senator Martinez. Do you think an 18-year-old taking a loan 
at 390 percent is conscionable? You can look at me with a 
straight face and tell me that that is, in fact, what you 
believe?
    Mr. Miller. I believe that used for its intended short-term 
purpose, that loan can be very helpful to bridge a financial 
problem that an 18-year-old might have.
    Senator Martinez. Have you ever gone through a credit 
counseling place where people counsel folks on credit 
counseling and how to avoid financial difficulties such as 
that? Do you think anyone ever in a credit counseling session 
would recommend someone to go get yourself a loan with a 390 
percent?
    Mr. Miller. I don't know. I am not familiar with how credit 
counseling operations act.
    Senator Martinez. You should become familiar. Your 
organization should become familiar, because our servicemen and 
women need to be become familiar, and part of avoiding this 
kind of unconscionable problem is for them to be better 
informed on issues of financial literacy, and I think that is 
one of the areas we really show focus, but I also don't 
understand how a credible organization purporting to serve the 
public interest could suggest that loans at those rates of 
interest are really in the best interest of our servicemen and 
women.
    Thank you.
    Senator Shelby. Senator Carper.
    Senator Carper. Thank you, Mr. Chairman.
    I spent some time at some of those bases that Senator 
mentioned, Jacksonville, Mayport, those places. I was in the 
Navy for 23 years and active in the Reserves, and one of the 
things I was struck by in the training that I had and I suspect 
the training that given to our enlisted personnel down in 
Orlando and other places around the country, that apparently we 
don't do a very good job of literacy training, financial 
literacy training, for the officers that were coming up and I 
am sure for enlisted men and women as well.
    Let me just ask our friends here from the DoD and maybe 
Admiral Abbot your own thoughts on the kind of financial 
literacy training we are providing to people that are in the 
armed services, especially with the enlisted ranks.
    Admiral Abbot. Senator, the Navy and I believe all the 
services are doing a job good job at financial literacy 
training and it is getting better. It starts at boot camp and 
it continues on into the specialty schools afterwards. They 
have to start off at square one. As has been mentioned before, 
a lot of these young people haven't ever had a paycheck, 
haven't had a checking account. They are required to have a 
checking account in order to have their pay deposited. You have 
to start off by teaching them how to read an earning statement 
and how to balance a checkbook, and then they move on in 
subsequent sessions to give them more of an education on 
handling the basics of life, of buying an automobile and 
housing and paying for groceries and dealing with the family; 
but it requires a continuum of education and repetition, and 
the Navy and the Marine Corps I know are focused on that and 
getting better.
    Senator Carper. Good. I know when I got to the Naval Air 
Station in Pensacola when I was a brand new enlisted man, one 
of the first things I did was I opened up an account at the 
Navy Federal Credit Union right there in Pensacola and used 
that to buy a car, and I know a lot of my colleagues did the 
same kind of thing. We have Federal Credit Unions. We have 
banks all over the country as well. The access to credit unions 
on the military base is pretty good, and the idea is that an 
enlisted man or woman or an officer can go into a credit union 
or a local community bank and get access to pretty low rates, 
especially in those credit unions. I am not sure why that are 
not better used.
    The other thing I would say--Senator Martinez has gone. 
What I find especially objectionable and concerning with 
respect to the kinds of loans that we are talking about here 
today is not so much they are paying $15 to get a loan for a 
transaction cost. The real problem is when the loans roll over 
and over and over and extend beyond a week or two. That is 
where the real problem lies and that is where I hope that we 
will focus our attention and the industry will focus its 
attention.
    The other thing is, Mr. Chairman, my hope is that when we 
go to the next year that we can come back and revisit this 
issue in the context of predatory lending in a broader sense 
that is going on in this country. I am very concerned, and I 
know you are in Alabama and other States, and this is one that 
we need to just keep our eye on the ball and do something 
responsible and soon.
    Thank you.
    Senator Shelby. We have a vote. We have got to conclude the 
panel. We thank you for your contribution. We appreciate what 
you are doing. This is something that I believe we have to 
address.
    Thank you very much.
    The Committee is adjourned.
    [Whereupon, at 11:43 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Thank you, Mr. Chairman and Ranking Member Sarbanes. I appreciate 
that the Committee is meeting today to address this issue of critical 
importance.
    Thousands of our military personnel are currently serving in harm's 
way in defense of this country. In South Dakota, over 3,800 military 
personnel and civilians are stationed at Ellsworth Air Force Base, 300 
of which recently deployed in support of the Global War on Terror.
    As the father of an active-duty soldier who has served combat tours 
in Iraq and Afghanistan, I am acutely aware of the very personal 
challenges facing our men and women in uniform. I am proud of their 
courage and professionalism, and grateful for their service to our 
country.
    Congress has an obligation to ensure each soldier is combat ready 
before deployment. This includes equipping our troops with body armor, 
up-armored Humvees, night vision goggles, and other essential life-
saving equipment. But our commitment to our servicemembers does not 
just involve protecting their personal safety. I hear much too often 
that our military personnel and their families are not equipped with 
the tools to adequately manage their personal finances.
    Financial stress can affect any soldier regardless of their marital 
or deployment status--in particular, younger or lower-ranked enlisted 
personnel. We all sympathize with the soldier who incurs debt because 
he was blindsided by unexpected emergencies, auto repairs, personal or 
family illness or is just struggling with basic living expenses.
    To ensure our servicemembers are capable of addressing their 
financial needs, we must first provide them with adequate compensation. 
To that end, I have consistently supported robust pay raises each year 
in the defense appropriations bill.
    At the same time, we must help our soldiers exercise financial 
responsibility. This has proven to be a challenge for many Americans 
and financial literacy remains a critical issue of importance.
    I share DoD's concern about servicemembers falling into a ``cycle 
of debt'' whether through inappropriate use of credit cards, payday 
loans, or other forms of credit, and I believe Congress and DoD must 
work together to improve the financial literacy of our servicemembers, 
and crack down on abusive and predatory practices by any lender.
    It is essential that military personnel and their families have 
access to information and assistance and that DoD's commitment to 
financial readiness extends from the top down and is consistent 
throughout all branches. I am concerned that DoD's Financial Readiness 
Campaign that began in 2003 has not been fully embraced by all of the 
services.
    I look forward to hearing from our witnesses today, and I am 
especially interested in hearing from Secretary Chu regarding the 
report's findings and recommendations. I am concerned that DoD is 
recommending a federal ceiling on the cost of credit to military 
borrowers and their families, capping the APR at 36%. This would, in 
effect, ban short term, high APR loans, but would do nothing to address 
predatory lending by ``military lenders'' that specifically target 100% 
of their loans to servicemembers, DoD employees, and retired 
servicemembers.While well intentioned, I am not convinced that this 
approach would solve the larger problem.
    It is very clear that military personnel like many other consumers 
have a real and legitimate need for short-term, small denomination 
credit products. And we must remain mindful of that fact as we address 
the issue of predatory lending. There are clear differences of opinion 
as to how those products should be structured, and how they should be 
delivered. I have a real concern that if these types of financial 
services products are pushed outside of a regulated environment or 
banned outright, it will open the door for abuse and inevitably result 
in less consumer protection. There is something to be said for striking 
the right balance between regulation, consumer protection, and 
effectively meeting consumers' credit needs especially those of our 
service men and women.
    Our servicemembers, like all other consumers, should be afforded 
the benefit and opportunity to choose the financial services and 
products that best suit their needs. Additionally, the financial 
services industry must continue to develop and offer meaningful 
products, including short term credit products that will meet the needs 
of the military while also protecting all consumers, including 
servicemembers, from potentially abusive and predatory practices by 
lenders. And it is equally critical that the regulatory agencies foster 
a regulatory environment that supports short-term credit products and 
one in which such products can thrive while providing the greatest 
benefit to the consumer.
    As we continue to address the issue of predatory lending to the 
military, the primary goal should be to develop meaningful solutions 
that will offer the greatest protections to our servicemembers, while 
avoiding measures that carry the potential for the unintended 
consequence of driving servicemembers into potentially abusive, and far 
more expensive forms of credit.
    Mr. Chairman, I would like to include with my statement a cost 
comparison chart of payday loan alternatives.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Consumer groups and academic researchers comment on the cost of payday 
        advance versus its alternatives:
    ``We find that fixed operating costs and loan losses justify a 
large part of the high APR charged on payday advance loans . . . These 
operating costs lie in the range of [payday] advance fees, suggesting 
that payday loans may not necessarily yield extraordinary profits.''--
Payday Lending: Do the Costs Justify the Price, Center for Financial 
Research, Federal Deposit Insurance Corporation, 2005
    ``Critics also contend that [overdraft] bounce protection fees, as 
high as $37 per transaction, are little more than high-priced credit. 
`If a bank lends you $100 and charges you a $20 fee--and then you pay 
the money back in two weeks--that's an annualized interest rate of 
520%,' notes Jean Ann Fox, director for consumer protection at the 
Consumer Federation of America in Washington. `It's worse than a payday 
loan'.''--Business Week, May 2, 2005
    ``Unlike payday lending programs, the extraordinarily high APRs in 
fee-based overdraft programs are never disclosed as such, and none of 
the other consumer protections are provided. Moreover, fee-based 
overdraft programs are aimed at the very same customers that payday 
lenders are seeking . . . and the costs rival or exceed those of payday 
lending.''--Comment letter to Board of Governors of the Federal Reserve 
System from 90 consumer group organizational signators, January 27, 
2003
    ``Interviews and industry survey indicate that payday loan 
customers do make a cost analysis in comparing the price of a payday 
loan with the alternative costs of bouncing a check and/or incurring 
late fees . . .  When used on a recurring basis for small amounts, the 
annualized percentage rate for fee-based bounce protection far exceeds 
the APRs associated with payday loans.''--Low-Cost Payday Loans: 
Opportunities and Obstacles, Annie Casey Foundation Report, June 2005
    ``Courtesy pay is not marketed as an alternative to a payday loan, 
but it serves a similar function when used as credit. Credit unions 
charge fees ranging from $15 to $35 to cover an overdraft.''--Credit 
Union Payday Loan Alternatives, National Association of Community 
Credit Unions, December 2005
                                 ______
                                 
                  PREPARED STATEMENT OF DAVID S.C. CHU
   Under Secretary for Personnel and Readiness, Department of Defense
                           September 14, 2006
    Mr. Chairman and members of the committee, it is a privilege to 
testify on the predatory lending DoD report. This report, required by 
Section 579 of the Fiscal Year 2006 National Defense Authorization Act, 
reviews the impact of lending practices that prey on Service members 
and their families, the efforts of the Department to ameliorate those 
impacts, and recommendations for legislative remedies to assist our 
military families.
    This Administration recognizes personal finance as a primary aspect 
of ``quality of life'' for Service members and their families. It has 
included payday lending as one of ten key issues requiring the 
assistance of state governments to protect their well-being. Permit me 
to summarize how we reached this conclusion as context for the report.
                             Social Compact
    In 2001, the President directed the Secretary of Defense to 
``undertake a review of measures for improving the quality of life for 
our military personnel.'' We collaborated with the Military Services to 
develop a ``Social Compact'' that describes the reciprocal nature of 
the commitments among Service members (to the defense of the nation), 
their families (to being part of that commitment) and the Department of 
Defense (to caring for their well-being). This bottom-up review 
articulated the linkage between quality of life programs as a human 
capital management tool and the strategic goal of the Department--
military readiness.
    The Social Compact lays out long term strategic-level plans for key 
aspects of quality of life, of which financial readiness is one. The 
long-term vision for financial readiness is to develop a military 
culture that values financial competency and responsible financial 
behavior. Financial readiness is equally important as other military 
skills and attributes.
    Financially ready Service members seek out information to be 
proficient, and seek assistance when they encounter difficulty. 
Financially ready Service members would not seek to hide their 
financial problems by continuing to build debt to the point of 
destroying their finances, adversely impacting their family life and 
jeopardizing their military careers.
    The goals associated with this strategic plan focus on the benefits 
of financial readiness to the individual and to the Department. We seek 
to:

            Reduce the stresses related to financial problems--
        the stress of out-of-control debt that can impact the 
        performance of Service members and their family's quality of 
        life.
            Increase savings--a personal and family goal of 
        motivated Service members to control their finances and plan 
        and prepare for their futures.
            Decrease dependence on high interest rate or 
        unsecured debt--the vulnerability associated with living from 
        paycheck to paycheck.
            Decrease the prevalence of predatory practices--
        protection from financial practices that seek to deceive 
        Service members or that take advantage of them at a moment of 
        vulnerability.

    These goals establish an environment and culture in which Service 
members can feel secure about their finances and are ready to engage in 
the military mission. To accomplish these goals, Service members need 
to be competent in dealing with finances, protected from financial 
predators and motivated to achieve financial readiness. The Department 
uses awareness media, education programs and assistance through 
counseling to help Service members conform their behavior to the goals. 
But these tools do not protect them from predators as they develop 
their financial competency.
                 Financial Education Policy and Metrics
    The Military Services are expected to provide instruction and 
information to meet the needs of Service members and their families. To 
this end, the Department published in November 2004: DoD Instruction 
1342.27, Personal Financial Management Programs for Service Member.
    As outlined in the Government Accountability Office Report 05-348, 
each Military Service tailors its programs for training first-term 
Service members on the basics of personal finance. These programs vary 
in terms of venue and duration, but all Military Service programs must 
cover the same core topics to the level of competency necessary for 
first-term Service members to achieve financial readiness. The 
Department monitors the ability of Service members to pay their bills 
on time, as a reflection of their financial competency and ability to 
apply basic financial principles. The Department has tracked the 
performance of the first four enlisted ranks as a leading indicator for 
the rest of the force. Since 2002, these Service members' self-reported 
assessments indicate they are paying better attention to keeping up 
with their monthly payments (graph at Table 1).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The Department is adding another indicator this year to the 
performance measure for personal finance: enrollment in the Thrift 
Savings Plan.
    I review these metrics quarterly along with metrics that measure 
other important aspects of Service member and family quality of life.
    The Department is developing an evaluation tool that measures 
first-term Service members' ability to apply basic principles to 
scenarios they may encounter. This tool will standardize the evaluation 
process throughout the Military Services and will help ensure that 
Service members can apply the instruction they receive.
                      Financial Readiness Campaign
    To assist the Military Services in delivering financial messages, 
the Department established the Financial Readiness Campaign in May 
2003. It is now supported by 26 nonprofit organizations and federal 
agencies. In the past three years, Service members have benefited from 
the materials and assistance from:

            Air Force Aid Society (AFAS)--provides financial 
        counseling and emergency monetary support for airmen in need.
            American Savings Education Council (ASEC)--provides 
        over 60 award winning public service announcements that have 
        been shown on American Forces Radio and Television Service 
        (AFRTS).
            Army Emergency Relief (AER)--provides counseling, 
        education programs and emergency financial relief to soldiers.
            Consumer Federation of America (CFA)--established 
        the ``Military Saves Campaign'' as part of the CFA ``America 
        Saves'' initiative, to encourage Service members to establish 
        emergency savings and invest in the Thrift Savings Program.
            Association of Military Banks of America (AMBA)--
        AMBA members provide educational programs to supplement 
        programs offered by the Military Services, as part of the 
        responsibility for residing on military installations. 
        Additionally, AMBA assists the CFA in deploying the Military 
        Saves Campaign.
            Council of Better Business Bureaus--works with the 
        Military Services to assist Service members and their families 
        with a variety of consumer-related issues, along with providing 
        education programs upon request.
            Defense Credit Union Council (DCUC)--members of 
        DCUC provide education programs to supplement programs offered 
        by the Military Services, and assist in the deployment of 
        Military Saves.
            Federal Deposit Insurance Corporation (FDIC)--made 
        available their ``Money Smart'' curriculum and train-the-
        trainer program to the Military Services, as well as AMBA and 
        DCUC members.
            Federal Reserve Board--studies the impact of the 
        AER sponsored education course conducted at Fort Bliss, TX, to 
        determine the effect of training on financial behavior.
            Federal Trade Commission (FTC)--provides most 
        widely disseminated materials available outside of DoD, on 
        various topics concerning consumer protection.
            Financial Literacy and Education Commission 
        (FLEC)--consolidates the materials available through the 
        federal agencies via the ``www.mymoney.gov'' website, and 
        accompanying toll-free number. It is widely advertised and 
        linked to DoD and Military Service websites concerning personal 
        finance.
            InCharge Institute--provides access to credit 
        counseling/debt management, and publishes a quarterly magazine 
        ``Military Money'' in partnership with the National Military 
        Family Association (NMFA). The magazine is designed primarily 
        to reach out to military spouses on a variety of financial, 
        spouse and family life topics. To accompany the magazine, 
        InCharge also provides public service announcements called the 
        ``Military Money Minute,'' on AFRTS, covering helpful financial 
        tips on military pay, deployment preparation, etc.
            Institute for Consumer Financial Education--helps 
        individuals and counselors with credit questions and 
        understanding credit reports.
            Moneywise with Kelvin Boston--provides access to 
        his syndicated television program for broadcast on AFRTS.
            National Association for Credit Counseling--
        partners with military installations to provide educational 
        classes and credit counseling services.
            National Association of Securities Dealers (NASD) 
        Foundation--funds a multi-year awareness and education program 
        to supplement the programs provided by the Military Services. 
        Included in the program are multimedia public service 
        announcements (through sources such as AFRTS, Military Times 
        magazines and local radio); an interactive website; sponsorship 
        of a scholarship program for military spouses (through 
        partnership with NMFA) to accredit them as Financial Counselors 
        in return for volunteer hours in military communities; and 
        education for Military Service Financial Counselors and 
        Educators.
            National Endowment for Financial Education (NEFE)--
        provides access to its ``Project for Financial Independence,'' 
        to severely injured Service members, members of the Guard and 
        Reserve, and their families. The Project for Financial 
        Independence connects Certified Financial Planners with Service 
        members (geographically separated from an active duty military 
        installation where they can obtain financial counseling) to 
        accomplish pro bono financial planning.
            National Military Family Association (NMFA)--
        partners with several other organizations to facilitate 
        reaching military spouses, a primary target of the Financial 
        Readiness Campaign.
            Navy-Marine Corps Relief Society--provides 
        education, counseling and emergency financial support for 
        sailors and Marines in need.
            Securities and Exchange Commission--provides 
        seminars at military installations, along with investor 
        education materials in libraries on military installations.

    These partnerships allow the Military Services to choose the 
programs that can best supplement the education, awareness and 
counseling services they provide.
                    Education and Predatory Lending
    Predatory lending practices are covered as topics in initial 
financial education training and in refresher courses offered at the 
military installations. As described in the report, the Military 
Services have provided over 11,800 classes and trained over 324,000 
Service members (approximately 24 percent of the force), as well as 
19,400 family members.
    In addition to these classes, Financial Readiness Campaign partner 
organizations conducted 1,300 classes for a total of 60,600 Service 
members and family members. These classes were primarily provided by 
the staff of banks and credit unions located on military installations. 
These institutions provide these classes as part of their 
responsibilities outlined in the DoD Financial Management Regulation. 
Other organizations involved include local Credit Counseling Agencies, 
state financial regulatory agencies, the InCharge Institute and the 
NASD Foundation.
    The Military Service financial educators, along with partner 
organizations, have also distributed over 223,000 brochures and 
pamphlets, with the Military Services and Federal Trade Commission the 
primary provider of these products. In addition, Military Money 
Magazine has run several articles, including two cover article 
editions, on predatory lending. The free distribution of the magazine 
is through military commissaries, family support centers, other service 
agencies on the installation. The magazine is sent to residents on the 
military installations and home addresses off the installation upon 
request. Approximately 250,000 copies are distributed per quarter.
                 Predatory Lending Practices Considered
    The lending practices covered in education programs parallel those 
covered in the report: payday loans, Internet loans, military 
installment loans, tax refund anticipation loans and rent-to-own 
programs. Education programs also cover budgeting, the appropriate use 
of credit, credit cards, and other financial services.
    The loans covered in the report include those with high interest 
rates, little or no responsible underwriting, loan flipping or repeat 
renewals that ensure profit without significant payment of principal, 
loan packing with high cost ancillary products whose cost is not 
included in computing interest rates, a non-mortgage loan structure or 
terms that transform these loans into the equivalent of highly secured 
transactions; and loans that involve fraud or deception, waiver of 
meaningful legal redress, or operation outside of state usury or small 
loan protection law or regulation. These characteristics strip earnings 
or savings from the borrower, place the borrower's key assets at undue 
risk, potentially deepen the borrower's financial shortfall and trap 
the borrower in a cycle of debt. These loans take advantage of the 
borrower's lack of understanding, vulnerability or both.
    The types of loans included in the report were chosen as a result 
of feedback from military financial counselors and legal assistance 
attorneys who have provided counsel to Service members with financial 
problems. The Military Services and Military Aid Societies provided 
3,393 case studies providing information about incidents where Service 
members have requested assistance with their lending problems. These 
case studies showed that the typical scenario involved indebtedness 
resulting from a lack of financial control, a financial emergency, or 
both. Many of these cases involved military borrowers who owed money to 
installment lenders and payday lenders that created a cycle of debt.
      Efforts to Curb the Prevalence and Impact of Predatory Loans
    The Department has attempted to use the processes and resources 
available within the Department to curb the prevalence of payday 
lenders. But the Armed Forces Disciplinary Control Board (AFDCB) and 
command policy are not adequate to address the issue. The AFDCB is 
designed to address commercial entities providing services that are a 
detriment to good order and discipline, and in violation of federal or 
state statute. Without appropriate statute, commanders and AFDCBs have 
difficulty citing payday lenders as the focus of remedial action. 
Moreover, in states that authorize payday lending, AFDCBs must 
establish their own local guidelines in addition to the provisions of 
state law, ensure all affected businesses are aware of these new rules, 
and then require these businesses to comply. The Department has 
considered establishing guidelines that would ameliorate the concerns 
posed by lenders characterized above, but establishing these policies 
within DoD poses legal problems and raises the potential for 
troublesome litigation against the Department. There is no established 
authority for DoD to make rules governing off-base private business 
dealings.
    Military installment companies have also attempted to evade state 
usury limits and oversight. In 2005, the California Department of 
Corporations considered a complaint filed against one such company, 
alleging it operates without a license, charges usurious interest, 
collects prepaid finance charges which are not permitted in California, 
contracts for excessive dishonored check fees, and automatically adds 
various forms of credit insurance to loan agreements (98 percent of 
contracts include ``voluntary'' insurance purchases).
    Internet lenders claim jurisdiction in states with lax protections 
and unlimited rates and often attempt to bypass the state credit, usury 
or payday loan laws of the state where the borrower receives the loan. 
All military installment lenders cited in the report listed Nevada as 
their home state. State regulators have successfully enforced home-
state law against Internet payday lenders making loans to consumers in 
their states in Colorado, New York, Massachusetts, Kansas, Pennsylvania 
and the District of Columbia.
    The scope and methods of payday, military installment and Internet 
lenders are outside the capability of the Department to place ``off 
limits'' as a way of dealing with good order and discipline concerns 
associated with these lenders' practices. It is also unrealistic to 
believe that the Department can adequately control these concerns 
through education alone. The recent survey accomplished by the Consumer 
Credit Research Foundation stated that the primary reason Service 
members choose payday loans is because they are convenient. Certainly, 
obtaining ``fast cash'' from a payday lender is far more convenient 
than debt counseling or addressing inherent overspending that creates 
situations where sub-prime loans are needed. The Department seeks your 
assistance in helping Service members find convenient, less costly 
options that build their financial future.
                              Alternatives
    The Department would prefer Service members and their families seek 
out the alternatives available through Military Aid Societies, military 
banks and defense credit unions. These institutions have established 
programs and products designed to help Service members and their 
families resolve their financial crises, rebuild their credit and 
establish savings.
    The Military Aid Societies are strong advocates for limiting the 
cost associated with credit and for developing alternative products by 
financial institutions for Service members who cannot otherwise qualify 
for loans. Within their own resources they provided $87.3 million in 
no-cost loans and grants to Service members and their families in 2005.
    As described in the report, many military banks and defense credit 
unions have developed products and services to assist Service members 
recover from their financial problems. These alternative programs 
require Service members to commit to changing their financial behavior. 
The Department is seeking this outcome in its awareness campaigns, 
education programs, and the counseling services it offers, and supports 
reasonable alternative programs that help Service members recover their 
financial well-being.
                      Legislative Recommendations
    For the reasons outlined above, the Department is requesting the 
Congress' assistance in establishing limits that will help Service 
members seek out alternatives capable of motivating them to change 
their financial behavior. The report outlines several recommendations 
that are designed to curb the corrosive nature of predatory loans. Each 
recommendation seeks to limit the abuses articulated in the report:

            Require that unambiguous and uniform price 
        disclosures be given to all Service members and family members 
        with regard to any extension of credit (excluding mortgage 
        lending). All fees, charges, insurance premiums and ancillary 
        products sold with any extension of credit should be included 
        within the definition of finance charge for the computation and 
        disclosure of the annual percentage rate (APR) for all loans 
        made to military borrowers. As stated in the report, some loan 
        companies pack loans with additional fees not included in the 
        APR calculation. Additionally, many Internet lenders do not 
        disclose their interest rates and fees on their websites, and 
        are only disclosed after the borrower has committed to taking 
        the loan.
            Require a federal ceiling on the cost of credit to 
        military borrowers, capping the APR to prevent any lenders from 
        imposing usurious rates. Lenders should be prohibited from 
        directly or indirectly imposing, charging, or collecting rates 
        in excess of 36 percent APR with regard to extensions of credit 
        made to Service members. This APR is expected to cover all cost 
        elements associated with the extension of credit. This 
        limitation is expected to affect all lenders referenced in the 
        report (payday, installment, Internet, tax refund anticipation, 
        and rent-to-own). This limit may affect payday lenders, but by 
        their own statistics, the military represent only one to four 
        percent of their market. True, a 36 percent APR may preclude 
        some Service members from obtaining credit. The Department 
        believes Service members who require loans with interest rates 
        above 36 percent APR should seek assistance and not consider 
        further increasing their debt load. The 36 percent APR limit 
        creates a barrier for installment lenders to refrain from 
        packing fees and premiums onto the base interest rate they 
        charge for a loan. The limit of 36 percent APR is considered 
        appropriate, since it mirrors the limitations found in several 
        states for their small loan products. For those states where 
        the cap is lower than 36 percent, the state limit and consumer 
        protections would apply.
            Prohibit lenders from extending credit to Service 
        members and family members without due regard for the Service 
        member's ability to repay. Perhaps the most important limit 
        that can be applied is assuring Service members are not 
        provided loans they cannot repay in a timely manner. If they 
        are in situations that require them to take loans to meet 
        short-term obligations without considering their short- and 
        long-term ability to repay, then they should be obtaining 
        counseling and assistance to restructure their debt and develop 
        long-term budgets that can help them recover from their 
        financial concerns. Such a prohibition would also limit the use 
        of high interest credit to make impulse and unnecessary 
        purchases, since these outlays push Service members and their 
        families deeper into debt. Lenders that require checks, access 
        to bank accounts or car titles to secure obligations consider 
        these essential assets to mitigate their risk and do not 
        consider the ability of the borrower to repay the loan. Lenders 
        that require allotments to repay loans deliver their products 
        under the same expectations. Access to essential assets places 
        the borrower in a position of undue duress, with no options but 
        to pay according to the schedule, even if the borrower has no 
        capability of doing so. Again, this is not of concern to the 
        lender holding these assets. If this restriction precludes some 
        Service members from obtaining credit, then they may consider 
        the alternatives--counseling, assistance and a change in 
        financial behavior.
             Prohibit provisions in loan contracts that require 
        Service members and family members to waive their rights to 
        take legal action. Service members should maintain full legal 
        recourse against unscrupulous lenders. Loan contracts to 
        Service members should not include mandatory arbitration 
        clauses or onerous notice provisions, and should not require 
        the Service member to waive his or her right of recourse, such 
        as the right to participate in a plaintiff class. Waiver is not 
        a matter of ``choice'' in take-it-or-leave-it contracts of 
        adhesion. To the contrary, Service members should be given the 
        opportunity to hold lenders accountable for situations where 
        they have violated their rights.
            Prohibit contract clauses that require Service 
        members to waive any special legal protections afforded to 
        them. These proposed protections, and those provided to Service 
        members through the Servicemembers Civil Relief Act, were 
        intended to strengthen our national defense by enabling Service 
        members to devote their entire energy to the defense needs of 
        the Nation. In the interest of our national defense, such 
        protections should not be subjected to waiver (other than in 
        circumstances stated in the Servicemembers Civil Relief Act), 
        in writing or otherwise.
            Prohibit states from discriminating against Service 
        members and family members stationed within their borders, and 
        prohibit lenders from making loans to Service members that 
        violate consumer protections of the state in which their base 
        is located. States should be prohibited from discriminating 
        against Service members stationed within their borders and 
        should be required to assure that such Service members are 
        entitled to and receive the benefit of all protections offered 
        to citizens of the state, including regulation of lenders 
        located in the state or that provide loans via the Internet to 
        Service members stationed there. States have a vested interest 
        in assuring the financial safety and stability of Service 
        members stationed within their borders. States should be 
        prohibited from authorizing predatory lenders to treat ``non-
        resident'' Service members stationed within the state's borders 
        differently than the state would permit that lender to treat 
        in-state residents. Lenders should be prohibited from charging 
        Service members stationed within a state an APR higher than the 
        legal limit for residents of the state, and should also be 
        prohibited from violating any other consumer lending 
        protections for residents of the state in which the base is 
        located.
                               Conclusion
    The Department appreciates the opportunity to report to the 
Congress on the issue of predatory lending. The report outlines the 
prevalence around military installations of payday lenders and the 
overt marketing of some installment and Internet lenders. The report 
and this testimony provide an overview of the efforts within the 
Department to educate, inform and influence Service members and their 
families to take control of their finances, build wealth and escape the 
cycle of debt--for their own well-being and to enhance their military 
readiness. The Department's strategic plan seeks to increase savings 
and decrease dependence on debt. The strategic plan also focuses on 
improving the protection afforded Service members and their families in 
the market place--again to help assure their military readiness.
    The vision for personal finance in the Department is to develop a 
military culture that values financial competency and responsible 
financial behavior, in other words, a system that values Service 
members addressing their financial problems, rather than perpetuating 
them through high interest loans. Service members inherently understand 
that limits on interest rates are appropriate, even if these limits 
would decrease the availability of credit. When asked in a recent 
survey conducted by the Consumer Credit Research Foundation if Service 
members strongly/somewhat agree or disagree with the statement: ``The 
government should limit the interest rates that lenders can charge even 
if it means fewer people will be able to get credit,'' over 74 percent 
of the Service members surveyed agreed with the statement (with over 40 
percent strongly agreeing). Similarly when asked their position on the 
statement ``There is too much credit available today,'' 75 percent of 
Service members not using payday loans and 63 percent of Service 
members using payday loans agreed (with 51 percent of non-users 
strongly agreeing).
    Service members agree that there should be limits. Commanders have 
made their positions known that limits should be established. This 
issue is an important part of the Department's social compact with 
commanders, Service members and their families, for their well-being 
and in support of military readiness. The Department asks for your 
assistance enacting the statutory language necessary to establish more 
effective limits.
    I thank you for this opportunity to share these concerns with you 
and the committee. The Department stands ready to assist the committee 
in developing effective limits on predatory lending.
                                 ______
                                 
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        PREPARED STATEMENT OF ADMIRAL CHARLES S. ABBOT, RETIRED
President and Chief Executive Officer, Navy-Marine Corps Relief Society
                           September 14, 2006
    Mr. Chairman, Senator Sarbanes, Members of the Committee on 
Banking, Housing, and Urban Affairs: I am honored to have the 
opportunity to testify this morning on the Department of Defense Report 
on Predatory Lending Practices Directed at Members of the Armed Forces 
and Their Dependents. The Navy-Marine Corps Relief Society was founded 
by President Theodore Roosevelt in 1904 to provide emergency financial 
assistance in the form of interest-free loans and grants to Sailors, 
Marines and their families. Through the decades, our organization has 
encountered various scams, but none as flagrant and serious as today's 
predatory lending industry. As President of the Society, I have 
personally witnessed the downward spiral of debt suffered by our 
Sailors, Marines and their families who seek financial assistance from 
predatory lenders. This industry says it does not target the military, 
but pick up any edition of Army, Navy, Air Force or Marine Corps Times 
and you'll see large, color advertisements with quotes like ``Our 
entire focus is on the U.S. Military''; or ``We are dedicated 
exclusively to military personnel.'' Instead of solving what may be 
temporary cash flow problems, these military families become 
overwhelmed and financially destroyed when they fall into the payday 
loan trap. The resulting low morale and pre-occupation with personal 
financial difficulties have a negative impact on military readiness. 
Their stories are heartwrenching:

            A 21-year-old Active Duty Sailor in Virginia Beach, 
        with four dependents was involved in payday loans for two 
        years. He started in March 2004 by taking out three payday 
        loans to take his family to visit his grandfather who was 
        diagnosed with cancer. By October 2005, he had four payday 
        loans totaling $2,300 that cost him $600 every month just to 
        roll over. To cover all of this, plus the bounced checks that 
        it caused, he also borrowed from his Thrift Savings Plan and 
        took out additional loans. He routinely paid late charges for 
        his rent and car payments.
            An E-4 Active Duty Sailor with a wife and child in 
        the Pacific Northwest was assisted by the Society with payment 
        of 8 payday loans totaling $5,250 in July 2005. The service 
        member took out two payday loans to make a down payment on a 
        car. His two loans grew to four, six, then eight as he rolled 
        them over and continued to make up his budget deficit by taking 
        out additional payday loans. His electricity was cut off. The 
        family had to go and live with relatives. His car was 
        repossessed, sold at auction, and he currently owes $12,000 on 
        that automobile.
            An E-6 Active Duty Sailor requested assistance in 
        paying one month's mortgage ($1,870.38) payment. The service 
        member stated he got behind on his mortgage when his wife's 
        father became ill in Japan and he had to send her home to 
        provide support. At that time, he turned to payday lenders. He 
        took out 10 payday loans. During some months, he needed two 
        payday loans to pay off earlier loans. He used his reenlistment 
        bonus check to pay off the lenders and refinanced his house to 
        pay off all of his other debts, but still required the 
        Society's assistance to catch up on his mortgage.
            In Jacksonville, Florida, an E-5 Active Duty Sailor 
        with a wife and three children accumulated nine payday loans 
        totaling $5,409. The interest rate on these various loans 
        varied from 121% to 421%. Having no credit cards, this military 
        couple purchased furniture by using payday loans on the 
        occasion of a permanent change of station move. There was a 
        death in the family, followed by an ill relative. Each month 
        they rolled the loans over, paying a fee to take out additional 
        new loans. Finally, they sought assistance from our 
        organization.

    These examples illustrate the ever-growing problem. Since August of 
2001, the Society has assisted more than 5,500 Navy and Marine Corps 
clients victimized by predatory lenders in the amount of $2,597,881.19. 
The problem has been made more difficult to monitor and control now 
that these loans are easily accessible on the Internet. The web sites 
of these predators are as compelling as the neon signs that beckon 
unsuspecting Soldiers, Sailors, Airmen and Marines at establishments 
outside our military bases across the United States. If one reads the 
not so fine print at these web sites, one can learn that:

            At Checkmate, you can borrow $150 for three days 
        with a finance charge equivalent to an Annual Percentage Rate 
        (APR) of 3,220 percent;
            At Northway Financial Corporation, you can borrow 
        $700 and the cost for your credit as a yearly rate is 758.08% 
        APR;
            At ATMAdvance.com, you can borrow $170 for two 
        weeks and the finance charge is equivalent to 460.16% APR;
            At Cashcall, you can borrow $5,000, and if you make 
        scheduled payments only (120 payments over ten years), you will 
        end up paying back more than $30,000.

    It is a grim picture that is brought into sharp focus when 
destitute military clients come to the military aid societies to ask 
for help. The Department of Defense report does a commendable job of 
documenting the problem and its impact on our military families. 
Equally commendable is the Department's aggressive education program 
designed to inform our military families about the perils of accepting 
financial assistance from predatory lenders. Education, consisting of 
effective personal financial management training, and an intensive, 
sustained publicity campaign can reduce the problems resulting from 
this legalized loan shark industry. It is an important first step, but 
education alone is not enough.
    Two additional requirements are critically important to solving 
this serious problem: responsible alternative sources of short term 
loans and, equally important, Federal legislation with teeth. There has 
been some success fighting this battle on the state level; but Federal 
legislation will be necessary that, at a minimum, provides the 
following:

            Caps the interest rate at 36% (to include all fees 
        and insurance).
            Eliminates all loan roll overs or the ability for 
        individuals to take out another loan to payoff the first loan 
        which creates a vicious cycle of debt.
            Requires all payday lending businesses to belong to 
        a PDL association that will serve as a clearing house to ensure 
        clients don't have outstanding payday loans from other payday 
        lenders, and allows monthly payment plans.
            Regulates on-line payday loan transactions.

    Thank you for focusing attention on this significant problem that 
affects military readiness and the lives of our men and women in 
uniform. I appreciate this opportunity to share my concerns with 
members of this committee. I hope that Congress will take prompt and 
effective action by drafting and passing effective anti-predatory 
lending legislation.
    I would be pleased to answer your questions.

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              PREPARED STATEMENT OF WILLIAM O. BROWN, JR.
Associate Professor, Department of Accounting and Finance, Bryan School 
        of Business and Economics, University of North Carolina
                           September 14, 2006
    Chairman Shelby, Senator Sarbanes and members of the Committee, 
thank you for the opportunity to speak to you today about the 
Department of Defense's report on lending practices directed at members 
of the armed forces. I am currently an Associate Professor in the 
Department of Accounting and Finance at the University of North 
Carolina at Greensboro and an economist by training. Over the past two 
years I have conducted research on payday lending, military 
compensation and the use of payday loans by military personal. In June 
of this year, I released a study with my colleague, Dr. Charles B. 
Cushman, Jr. from The George Washington University, of payday loan 
attitudes and usage among enlisted military personnel. Our results are 
cited on several occasions in the Department of Defense Report.
    I would like to take this opportunity to share with you some of our 
key findings and then raise some of my concerns about the methodology 
and analysis in the recent Department of Defense report. Our study 
surveyed U.S. enlisted personnel in four branches of the armed service 
regarding their attitudes toward, and usage of, short-term credit, 
including payday loans. Our survey is the first systematic survey of 
enlisted military personnel regarding their economic circumstances and 
attitudes toward short-term credit. Our analysis is based on empirical 
data that we collected through a random sample of enlisted military 
personnel who live near military bases in the United States.
    I want to briefly discuss some of our findings that I believe are 
relevant to the discussion today. Our results indicate that 13% of the 
460 enlisted personnel that lived around military bases and responded 
to our survey had obtained payday loans in the previous year. It is 
important to note that these numbers are only for enlisted personnel 
and not all military personnel. It is suggested in the Department of 
Defense report and elsewhere that our number indicates a higher 
incidence of payday loan use by members of the military than the 
general population. However, our results do not provide such a 
comparison. One would need to compare enlisted personnel with a 
civilian population of similar age and income in order to make such a 
comparison. Otherwise, it is an apples to oranges comparison.
    Military borrowers report that they use payday loans to help pay 
bills, for auto and home repairs, family emergencies, relocations and 
other short term cash flow disruptions. This usage is very similar to 
that reported by civilian users of payday loans.
    The military enlisted personnel who have had a payday loan repay 
them more quickly than their civilian counterparts. Forty-nine percent 
of military payday loan borrowers have had two or fewer loans in the 
last 12 months, and 78% have had four or fewer loans. A 2001 study 
indicated that only 35% of civilian payday loan users had fewer than 
four loans. There is little evidence that military users of payday 
loans use these loans as a substitute for longer term credit. Given the 
relative low overall default rate for such loans in general, the claims 
of some opponents to payday lending that payday loan are a threat to 
military readiness appear unsupported.
    Payday loans are but one form of short-term credit available to 
military personnel. Bounced-check fees, late fees and utility reconnect 
fees can be and are often more costly than a payday loan. The majority 
of military survey respondents reported that they choose a payday loan 
for convenience related reasons. In addition some military personnel 
reported a lack of alternative options or lack of knowledge about 
alternative sources of short term loans indicating that the military 
may need to do a better job of educating enlisted personnel about short 
term credit options.
    As potential decisions regarding the cost and availability of 
consumer credit by members of the armed services are considered today, 
I sincerely believe that our comprehensive study, which I have only 
briefly reviewed here today, would be a valuable body of information to 
inform your views on this topic. For this reason, I am submitting a 
copy of our full study for the record today.
    As to the Department of Defense report, I have several points of 
concern and disagreement with the conclusions drawn.
    From anecdotes portrayed in the news media and mentioned in the 
Department of Defense report, one could have the impression that the 
majority of military personnel are deep in debt, the victims of 
aggressive payday loan issuers. I am sure many on the anecdotal stories 
are true. However, anecdotes only tell us what can happen in some 
cases, they fail to give us a bigger picture view or tell us how often 
these things happen. There is nothing in the Department of Defense 
report to give any indication of the prevalence of problem borrowing by 
military personnel.
    There are certainly some military personnel with financial problems 
and service members with financial problems may have obtained payday 
loans, but there is no evidence that payday loans are the cause rather 
than a symptom of these financial problems. This causation connection 
is completely missing in the Department of Defense report.
    Consumer make purchasing decisions based on a number of factors: 
price, convenience and opportunity being chief among them. This 
Department of Defense report fails to consider that service members 
either choose payday loans either because of they lack a better 
alternative or because they lack available information about better 
alternatives. In either case, the Department of Defense needs to do a 
better job of working with financial services firms to provide products 
that meet the needs of military personnel and educating military 
personnel about the availability and use of those products.
    Finally, the Department of Defense's recommendation to reduce the 
maximum permissible charge on payday loans to 36% would likely drive 
lenders out of the market. The problem is that marginal cost of 
providing small consumer loans is high. This is why so many banks and 
financial service firms fail to provide such products. When you take 
choices away from consumers, prices go up, not down. Again, members of 
the military have a demonstrated need for access to short-term credit. 
The likely impact of such a rule would be to make military personnel 
with short term credit needs significantly worse off.
    Mr. Chairman and members of this Committee, I thank you for the 
opportunity to appear before you and will be happy to answer any 
questions you may have.

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                  PREPARED STATEMENT OF LYNN DRYSDALE
              Staff Attorney, Jacksonville Area Legal Aid
                           September 14, 2006
Introduction
    Chairman and members of the Committee, thank you for the 
opportunity to speak in support of the Department of Defense Report on 
Predatory Lending Practices Directed at Members of the Armed Forces and 
Their Dependents and to illustrate the problems and proposed solutions 
in the report with the experiences of military families I represent in 
Florida.
    Since 1988, I have been a consumer protection attorney with 
Jacksonville Area Legal Aid, Inc. and represent low income consumers in 
Duval County. I am co-author of a law review article titled ``The Two-
Tiered Consumer Financial Services Marketplace: The Fringe Banking 
System and its Challenge to Current Thinking About the Role of Usury 
Laws in Today's Society,'' published in the South Carolina Law Review 
in 2000. This widely quoted article covers the high cost loan products 
detailed in the Department of Defense report to Congress. I serve on 
the Jacksonville Bankruptcy Bar Association Board of Directors and have 
been a trainer for Judge Advocates, legal officers and Senior 
Leadership at Naval Air Station Jacksonville.
    Duval County, FL is home to Jacksonville Naval Air Station and 
Mayport Naval Station where about thirty thousand service members plus 
their families and retirees live and work. Over the years I have 
represented many of these Sailors and their dependents as well as 
veterans who have fallen victim to the predatory loan practices 
described in the DOD Report to Congress. Today I will use their stories 
to put a face on the problems identified in the Department of Defense 
report and to support the recommended solutions to those problems.
Why military consumers are ideal customers for quick cash lenders
    Despite their moderate incomes, many Service members are young and 
financially inexperienced, with young families and tight budgets. They 
are attractive to lenders because their pay is certain, their residence 
is easy to find and they live in concentrated areas. They have stable 
and steady employment and, as members of the Armed Forces, unlike 
civilian borrowers, they are easy to collect from because the lender 
routinely contacts their employer pre-judgment. Service members must 
comply with the Uniform Code of Military Justice and could lose rank, 
miss opportunities for advancement in rank and pay, and could lose 
their jobs for failure to honor their debts.
Military pay arrangements benefit lenders
    Members of the Armed Forces are required to maintain bank accounts 
in order to receive direct deposit of their federal pay. This makes 
them attractive to payday lenders whose only qualifications for quick 
cash loans are a steady source of income and an open bank account. 
Because they must have a bank account, Service members have added 
incentive to pay additional sums to renew loans in order to keep the 
checks provided as security from being returned for insufficient funds. 
The Uniform Code of Military Justice penalizes a service member's 
failure to make good on a check drawn on his or her bank account. Many, 
if not most, lenders can and do ask military borrowers to sign over 
electronic access to their bank accounts to repay loans. Some lenders 
require their loans to be repaid by allotment of military pay, which 
means that funds are taken out of their pay and sent to creditors 
before the Service member has an opportunity to use the money to pay 
rent or utilities. This is a form of payment that is supposed to be 
voluntary and a convenience to the Service member but has been turned 
into a way to ensure that high cost lenders get paid before funds are 
available to pay pressing bills or feed the family. A few lenders even 
require borrowers to sign wage assignments to insure payment is made 
timely, despite the federal prohibition on wage assignments in loans to 
enlisted Service members.
    While these Service members have unique features, such as needing 
to prove financial responsibility, to strive for advancement in rank 
and pay, and to preserve security clearances, their experiences with 
predatory lending are replicated in low to moderate income families in 
civilian life. The Department's report, in many ways, describes the 
plight of all low to moderate income consumers who struggle to make 
ends meet in a predatory lending environment.
    In my testimony, I will highlight three main points:

    1.  Predatory loan products and services are expanding rapidly, 
including quick cash loans offered in exchange for a personal check to 
be deposited next payday, loans secured by the free and clear title to 
the family vehicle, and installment loans repaid by military allotments 
or electronic access to the bank accounts Service members are require 
to have. All of these loans place important assets at risk, come at a 
steep cost, and often trap borrowers in repeat borrowing or renewals. 
These products also do not provide even the compliant consumer with a 
credit history that helps them escape from this choice of borrowing. 
High cost predatory lenders target service members by location, 
affinity marketing, presence on the Internet, or because they are 
widely available in the communities where military families reside.

    2.  Service members are not being protected by most states, either 
because high cost lenders have been carved out of usury or loan laws, 
or lenders claim that state credit laws do not protect nonresident 
borrowers such as Service members stationed in the jurisdiction, or 
because lenders have exploited every loophole to evade consumer 
protections. High cost loan contracts are grossly one-sided and include 
unilateral, mandatory arbitration clauses to deprive Service members of 
their day in court and limit their remedies, both of which are the 
cornerstones of the American justice system they fight to preserve. 
Congress must step in to protect Service members.

    3.  Service members are disproportionately targeted and punished by 
the products and practices of high cost lenders who harass them, their 
families and those in their command and who threaten criminal 
prosecution, court martial, loss of rank and pay, loss of security 
clearance and dishonorable discharge. Service members fear the 
consequences of failure to make good on checks used to get payday 
loans, and facing automatic and electronic withdrawal of money from 
their accounts are forced to juggle finances to stay afloat. They fear 
the loss of the family car whose title is pledged for loans. They fear 
the lender retaliation resulting from the cancelling of an allotment 
given to a lender. This struggle leads to stress, to loss of morale and 
impedes military readiness in addition to harsh financial consequences 
felt by the entire family. The practices and problems described in the 
DOD Report come alive in my clients' stories.

            Mr. Hubbell and his wife are both service members. 
        You may have seen their story on a recent ABC News program. Due 
        to the costs of his wife's illness and her inability to work, 
        they took out a payday loan which led to thousands of dollars 
        in outstanding loans from both payday lenders and installment 
        loan companies. The more they paid, the more they owed and have 
        repaid tens of thousands of dollars. One loan led to another 
        because they had to keep borrowing more money to avoid the 
        threats of criminal prosecution and the consequences of the 
        lender contacting Mr. Hubbell's command. Over a five-year 
        period of time, they were forced to borrow just over $10,000 
        and still have a monthly payday loan debt of just over $3,500. 
        The Hubbells still owe over $12,000 on loans, most of which 
        only went to pay off other loans and provided no benefit to the 
        Hubbells except for digging them deeper into debt. Mr. Hubbell 
        is an air traffic controller and felt he had no option but to 
        stay on this debt treadmill because of his fear of the real 
        danger of losing his security clearance and his rank.

            Another of my clients borrowed from a sham lender 
        who pretended to sell Internet access to cloak a criminally 
        usurious loan. When he was unable to keep up with payments, the 
        lender directly debited his account for more than the amounts 
        needed to pay off his loan. The lender also harassed him on his 
        ship and called his superior officers. He was faced with not 
        having enough money for groceries and rent for his family, 
        including three children.
Problems Identified in the DOD Report 
1. Predatory loan practices and unsafe credit products are high risk 
        for military borrowers
    The Report describes the same types of high-cost, high-risk loan 
products that we addressed in the law journal article about the two-
tiered financial services market: Payday loans, rent to own, car title 
loans, high cost installment loans, and refund anticipation loans. From 
my experience helping low income and military consumers, I concur with 
the Report's description of the lenders' extreme high costs and their 
unsafe and unsound lending practices. I also concur with the 
description of the risk to borrowers' assets. Lenders require borrowers 
to grant them electronic access to their bank accounts as a condition 
of getting a payday loan at a store or via the Internet or to borrow 
from a military installment lender. As a result, consumers lose control 
of their bank accounts and rack up multiple fees when lenders make 
repeated efforts to collect on the loan by electronically accessing 
their bank accounts multiple times in one day for just one loan.
    Predatory lending is not committed only by one class of lenders. 
Even banks have begun to join the fray of those lending at triple digit 
rates. Two banks are offering ``account advances'' that work just like 
a payday loans: the bank advances up to $500 for a short, typically two 
week loan that must be paid back on the next payday, at annual rates up 
to 500%. In North Little Rock, Arkansas, near Camp Robinson and Camp 
Pike, ACE Cash Express partners with First Bank of Delaware to offer an 
installment loan at a 390% APR rate. The bank can violate Arkansas' 
constitutional 17% usury cap because banks are exempt from state 
regulation.
    The high risks to military borrowers who must maintain bank 
accounts and who rely on their military pay are illustrated by a Navy 
borrower I represented.

            Mr. M had an installment loan through a 
        ``military'' lender that required automatic access to his bank 
        account for electronic payment. When he did not make a timely 
        payment, the lender ``hit'' his bank account eleven times in 
        one day, causing hundreds of dollars in late fees, NSF fees and 
        other bank charges.

    Lenders often require the borrower to sign a military allotment, 
which permits the lender to be paid directly by the Department of 
Defense out of the Service member's pay before funds are deposited in 
the bank. Allotments to pay consumer debt are supposed to be a 
convenience for the Sailor, payday and installment lenders turn this 
convenience into a mandatory wage assignment which is prohibited by 
federal law for enlisted personnel. The allotment becomes another 
method used by the payday lender to put the Service member at risk.

            Ms. W obtained a loan from a ``military'' lender 
        that was marketed online. The lender required her to pay them 
        through a military allotment check. They threatened to contact 
        her Command if the allotment was redirected. This put Ms. W in 
        a bind because the costs were so high for the loan that the 
        allotment took away money she needed for food, transportation 
        to and from work and utilities.

    Deceptively marketed car title loans have also been problematic for 
my clients. In these loans, borrowers sign over the free and clear 
title to their vehicle to secure loans for a fraction of the vehicle's 
value. Typically these loans must be repaid in full at the end of the 
month to avoid repossession of the family's transportation. We had a 
plague of title loan abuses in Florida until the Legislature finally 
imposed a reasonable 30 percent interest rate cap on these secured 
loans. Although Florida now caps these rates, the Report maps show that 
title loan sales outlets are still located in Jacksonville to channel 
customers to lenders across state lines in Georgia where title lenders 
are permitted to charge 300 percent annual interest.

            I represented several Sailors who were in constant 
        fear of losing the family's only means of transportation and 
        their only means of getting to work. In addition to being 
        responsible for sound financial decisions, Service members must 
        also be at work on time. The stress of a potential loss of 
        transportation left one aircraft mechanic constantly distracted 
        while trying to take care of Navy aircraft.
2. Predatory Lenders Target Military Borrowers 
    The Report includes a set of maps created by Professor Steve Graves 
from California State University at Northridge, illustrating the 
clustering of payday lenders, installment lenders and a few title loan 
outlets around military bases in Duval County. In addition, payday 
lenders that do not explicitly ``target'' the military have a big 
presence in the commercial areas of Jacksonville. For example, the 
largest national chain, Advance America has twenty-nine outlets in 
Jacksonville, Orange Park, and Atlantic Beach yet stated that only 
about five percent of its borrowers in Duval County are members of the 
military or their spouses.
    The Report also includes a brief survey of online lenders and notes 
there are millions of ``hits'' representing companies that appear when 
someone uses ``military'' and ``loans'' as their search terms. Some of 
these sites are designed to appeal to Service members with photos of 
Service people, flags, patriotic symbols, and military-sounding names. 
Other online lenders that appear in searches market to the general 
public but include ``military'' pages to attract more hits from Service 
members.
    The problems for military borrowers come from both lenders that 
wrap themselves in the flag and those that market generally to cash-
strapped consumers either in communities where Service members and 
reservists' families live or through websites available to Service 
members anywhere around the world where they have access to the 
Internet. The loans are just as expensive and risky for Service members 
whether made by a lender with ``military'' in the title or by a 
national chain marketing to the entire community.
    My clients tell me that they are influenced by loan ads that 
include military trappings. They think advertisements appearing in 
local Navy papers have been approved by the military.

            Mr. M and Ms. W are both in the Navy and are 
        stationed at NAS-Jax. They each responded to advertisements in 
        the local Navy newspaper and on the Internet by companies 
        called Loans 4 Military and Military Financial Network, Inc. 
        They both thought that the lenders were approved by the Navy 
        because of their names, their patriotic web sites and because 
        they were advertised in the Navy paper. The lender advertised a 
        much lower rate than that which was actually provided. As a 
        result, the borrowers were left with insufficient funds to pay 
        their bills because these lenders required repayment by 
        allotment. They had to take more loans to cover the bills that 
        were not being paid because of the allotments.
3. High cost loans, abusive collection practices, and the debt trap 
    The Defense Report describes the high and deceptively marketed 
costs, illegal collection practices and repeat borrowing trap that 
results from predatory lending to Service members.

            The cost of payday loans for my clients over the 
        years has ranged from 390 percent to 906 percent.
            One of my clients had an installment loan with a 
        disclosed interest rate of 17% while the true but undisclosed 
        interest rate was 102%.
            Mr. N who is in the Navy obtained a title loan 
        deceptively marketed as the sale and buy back of his motor 
        vehicle. The lender hid the 300% rate charged because the 
        Florida Legislature had reduced the interest rates that title 
        lenders could charge from 264% to 30%.
            I regularly see clients who have loans with an 
        installment lender which deceptively markets its products to 
        Service members and claims to provide low interest rates. For 
        example, the disclosed rate in one $1,000 loan was 19%. The 
        lender also required the borrower to pay $475.95 for insurance 
        that provided absolutely no real benefit for the borrower. The 
        insurance was actually additional interest disguised as a real 
        ``insurance'' product.

    The Department of Defense Report includes results of this year's 
Defense Manpower survey and questions about payday loan use. Those 
Service members who admitted to using payday loans reported an average 
of 13 transactions last year (including new loans and loan roll-overs). 
This loan use pattern is at the top of the range for average 
transactions per borrower as reported by publicly-traded lenders and 
state regulators who collect that data, as noted in the Report. If a 
consumer pays for thirteen $350 two-week payday loans at a cost of $15 
per $100, they would pay $682.50 in finance charges to use $350 for 
twenty-six weeks of the year.
    It isn't just the high cost of payday loans that springs the debt 
trap. Failure to pay or renew a loan means that the check written to 
secure the loan will bounce and set off a cascade of bounced check fees 
charged by both the payday lender and the consumer's bank, not to 
mention the adverse impact on the borrower's credit report as a result 
of the perceived failure to maintain the bank account.

            Mr. K spent his entire day off going from payday 
        lender to payday lender to keep from having his checks bounce. 
        At one time, he was trying to juggle nine loans. This is the 
        same experience that a witness reported to Senator Lieberman at 
        his 1999 forum on payday lending here in the Senate.
    Coercive collections are made easy due to the terms included in 
payday loans, car title loans and installment loans.

            A payday lender sent one of my clients, who was 
        required to allow electronic access to his bank account in the 
        loan transaction collection, letters written by the lender on 
        State Attorney letterhead. In these unauthorized and illegal 
        collection letters, the lender threatened criminal prosecution 
        when he did not have sufficient money to pay the loan in full.
            Mr. W borrowed from Military Financial Network 
        which included language in their documents threatening Court 
        Martial, imprisonment and a dishonorable discharge if he did 
        not pay.
            Mr. G contacted me via email from an undisclosed 
        location at sea. He was worried about his wife and family 
        because of his outstanding payday loan debt. Due to threats she 
        had received, he was afraid that the payday lender would put 
        his wife in jail, leaving their two babies without a parent.
4. Service members sign away their rights in the credit market 
    Every contract I see includes a binding, unilateral pre-dispute 
mandatory arbitration clause which is especially burdensome to military 
borrowers who are not able to pay the costs associated with arbitration 
or travel to participate in arbitration. For example, Mr. W, who had 
the Military Financial Network loan while stationed in Florida, was 
prohibited from suing MFN and, if he thought they acted illegally, was 
required to arbitrate his dispute in Delaware. Therefore, he 
effectively had no remedy when MFN debited his account eleven times in 
one day, used a contract threatening Court Martial, and threatened him 
while at work.
5. Consumer Protections are evaded, not enforced, or nonexistent 
    Thirty-nine states have carved payday lenders out of usury or small 
loan rate caps or repealed their credit restrictions for all licensed 
lenders. Half the states permit title lenders to make short term cash 
loans at an average of 300% APR. In about half the states, installment 
lenders claim that state credit code or rate caps do not apply to 
nonresident service members stationed in that state. My home state of 
Florida is now in Federal court over the claim that Pioneer Military 
Lending is not licensed as a small loan company and does not comply 
with Florida protections. Installment lenders that make loans to 
military borrowers are not licensed or supervised in North Carolina or 
Virginia. Just recently California regulators withdrew its licensing 
waiver for one military lender, deciding that there was a public 
interest in supervising these companies.
    Over the years I have witnessed payday lenders use every trick in 
the book to escape real protections.
    Hiding behind the check cashing statute. In Florida, payday lenders 
tried for years to operate under the state check cashing law to avoid 
compliance with the state small loan law and credit protections. 
Eventually, Florida allowed payday lenders a safe harbor, permitting 
rates up to 390% APR for a $100 loan. Even with such generous rates, 
some lenders have attempted to evade Florida law.
    Rent-a-bank evasion of state limits were used by some of the 
largest payday lenders until the Federal bank regulatory agencies 
halted that tactic. Cash America, a publicly traded pawn and loan 
chain, used a series of out of state banks as a partner, claiming that 
they did not have to comply with Florida regulation. Jennafer Long 
borrowed money from ACE Cash Express while it partnered with Goleta 
National Bank to make loans at rates that exceeded Florida caps. The 
company repeatedly debited her bank account and harassed her 
supervising officers and threatened her with criminal prosecution when 
she was unable to repay on the due date. We sued and got a favorable 
ruling from the Federal court. Thankfully, the Comptroller of the 
Currency, the Office of Thrift Supervision, the Federal Reserve and the 
FDIC put a stop to the misuse of the charters of financial institutions 
through strict guidelines, safety and soundness enforcement and close 
examination of partner institutions.
    Sham transactions to cloak loans: There is no limit to the lengths 
some lenders will go to loan money to consumers at outrageous terms. 
Mr. B, a low-ranking Navy member, entered into a loan transaction with 
Florida Internet. The loan was characterized as the ``sale of the right 
to use the Internet'' for hourly increments. The loan was cloaked as a 
``rebate'' for buying Internet time. The lender required direct 
electronic access to the borrower's bank account. This company was 
hiding interest rates which exceeded 400%, which made the loans 
criminally usurious and well above the 18% general loan rate in 
Florida. The same lender used a ``catalogue'' sales model to avoid 
Florida usury and payday loan law and was sanctioned by the State 
Attorney in Pensacola, another Navy town. The lender has been convicted 
of racketeering charges and is awaiting sentencing after decades of 
predatory lending from Washington to New York's Fort Drum.
    Claim to broker loans for other lenders under the credit service 
organization model: Cash America is claiming to be a credit services 
organization as a ruse to ``broker'' payday loans in Florida for an 
Ohio-based finance company, which may be a Cash America subsidiary. 
Cash America guarantees repayment of the loans to the Ohio company, 
which should take them out of the definition of a credit services 
organization and put them in the category of a loan guarantor. Cash 
America's loans cost $18 per $100 for the ``broker fee,'' plus interest 
charged by the purported lender. This makes Cash America loans even 
more expensive than Florida's limits for payday loans. I believe that 
this arrangement does not comply with Florida's Credit Services 
Organization Act and is simply done to charge Florida borrowers higher 
rates than even the state payday loan law allows.
    Attempt to avoid state protections by doing business online 
    I recently filed a lawsuit against an Internet lender, 
Sonicpayday.com. This lender is available only on the Internet and 
charges interest rates as high as 900%. They do not allow the grace 
period provided by Florida law and encourage rollover transactions 
(paying off an outstanding loan with another more expensive loan). 
Sonic also requires its borrowers to sign a ``voluntary'' wage 
assignment. When my clients were unable to pay these high cost loans, 
Sonic contacted their employers and demanded the employers pay Sonic 
directly. They also contacted the Service member's chain of command 
when he told them he could not pay on time. Sonic loans have a term of 
two weeks or less. The short term makes the loan even harder to pay 
back.
    Noncompliance with protections. In July, Florida regulators took 
EZPawn to court over its failure to get a license to make payday loans. 
The Office of Financial Regulation alleged that EZPawn Florida, Inc. 
unlawfully blocked examiners from inspecting its loan papers and other 
records. This company, one of the large publicly traded payday loan and 
pawn chains, has at least eighteen locations in Florida
    The public record is replete with instances of large payday loan 
companies violating state consumer protection laws. This summer the 
Washington Department of Financial Institutions filed a case against 
Check'n Go for continued violation of state rules for payday lenders. 
Illinois Department of Financial Institutions fined Advance America 
earlier this year for violating the new Illinois law. West Virginia's 
Attorney General settled a case against Advance America for debt 
collection tactics used by its Ohio stores with West Virginia 
consumers. Arizona's Attorney General brought a case against a payday 
lender for threatening criminal prosecution for nonpayment. The 
Colorado Attorney General settled a case against an Internet payday 
lender that failed to comply with Colorado law. The North Carolina 
Banking Commissioner ruled that Advance America violated its small loan 
law while brokering loans through a series of out-of-state banks.
    Industry ``best practices'' voluntary codes fail to protect 
consumers 
    Trade group ``best practices'' codes of conduct are more public 
relations than consumer protection. The CFSA ``Best Practices'' do not 
call on their members to cap interest rates, to stop enticing consumers 
to write checks without money in the bank, to consider ability to repay 
in extending credit, or to provide affordable repayment terms for their 
loans. Instead, the trade group's voluntary guidelines call for lenders 
to obey the Truth in Lending Act and state law relating to disclosures, 
to refrain from threatening criminal prosecution if a check used to get 
a loan is returned unpaid, and calls for a 24-hour right to cancel the 
loan by returning the amount borrowed. Even where the guidelines appear 
to offer the protection of a four roll-overs limit (unless state law 
requires less), these companies do not consider back-to-back loans as 
roll-overs restricted by this limit. Their Best Practices call for 
borrower responsibility but says nothing about lender responsibility to 
make appropriate loans.
    One of my clients had a bad experience with a payday lender which 
bragged about being a member of CFSA in its contract and claimed that 
it followed CFSA's Best Practices:

            Ms. Griffin is a Navy wife who has a payday loan 
        with Advance America in Florida, which, as stated above, is a 
        state that requires licensed lenders to grant at least a 60-day 
        grace period with no additional fees, charges or costs if a 
        borrower seeks credit counseling. Despite the grace period and 
        a prohibition on ``roll-overs'' in her contract, she was 
        required to roll over her loan when she could not pay. When she 
        went to pay it off, she was $45 short, not realizing that she 
        would be charged another fee to roll over the loan. Advance 
        America refused the grace period even after she told them she 
        already had the counseling at the Navy Marine Corps Relief 
        Society, an authorized State of Florida Deferred Presentment 
        Provider counseling agency. The director of NAS Jax NMCRS, Ret. 
        Capt. Dave Faraldo, called the lender only to be told they did 
        not have to talk to him and did not have to provide the grace 
        period. You might think this was a matter of an inexperienced 
        employee; however, the Advance America employee said she had 
        been an employee trainer for eight years and they never had to 
        provide the grace period. When I provided a signed release that 
        I was Ms. Griffin's attorney, the Advance America staffer 
        refused to speak to me about the legally-required grace period 
        on her account.

    The organization also promotes its ``military best practices'' as 
all the protection military borrowers need. A close examination reveals 
no cap on interest rates; no ban on check holding or electronic access 
to bank accounts; no prohibition on mandatory arbitration clauses, and 
no ban on waiver of rights or access to the courts. Instead, the code 
prohibits after-the-loan practices that are already largely addressed 
by Department of Defense rules, the Servicemembers Civil Relief Act, or 
are promises that sound good but deliver little. Payday lenders use the 
borrowers' automatic access to bank accounts and checks to collect, not 
garnishment, in most cases. Federal law provides significant 
protections against garnishment of wages for enlisted personnel. 
Officers are directed by DOD not to assist creditors in collecting 
``exorbitant'' debts. The other weak provisions of the CFSA Military 
Best Practices, adopted in 2004, call for honoring repayment agreements 
negotiated by credit counselors, providing educational materials 
including a brochure, and maintaining a web site. Since these 
guidelines have been in effect for over two years, it is obvious their 
application did not prevent the serious problems identified by the 
Department of Defense in last month's report.
Solutions Needed 
    I agree with the reforms urged by the Department of Defense to 
protect military borrowers and believe these protections are needed by 
all consumers struggling to make ends meet.
    1. Rate cap which the Senate has already enacted as part of the 
2007 Defense Authorization bill, now in conference with the House. DOD 
calls for a 36% APR cap to include all fees, premiums, other charges. 
This is the typical state small loan rate cap and is double the federal 
interest rate cap for Federal credit unions. It is six times the 
interest rate for loans held by Service members prior to joining the 
military. The Talent-Nelson amendment places a federal ceiling on 
interest rates (helpful for those states that neglect to protect 
nonresident Service members who live in their states) but permits 
states to provide more protection.
    2. Loans should not be based on key assets for families. This puts 
too much risk into borrowing, fosters coercive collection tactics, and 
encourages consumers to take desperate steps to avoid losing those 
assets. S. 1878, introduced by Senator Akaka, would prohibit lending 
based on solicitation of unfunded checks or electronic access to bank 
accounts. It is already illegal for lenders to require consumers to pay 
debts through periodic electronic payments. This protection should be 
extended to single payment payday loans. No lender should be permitted 
to require a Service member to sign an allotment to military pay, 
providing a de facto wage assignment to lenders.
    3. Service members deserve to have the full range of American 
rights when dealing with creditors. They should not be asked to waive 
their rights under state and federal law or be forced to accept 
binding, unilateral mandatory arbitration. No one should have to sign 
that they will not sue a lender for illegal practices and will not join 
a class action lawsuit. Often class litigation is the most efficient 
means for both parties to litigate illegal practices relating to 
hundreds of cases involving relatively small sums. Also, no one should 
be required to agree to pay the lender's expenses to remove them from a 
class or promise they will not file for bankruptcy in the future. I 
agree with DOD that ``waiver is not a matter of `choice' in take-it-or-
leave-it contracts of adhesion.''
                                 ______
                                 
                 PREPARED STATEMENT OF HILARY B. MILLER
                 President, Payday Loan Bar Association
                           September 14, 2006
    Mr. Chairman and members of the Committee, it is a distinct honor 
to appear before you today. My name is Hilary Miller, and I am 
president of the Payday Loan Bar Association. I am here today as an 
expert in subprime lending, and I appear on behalf of the payday-
advance industry's national trade association, the Community Financial 
Services Association of America (``CFSA'').
    Our bar association and CFSA both subscribe to the highest 
principles of ethical and fair treatment of borrowers. CFSA represents 
owners of approximately half of the estimated 22,000 payday-advance 
retail outlets in the United States. CFSA has established--and, 
critically, enforces among its members--responsible industry practices 
and appropriate consumer rights and protections, including special 
protections for the benefit of military personnel.\1\
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    \1\ These protections and information resources for service 
members, which include prohibitions on garnishment and contacting the 
chain of command for collection assistance, can be viewed in their 
entirety at http://www.cfsa.net/genfo/MilBestPractie.html (visited 
September 2, 2006).
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    There are serious flaws in the Defense Department's recent Report 
on Predatory Lending Practices Directed at Members of the Armed Forces 
and Their Dependents (the ``DoD Report'').\2\ Those flaws involve 
fundamental matters of both methodology and policy.
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    \2\ A copy of the report is available at http://
www.defenselink.mil/pubs/pdfs/Report_to_Congress_final.pdf.
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    Decisions having potentially far-reaching implications regarding 
the cost and availability of consumer credit used by members of the 
Armed Forces must be reached only after careful gathering of data from 
a variety of sources and even-handed analysis of such data.
    By failing to synthesize information from balanced sources--and by 
systematically excluding any input from independent economists, 
consumer-credit experts or the industry itself--the DoD Report presents 
the views only of opponents of the kinds of lending discussed.\3\ The 
result is a biased, inaccurate and incomplete picture of the market for 
such credit, of the industry's practices and, most importantly, of the 
likely impact on military consumers were the DoD Report's 
recommendations to be adopted.
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    \3\ A flawed report was perhaps predictable in light of the 
original directive of Congress that the Secretary of Defense consult 
with ``representatives of military charity organizations and consumer 
organizations'' but not with industry representatives, economists or 
consumer-credit experts. Section 579 of the National Defense 
Authorization Act for Fiscal Year 2006, P.L. 109-163, 119 Stat. 3276-77 
(the ``2006 Act'').
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    The language of the report reveals the author's bias. Instead of 
providing an objective explanation of his findings, the author 
frequently employs normative and emotionally charged terms to describe 
subprime lending, thereby suggesting--without a basis in research--that 
such lending is a societal evil.
    Our industry has a vital interest in making sure that military 
borrowers can repay their loans, for one simple reason: as lenders, we 
only make money when our borrowers repay us. If they do not pay, not 
only do we fail to collect their finance charges--which the DoD 
criticizes--but we also lose many times those charges in loan 
principal. In short, it is contrary to our interests to have service 
members get into trouble with their loans. And the reason we lend to 
military borrowers at all is that the entirety of the available 
scientific data suggest that only a tiny percentage of military 
borrowers actually do get into trouble with payday loans. Anecdotes 
derived from a non-representative sample of this small group are now 
being used to drive public policy for the much larger numbers of 
military borrowers who use payday loans for their intended purpose and 
who repay their loans on time.
    Here are some of the DoD Report's principal flaws:

            The DoD report determines that payday loans are 
        ``predatory'' solely by uncritically adopting eight factors 
        used by a vociferous opponent of the industry, the Center for 
        Responsible Lending, without making an independent 
        determination that such loans are ``unfair'' or ``abusive'' as 
        required by the applicable statute. No other recognized 
        authority has adopted these factors.
            According to DoD's own internal data, fewer than 5% 
        of service members have had a payday loan.
            Because fewer than 6% of payday loans ultimately 
        default, at most 6% of that 5%, or 0.3%, of all service members 
        have experienced financial difficulty with a payday loan. In 
        other words, 99.7% of service members have either not had a 
        payday loan or experience no financial difficulties with payday 
        loans. There is simply no statistical evidence that payday 
        loans contribute to military readiness problems to any 
        measurable degree.
            Although some service members with financial 
        problems have taken out payday loans, DoD has presented no data 
        showing that payday loans cause financial problems. Payday 
        loans are intended to solve short-term financial problems, and 
        the overwhelming majority of users employ them in that manner.
            DoD's data regarding asserted hardship relating to 
        payday loans consist of a mere 12 anecdotes drawn from the 
        experiences of 1,400,000 or more service members.
            For a sample of service members with payday loans 
        who have experienced bankruptcy, payday loans account for less 
        than 4% of their total liabilities, and the financial 
        difficulties suffered by such service members manifestly relate 
        to preexisting (i.e., non-payday-loan) factors.
            DoD's data regarding ``targeting'' of service 
        members by payday lenders are flawed because they do not 
        control for demographics and fail to include tests of 
        statistical significance. The ``targeting'' argument assumes, 
        in defiance of logic, that the industry would commit 
        disproportionate resources to customers who account for only 1% 
        of revenues.
            Service members appreciate the convenience and ease 
        of obtaining a payday loan; 78% of service members with payday 
        loans agree that ``most people benefit from the use of 
        credit.''
            DoD's principal recommendation is to reduce the 
        maximum permissible charge on such loans to 36%, which is below 
        lenders' marginal cost--thereby driving legitimate, regulated 
        lenders out of the market and compelling borrowers to deal with 
        illegal lenders. Those lenders would just as likely pursue 
        illegal collection methods.
            A 36% rate cap is not the only possible approach to 
        addressing the needs of overburdened service members. The 
        industry has suggested allowing service members a longer 
        repayment plan similar to that offered by the banks highlighted 
        in the DoD Report. Our proposal to DOD was to allow service 
        members to repay their defaulted loans over a term of six 
        months or longer, and to limit interest rates to 36% in the 
        post-default period. It is hard to understand why the bank 
        program is embraced by DoD and the payday-advance industry's 
        proposal is ignored.
            Ironically, payday lending competes with bank and 
        credit union overdraft charges and service fees and is often 
        less expensive for the consumer. For example, if a service 
        member is a Pentagon Federal Credit Union member, the charge 
        for a $100 overdraft is $25; our industry typically charges 
        only $15 for a $100 advance. Similarly, Pentagon Federal's late 
        charge on a credit card is $39, which explains why more than 
        70% of our customers use payday advances to avoid late fees.

    In a comprehensive submission attached to these remarks, we discuss 
the DoD Report as it addresses payday lending. However, many of our 
criticisms of the DoD Report are equally applicable to the other forms 
of credit addressed in the DoD Report.
    The DoD Report should be rejected, and the subjects raised by the 
report should be given appropriately balanced further study and 
analytical reflection by qualified experts.
    Thank you for your interest. I will be pleased to take any 
questions.
                               Analysis 
I. Payday Loans Are Not ``Predatory'' 
    The DoD Report adopts wholesale, and without critical analysis, a 
set of eight criteria promulgated by a vociferous opponent of the 
industry, the Center for Responsible Lending (``CRL'') , for 
determining whether a payday loan is ``predatory.'' \4\ No political, 
regulatory or academic authority has adopted CRL's criteria. There 
exists no principled rationale for the use of these criteria to the 
exclusion of more established notions of what constitutes a 
``predatory'' loan.\5\
---------------------------------------------------------------------------
    \4\ DoD Report at pp. 13-14.
    \5\ A standard definition is an unsuitable loan designed to exploit 
vulnerable and unsophisticated borrowers. A predatory loan has one or 
more of the following features: charges more in interest and fees than 
is required to cover the added risk or cost of lending to borrowers 
with credit imperfections, contains abusive terms and conditions that 
surprise or trap borrowers and lead to increased indebtedness, does not 
take into account the borrower's ability to repay the loan, or violates 
fair lending laws by targeting women, minorities and communities of 
color. Payday loans meet none of these criteria. See, generally, U.S. 
Dep't of Treasury/U.S. Dep't of Housing and Urban Development, Joint 
Report on Recommendations to Curb Predatory Home Mortgage Lending 
(2000), available at http://www.hud.gov/library/bookshelf12/pressre1/
treasrpt.pdf (visited August 29, 2006).
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    Although not clear from the DoD Report, it appears that both CRL 
and the author of the DoD Report believe that the CRL criteria should 
be applied disjunctively; i.e., that a loan that possesses any one of 
the eight criteria is ``predatory.'' Since all payday loans possess at 
least two of the CRL criteria (``high'' cost and the use of a check-
repayment mechanism), the DoD Report effectively classifies all payday 
lending as ``predatory''--without making an independent determination, 
as required by Congress, of how payday loans are ``unfair or abusive'' 
(within the meaning of the 2006 Act).\6\ By circularly defining payday 
loans to be ``predatory,'' the result of the DoD Report is a political 
statement, not science.
---------------------------------------------------------------------------
    \6\ Section 576(c)(2) of the 2006 Act defines a ``predatory lending 
practice'' as ``an unfair or abusive loan or credit sale transaction or 
collection practice.''
---------------------------------------------------------------------------
    We discuss these eight factors individually.
Interest Rate 
    The DoD Report's principal objection to all of the types of loans 
it criticizes is their ``high cost.'' \7\ Yet no other authoritative 
source has classified any form of consumer lending as ``predatory'' 
based solely on pricing.\8\
---------------------------------------------------------------------------
    \7\ DoD Report at pp. 13, 16-20.
    \8\ As a general matter, consumer credit experts understand the 
term ``predatory'' to be rooted in deceptive and/or illegal practices 
to coerce borrowers into unfavorable agreements. Stephen C. Bourassa, 
Predatory Lending in Jefferson County. University of Louisville 2003, 
http://www.lul.org/?foreclosed.htm (visited August 29, 2006). See also, 
Remarks by Governor Edward M. Gramlich at the Housing Bureau for 
Seniors Conference, Ann Arbor, Michigan (2002):
    In understanding the problem, it is particularly important to 
distinguish predatory lending from generally beneficial subprime 
lending. Predatory lending refers to activities and practices just 
cited--asset-based lending, loan flipping, packing of unnecessary fees 
and insurance, fraudulent or deceptive practices. Subprime lending, on 
the other hand, refers to entirely appropriate and legal lending to 
borrowers who do not qualify for prime rates, those rates reserved for 
borrowers with virtually blemish-free credit histories. Premiums for 
extending credit to these borrowers compensate lenders for the 
increased risk that they incur and range several percentage points over 
rates charged on prime loans. Although some have argued that these 
premiums are excessive, market forces should eliminate inappropriate 
spreads over time.http://www.federalreserve.gov/boarddocs/speeches/
2002/20020118/default.htm (visited August 29, 2006) (emphasis added).
---------------------------------------------------------------------------
    In the case of payday loans, the cost of credit, standing alone, is 
neither ``unfair'' nor ``abusive,'' even though the interest rates on 
such loans (expressed as an annual rate) are nearly universally in the 
triple digits. Rather, such pricing has been found to be justified by 
the fixed costs of keeping stores open and the relatively high initial 
default rates on such loans. To the extent that CRL--and the author of 
the DoD Report, by unquestioningly adopting CRL's political views--
claim otherwise, their views are inconsistent with the research of 
federal consumer credit regulators.\9\
---------------------------------------------------------------------------
    \9\ Mark Flannery and Katherine Samolyk, Payday Lending: Do the 
Costs Justify the Price? FDIC Center for Financial Research Working 
Paper No. 2005-09. http://www.fdic.gov/bank/analytical/cfr/
workingpapers.html#payday (visited August 29, 2006).
---------------------------------------------------------------------------
    In large measure, the perceived high cost of payday lending is 
driven by the small dollar amount of each loan, the high cost of 
maintaining stores in operation (both during and outside of traditional 
business hours), and the costs of marketing, originating and collecting 
such loans. Payday loans are thus ``expensive'' for the same reason 
that, for example, small quantities of food, available on a 24/7 basis 
from 7-Eleven, cost more than the same items purchased in bulk from 
Sam's Club during regular business hours. Likewise, so-called ``low-
documentation'' mortgage loans have higher default rates and are more 
expensive than those based on more time-consuming credit 
investigations.\10\ Consumers who buy in small quantity and want it 
``right now'' and with no ``hassle'' pay higher prices for those 
privileges. This is not an unfair or deceptive business practice; it is 
part of the American system of freedom of economic choice.
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    \10\ Roberto G. Quercia, Michael A. Stegman and Walter R. Davis, 
The Impact of Predatory Loan Terms on Subprime Foreclosures: The 
Special Case of Prepayment Penalties and Balloon Payments (2005), 
Center for Community Capitalism, University of North Carolina. http://
www.kenan-flagler.unc.edu/assets/documents/foreclosurepaper.pdf 
(visited September 29, 2006).
---------------------------------------------------------------------------
    There is no evidence that payday-loan pricing causes economic harm. 
Indeed, borrowers' economic welfare is generally enhanced, rather than 
reduced, as a result of such borrowing. Any analysis of the cost of 
payday-loan credit must take into account the cost to the borrower of 
not obtaining such credit. For example, a consumer with limited credit 
alternatives may write a check drawn on insufficient funds. Even if the 
depository bank pays the overdraft, the cost of such credit is 
substantial, because the consumer is charged a service charge of $18 to 
$25 (or more) for the overdraft.\11\ But in most cases, middle-income 
consumers do not find that their banks are willing to pay overdrafts; 
rather, the checks are returned unpaid. When the check ``bounces,'' not 
only does the consumer's bank impose its service charge, but the 
consumer is also subjected to a returned-check fee by the merchant to 
whom the check had been written--generally another $25 or more. Thus, 
the total cost of ``bouncing'' a check, which may provide a consumer 
with a few days or weeks of credit until the check is paid is often $45 
or more. Alternatively, a consumer with limited credit alternatives may 
engage in self-help to obtain an extension of credit in the form of a 
deferred payment of rent, a utility bill, or an installment due on a 
mortgage or a car loan. Such late payments will generally subject the 
consumer to late fees--penalties charged by the landlord or creditor 
which are very substantial relative to the true amount of temporary 
credit of which the consumer has availed himself. If the payment is 
made to a utility, often the consumer is subject to disconnect and/or 
reconnect fees. These charges have also risen to the point that 
consumers will almost always find it less expensive to employ a payday 
advance instead. Academic literature supports this welfare-enhancing 
view of payday lending.\12\
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    \11\ The cost of overdraft-protection credit can be astronomical 
and generally exceeds the cost of comparable payday-loan credit. Banks 
are not required to disclose these costs as an annual rate. For unknown 
reasons, the DoD Report does not address them.
    \12\ Samuel Hanson and Donald P. Morgan, Predatory Lending? Federal 
Reserve Bank of New York working paper (2005), available at http://
www.consumercreditresearchfoundation.org/_files/
FRB_Morgan_Hanson_5_2005.pdf (visited August 29, 2006) (no evidence 
that payday lending is ``predatory'').
    The notion that the borrower engages in his own welfare-enhancement 
calculus is likewise suggested by Thomas E. Lehman of Indiana Wesleyan 
University:

    In all likelihood, the borrower cares not what the ``effective 
APR'' is on the loan. The real price signal to which the borrower 
responds is the flat fee that is charged to hold the postdated check. 
If the value attached by the borrower to the immediate cash advance 
exceeds the value of the [principal] plus the fee one or two weeks 
hence, then the borrower will undertake the transaction . . . .

    ``In Defense of Payday Lending,'' The Free Market, Ludwig von Mises 
Institute, Vol. 23, No. 9 (2003).
    See also, James J. White, ``The Usury Trompe L'Oeil,'' 51 S.C. L. 
Rev. 445, 466 (2000) (``Contrary to those who claim to befriend the 
impecunious consumer, . . . even the poorest consumers are quite savvy. 
They understand the alternatives and make choices about borrowing that 
are wise for them even when the decisions seem foolish or wasteful to 
middle-class observers'').
---------------------------------------------------------------------------
    The pricing of payday loans is thus not ``unfair'' because, among 
other reasons, given the costs of providing credit, such pricing does 
not result in a grossly disproportionate exchange of value with the 
consumer or excess profitability to the lender.
    A recent study by Karlan and Zinman (2006) provides the best and 
most complete scientific answer to the question, ``Do high-interest 
short-term loans harm consumers?'' The authors used a lender to conduct 
a large-scale, randomized trial in which marginal borrowers who would 
not ordinarily receive access to short-term loans were granted loans. 
Those who received these loans were, one year later, less likely to be 
poor, unemployed or hungry.\13\ There is no comparably rigorous study 
showing a contradictory result.
---------------------------------------------------------------------------
    \13\ Dean S. Karlin and Jonathan Zinman, Expanding Credit Access: 
Using Randomized Supply Decisions to Estimate the Impacts (2006). 
http://www.dartmouth.edujzinman/Papers/
Karlan&Zinman%20Consumer%20Credit%20Impacts.pdf (visited August 29, 
2006).
---------------------------------------------------------------------------
    Both Hanson and Morgan (2005), fn. 12, and Bond, Musto and Yilmaz 
(2006) \14\ conclude that predatory lending is effectively eliminated 
through robust competition.\15\ There can be no more perfectly 
competitive industry than the payday-loan business.\16\
---------------------------------------------------------------------------
    \14\ Philip Bond, David K. Musto and Bilge Yilmaz, Predatory 
Lending in a Rational World, Federal Reserve Bank of Philadelphia 
Working Paper No. 06-092 (2006). http://ideas.repec.org/p/fip/fedpwp/
06-2.html (visited August 29, 2006).
    \15\ See also, ``Let competition curb payday lending excesses,'' 
Crain's Chicago Business (May 17, 2004).
    \16\ See, generally, Banking on the fringe, Federal Reserve Bank of 
Minneapolis (July 2004), http://minneapolisfed.org/pubs/fedgaz/04-07/
banking.cfm (visited August 29, 2006).
---------------------------------------------------------------------------
    In summary, there is no authoritative or theoretical support for 
the DoD Report's conclusion that the ``high'' interest rates 
traditionally charged on payday loans, without more, render them 
``predatory.''
--Short Minimum Loan Term
    The DoD Report asserts--again adopting, without analysis or 
question, the CRL view--that the short-term nature of the loan, without 
more, renders a payday loan ``predatory.'' \17\
---------------------------------------------------------------------------
    \17\ ``The letters from the regulators recognize that a practice 
that can be abusive in some contexts can also--in absence of fraud or 
deception--be highly beneficial to consumers.'' Report of the Staff to 
Chairman Gramm, Committee on Banking, Housing and Urban Affairs, 
Predatory Lending Practices: Staff Analysis of Regulators' Responses 
(August 23, 2000) available at http://banking.senate.gov/docs/reports/
predlend/predlend.htm (visited August 29, 2006).
---------------------------------------------------------------------------
    The sole support for this claim is the unsubstantiated statement 
that ``75% of payday customers are unable to repay their loan within 
two weeks.'' There is no factual basis for this statement.
    Both CRL (and the author of the DoD Report) assume, without factual 
basis, that the reason all payday loans that have been renewed, or 
``rolled over,'' is that the borrowers were unable to repay them. This 
conclusion is but one of many possible conclusions why borrowers may 
choose to extend the maturity of their loans. None of the academic 
literature in this field addresses the reason for ``rollovers.''
    Even assuming that the average number of rollovers cited for non-
military users were correct, the rate of repeat usage of payday loans 
among military borrowers is known to be much lower. In a recent 
independent study, 49% of military enlisted payday-loan borrowers 
reported they have used a payday loan no more than twice in the last 
year (compared to 16% of the general population of payday borrowers); 
79% said they had no more than four loans in the last year (compared to 
65% of the general population).\18\
---------------------------------------------------------------------------
    \18\ William O. Brown, Jr. and Charles B. Cushman, Payday Loan 
Attitudes and Usage Among Enlisted Military Personnel (2006). Available 
at http://www.consumercreditresearchfoundation.org/_files/
060628MilitaryPDLSurvey.pdf (visited August 29, 2006).
---------------------------------------------------------------------------
    Finally, there is no theoretical support for the supposition that a 
loan, the duration and cost of which are fully disclosed to the 
consumer, and which (as noted in the preceding paragraph) military 
borrowers actually repay in accordance with the original schedule, is 
``predatory'' within the meaning of the 2006 Act. The cost of renewal 
credit is neither ``unfair'' nor ``abusive'' for the same reasons 
(supra, pp. 2-4) that the cost of the original loan is not predatory. 
The mere fact that a minority of military borrowers may find it 
necessary to renew their loans likewise does not render such loans 
``unfair'' or ``abusive'' because the consequences of renewal do not 
result in either a meaningful reduction in consumer economic welfare 
nor excess profits to the lender.
--Single Balloon Payment
    The DoD Report again incorporates, without examination, a CRL 
criterion for ``predatory'' lending that the entire balance of a 
consumer loan is repayable in a single balloon payment.\19\ The report 
incorrectly states that payday loans do not allow for partial 
installment payments to be made during the loan term; in fact, nearly 
all payday lenders permit partial payments, and such prepayments are 
required to be accepted under the laws of many states.\20\
---------------------------------------------------------------------------
    \19\ Many ``mainstream'' forms of consumer credit are payable in a 
single balloon payment, such as the currently popular interest-only 
home mortgages and certain home equity lines of credit. The DoD Report 
fails to explain how, if at all, these credit vehicles are 
distinguishable in predation from payday loans.
    \20\ E.g., Nevada, Utah, Louisiana and Virginia.
---------------------------------------------------------------------------
    The DoD Report fails to set forth any principled reason why a 
requirement for repayment in a single balloon payment is evidence of 
predation. As with the ``short minimum loan term'' issue discussed 
above, the nature and terms of the loan are fully disclosed to, and 
understood by, the borrower at the time the loan is entered into--
perhaps more than any other aspect of any loan's terms. There is no 
fraud or deception regarding the consequences to the consumer of being 
unable to make partial repayments or of failure to make the single 
required repayment. There is no material economic difference to the 
borrower, ceteris paribus, in being required to make a single payment 
in two weeks instead of two payments at one-week intervals; indeed, 
because payday loans generally have a ``bullet'' maturity date at or 
immediately after the borrower's next payday, the single-installment 
nature of the loan benefits the borrower by allowing payment coincident 
with his employer's payroll practices.
--Loan ``Flipping''
    The DoD Report adopts the CRL terminology of ``loan flipping'' to 
refer to ``rollovers,'' or loan renewals. Neither CRL nor the DoD 
Report correctly utilizes the term ``flipping,'' although use of the 
term gives the issue more of a political charge, as CRL hopes and 
expects; and in this respect, the author of the DoD Report is likely an 
unwitting dupee.
    ``Loan flipping'' is a ``predatory'' practice by mortgage lenders 
where the lender induces the borrower to refinance an existing, 
favorable mortgage (often serially) by falsely representing the 
benefits of the new loan, and ultimately providing little or no 
economic benefit for the consumer because the manifest benefit is 
consumed by additional loan points, loan fees, prepayment penalties and 
fees from financing the sale of credit-related products such as life 
and disability insurance.\21\ For example, some homeowners are 
pressured by lenders into refinancing existing subsidized mortgage 
loans in exchange for commercial loans at higher interest rates, but 
with slightly lower monthly payments and substantial fees rolled into 
an increased principal balance. These tactics, because the consumer is 
actively deceived into believing that the transaction produces a net 
economic benefit for him, are clearly ``abusive'' within the meaning of 
the 2006 Act.
---------------------------------------------------------------------------
    \21\ See, Comptroller of the Currency, Guidelines for National 
Banks to Guard Against Predatory and Abusive Lending Practices, O.C.C. 
Advisory Letter 2003-2, available at http://www.occ.treas.gov/ftp/
advisory/2003-2.doc (visited August 29, 2006).
---------------------------------------------------------------------------
    In contrast, renewals of payday loans are initiated not by the 
lender but rather by the borrower. The borrower fully understands at 
the outset of the original loan and of any renewal loan what the costs 
and benefits are to him of repayment or renewal. Pricing of a payday 
loan is straightforward and does not involve complex computations to 
determine the cost of credit. There is no opportunity for the lender to 
conceal costs or to confuse the borrower regarding the economic 
benefits of extension.
    The payday lender's ``default setting'' is that the loan must be 
repaid in full on the original due date. Because payday-loan renewals 
are initiated by the borrower, the harms sought to be avoided by 
federal and state anti-``flipping'' regulations are simply absent from 
this arena.
    Under the Best Practices for the Industry of the CFSA, CFSA members 
limit payday-loan renewals to the lesser of four or the number 
permitted by applicable state law.\22\ Applicable state laws in Arizona 
(for military borrowers), California, District of Columbia, Florida, 
Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, 
Mississippi, Montana, Nebraska, New Hampshire, Ohio, Oklahoma, South 
Carolina, Tennessee, Virginia, Washington and Wyoming proscribe all 
rollovers whatsoever. State laws in Alabama, Colorado, North Dakota and 
Rhode Island limit the permissible number of rollovers to one. Laws in 
the other 12 states which permit payday lending have variable limits on 
the number of rollovers permitted.
---------------------------------------------------------------------------
    \22\ Community Financial Services Association, Best Practices for 
the Industry, http://www.cfsa.net/genfo/egeninf.html (visited August 
29, 2006).
---------------------------------------------------------------------------
    There is no factual or authoritative support for the DoD Report's 
conclusion that merely permitting rollovers, to the very limited extent 
allowed by law or by CFSA's Best Practices, is a predatory practice.
--Simultaneous Borrowing from Multiple Lenders
    It is theoretically possible for a borrower to incur substantial 
amounts of debt by contracting simultaneously with multiple payday 
lenders--just as a borrower may have multiple credit cards, mortgages, 
car loans and doctors' bills. Neither CRL nor the author of the DoD 
Report explains how this possibility is the result of a predatory 
practice by lenders. Virtually any consumer good or service holds risks 
if it is over-consumed. To the extent that a borrower can become 
indebted to multiple lenders simultaneously, consumer activists like 
CRL (and, by wholesale adoption, the author of the DoD Report) appear 
to expect lenders to protect borrowers not from predation by lenders 
but rather from the results of the borrowers' own improvident financial 
decisions.
    It is ironic that the proponents of such protections expect sellers 
of credit services to ascertain whether the buyers have relationships 
with competitors, and, if so, to refrain from doing business with those 
buyers. In any other field of endeavor, the Sherman Act would be loudly 
invoked, and the Justice Department would be vitally concerned about 
the anticompetitive nature of these behaviors.
    Once again, the author of the DoD Report does not explain how it is 
``unfair'' or ``abusive'' for a lender to extend credit to a borrower 
who has existing credit relationships with others--especially, as is 
usually the case, if the lender is unaware of those relationships.\23\
---------------------------------------------------------------------------
    \23\ Alabama, Florida, Illinois, Indiana, Michigan, North Dakota 
and Oklahoma have state ``database'' requirements that limit or 
proscribe multiple loans to a single borrower from multiple payday 
lenders and provide for an electronic means to determine the existence 
of an outstanding loan from a competitor.
---------------------------------------------------------------------------
--No Consideration of the Borrower's Ability to Repay
    CRL's language, which is once again adopted unquestioningly and 
verbatim by the DoD report, asserts that ``payday lenders encourage 
consumers to borrow the maximum allowed, regardless of their credit 
history.'' The notion that payday lenders extend credit regardless of 
the likelihood of repayment by borrowers is preposterous and reveals 
the utter ignorance of the DoD Report's author regarding how the 
industry operates.
    Every payday lender employs a credit-scoring system to make credit 
decisions regarding individual borrowers. Such systems are ubiquitous 
in the consumer credit industry and are employed equally for credit 
cards, car loans, store credit and mortgages; the models vary from 
lender to lender and by type of loan. The largest and most 
sophisticated payday lenders employ computer-based models that are 
tested against large databases of actual experience and that are 
continually refined over time. Smaller lenders often use paper-based 
``check the box'' systems to ensure that borrowers meet their credit 
criteria. The systems take into account such factors as whether the 
borrower has a telephone at his residence, whether he has a steady 
source of income, his prior credit history with the lender and others, 
and his legal ability to contract. The factors vary by lender.
    All of these systems have one goal, and one goal only: to screen 
out borrowers who are unlikely to repay their payday loans.
    Lenders make money only if borrowers pay them; if they do not 
repay, lenders go out of business. It is beyond silly to suggest that 
lenders are unconcerned about the possibility that a borrower will 
default.
--Deferred Check Mechanism
    A universal feature of a payday loan is that the borrower gives the 
lender a check or other authorization to debit the borrower's checking 
account on the maturity date of the loan. If the borrower has not 
prepaid the loan in cash or otherwise, on the maturity date, the lender 
deposits the check. If the check is returned unpaid, the borrower may 
be subjected to a service charge by his bank because the borrower 
failed to arrange to have sufficient funds in his checking account at 
loan maturity.
    Once again, the DoD Report fails to explain how it could be 
predatory from the standpoint of the lender when a third party charges 
the borrower for returning a check unpaid. The lender does not control 
such charges and is a stranger to the relationship between the borrower 
and his depository bank. The borrower, but not the lender, had the 
power to avoid the charge by assuring that adequate funds were in the 
borrower's account.
    Automatic charges to the borrower's checking account are a routine 
feature of many ``mainstream'' forms of consumer credit. The DoD does 
not suggest how a lender's right to initiate such charges, standing 
alone, is ``unfair'' or ``abusive.''
    The DoD Report also improperly suggests that a borrower ``may fear 
criminal prosecution'' for such returned checks. Any such fears are 
unfounded. CFSA, through its Best Practices (supra, fn. 22), forbids 
its members from threatening or pursuing criminal action against a 
borrower as a result of the borrower's check being returned unpaid. 
This proscription is codified in most of the state laws that permit 
payday lending.\24\
---------------------------------------------------------------------------
    \24\ See, e.g., Cal. Fin. Code Sec. Sec. 23035(c)(3) and (d)(1).
---------------------------------------------------------------------------
--Mandatory Arbitration Clauses
    Many consumer and non-consumer contracts contain arbitration 
clauses. Parties to arbitration clauses do not waive their substantive 
rights or, as the DoD Report erroneously states, eliminate the 
borrower's right to sue for abusive lending practices.\25\ Congress 
enacted the Federal Arbitration Act to promote the expeditious and 
inexpensive resolution of both contractual disputes and statutory 
claims. Longstanding federal public policy strongly supports 
arbitration of disputes. As the U.S. Supreme Court has held:
---------------------------------------------------------------------------
    \25\ The DoD Report incorrectly states (at p. 21) that the Federal 
Arbitration Act ``eliminates the borrowers' opportunity to obtain legal 
recourse'' and improperly suggests that arbitrators ``paid for by the 
lender'' will be biased in favor of the lender. These statements are 
patently false.

          By agreeing to arbitrate a statutory claim, a party does not 
        forgo the substantive rights afforded by the statute; it only 
        submits to their resolution in an arbitral, rather than a 
        judicial, forum. It trades the procedures and opportunity for 
        review of the courtroom for the simplicity, informality, and 
        expedition of arbitration.\26\
---------------------------------------------------------------------------
    \26\ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 
U.S. 614, 629, 105 S.Ct. 3345, 87 L.Ed.2d 444 (1985).

    Arbitration permits the vindication of consumer claims for abusive 
and other improper lending practices. An analysis of actual awards and 
results suggests that consumers fare better in arbitration than in the 
judicial system and are satisfied with the results.\27\
---------------------------------------------------------------------------
    \27\ Michael T. Burr, The Truth About ADR, 14 Corporate Legal Times 
44, 45 (2004); Ernst & Young, Outcomes of Arbitration--An Empirical 
Study of Consumer Lending Cases (2004), http://www.adrforum.com/
rcontrol/documents/ResearchStudiesAndStatistics/2005ErnstAndYoung.pdf 
(visited August 29, 2006).
---------------------------------------------------------------------------
    The DoD Report's statements regarding arbitration are simply 
unfounded.
II. The DoD Report Fails to Demonstrate the Existence of a Problem 
        Warranting Legislative Action
    The DoD Report presents what is at best a confused, inconsistent 
and anecdotal picture regarding the prevalence of payday-loan use among 
service members. It is impossible to draw any conclusion from the 
report regarding (a) what percentage of military borrowers have 
experienced extreme financial difficulties while having payday loans 
outstanding, or (b) whether, and in what percentage of cases, payday 
loans were themselves a material factor in causing or contributing to 
the financial difficulties. Without such information, Congress cannot 
make an informed decision regarding the legislative action, if any, to 
be taken. It may indeed be the case that some change is warranted, but 
it is impossible to draw any conclusions from the haphazard 
presentation of data contained in the DoD Report.
--No Meaningful Percentage of Service Members Appear to be ``In 
        Trouble'' with Payday Loans
    The author's methodology in drafting the DoD Report is highly 
problematic. Although a quantitative survey of military personnel was 
undertaken to determine what actual percentage of service members make 
use of payday loans, that study was not used as a vehicle to determine 
how such loans have contributed to (or deterred) the service members' 
economic welfare. Instead, the Defense Department now discredits its 
own survey and substitutes, for quantitative data, a number of ``case 
studies'' culled from reports by ``financial counselors and legal 
assistance attorneys'' in instances where assistance had been rendered 
to service members after ``being trapped in high interest loans.'' \28\
---------------------------------------------------------------------------
    \28\ DoD Report at p. 39.
---------------------------------------------------------------------------
    These ``case studies'' were not chosen at random from all 
financial-assistance files.\29\ The ``case studies'' are not asserted 
to be a representative cross-section of all military families, of all 
military payday-loan users, or, indeed, of all users of military 
financial counseling. Rather, they are the product of the author's 
attempt to extract the most sympathetic (and possibly most egregious) 
examples of personal financial mismanagement by service members and 
then to hold them out as the ``evidence'' of the need for legislative 
relief.
---------------------------------------------------------------------------
    \29\ The DoD Report does not disclose how the ``financial 
counselors and legal assistance attorneys'' were instructed to select 
the ``case studies.''
---------------------------------------------------------------------------
    It is impossible to determine the prevalence of personal financial 
problems from the anecdotes presented in the DoD Report. Assuming, in 
the light most favorable to the DoD Report's author, that the 3,393 
``case studies'' are drawn only from a single short time period, they 
represent a mere 0.2% of the 1,379,879 active duty personnel; \30\ if 
the ``case studies'' were collected over a longer period, possibly of 
years--during which the armed forces experienced considerable 
turnover--then the incidence of such ``cases'' is much lower than 0.2%. 
The DoD Report simply does not disclose enough information to be able 
to fix the proper denominator.
---------------------------------------------------------------------------
    \30\ Department of Defense, Directorate for Information Operations 
and Reports (2006). Military Personnel Statistics. http://
www.dior.whs.mil/mmid/military/rg0601.pdf (visited August 30, 2006).
---------------------------------------------------------------------------
    The ``case studies'' were distilled into 17 anecdotes in the DoD 
Report. A mere 12 of these anecdotes involved payday loans.\31\ Twelve 
anecdotes should not be deemed sufficient evidence to warrant 
extraordinary legislative action.
---------------------------------------------------------------------------
    \31\ DoD Report at pp. 39-42.
---------------------------------------------------------------------------
    The best evidence of the absence of a ``problem'' is contained in 
other, inconsistent aspects of the DoD Report itself:
    First, according to the Defense Department's own data, only 5% of 
service members use payday loans at all.\32\
---------------------------------------------------------------------------
    \32\ DoD Report at p. 13. The author of the DoD Report insists that 
his own data must be incorrect because such data are is inconsistent 
with a study by the Consumer Credit Research Foundation (fn. 18, supra) 
that found the incidence of payday-loan use by enlisted military 
personnel at 13%. But the Foundation only surveyed personnel who live 
on and in the immediate vicinity of military bases in the continental 
United States; if deployed and otherwise stationed personnel --who 
generally will not have access to payday loans at retail locations--
were included in the denominator, the result would likely be much lower 
and consistent with the DoD Report's 5% figure.
---------------------------------------------------------------------------
    Second, the DoD Report states that ``payday loans carry very low 
risk of loss''; \33\ in other words, the default rate--the best proxy 
for the rate at which payday-loan borrowers ``get in trouble''--is low. 
CRL claims the default rate to be 6%.\34\ Assuming this rate to be 
accurate, or even in the ballpark, the percentage of all service 
members who ``get into trouble'' while having payday loans outstanding 
is about 6% of 5%, or 0.3%. In other words, 99.7% of service members 
either do not use payday loans or are unaffected by ``troubled'' payday 
loans.
---------------------------------------------------------------------------
    \33\ Id.
    \34\ Center for Responsible Lending, Fact v. Fiction: The Truth 
about Payday Lending Industry Claims. http://
www.responsiblelending.org/issues/payday/briefs/
page.jsp?itemID=29557872 (visited August 30, 2006).
---------------------------------------------------------------------------
    Finally, the DoD Report itself suggests that the ``problem,'' if 
one exists at all, is diminishing substantially without legislative 
action--a 20% decline from 2004 to 2006--through, among other things, 
education and command attention.\35\
---------------------------------------------------------------------------
    \35\ DoD Report at pp. 37-38.
---------------------------------------------------------------------------
    A problem which is not experienced by 99.7% of all service members, 
and where usage is declining to immaterial levels, cannot be said to be 
worthy of immediate legislative action.
--There Is No Evidence That Payday Loans Cause Financial Hardship or 
        Affect Military Readiness
    As noted above, in a very small percentage of cases--0.3% of all 
service members--there is a default or ``trouble'' with a payday loan.
    The data do not show whether payday loans caused the service 
members' financial difficulty, or whether--as is far more likely--the 
payday loan was merely an unsuccessful attempt to find a solution to a 
preexisting financial problem.
    The 12 anecdotes presented in the DoD Report involving payday loans 
fail to present, in a balanced way, the totality of the financial 
circumstances of the borrowers. It is impossible to determine from 
those anecdotes how the service members fell on hard times, whether 
they sought payday loans before or after experiencing other financial 
reversals, the other obligations they had outstanding, and why they 
were ultimately unable to repay their debts.
    The author of the DoD Report wishes readers to believe that payday 
loans were the cause of the service members' difficulties in those 
cases where the service members (a) had outstanding payday loans, and 
(b) experienced financial difficulties. In other words, he concludes 
that the mere coincidence of payday loans and financial difficulties 
means that payday loans must be the cause of the financial 
difficulties. This post hoc, ergo propter hoc reasoning--that 
correlation is causation--is a tempting logical fallacy for an author 
whose conclusion had been reached before the research began.
    Such an explanation is not supported by DoD Report's data and, more 
importantly, is inconsistent with what is known generally about how 
consumers behave with payday-loan borrowings. Although the vast 
majority of payday-loan borrowers use such credit responsibly, for its 
intended short-term purpose and under circumstances where repayment is 
likely, a small minority of borrowers seek payday loans when they are 
already in serious financial difficulty and when their repayment 
prospects are poor. Such borrowers may hold a good-faith expectation 
that their circumstances will improve if they can temporize, or they 
may simply seek to postpone the day of reckoning. Either way, this 
small minority of borrowers is generally operating under an enormous 
debt load before incurring payday-loan debt. Often, the debts have been 
caused by circumstances beyond the borrower's control, such as 
unforeseen medical expenses (medical expenses are a factor in 
approximately half of all personal bankruptcies, even among fully 
insured debtors \36\). In such circumstances, a payday loan will have 
postponed, but ultimately made little difference to, the debtor's 
financial failure.
---------------------------------------------------------------------------
    \36\ See, generally, ``MarketWatch: Illness And Injury As 
Contributors To Bankruptcy,'' Health Affairs (February 2, 2005) 
(available at http://content.healthaffairs.org/cgi/content/full/
hlthaff.w5.63/DC1 [visited August 31, 2006]).
---------------------------------------------------------------------------
    This analysis is borne out by a random sample conducted by CFSA of 
service members' bankruptcy petitions in cases where payday loans were 
discharged, which provide the details of their debts on a creditor-by-
creditor basis.\37\ Payday-loan debt comprises less than 4% of such 
bankrupt service members' total liabilities. Perhaps more interesting 
is that none of such petitions reveals either a judgment or garnishment 
for payday-loan debt, while such judgments and garnishments for other 
debts were commonplace.
---------------------------------------------------------------------------
    \37\ Details available on request.
---------------------------------------------------------------------------
    It is likewise difficult, because of the lack quantitative data, to 
accept at face value the DoD Report's implicit (and unexamined and 
unexplained) conclusion that high-interest-rate lending, without more, 
adversely affects military readiness. While being ``in financial 
trouble'' may result in loss of a security clearance, there is no 
logical causation chain that connects merely having access to payday 
loans to being ``in trouble.'' As noted above, the vast majority of 
payday-loan borrowers repay their loans without ``trouble.'' To the 
extent that these borrowers are ``in trouble,'' the data available show 
that they were universally ``in trouble'' before obtaining payday-loan 
credit. In the vast majority of cases, payday loans are a solution to a 
problem, not the problem--and there is no objective evidence to the 
contrary.
    Finally, if it is assumed--as CRL posits--that some military 
borrowers make use of multiple payday loans, the total amount they pay 
in interest is extremely unlikely, without more, to give rise to a 
``readiness'' problem. A borrower with ten loans over a two-year period 
who pays $600 in interest will have paid less in payday-loan interest 
than the cost of a twice-weekly cup of coffee from Starbucks.
    In summary, the DoD Report fails to set forth any evidence from 
which Congress may logically conclude that payday loans cause or 
contribute to financial difficulties for service members. To the 
contrary, the data suggest that the vast majority of borrowers repay 
their payday loans without difficulty, as intended, and use them as the 
short-term ``bridge'' for which they are designed.
--Alleged ``Targeting'' of Military Customers is Not Meaningful to this 
        Analysis
    The DoD Report cites at length a study (Graves and Peterson, 2005) 
\38\ purporting to show that payday lenders concentrate their retail 
locations near military institutions in order to ``target'' potential 
military borrowers. Even assuming the correctness of this analysis, 
such putative ``targeting'' is irrelevant if (a) payday loans are not 
``predatory'' (within the meaning of the 2006 Act), or (b) payday loans 
do not materially cause or contribute to a decrease in economic welfare 
for borrowers. As noted above, the DoD Report sheds heat, but no light, 
on these matters.
---------------------------------------------------------------------------
    \38\ ``Predatory Lending and the Military: The Law and Geography of 
`Payday' Loans in Military Towns.'' 66 Oh. St. Law Rev. 653 (2005).
---------------------------------------------------------------------------
    Moreover, even if the concentration data are credited, there are 
innocent as well as sinister explanations for such concentration. For 
example, areas around military bases universally contain large numbers 
of support businesses, the employees of which are often more squarely 
within the demographic profile of payday-loan users than service 
members themselves.
    Graves and Peterson also assume that demographics alone explain 
retailers' store- location decisions. They do not consider, and thus do 
not include in their analysis, other factors that may explain these 
decisions. For example, rental costs, payroll costs, zoning regulations 
and proximity to other retail outlets (``agglomeration effects,'' in 
economic terms) are all factors in store-location strategy.\39\
---------------------------------------------------------------------------
    \39\ Graves and Peterson's study does not follow customary social 
science protocols by controlling for, for example, characteristics of 
the nearby non-military populations such as income, unemployment, home 
ownership and education levels. Their paper implicitly assumes that all 
those characteristics are distributed equally across each state, and 
that military bases are placed in random locations. Graves and Peterson 
calculate the ``predicted'' number of payday lenders by calculating a 
statewide number of payday outlets per person and multiplying that 
number by the population in the military installation's ZIP Code. Their 
theory assumes, effectively, that Detroit and Grosse Point should have 
the same number of payday lenders per person. They fail to provide t-
statistics from which a reader can determine whether the difference 
between the ``predicted'' and ``actual'' number of lenders is 
statistically significant. For these reasons, the study cannot be 
accorded any scientific weight.
---------------------------------------------------------------------------
    The ``targeting'' argument also defies common sense. Military 
customers account for a very small percentage of all users of payday 
loans.\40\ It is illogical that payday-loan companies would devote 
disproportionate resources to marketing to such a small percentage of 
their customer base.
---------------------------------------------------------------------------
    \40\ Letter from Penn, Schoen & Berland Associates, Inc., Results 
of Poll Determination Payday Loan Usage Among Active Duty Members of 
the US Military (January 2005), available at http://www.cfsa.net/genfo/
Military-Polling-Results-Memo.pdf (visited September 5, 2006).
---------------------------------------------------------------------------
    Finally, the unspoken message of both the DoD Report and of Graves 
and Peterson is that it is somehow wrongful for businesses to address 
their services directly to groups of their potential customers. Yet 
military borrowers have legitimate needs for short-term credit, based 
on their age, their stage in the economic lifecycle and the high value 
to them of immediate consumption of certain kinds of goods and 
services:

          While military compensation tends to be stable, the household 
        cash expenditures of military enlisted personnel can be 
        irregular because of features of the military lifestyle and 
        rules governing service. Enlisted personnel, because of their 
        young age, general standard of living and historical low 
        incomes, are not likely to have amassed significant 
        precautionary savings to address these issues. However, they 
        are able to smooth these irregularities in cash outflows by 
        taking on debt, and they can repay that indebtedness through 
        their stable incomes.
          Because of their youth, military enlisted personnel tend to 
        be at the stage in life where the acquisition of durable goods 
        can provide a stream of perceived economic benefits that 
        substantially exceeds the cost of consumer credit.\41\

    \41\ William O. Brown, Jr. and Charles B. Cushman, Compensation and 
Short-Term
Credit Needs of U.S. Military Enlisted Personnel (2006). 
http://www.consumercreditresearchfoundation.org/_files/
060427MilitaryCredit.pdf (visited August 31, 2006).

    In the final analysis, however, there is simply no analog for 
Graves and Peterson's ``targeting'' analysis in any other field of 
endeavor. Public policy regarding the services offered by fast-food 
stores, convenience stores, gasoline stations, supermarkets, liquor 
stores or casinos is not derived from studies of the concentration of 
their outlets around military bases. Rather, an objective and 
quantitative determination must be made regarding the nature of the 
services offered and their value to society. The DoD Study fails to 
provide a scientific and factual basis for such a determination.
III. The DoD Report's Conclusions Are Not Supported by Economic Theory 
        or Sound Public Policy
    The DoD Report fails to provide quantitative and scientific 
evidence to demonstrate the existence of a ``problem'' requiring a 
legislative solution. But even if the DoD Report's deeply flawed 
analysis were credited, the principal recommendations of its author 
find little theoretical support in economic literature or public 
policy. Although apparently well intentioned, implementation of the 
author's recommendations will not provide a meaningful benefit to 
service members and will materially diminish the economic choices 
available to military personnel, while creating unintended consequences 
and problems. These recommendations should therefore be rejected.
--36% APR Ceiling
    The DoD Report's principal and most dramatic recommendation is a 
36% across-the-board federal interest-rate ceiling on all lending to 
military borrowers. If this interest rate were to be applied to payday 
lending, it would fix the consumer price below the lenders' marginal 
costs and well below the lenders' average costs (Flannery and Samolyk, 
2005, fn. 9). The practical effect of such a rate cap would be to 
eliminate the legitimate market for such lending altogether.
    The economic effects of price controls of any kind are notorious. 
While affordability and consumer protection are generally cited as the 
goals of price ceilings, price controls invariably become a wealth-
redistribution mechanism. This mechanism evolves into a system of 
implicit subsidies, under which some rates are maintained at levels 
that are artificially high so that others can be restrained. Usury 
ceilings erode service quality, as lenders reduce the expenses of their 
operations and weed out all but the most creditworthy borrowers; 
pricing to the most desirable customers is invariably increased so that 
the least desirable customers can be subsidized, if they are served at 
all. The distortion of market forces that occurs with rate caps will 
deprive the most desperate of borrowers of the opportunity to borrow 
from legitimate, regulated lenders and instead compel marginal 
borrowers to deal with lenders who are willing to lend illegally\42\ 
and who, more likely than not, will pursue just as illegal collection 
practices when the loans come due.
---------------------------------------------------------------------------
    \42\ Rationing and under-the-table payments are common results of 
statutory price ceilings. ``Loan sharking'' is the most prevalent 
result of artificially low usury ceilings.
---------------------------------------------------------------------------
    The DoD Report assumes, without any theoretical or practical 
foundation, that: (a) payday loans will continue to be available in a 
legitimate market, even if rates are fixed below lenders' costs; or (b) 
if such loans are unavailable, borrowers will behave in a manner deemed 
more ``responsible'' financially.
    History teaches that Congress has vast powers, but it cannot 
suspend the laws of economics; needy borrowers will obtain the credit 
that they need, even if they can only do so illegally.
    The effect of a legitimate and regulated market for payday loans 
has been salutary. As noted above, CRL claims that at least 94% of 
payday-loan borrowers repay their loans without default; approximately 
99.7% of all service members appear to be unaffected by payday-loan 
defaults. There is no meaningful black market for military credit, so 
that the opportunities for a wide range of criminal behaviors simply do 
not exist--yet.
    Consumer credit experts, even those who favor usury ceilings, 
recognize the bluntness of usury as a tool for regulating consumer 
credit policy.\43\ Other tools, while less direct, may have a consumer-
friendly effect while allowing the market itself to create the proper 
pricing. For example, liberalized bankruptcy exemptions and 
restrictions on creditor remedies (such as on garnishment and 
collection) force lenders to internalize the costs of improvident 
credit decisions while not restraining prices artificially. Likewise, 
as the DoD Report recommends, enhanced disclosures may be useful to 
promote informed shopping and to eliminate the effects of unintended 
transactions. Finally, there are a variety of approaches that are 
gaining popularity in Europe but have not been attempted in the United 
States, such as requiring lenders to give advice regarding appropriate 
forms of credit and so-called ``responsible lending'' rules.\44\ (The 
CFSA Best Practices, fn. 22, are a form of ``responsible lending'' 
principles.) There is thus sound scholarly support for the notion that 
usury regulations should be the last resort, not the first, in 
regulating credit markets. Evidence of need for such crude re-
regulation is simply absent from the DoD Report.
---------------------------------------------------------------------------
    \43\ Steven M. Crafton, An Empirical Test of the Effect of Usury 
Laws, 23 J.L. & Econ. 135, 145 (1980); James E. McNulty, A 
Reexamination of the Problem of State Usury Ceilings: The Impact in the 
Mortgage Market, 20 Q. Rev. Econ. & Bus. 16, 26-27 (1980); Loretta J. 
Mester, Why Are Credit Card Rates Sticky?, 4 Econ. Theory 505, 505, 521 
(1994); Usury Laws: The Bad Side of Town, Economist, Nov. 28, 1998, at 
30.
    \44\ See, e.g., Commission of the European Communities, Proposed 
Directive on Consumer Credit Agreements (2005), available at http://
ec.europa.eu/consumers/con_int/fina_serv/cons_directive/
2ndproposal_en.pdf (visited August 31, 2006).
---------------------------------------------------------------------------
    The DoD Report proposes to reverse years of enlightened 
deregulation of credit markets. This deregulation has resulted in 
unprecedented access to credit for low-income borrowers.\45\ Moreover, 
deregulation has caused the average cost of credit to existing 
borrowers todecline.\ 46\
---------------------------------------------------------------------------
    \45\ See, generally, Baxter, W.F., ``Section 85 of the National 
Bank Act and Consumer Welfare,'' 1995 Utah L. Rev. 1009, 1023:
    ``Finally, notwithstanding the familiar populist politics of usury 
laws, the greatest gains from federal preemption are likely to accrue 
to the least well-off consumers in society. Regulatory restrictions in 
credit markets hurt highest-risk borrowers the most. Based on a review 
of the empirical literature estimating the impact of restrictive 
interest rate ceilings before Marquette, one study concludes that 
`lower-income families and families headed by younger persons would 
seem to be among those most likely to be denied credit as a result of 
such [interest rate] ceilings.' [footnote omitted] In credit card 
markets in particular, both the Credit Research Center survey data and 
a New York State study echo this result. These studies indicate that 
pre-Marquette rate ceilings affected the probability that a low-income 
or lower-middle-income family would hold a credit card but did not 
affect the probability of cardholding for higher-income families.''
    \ 46\ Id. at 1022.
---------------------------------------------------------------------------
    Service members obviously appreciate the convenience and ease of 
obtaining a payday loan; 78% of service members agree that ``most 
people benefit from the use of credit.'' \ 47\ Other authorities are in 
accord.\48\
---------------------------------------------------------------------------
    \ 47\ DoD Report at p. 44.
    \ 48\ ``Payday lenders have grown dramatically in the past few 
years precisely because they are meeting both a need and a service 
banks and credit unions have failed to provide--convenient, small loans 
on a short-term basis . . . Payday lenders are fast, friendly and have 
convenient hours; they are open until 6 p.m. and on Saturdays . . . 
They have a good business model; they fill a need and provide a service 
that people want.'' National Association of Community Credit Unions, 
Credit Union Alternatives to Payday Lending (January 2006), available 
at 
http://www.naccu.coop/white_papers.html (visited August 29, 2006).
---------------------------------------------------------------------------
    The state legislatures of 37 states have performed this calculus 
and reached conclusions that are directly contrary to those of the 
author of the DoD Report. Recognizing that it is better to have a 
robust and competitive but regulated market for the kinds of credit 
that borrowers actually demand, these states have, after careful study, 
both enabled such lending and set interest-rate ceilings at levels that 
exceed lenders' costs. The DoD Report discounts the decisions of these 
state legislatures entirely.
    Throughout, the DoD Report notes that many borrowers turn to payday 
lending because they already have bad credit. The DoD Report's 
``solution'' is to eliminate a borrowing option when the damage (i.e., 
bad credit) has already been done. The most appropriate and effective 
policy response would be one that addresses the root cause, not one 
that eliminates a possible, albeit temporary, solution. Education and 
the fostering of sound personal finances would create more financial 
options for households than any other solution.
    The DoD Report gives no attention to the possible harm caused by 
eliminating lawful access to payday-loan credit for the 99.7% of 
service members who either do not payday loans at all, or who use them 
responsibly and for their intended purpose. Further study of this issue 
is warranted prior to material legislative change.
--Ability to Repay 
    As noted above, the DoD Report discusses the extension of credit 
without regard to ability to repay. Payday lenders never extend credit 
without consideration of the borrower's ability to repay. An essential 
feature of any positive credit decision is that the borrower has a 
steady source of income, and that income can be used to make loan 
payments. This is the same criterion that is employed by providers of 
both secured and unsecured credit of virtually every kind (with the 
possible exception of pawn lending).
    The overarching unique feature of a payday loan is that the 
borrower provides the lender with a check for the aggregate of the loan 
principal and finance charge at the inception of the relationship; the 
lender knows that the check is likely to be honored because the 
borrower's checking account is periodically replenished by the 
borrower's employer. It is this very check that provides the lender 
with the borrower's assurance of repayment. The DoD Report stands logic 
on its head by recommending that this check be dispensed with, thereby 
eliminating the lender's assurance of the borrower's ability to repay.
    If taking the borrower's check were proscribed, a payday loan would 
have very different economic characteristics, because the lender's 
collection costs and overall credit experience would be dramatically 
and adversely affected. Elimination of the check would drive lenders' 
costs up to the point were it would no longer be economic to extend 
credit at current market rates; such credit would be unthinkable at the 
proposed ceiling rates.
--Arbitration 
    The DoD Report recommends that arbitration clauses in loan 
contracts with military borrowers be forbidden. As noted earlier in 
this letter, there is no evidence of a ``problem'' to which this 
``solution'' purports to be responsive. Overall complaint rates to 
regulators regarding payday loans are extremely low: on the order of 
magnitude of one complaint per million loans. Other than litigation 
involving the now-defunct ``bank model,'' there have been only a 
handful of reported cases relating to the payday-loan industry.
    As noted above, agreeing to arbitration does not amount to the 
waiver of any substantive rights. By agreeing to arbitrate, a consumer 
submits his claims to an impartial tribunal that is authorized to award 
any remedy that a court might award, including injunctive relief, 
attorneys' fees and costs. Arbitration is more expeditious and less 
expensive than litigation and produces results with which consumers are 
nearly universally satisfied.
    This recommendation is inconsistent with federal public policy that 
encourages non-judicial resolution of disputes and should be rejected.
--Other Recommendations 
    CFSA takes no position regarding the remaining recommendations of 
the DoD Report.
    Although the report makes the uncontroversial suggestion that 
uniform cost-of-credit disclosures be given to military borrowers, in 
fact such disclosures are already being made to all payday-loan 
borrowers because they are required under the Truth in Lending Act, 15 
U.S.C. Sec. 1601 et seq., and the Federal Reserve Board's implementing 
Regulation Z, 12 C.F.R. Part 226. The requirement for such disclosures 
is likewise incorporated in many of the state-law provisions that 
enable payday lending. It is unclear whether this recommendation is 
intended to remedy a perceived deficiency in payday lending or in some 
other form of credit.
    The report also makes the recommendation that lenders be precluded 
from contracting for waivers of the protections provided by the 
Servicemembers' Civil Relief Act.\49\ Such waivers are unenforceable in 
any event, and it is once again not clear what wrong is sought to be 
remedied by the author's recommendation.
---------------------------------------------------------------------------
    \49\ This law protects not only those on active duty but also 
Reservists and activated members of the National Guard. 50 U.S.C. App. 
Sec. 501 et seq. The U.S. Supreme Court has said that the predecessor 
statute should be read ``with an eye friendly to those who dropped 
their affairs to answer their country's call,'' Le Maistre v. Leffers, 
333 U.S. 1, 6 (1948), and its provisions are generally considered to be 
non-waivable.
---------------------------------------------------------------------------
                              Conclusion 
    The DoD Report is biased, unscientific and fails to follow the 
routine social-science protocols that enable policy makers to reach 
informed decisions regarding consumer-credit law. The report makes 
recommendations that are unsound from a policy standpoint, and those 
recommendations are intended to address problems that have not been 
proven to exist with any demonstrated rate of incidence. The 
overwhelming evidence is that payday loans are employed by borrowers 
for their intended short-term purpose, and nearly all borrowers repay 
them as agreed, without financial distress.
    The DoD Report should be rejected in its entirety.
                                 ______
                                 
             PREPARED STATEMENT OF CHRISTOPHER L. PETERSON
Assistant Professor of Law, Levin College of Law, University of Florida
                           September 14, 2006
    It is an honor to appear today before this Committee. Thank you for 
the opportunity to share some thoughts on predatory lending practices 
directed at military personnel and their dependents. My name is 
Christopher Peterson and I am a law professor at the University of 
Florida where I teach commercial law and consumer law classes. I 
commend you, Mr. Chairman, Senator Sarbanes, and other members of the 
Committee for organizing these hearings and for providing an 
opportunity to discuss this important and timely national issue.
    As you know, the Department of Defense recently released a large 
report on predatory lending to military personnel. I have been asked to 
share my reactions to this report. In short, I believe that deceptive 
and onerous credit is a significant problem for both the military and 
for many middle and lower income Americans. The Department of Defense's 
report does an excellent job of compiling the various predatory lending 
threats to its personnel and in recommending an appropriate policy 
response. In this testimony, I will briefly discuss some historical, 
economic, geographic, and legal considerations which may be of 
assistance to you in deliberating on the meaning and significance of 
this report.
Military Personnel Have Historically Been Vulnerable to Oppressive 
        Credit
    Predatory lending is not a new phenomenon either in American or 
world history. Since humanity's earliest recorded history, some 
creditors have always been willing to take advantage of desperate, 
incautious, or naive borrowers by making loans with ruinous interest 
rates and remedies. While today's borrowers wonder whether they will 
have sufficient funds in their account to cover a check post-dated two 
weeks in advance, ancient debtors dreaded ``the end of the moon'' when 
their high cost loans came due.
    Moreover, government and religious leaders of virtually all complex 
civilizations have tried to limit the harsh consequences these 
contracts can have both for borrowers and for their communities and 
institutions. It is no coincidence that humanity's very first recorded 
comprehensive legal system, the Code of Hammurabi (c.1750 B.C.E.), 
includes aggressive consumer protection rules. According to legend, the 
Babylonian Emperor Hammurabi ascended a mountain where Shamash, the 
Babylonian God of Justice gave him a comprehensive code which was used 
to govern that civilization for over a thousand years. Included in the 
statute was a usury law that limited interest rates to 20% per annum 
for loans of silver and 33% on loans of grain. The text of the code 
bears a remarkable similarity to interest rate caps adopted thousands 
of years later, including the interest rate cap purporting to limit 
interest rates to 18%, which is still in the State code in my home 
state of Florida. Ironically, the loans offered by companies that 
surround virtually all of our military bases would have been illegal in 
ancient Babylon.
    History books are full of evidence suggesting military personnel 
have tended to be especially vulnerable to oppressive moneylenders. For 
example, violent riots broke out in the early Roman Republic (before 
they adopted a usury law) when the public learned of an oppressive 
credit contract between a military veteran and a money lender. When the 
veteran was unable to pay his debt the moneylender took his farm and 
imprisoned him. The resulting riots, usually called the ``First 
Secession'' by Roman historians, threatened to undermine the entire 
emerging Roman Republic. Public resentment of oppressive credit 
contracts was stabilized when the government adopted an interest rate 
cap in the twelve tables, a law which served as the foundation of Roman 
law and still influences civil legal systems in Europe and the state of 
Louisiana. Throughout most of the Roman Empire and eventually the 
Byzantine Empire, the government capped interest rates at 12% per 
annum.
    All throughout our national history--with the exception of the past 
decade or two--we have attempted to protect military and non-military 
borrowers alike with usury laws. The founding fathers brought over 
English interest rate caps when they arrived in America. When the U.S. 
Constitution was ratified, low usury ceilings and a frontier thrift 
ethic were nearly universally agreed upon by America's first leaders. 
It is extraordinarily unlikely that George Washington, Thomas 
Jefferson, or Alexander Hamilton would have tolerated 500 percent 
interest rate loans to members of the Continental army. Certainly 
Benjamin Franklin, who frequently wrote on the subject and was a strong 
proponent of usury law, would have been outraged at today's military 
loans.\1\
---------------------------------------------------------------------------
    \ 1.\ ``For example, Franklin once wrote: Think what you do when 
you run in Debt; You give to another Power over your Liberty. If you 
cannot pay at the Time, you will be ashamed to see your Creditor; you 
will be in Fear when you speak to him; you will make poor pitiful 
sneaking Excuses, and by Degrees come to lose your Veracity, and sink 
into base downright lying; for, as Poor Richard says, The second Vice 
is Lying, the first is running in Debt. . . . Poverty often deprives a 
Man of all Spirit and Virtue: Tis hard for an empty Bag to stand 
upright . . . . The Borrower is a Slave to the Lender, and the Debtor 
to the Creditor, disdain the Chain, preserve your Freedom; and maintain 
your independency: Be industrious and free; be frugal and free.'' David 
M. Tucker, the Decline of Thrift in America: Our Cultural Shift From 
Saving to Spending 9-10 (1991); 7 The Papers of Benjamin Franklin 342-
49 (Leonard W. Labaree ed., 1963).
---------------------------------------------------------------------------
    During America's rise to international power in the twentieth 
century federal and state governments relied on usury laws to deter, 
educate, and exercise symbolic moral leadership on predatory lending. 
During the years when so-called ``greatest generation'' governed our 
country, very few states or leaders were willing to depart from our 
traditional usury laws. Our military, along with our allies (all of 
which, incidentally, did not tolerate predatory lending to their troops 
either), managed to win the Second World War without the assistance of 
triple digit interest rate loans in whatever form those loans might 
take. In the economic boom years following the war, our country became 
more comfortable with using credit to finance a middle class lifestyle. 
But it was not until much later that loopholes in our law, including 
the Supreme Court's historically dubious interpretation of the National 
Bank Act, allowed lenders to begin marketing loans with terms that in 
past generations would have been associated with illegal loansharks.
    A long term historical perspective suggests that the Department of 
Defense's recent report on predatory lending is actually quite 
conservative in substance and modest in proposals. Any responsible look 
at our national history reveals that at no other time would the 
Pentagon have been forced to implore the Congress to protect its 
personnel from triple digit interest rate loans. In every previous 
American generation, the Department of Defense's substantive legal 
recommendations would have been accepted with little or no debate.
The Department of Defense Report is Economically Sound 
    Free and competitive enterprise is one of the backbones of American 
society. And, no institution is more responsible for preserving our 
freedom to conduct business than the Department of Defense. However, I 
would respectfully counsel the Senate to recall the great difference 
between a competitive market and market anarchy.
    In a competitive market, self-interested, autonomous commercial 
behavior creates better policy outcomes than government intervention, 
because each individual can be trusted to make their own resource 
allocation decisions. As each individual makes decisions about where to 
invest their time, services, and funds, competitive markets naturally 
evolve into a result that is better than could have been achieved had 
government intervened. Adam Smith famously compared this process of 
individual, self-interested decision making to an ``invisible hand'' 
that guides social policy to the optimal outcome.
    Unfortunately, sometimes the invisible hand alone does not work. 
Responsible leaders uniformly agree that the government must intervene 
in the market for some goods and services. We can all agree that the 
U.S. government should ban free markets for weapons grade plutonium, 
child pornography, or heroin. These products have characteristics 
associated with them that make an unregulated market unacceptable. The 
sale of plutonium to terrorists would likely impose the highest 
externalities on those killed by a bomb made as a result of the 
contract. We ban child pornography because contracts to purchase it 
create an incentive to assault our children, and because we refuse to 
recognize economic demand for that product as morally legitimate. We 
ban the sale of heroin because buyers of this product tend to make non-
rational decisions by virtue of the product's addictive 
characteristics. Our ancient (and only recently relaxed) laws against 
predatory loans are evidence of analogous market imperfections 
associated with credit contracts.
    At least three market imperfections prevent the market for high 
cost short term loans from resolving to an efficient equilibrium: (1) 
imperfect information, (2) behavioral distortion, and (3) 
externalities. First, consumers have great difficulty comparing the 
prices of credit. Despite the best efforts of our educational system, 
many people in our society still have (and likely will always have) 
difficulty learning to read or make simple mathematical calculations. 
The ``invisible hand'' cannot create efficient outcomes when individual 
borrowers do not compare the price of a loan to its opportunity cost. 
In markets that are targeted by predatory lenders, it is likely that a 
large percent of the served population have little or no idea how to 
compare credit prices. Moreover, because creditors can hide and obscure 
those prices through inaccurate disclosure, hidden fees (including 
contingent charges such as late fees, over-the-limit fees, attorney 
fees, etc.), and worthless add-on products that even rational borrowers 
will not attempt to shop, since doing so is likely to be an 
unproductive use of time.\2\
---------------------------------------------------------------------------
    \ 2.\ Although the government has attempted to assist in this 
respect by passing the Truth in Lending Act, most people agree that 
there are serious problems with this statute as it is currently 
written. TILA disclosures are difficult to understand, come far too 
late in negotiations (after a loan applicant has already decided to 
borrow), and are riddled with exceptions that distort the usefulness of 
disclosures. Moreover, inflation has outdated the dollar limits to the 
scope of the statute and the remedial damage awards that deter non-
compliance. Besides, predatory lenders consistently disregard and 
obscure TILA disclosure rules anyway. See generally Christopher L. 
Peterson, Taming the Sharks: Towards a Cure for the High Cost Credit 
Market (U. Akron Press, 20034)
---------------------------------------------------------------------------
    Second, Consumers, including military personnel, do not always make 
economically rational decisions. As the nobel prize winning research of 
Daniel Kahneman and Vernon Smith demonstrates, people often fail to 
match their estimation of the value of the a product to the utility 
they actually receive from it. For example, consumers often 
unreasonably discount the value of future income. Sometimes, for better 
or worse, people want today, what they should wait for until tomorrow. 
That is why it is difficult to save for retirement and it is one reason 
why many people borrow more money than they should. Similarly, 
consumers tend to overestimate their own ability to control financial 
outcomes and underestimate factors outside their control, such as 
unexpected car repairs, illness, payroll mistakes, job loss, etc. This 
common tendency leads borrowers into believing they can quickly repay 
high cost loans, when in reality, they cannot. Predatory lenders 
understand how these behavioral distortions operate in the credit 
market, and intentionally exploit them. This is why advertisements for 
``fast cash'' or ``easy credit'' can tempt people, including soldiers, 
sailors, airmen, and marines, into making unreasonable financial 
decisions.
    Third, predatory loans have significant costs--usually referred to 
as externalities--born by those not privy to the contract. For example, 
when a predatory loan does not only hurt the borrower, it can also lead 
to deprivation of resources that would have otherwise gone to the 
borrower's children or other dependents. Neighborhoods that host 
predatory lenders often suffer from lower property values. Utilities, 
hospitals, land lords, and mainstream financial service providers all 
have greater difficulty obtaining timely payment from consumers who 
become mired in high cost debt. Because they tend to be more aggressive 
than other creditors, predatory lenders frequently skip to the head of 
the line obtaining payment before others with less questionable debts.
    The Department of Defense report should be seen as an emphatic 
example of the externalities associated with predatory loans. Military 
leaders are speaking out, explaining that predatory lending is eroding 
the military readiness of our armed forces. Who better to know whether 
this is true than the Pentagon along with the many generals, admirals, 
and other officers who have spoken out on this issue? By trapping 
military borrowers in high cost predatory loans, lenders are disrupting 
the family lives and emotional well being of those who are protecting 
us in a complex and dangerous world. The evidence cited by the Pentagon 
on the thousands of service members who have suffered revoked security 
clearances as a result of predatory lending should be seen as concrete, 
unimpeachable evidence of a market distorting externatility associated 
with high cost consumer loans.
The Department of Defense Report is Empirically Sound
    A previous study conducted by Professor Stephen Graves, of 
California State University, Northridge, and myself examined the 
location patterns of one type of predatory lender in relation to 
military installations around the country.\3\ In our study we examined 
20 states, 1,516 counties, 13,253 ZIP codes, nearly 15,000 payday 
lenders, and 109 military bases. We found high concentrations of 
predatory lending businesses in counties, zip codes, and neighborhoods 
in close proximity to military bases. Our study controlled our 
observations by comparing the density of payday lender locations in 
military areas to statewide averages and also by comparing payday 
lender locations to bank locations. We could find no statistically 
reasonable explanation for these location patterns except for the 
presence of military personnel living on or in close proximity to 
military bases.
---------------------------------------------------------------------------
    \ 3\ Steven M. Graves & Christopher L. Peterson, Predatory Lending 
and the Military: The Law and Geography of ``Payday'' Loans in Military 
Towns, 66 Ohio St. L.J. 653-832 (2006).
---------------------------------------------------------------------------
    This pattern existed in every state we looked at, except for New 
York, which had consistently and aggressively enforced its 25 percent 
per annum interest rate cap. Unlike every other major military 
installation we studied, Ft. Drum (home to the Army's 10th Mountain 
Division) in upstate New York was not surrounded by payday loan 
outlets. While other credit options were available, including finance 
companies, credit unions, banks, thrifts, and pawnshops, there was not 
a large on the ground force of triple digit interest rate lenders 
surrounding the base. In contrast, voluntary trade association 
guidelines, or so-called ``best practices'' agreements, did not create 
any demonstrable influence on the geographic patterns associated with 
payday lenders and military installations. Similarly, a variety of 
ancillary state consumer protection rules, such as rollover 
limitations, internet databases, and licensing requirements, did not 
deter payday lender clustering around military bases. We concluded that 
usury laws--the time tested, conservative, historical American response 
to predatory lending--appeared to be the best legal tool for addressing 
concerns about predatory lending to military personnel.
    The Department of Defense report further corroborates our findings. 
It uses a variety of quantitative and qualitative data to establish the 
existence of a significant predatory lending problem. The report makes 
realistic estimates of the percent of service members using payday 
loans. The report also accurately summarizes a variety of other 
potentially predatory credit products used by military personnel. The 
report accurately describes Department of Defense financial education 
efforts, as well as the inherent limitations to this approach. The 
report accurately summarizes the many better alternatives to predatory 
loans available to military borrowers, and pragmatically explains that 
these alternatives are not likely to prevent service members from 
falling into predatory debt traps. The report persuasively presents 
compelling qualitative narratives of service members and their families 
who have suffered real personal, financial, emotional, and professional 
lossses as a result of predatory lending. And the report compiles a 
useful list of suggestions for policy reform--all of which would 
meaningfully improve the lives of military service members.
    In conclusion, I do have one reservation with the Department of 
Defense report. I am afraid the comprehensive nature of the report 
might be used as a tool to prevent immediate reform of credit laws. 
While I believe comprehensive reform is necessary, reestablishing our 
traditional, time-tested usury law should be a necessary first step on 
the path to comprehensive reform. Accordingly, I strongly urge Congress 
to take the opportunity presented by the Talent-Nelson amendment to 
this year's defense authorization bill. This amendment reasonably re-
establishes a cap on allowable interest rates charged to military 
personnel at a generous 36 percent per annum. Loans in excess of this 
amount have proven historically dangerous, economically inefficient, 
and geographically targeted at the military. For additional information 
on these issues I invite the Committee members and their staff to 
review my prior published writing.\4\
---------------------------------------------------------------------------
    \ 4\ A bibliography of my research is available at http://
www.law.ufl.edu/faculty/peterson/..
   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ADM. 
                    CHARLES S. ABBOT (RET.)

Q.1. While military relief societies seem to present a means to 
help soldiers in financial distress, a recent Washington Post 
article claimed that these societies have cumbersome procedures 
and require referrals from a ranking officer prior to obtaining 
financial assistance. Do these procedures create obstacles for 
service members and if so, what can be done to reduce or 
eliminate them?
A.1. The mission and charter of each service's Military Aide 
Society (MAS) are designed to best support the requirements of 
the service. Each provides a different level and variety of 
services to their clients. All the MAS have an agreement that 
allows them to provide assistance to service members and 
families from the other military services.
    The Navy-Marine Corps Relief Society was established in 
1904 and has been dedicated to the financial health and welfare 
of Sailors, Marines and families since. Though a private non-
profit, volunteer service organization, we work in partnership 
with the Navy and Marine Corps to support the financial 
readiness of the service member and family. With 53 full 
service offices on Navy and Marine installations around the 
world, we provide financial, educational and other assistance 
to those in need. The majority of our assistance is provided 
for basic living expenses, vehicle repair, and emergency 
travel.
    As a charity supported by the generosity of active duty and 
retired Sailors and Marines, the Society has a responsibility 
to provide assistance based on valid needs. In every case, we 
require verification of eligibility, and in non-emergency cases 
we verify financial need. Our caseworkers are well trained, 
case management records are automated, and our procedures well 
refined and efficient. We require no referral by the service 
member's chain of command. Many of our clients are ``walk-ins'' 
at our offices. Every client's case is thoroughly reviewed by a 
qualified caseworker.
    We have a policy of confidentiality and do not involve the 
clients command unless there is misconduct or criminal 
activity. If a client's request is denied at the local level, 
the client may decide to involve the command and request an 
appeal from the Society's leadership.
    I am proud to say that during our most recent (2006) client 
satisfaction survey, the Society received a 98% satisfaction 
rate.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY FROM WILLIAM O. 
                           BROWN, Jr.

Q.1. You criticize the Department of Defense Report methodology 
on several grounds. One of these grounds is that the Report 
fails to show how payday loans cause financial problems, rather 
than being a mere symptom of larger financial problems. Could 
you explain this lack of causation argument?
A.1. The Department of Defense Report only provides anecdotes 
of military members that had financial difficulties and 
acquired payday loans. The Department of Defense does not 
conduct a study of bankruptcy filings by military personnel in 
order to determine if there is any systematic relationship 
between payday lending and bankruptcy. The Report provides no 
evidence that financial problems among military personnel are 
caused by their usage of payday loans. Payday loans are small 
denomination loans intended to solve short-term financial 
problems and my research indicates that most members of the 
military use them for that purpose. The rate of default on 
payday loans is in the neighborhood of 5% indicating that few 
individuals with payday loans have larger financial problems 
that would prevent the repayment of the loans. Most individuals 
that declare bankruptcy or experience severe financial problems 
have a variety of financial problems caused by unexpected 
negative life events or overspending. These problems are 
usually far larger in scale than the amount borrowed through 
payday lending. To the extent that those with severe financial 
problems use payday loans, they already have these problems 
when they obtain the payday loans and using them as a last 
attempt to pay off other creditors.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM WILLIAM O. 
                           BROWN, Jr.

Q.1. What would be the potential unintended consequences of 
price caps on individuals seeking access to the growing demand 
for short-term, small denomination credit?
A.1. There was a study in 2005 by two economists at the FDIC 
that found that the current price of payday loans just cover 
the cost of providing this service. If prices are capped, then 
the industry will no longer be able to profitably provide these 
loans and legitimate providers will no longer offer them. There 
is a demonstrated need for such products by military personnel. 
These military personnel will no longer be able to use what 
they consider as a valuable source of short-term credit and 
will likely turn to alternative sources for their short term 
borrowing needs. These may include legal lenders such as pawn 
shops where borrowers risk forfeiting personal possessions or 
credit cards where borrowers are more likely to carry an 
ongoing credit balance. Some former payday loan customers will 
almost certainly turn to lenders that are willing to violate 
both the legal interest rate cap and legal collection practices 
when dealing with borrowers. Studies indicate that countries 
with more stringent interest rate caps on consumer loans have 
larger and more active illegal lending markets. As a result, 
the price caps may have the ultimate result of sending military 
borrowers to legal credit products that are less well fit for 
their needs or illegal credit products that come with much 
higher costs than the existing legal products. A combined 
program of encouraging more competition in the market for 
short-term loan products and better education about financial 
products among military personnel would be more beneficial than 
the proposed interest rate caps.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM LYNN 
                            DRYSDALE

Q.1. The Report discusses coercive actions that are often 
employed by lenders to collect on debts, such as garnishment of 
wages or attempting to collect when a customer has been 
deployed. The Report also mentions that many loan contracts 
require borrowers to waive their rights to legal action or any 
special legal protections afforded to them. What evidence have 
you seen of either coercive collections actions or mandatory 
waivers of important legal rights?
A.1. In Florida payday lenders are called deferred presentment 
providers. I see many varieties of coercive collection 
practices and all lenders include clauses in their contracts 
prohibiting consumers from filing lawsuits against the lenders 
and cutting off other consumer rights. These contracts and 
practices are particularly harmful in these high cost, short-
term loans because the loans are almost impossible to timely 
pay and are deceptively marketed. I have seen coercive 
collection techniques lead to the payment of payday loans 
before other essential household bills exacerbating rather than 
alleviating financial emergencies. Also, the coercion leads to 
stress which affects individuals and their families.
    Representative samples of coercive collection techniques 
and mandatory waivers of important legal rights follow:
     Mr. Hubbell and his wife are both service members. 
Due to the costs of his wife's illness and her inability to 
work, they took out a payday loan which eventually led to 
thousands of dollars in outstanding loans from both payday 
lenders and installment loan companies. Over a five year 
period, the more they paid, the more they owed. They have 
repaid tens of thousands of dollars and still owe over $12,000, 
a monthly payday loan debt of just over $3,500. Most of the 
repaid sums went to pay off other loans and provided no benefit 
to the Hubbells except for digging them deeper into debt.
    Mr. Hubbell is an air traffic controller. Therefore, he 
felt he had no option but to stay on the debt treadmill because 
of the fear created by threats of criminal prosecution and the 
inevitable consequence of lenders' contacts to Mr. Hubbell's 
command which would lead to loss of his security clearance and 
his rank. Lenders were harassing him on base and at home. One 
day a lender called him while on the ship, cussed at him and 
threatened him. Mr. Hubbell told the collector to contact his 
attorney. Twenty-five minutes later his superior officer called 
and said the lender had called him twice in the short period of 
time since he hung up from speaking with Mr. Hubbell. The 
collector harassed the superior officer and demanded the name 
and number of the base Commanding Officer.
    Each of the lenders required either payment by allotment or 
electronic assess to his bank account as additional security, 
required him to allow them to debit his account more than once 
in one day, and one required him to sign an illegal wage 
assignment. See Exhibit ``A'' attached.
    Each of the loan contracts contained a unilateral, 
mandatory arbitration clause. The required arbitration was 
expensive and prevented Mr. Hubbell from suing them for illegal 
actions while the lenders retained the right to take money 
directly from his account without prior notice.
     Mr. Bartholomew borrowed from a sham lender who 
pretended to provide ``rebates'' instead of loans when a person 
purportedly purchased Internet access. The disguise was used so 
the lender could hide criminally usurious loans, ignore the 
Florida anti-rollover laws and ignore Mr. Bartholomew's right 
to a grace period.
    This lender required electronic access to his account as 
additional security for his loan. When he was unable to keep up 
with payments, the lender directly debited his account for more 
than the amounts needed to pay off his loan. The lender also 
harassed him on his ship and called his superior officers. He 
was faced with not having enough money for groceries and rent 
for his family, including three small children; they debited 
his account multiple times in one day. When he closed the 
account because the lender's actions rendered the account 
overdrawn, the lender sent him a letter which was copied on to 
the official letterhead from our local State Attorney's Office 
threatening to put him in jail for failing to pay the loan.
    Mr. Bartholomew's contract also contained a unilateral, 
mandatory arbitration clause. The arbitration required was 
expensive and attempted to prevent Mr. Bartholomew from suing 
them for illegal actions while the lender retained the right to 
take money directly from his account. The clause contained in 
his contract also limited the remedies he could seek in 
arbitration. See Exhibits ``B'' (Loan Document) and ``C'' 
(unauthorized letter using State Attorney letterhead) attached.
     Mr. Wall had an installment loan through a 
``military'' lender that required automatic access to his bank 
account for electronic payment and required him to allow 
multiple debits in one day for a single loan. When he did not 
make a timely payment, the lender ``hit'' his bank account 
eleven times in one day. The lender then charged him $525.00 in 
late and bad check fees and his credit union charged him 
$275.00 in NSF charges. See Exhibit ``D'' attached.
    The lender also included provisions in his contract 
preventing him from suing the lender for illegal actions and 
requiring him to take all claims to an expensive arbitration 
process in Delaware even though he was solicited and signed the 
loan in Florida. Lastly, his contract contained the following 
phrase: ``I understand that persuant (sic) to Art 134 and Art 
123a of the Uniform Code of Military Justice that failure to 
comply with the terms of this agreement may result in a maximum 
penalty of a bad conduct discharge, 6 months confinement and 
forfeiture (sic) of all pay and allowances.'' See Exhibit ``E'' 
attached.
     Ms. Worrow obtained a loan from a ``military'' 
lender that was marketed online. The lender required her to pay 
through a military allotment check. They threatened to contact 
her Command if the allotment was redirected. This put Ms. W in 
a bind because the costs were so high for the loan that the 
allotment took away money she needed for food, transportation 
to and from work and utilities. See Exhibit ``F'' attached.
    Her lender also prevented her from suing them for illegal 
practices and required her to sign a unilateral, mandatory 
arbitration clause. Therefore, she could not sue them but they 
could take money directly from her pay check or bank account.
     Mr. K spent his entire day off going from payday 
lender to payday lender to keep from having his checks bounce. 
At one time, he was trying to juggle nine loans. Each time a 
payday loan became due he felt compelled to take out another, 
more expensive loan because the lenders were harassing him with 
illegal threats of criminal prosecution. They also contacted 
his superiors at work and required him to agree to automatic 
withdrawal from his bank account.
     Mr. G contacted me via email from an undisclosed 
location at sea. He was worried about his wife and family 
because of his outstanding payday loan debt. Due to threats she 
had received, he was afraid that the payday lender would put 
his wife in jail, leaving their two babies without a parent.
     Ms. Griffin is a Navy wife who has a payday loan 
with Advance America in Florida. In its contract, Advance 
America claimed it was a member of the Community Financial 
Services Association, a payday lender trade association. It 
also claimed it followed the Best Practices of this association 
published on its Web site such as promises to follow state law. 
Florida law requires lenders to grant at least a 60-day grace 
period with no additional fees, charges or costs if a borrower 
seeks credit counseling and prohibits ``roll-overs.'' Instead 
of providing the grace period, Advance America required her to 
roll over her loan when she could not pay. When she went to pay 
it off, she was $45 short, because of the ``roll over'' fee.
    Advance America refused the grace period even after she 
told them she already had the counseling at the Navy Marine 
Corps Relief Society, an authorized State of Florida Deferred 
Presentment Provider counseling agency. The director of NAS Jax 
NMCRS, Ret. Capt. Dave Faraldo, called the lender only to be 
told they did not have to talk to him and did not have to 
provide the grace period. The Advance America employee added 
she had been an employee trainer for eight years and they never 
had to provide the grace period. When I contacted Advance 
America as Ms. Griffin's attorney and provided a signed 
release, the employee refused to speak to me about the legally-
required grace period on her account.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATORS SHELBY AND JOHNSON 
                     FROM HILARY B. MILLER

Q.1. Although the Report acknowledges that many payday lenders 
voluntarily adopt a set of best practices, it criticizes the 
lack of a mechanism to monitor and enforce them. Is there more 
the industry could be doing to make sure lenders are complying 
with these best practices?
A.1. The industry's principal trade association, Community 
Financial Services Association of America (``CFSA''), seeks to 
enforce its Best Practices by causing them to be enacted into 
positive state law and by assuring that state regulators have 
appropriate information, authority and enforcement powers. To 
date, CFSA member companies have dedicated millions of dollars 
to this activity, and 37 states and the District of Columbia 
have enacted laws that incorporate CFSA's Best Practices in 
some part. Compliance with CFSA's Best Practices is also 
mandatory for CFSA's members, and the association investigates 
and takes appropriate enforcement steps with respect to 
violations. Because of both the transparency and simplicity of 
loan terms, consumers are highly unlikely to be misled by non-
compliant lenders. The industry continues to work with 
legislators and regulators to assure consistent and, to the 
greatest extent possible, uniform regulation of these loan 
products.
Q.2. In your testimony you state that it is contrary to the 
interests of the payday lending industry to have service 
members get into trouble with their loans. But if borrowers can 
not pay in full when the loan is due and choose to roll over 
the current loan into another, larger loan, don't lenders 
benefit from the additional fees that result? How frequently 
are loans rolled over?
A.2. As noted in my prepared statement, a recent independent 
study showed that 49% of military enlisted payday-loan 
borrowers have used a payday loan no more than twice in the 
last year, and 79% had had no more than four loans in the last 
year.\1\ Of the 38 states that have permitted payday lending, 
36 have strict statutory limitations on rollovers, and there is 
an outright ban in 22 of those states. CFSA's Best Practices 
ban rollovers unless they are allowed by state law, in which 
case rollovers are limited to the lesser of four or the state-
law limit. While rollovers are frequently mentioned as an issue 
with payday loans, the reality is that military borrowers very 
rarely experience repayment problems with their loans and, as a 
group, are in debt for much shorter periods than their civilian 
counterparts. Payday lenders do not earn more in fees from a 
loan rollover than from a new loan. While payday lenders charge 
a fee for rollovers, every lender (including bank overdraft 
lenders, as well as mortgage lenders, credit card lenders and 
auto lenders) benefits to some extent when a borrower pays a 
fee for the privilege of paying late. This is the inherent 
nature of consumer lending, and it is not fundamentally 
wrongful or misleading. Moreover, the consequences to a 
borrower of not being able to extend--on a limited and 
responsible basis--the maturity of a payday loan may often be 
more costly to the borrower than the small extra fee for this 
service; those consequences may include adverse credit-bureau 
entries, bounced checks, overdraft fees, late-payment fees and 
other vendor charges.
---------------------------------------------------------------------------
    \1\ William O. Brown, Jr. and Charles B. Cushman, Payday Loan 
Attitudes and Usage Among Enlisted Military Personnel (2006). Available 
at http://www.consumercreditresearchfoundation.org/_files/
060628MilitaryPDLSurvey.pdf (visited August 29, 2006).
---------------------------------------------------------------------------
Q.3. Did your industry seek to work with DoD and give it input 
on this study? What, if anything, has the industry proposed to 
DoD to stop specific abusive practices that may occur when 
payday loans are made?
A.3. CFSA made repeated good faith attempts to work with DoD, 
but DoD clearly had no interest in doing so. First, over a year 
ago before the study was prepared, CFSA representatives met 
with key DoD representatives--including some whom we understand 
were directly involved in preparing the report--and requested 
that DoD work with CFSA to address concerns with respect to 
payday lending to military personnel. These DoD officials 
showed no interest in working with CFSA and failed to follow up 
with any further contact. Then, while the study was being 
conducted, CFSA became concerned that DoD had not contacted the 
association or its members for information or input. 
Accordingly, CFSA made a number of requests for meetings with 
relevant DoD officials; DoD staff would schedule meetings with 
CFSA but subsequently cancel those meetings. Finally, again at 
CFSA's initiative and request, about a week before the study 
was released, Dr. Chu and several of his associates met with 
CFSA representatives. During the meeting, CFSA sought to 
educate DoD regarding the fundamental fallacies of certain 
arguments and factual assertions by opponents of the industry 
like the Center for Responsible Lending (``CRL''). CFSA also 
proposed amending federal law to include over a dozen 
additional safeguards for military borrowers, including a total 
ban on rollovers and a payment plan, but DoD had no interest in 
these proposals and proceeded to issue its report a few days 
later. I am attaching a separate memorandum summarizing CFSA's 
proposals to DoD. I trust that you and other Committee members 
will see from this memorandum that CFSA was proposing tough 
measures that would have prevented abuses while at the same 
time preserving payday loans as a credit option for service 
members. DoD unfortunately had no interest in adopting such 
responsible measures and instead continued to follow its course 
of blindly accepting erroneous CRL contentions and flawed 
studies and of recommending unwarranted measures.
Q.4. Wouldn't the use of a properly constructed payment plan 
resolve most of the ``cycle of debt'' problems some military 
customers may have in repaying their loans? If so, will 
industry support such a plan?
A.4. Absolutely. The industry supports such plans and would 
support them for military borrowers. In states where payment 
plans have been required by law, such plans have enabled tens 
of thousands of customers to defer payment in accordance with a 
plan that meets their individualized cash-flow requirements. 
Such plans give borrowers options rather than, as the DoD 
report urges, taking them away. As noted above, CFSA proposed 
banning rollovers and requiring an extended payment plan. The 
effect of such a plan would be to provide military borrowers 
with an interest-free, long-term principal-reduction plan that 
would make it just as easy to repay a payday loan as it is to 
obtain one.
Q.5. On pages 14 and 15, the report states as a fact that the 
two-week loan cited by payday lenders ``is virtually 
nonexistent.'' It then says that Center for Responsible Lending 
research shows that only 1% of loans go to borrowers who take 
out only 1 loan a year and 91% of payday loans go to borrowers 
with 5 or more loan transactions per year. It says that it is 
the rule, not the exception, that payday loans catch the 
borrower in a debt trap with the average borrower paying back 
$834 for a $339 loan. Are these statements accurate?
A.5. No. Unfortunately, the Center for Responsible Lending 
generally is not responsible or accurate when making most of 
its contentions regarding payday lending. It repeatedly puts 
forth erroneous ``facts'' and reaches unsupportable and 
misleading conclusions based on faulty and biased analyses. To 
date, there have been only a handful of legitimate academic 
studies regarding the rate of repeat payday loan usage, and 
these studies do not support CRL's assertions with respect to 
military borrowers. Among service members--which is the only 
relevant population for purposes of the DoD Report, not the 
general population--the correct facts are as set forth on page 
2 above. DoD's own statistics show that the rate of usage, 
including repeat usage, of payday loans among military 
borrowers is extremely low. These low rates of usage and repeat 
usage were not demonstrated to be sufficiently problematic to 
warrant extraordinary legislative action. DoD proceeded to 
reject its own data and disregarded other readily available 
information--including independent third-party data--contrary 
to CRL's positions, and adopted CRL's inaccurate contentions 
and inappropriate ``solutions'' without critical or responsible 
analysis.

ATTACHMENT

A Case Against Prohibition of Regulated Storefront Payday Lenders as a 
            Short-term Credit Option for Military Personnel

    Most public policy debates revolve around a perceived 
problem and a proposed solution.
    In this case, the Department of Defense (``the 
Department'', or ``DOD'') has determined that an increasing 
number of military personnel have become sufficiently concerned 
about their domestic financial obligations, to cause an adverse 
effect on military readiness. In response to this problem, the 
DOD has recommended, as one primary solution, that Congress 
prohibit the offering of payday advances that charge a fee 
exceeding 36% when annualized over 365 days (``APR'').
    The Community Financial Services Association of America 
(``CFSA'') does not question the DOD's analysis of its 
military's state of readiness to defend our country. In fact, 
no fair-minded critic of the payday advance industry has ever 
suggested that the owners and employees of this industry do not 
unequivocally support our military and the DOD's duty to 
protect the men and women who serve our nation.
    The focus of this discourse is not on the problem, but 
instead, on the proposed solution. It is our intention only to 
illustrate the inherent flaws in the proposed 36% APR cap, 
which would effectively apply to just one small segment of the 
short-term, unsecured consumer credit market and, most 
certainly have unintended consequences to the very ones it is 
intended to protect.

A DISPASSIONATE ANALYSIS OF THIS SHORT-TERM, UNSECURED CREDIT MARKET 
        INDICATES THAT PROHIBITION OF ONE SEGMENT WILL LIKELY 
        EXACERBATE, NOT REMEDY, THE PROBLEM.

    Virtually every commentator who has opined upon the payday 
advance issue, has agreed upon at least one fact--there is an 
enormous demand for short-term access to money in small 
denominations. Consumers define short-term to mean until their 
next influx of cash, typically occurring on their next payday.
    The market satisfying this demand is estimated at 
approximately $100 billion and is supplied by a number of 
financial and quasi-financial services, none of which are 
traditional loan products. All of the diverse providers in this 
short-term, unsecured credit market offer the same end 
product--the ability of a consumer to access credit by entering 
into a fee transaction to be ``settled up'' at the customer's 
next receipt of income. In decreasing order by size, this 
market volume is composed of the following credit products:
          1. Late fees--paying one creditor, or funding an 
        immediate cash need, by delaying a payment to another 
        creditor;
          2. Bank non-sufficient funds fees--using an unfunded 
        check, either unintentionally or intentionally, to pay 
        a creditor by forcing your bank to ``front'' the 
        payment until funds are available to replenish your 
        account;
          3. Courtesy overdraft, or ``bounce'', protection 
        fees--using your bank's permission to overdraw your 
        account, thereby creating immediate cash funds;
          4. Payday advance fees at storefront lenders--using 
        regulated payday advance lenders to ``cover'' your 
        unfunded check until payday;
          5. Payday advance fees at offshore Internet lending 
        sites or from other subterfuge products--satisfying 
        your need for short-term cash through lenders who are 
        immune to state or federal regulation.
    A common mistake when evaluating the cost of a payday 
advance is to compare it to traditional loan products. Such a 
comparison serves no useful purpose, since the comparison would 
be of products that occupy very different segments of the 
financial services market and, accordingly, fill very different 
needs of consumers. A fair analysis of the payday advance 
service must be made in the context of the actual products and 
services with which it competes, and with an understanding of 
the real alternatives available to its customers. Below is a 
comparison of the costs and the total fee volumes for these 
market segments.

                  COSTS AND MARKET FEE VOLUME OF CONSUMERS' SHORT-TERM UNSECURED CREDIT OPTIONS
----------------------------------------------------------------------------------------------------------------
                                      Cost per $100 loan or
           Credit option                   Occurrence             Total fee volume          State Regulation
----------------------------------------------------------------------------------------------------------------
Storefront Payday Advance                               $15                $6 billion                 38 States
Offshore Internet Payday Advance                    $10-$40                   Unknown                      None
Bounced Check Fees                                      $54           $22 billion NSF                      None
                                                              + Unknown Merchant Fees
Overdraft Protection Fees                               $27               $10 billion                      None
Late Fees (credit card, landlord,                       $39               $57 billion                      None
 utilities, etc.)
----------------------------------------------------------------------------------------------------------------

THE DOD'S PROPOSED 36% APR CAP WILL ELIMINATE ONLY THE SMALLEST SEGMENT 
        OF SHORT-TERM CREDIT OPTIONS AVAILABLE TO MILITARY PERSONNEL.

    A payday advance cannot be offered at a 36% APR. The 
typical payday advance customer is charged $15 for a $100, 14-
day advance, resulting in an annualized rate of 391% (use of 
the APR assumes the customer takes out the loan every two weeks 
for 52 weeks--in reality, this virtually never occurs as most 
states prohibit such constant rollovers, as do our mandatory 
industry Best Practices). At a 36% APR, the total fee charged 
for that same $100 advance would be $1.38, representing a 91% 
reduction in gross revenue. The public filings of publicly 
traded payday advance companies indicate that the average net 
profit, after taxes, is between 10%-20% of gross revenue, well 
in line with, and often below, other financial services 
companies. No serious policy maker believes that the payday 
advance product can be offered with a 36% APR, a belief shared 
by thoughtful commentators as exhibited in this excerpt from an 
August 14, 2006 editorial in the St. Louis Post Dispatch:

        --``Sen. Talent's proposal, tacked on as an amendment 
        to a defense bill (SB 2766), would limit the annual 
        percentage rate to 36% percent for military members and 
        dependents. That works out to about $1.38 on a two-week 
        loan of $100. Payday lenders argue that's less than it 
        costs to service such loans, and that the industry 
        couldn't stay in business at rates that low. There's 
        truth to that argument, and payday loans--if they're 
        [not] allowed to snowball out of control--do serve a 
        legitimate purpose. While the Talent/Nelson amendment 
        has the support of the Center for Responsible Lending, 
        a nonpartisan research center in Washington, and the 
        Consumer Federation of America, there are other 
        approaches. Mr. Talent might take a look at the new 
        reforms in Illinois.''

    Economists, academicians and state policy makers have 
substantiated the fact that this restrictive APR would not be 
feasible for payday advance lenders. Researchers representing 
many of the nation's credit unions and the Federal Deposit 
Insurance Corporation (FDIC), neither of which are advocates 
for the payday advance product, have studied the issue of cost 
and profitability and come to the conclusion that the costs 
largely justify the price. Below are two references from such 
studies.
        The Economics of Payday Lending, John P. Caskey, Filene 
        Research Institute & The Center for Credit Union 
        Research, Madison, WI, 2002.

        --``Another possible approach to the rise of payday 
        lending would be for credit unions to undercut payday 
        lenders by offering low-cost small-value loans to 
        payday loan customers. But this approach is unlikely to 
        be successful. If a credit union were to find good loan 
        candidates and charge them its top loan rate of 18% APR 
        for a short-term small-value loan, this would not cover 
        its costs.''
        --``For example, a $200 two-week loan at 18% APR would 
        generate $1.38 in interest, not enough to cover even 
        the origination cost. In other words, the high cost of 
        payday loans substantially reflects the high cost of 
        making small-value, short-term loans.''

        Payday Lending: Do the costs justify the price?, Mark 
        J. Flannery and Katherine Samolyk, for the Center for 
        Financial Research, FDIC, 2005.

        --``The payday advance product's structure makes it 
        costly to originate these short-term loans, whose 
        default rates substantially exceed the customary credit 
        losses at mainstream financial institutions.''
        --. . .``an important reason why advance fees are high 
        is that the loan is short-term and non-amortizing.''
        --``We find that fixed operating costs and loan losses 
        justify a large part of the high APR charged on payday 
        advance loans . . . These operating costs lie in the 
        range of [payday] advance fees, suggesting that payday 
        loans may not necessarily yield extraordinary 
        profits.''
        --``These APRs substantially exceed the rates 
        associated with mainstream consumer credit products, 
        although some mainstream services (e.g., overdraft 
        protection fees or credit card late payment fees) might 
        translate into similar APRs if providers were required 
        to report such information.''

    Additionally, policy makers in 37 states (plus D.C.) have 
studied the rate issue and passed legislation allowing an 
average fee of $17.50 per $100. In fact, Indiana, Kansas and 
Rhode Island, having previously enacted restrictive fees 
averaging about $12.50 per $100, repealed those rates in favor 
of a $15 per $100 fee. Policymakers in these states found that 
rates below $15 per $100 had restricted competition and forced 
consumers to more expensive, less desirable and even 
unregulated alternatives.

AVAILABILITY OF MARKET ALTERNATIVES MAKES IT UNLIKELY THAT ELIMINATION 
        OF THE STOREFRONT PAYDAY ADVANCE OPTION FOR SERVICEMEMBERS WILL 
        DECREASE THE READINESS PROBLEM.

    On the surface, it might seem reasonable to assume that 
reducing the annual percentage rate (from 391% to 36%) paid by 
military personnel for a storefront payday advance might 
correspondingly reduce the DOD's military readiness problem. 
Given the current market short-term credit alternatives 
discussed previously, the reality must be that it will either 
have no effect, or intensify the problem. What is clear is that 
the expected result of lowering the APR of a storefront payday 
advance to 36% will not occur--but the unintended result of 
forcing the military to more expensive, or more dangerous 
alternatives, surely will.
    As noted earlier, there exists a $100 billion demand for 
financial services that provide immediate access to needed 
money or credit. Storefront payday advances comprise about 6% 
of the supply side of that market. The remaining 94% of the 
market will not be subject to the 36% rate cap. Since 
prohibition of the storefront payday advance service option 
will not eradicate the demand for the service by the 6% of 
customers in the market that currently use it, those customers 
will simply shift to one of the other alternative products 
available.
    Case studies of consumers who had unfortunate, and 
sometimes dire, experiences with these other sources of higher 
cost credit are plentiful. Consider just these few recent 
examples.
          -- Mark Keil, of Dayton, OH, stopped at a convenience 
        store for $19.45 worth of cigarettes. The expense 
        cleared his debit card, along with several others over 
        the next several days, but he didn't know his bank had 
        automatically covered these overdrafts. He paid $198 to 
        his bank for covering $59 in overdrafts. Six months 
        later he had amassed $1,194 in overdraft fees. (AARP 
        Magazine, September & October 2006)
          -- Carolyn Russell, of Fort Worth, TX and living on a 
        fixed income, called her bank and was told she had 
        $2.32 available in her checking account. She 
        immediately bought that amount of gas for her car. 
        Eight days later she received a notice from her bank 
        that she was overdrawn by two cents and required to pay 
        a $36 fee. After calling to inquire, she went to the 
        bank the next day to pay the overdraft, which by then 
        had grown to more than $70, due to daily penalties. 
        (Star Telegram, July 7, 2006)
          -- Unidentified customer from Bristol, TN, signed up 
        for a payday loan on the Internet and it ``turned into 
        a nightmare. They were debiting my bank account, so 
        months later I was still getting deductions from my 
        bank account . . . On the whole run I lost about three 
        or four hundred dollars.'' (Briston Herald Courier, 
        January 4, 2006)
          -- Fatemeh Hosseini, of Sunnyvale, CA, worked a 
        second job to try to keep up with her credit card 
        payments. Although she had stopped using her cards to 
        buy anything, in two years her debt nearly doubled. 
        ``That's because Hosseini's payments sometimes were 
        tardy, triggering late fees ranging from $25 to $50 and 
        doubling interest rates.'' She eventually filed for 
        bankruptcy. (The Washington Post, March 6, 2005)
    These readily available alternatives have raised the ire of 
consumer advocates, credit union officials and state regulators 
of financial services:
          -- Paying overdraft fees ``can be as costly as payday 
        loans . . . $80 one week overdraft loan with a $26.90 
        fee equals 1,753% interest.'' (Center for Responsible 
        Lending issue paper on bank overdraft fees, April 2006)
          -- ``Critics also contend that bounce-protection 
        fees, as high as $37 per transaction, are little more 
        than high-priced credit. ``If a bank lends you $100 and 
        charges you a $20 fee--and then you pay the money back 
        in two weeks--that's an annualized interest rate of 
        520%,'' notes Jean Ann Fox, director for consumer 
        protection at the Consumer Federation of America in 
        Washington. ``It's worse than a payday loan.'' 
        (Business Week, May 2, 2005)
          -- ``These products [overdraft ``bounce'' protection] 
        are worse than payday loans. With payday loans at least 
        you get a disclosure, which is required by federal law, 
        so you know how much they're gouging you,'' says Chi 
        Chi Wu with the National Consumer Law Center. (AARP 
        Magazine, September & October 2006)
          -- ``About 80% of our members are using courtesy pay 
        the way it was intended just a few times a year here 
        and there,'' explained First Financial Federal Credit 
        Union CEO Rob Windsor. ``But 20% were paying us a lot 
        more than they should be . . . Our courtesy pay fee is 
        $15, which is pretty low, but even with that low fee, 
        we see people who are paying thousands in courtesy pay 
        fees.'' (Banking Wire, March 2, 2006)
          -- ``A common complaint against online payday lenders 
        is that the customer is required to give banking 
        information, whereas if they walk into a payday lender 
        store they give them a postdated check. But what's 
        happening online is the payday lender uses the bank 
        information to make unauthorized withdrawals from the 
        consumer's account. They say they're collecting funds 
        owed to them. They can make these withdrawals in a way 
        they can't with a postdated check,'' said Karolyn 
        Klohe, financial legal examiner, WA Department of 
        Financial Institutions. (Bankrate.com, September 12, 
        2005)
          -- ``People who use online payday lenders risk losing 
        money, paying excessive fees and having their 
        identities stolen, the Nebraska Department of Banking 
        and Finance warned Tuesday. `Using the Internet for 
        this type of transaction puts the borrower back into an 
        unregulated electronic alley, possibly dealing with 
        lenders from foreign countries,' said John Munn, 
        director. (Omaha World-Herald, April 12, 2006)
    The previously discussed alternative short-term credit 
products each fill a niche and may be, depending on the 
circumstances, a better or worse choice for a consumer than a 
payday advance. But no one can deny that, if a consumer is 
seeking a payday advance from a storefront lender, it will in 
many cases be:
          1.  less expensive than NSF/merchant fees, overdraft 
        protection fees, most internet lending fees and some 
        late fees;
          2.  safer than a transaction with an internet lender 
        located overseas;
          3.  void of any negative impact on the customer's 
        credit score, unlike NSF or late fees.
    It is ironic that storefront payday advances represent
          -- the smallest segment of a distinct market
          -- often the least expensive supplier in that market
          -- an industry that fully discloses all costs 
        associated with the transaction and seeks responsible 
        regulation from state policy makers
. . . and, yet, is the only significant supplier in the market 
subject to prohibition by the DOD proposed 36% rate cap.

TRADITIONAL, LOWER COST ALTERNATIVES TO PAYDAY ADVANCE LOANS, BOUNCED 
        CHECK FEES AND LATE BILL PAYMENTS CANNOT FILL THE DEMAND FOR 
        THIS SHORT-TERM, LOW DENOMINATION CREDIT.

    Even with the best intentions and advocacy efforts, the DOD 
and other organizations are not equipped to provide enough 
alternative financial resources to eliminate the $100 billion 
short-term credit market in the foreseeable future. Given the 
level of consumer demand, if business enterprises could offer 
them at 36% APR, traditional financial institutions would 
already be doing so. Even non-profit entities--with well-funded 
operating resources, tax-exempt status and a mission to provide 
affordable financial aide to those in need--have found it 
difficult, if not impossible, to offer low-cost alternatives to 
payday advances.
    While a number of institutions have talked about providing 
low cost alternatives to payday advance loans, there has been 
little real progress made in offering similar, viable products 
that are attractive to consumers. In fact, there is one school 
of thought that traditional financial institutions may have 
little incentive to do so.
    The Annie E. Casey Foundation has recently released a 
report, authored by former Assistant Secretary of the U.S. 
Department of the Treasury and current Chairman of the FDIC 
Sheila Bair, entitled, ``Low-Cost Payday Loans: Opportunities 
and Obstacles.'' (http://www.aecf.org) The report underscores 
the importance of small-denomination, short-term loans and 
encourages banks and credit unions to offer lower cost payday 
loan alternatives to their customers. But the report points out 
that banks and credit unions may be reluctant to do so, saying:

           --``Though depository institutions have the means to 
        offer low-cost payday loan alternatives, the 
        proliferation of fee-based bounce protection programs 
        represents a significant impediment to competition.''
           --``. . . fee-based bounce protection programs are 
        functionally equivalent to payday loans when used by 
        customers as a form of credit. When used on a recurring 
        basis for small amounts, the annualized percentage rate 
        for fee-based bounce protection far exceeds the APRs 
        associated with payday loans.''
           --``To the extent so many depository institutions 
        are relying on bounce protection for significant fee 
        income, they may view it as against their own interests 
        to cannibalize profits through development of other, 
        lower-cost forms of small dollar credit.''

    The report goes on to say that payday loans can be the 
lowest-cost option available to some consumers:

           --``Interviews and industry survey indicate that 
        payday loan customers do make a cost analysis in 
        comparing the price of a payday loan with the 
        alternative costs of bouncing a check and/or incurring 
        late fees.''
           --``When used on a recurring basis for small 
        amounts, the annualized percentage rate for fee-based 
        bounce protection far exceeds the APRs associated with 
        payday loans.''
           --``. . . APR disclosure of fee-based bounce 
        protection might help payday loan vendors, since for 
        some consumers, their product will be less expensive.''

    CFSA supports the exploration and encouragement of payday 
advance alternatives. The entry of traditional financial 
institutions into the payday advance market would accelerate 
overall acceptance of the service and provide more consumer 
choices--both having positive effects on consumers and the 
industry. In the interim, consumers need to have viable and 
safe credit options. And while a payday advance isn't the best 
choice for consumers in every situation, increasing evidence 
shows it is often the lower cost, more desirable alternative.

THE CFSA PROPOSAL

    CFSA has continually worked with legislators, regulators, 
policymakers, customers and critics around the country to 
resolve concerns about the payday advance product. To that end, 
37 states have passed legislation that balances consumer 
protections with the consumer's right to continued access to 
the product. After passage of such legislation, it is common to 
see the number of complaints filed with the state regulator, 
statistically disappear.
    It is also important to note that, while thousands of 
legislators have participated in hundreds of hearings in which 
the rate issue has been debated and votes have been taken, no 
legislature has passed a fee cap that results in a 36% APR for 
payday advances. There are two reasons that such attempts at 
36% APR caps fail.
    First, it is understood that such a cap is implicit 
prohibition of the product, thereby taking a choice away from 
consumers instead of empowering the consumer with options. 
Legislators' sentiments seem to echo remarks made by Jeffrey M. 
Lacker, president ofthe Federal Reserve Bank of Richmond, at 
the Conference of State Bank Supervisors May 18, 2006:

        --``Much of the popular response to consumer credit 
        expansion and its byproducts has been less about 
        prudential supervision, however, and more about 
        consumer protection. Many proposals amount to calls for 
        lending restrictions or the outright prohibition of 
        some lending practices. This strikes me as a dangerous 
        approach. In the long run, it would tend to slow 
        innovation and constrain the availability of financial 
        products to a broad range of consumers in order to 
        protect the relatively few who use a credit product 
        inappropriately or unadvisedly.''

    Second, nearly all policy informed makers understand that 
rate is not the issue on which to focus.
    The first reason serves as the basis for why a 36% rate 
will not help the DOD solve its problem. The second reason 
forms the foundation of CFSA's proposal to help do so.
    It is not a $15 fee that causes some consumers to struggle 
with a payday advance, but, rather, the repayment of the $100 
principal amount--which is a common issue for all the products 
serving this market. While customers are able to repay a $15 
payday advance fee, or the $25 overdraft fee or even the $39 
late fee, some will have difficulty repaying the underlying 
principal balance. It is those customers that need a safety net 
to help them manage their obligations, without making their 
situation any worse.
    CFSA would be willing to discuss a payment plan option that 
would allow military customers to repay their principal balance 
due, over many months, without the accumulation of any interest 
or charges. A military customer would be eligible for the plan 
under either of two conditions:
          1.  the customer has completed a DOD-approved 
        financial readiness program; or
          2.  the customer has entered into 4 or more 
        consecutive payday advances.
    Under either condition, the customer would be able to 
unilaterally convert his payday advance into a longer term, 
less expensive installment loan, which, when adding in the 
initial payday advance fee, would result in an overall APR of 
36% or less. The dual conditions would require payday advance 
companies to provide this special assistance to those members 
of the military who have either chosen to help themselves 
through financial readiness programs or have exhibited the need 
to be helped by their demonstrated repeated use of the service. 
At the same time, however, DOD would be allowing continued 
access to the product for all others, who neither seek nor need 
such assistance.

CFSA Is Willing to Discuss a Number of Consumer Protections for the 
        Military, Many of Which Have Been Promoted and Implemented in 
        Various States:

            Provide military customers the unfettered 
        opportunity to convert payday advance transactions into 
        longer term, cost-free payment plans (resulting in a 
        36% APR), if either of the following events occur:
                    The customer completes a DOD-
                approved financial readiness program; or
                    The customer enters into 4 or more 
                consecutive payday advance transactions.
            Prohibit the rollover of payday advances by 
        military customers.
            Require unambiguous and uniform price and term 
        disclosures.
            Require payday advance companies to provide 
        information to the military customer concerning 
        appropriate use of the service, counseling options and 
        alternative programs and products available to the 
        customer.
            Prohibit prepayment penalties and require the 
        rebate of unearned fees.
            Prohibit mandatory arbitration clauses which 
        are unconscionable, oppressive, unfair or substantially 
        in derogation of the rights of the military customers.
            Prohibit the garnishment, or allotment, of 
        military wages.
            Prohibit the payday advance company from 
        contacting, or threatening to contact, the customer's 
        commanding officer or any other person in the 
        customer's military chain of command, in effort to 
        collect on an advance.
            Prohibit the waiver of a military customer's 
        rights under the Servicemembers Civil Relief Act or 
        under any other federal or state law.
            Prohibit the use of any representations or 
        symbols that suggest, give the appearance of, or 
        provide reasonable cause to believe, that any component 
        of the Armed Forces, the Department of Defense, or any 
        other federal entity sponsors or endorses the payday 
        advance company.
            Require payday advance companies to defer all 
        collection activity and halt the accrual of interest or 
        any other fees, upon the deployment of a military 
        customer to a combat, combat support or combat service 
        support posting.
            Provide military customers the right to 
        rescind a payday advance, without cost, within 2 
        business days of entering into the transaction.
            Prohibit payday advance companies from 
        threatening or pursuing criminal action against a 
        military customer as a result of the customer's check 
        being returned unpaid or the customer's account not 
        being paid.
            Consider the use of payday advance locations 
        as platforms for the dissemination of DOD approved 
        financial readiness materials.

Conclusion

    The Department of Defense has voiced its concern--the 
financial obligations of our military men and women should not 
escalate into a distraction from their duties, nor should it 
impair the country's military readiness. In addressing this 
concern, the Department may:
          1.  Attempt to eliminate the storefront payday 
        advance option, and naively hope that its personnel 
        choose not to use the unrestricted alternative 
        products, or
          2.  Allow CFSA to work with the Department in 
        designing and implementing real, effective solutions 
        regarding payday loans for the military personnel who 
        need assistance.
    We are prepared to offer you a list of references from 
across the country that will confirm that CFSA has successfully 
resolved the concerns of many of its critics and, in doing so, 
has demonstrated its integrity and good faith. We respectfully 
request the opportunity to enter into such discussions with the 
Department of Defense.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 
                  FROM CHRISTOPHER L. PETERSON

Q.1. It is my understanding that you conducted a study that 
found that payday lenders were disproportionately located near 
military installations. How many locations did you examine as 
part of your study and what do you think are the implications 
of these findings?
A.1. Steven Graves, a Geography Professor at the University of 
California at Northridge, and I recently published a study on 
predatory lending to military personnel. The full citation to 
the study is Steven M. Graves & Christopher L. Peterson, 
Predatory Lending and the Military: The Law and Geography of 
``Payday'' Loans in Military Towns, 66 OHIO STATE LAW JOURNAL 
653-832 (2005). It should be available in the Library of 
Congress and any other law library around the country. 
Moreover, a copy of the study accompanies this correspondence. 
We would be honored to have the study or any portion thereof 
accompany the written record of this hearing.
    In conducting our study, we examined 20 states, 1,516 
counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 
109 military installations. Our study found high concentrations 
of payday lending businesses in counties, ZIP codes, and 
neighborhoods in close proximity to military bases. In order to 
assure that this pattern of ``clustering'' around military 
bases was not caused by factors unrelated to the presence of 
military personnel, we controlled our observations by comparing 
the density of payday lender locations to that of bank 
locations. Even when accounting for commercial development 
patterns and zoning ordinances with bank locations, payday 
lender location patterns unambiguously show greater 
concentrations per capita near military populations. We believe 
our findings stand as conclusive proof that the payday lending 
industry targets members of the armed forces and their 
families.
    In addition to our empirical findings, our research 
included an extensive discussion of sociological and historical 
literature on the financial well being of military families. We 
concluded that clustering of payday lenders around military 
installations was the most recent incarnation of an ancient 
history of predatory lending to military personnel both in our 
country and around the world. Payday loans, which typically 
have interest rates of between 300 and 900 percent, are 
extremely dangerous financial products that can trap consumers 
with modest income in a ruinous cycle of high cost borrowing.
    Our study recommended reestablishing the traditional 
American response to predatory lending: usury law. For the 
great majority of the past century, the American government 
protected service members from high-cost predatory loans with 
usury laws limiting interest rates to between 18% and 42% per 
annum. Through federal preemption and state legislative change, 
these laws have given way to an environment in which service 
members are literally surrounded by lenders clamoring to charge 
annual rates averaging around 450%. Military personnel both in 
ancient history and contemporary America have chronic financial 
vulnerabilities owing to their demanding and semi-nomadic 
lifestyles. Inevitably, many struggling military personnel and 
their families find the temptation of short term financial 
quick fixes advertised as ``easy,'' ``no hassles,'' ``no credit 
check,'' or ``quick cash'' too difficult to pass up.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

              Additional Material Submitted for the Record
                          Hilary B. Miller, Attorney at Law
                                  Greenwich, CT, September 20, 2006
Hon. Melquiades R. Martinez,
317 Hart Senate Office Building
Washington, DC.

Re: Predatory Lending Practices Directed At Members of the Armed Forces 
and Their Dependents

Dear Senator Martinez:
    In the limited time available for last Thursday's hearing, it was 
not possible to provide complete information regarding the finance 
charges applicable to payday advances. On behalf of Community Financial 
Services Association of America, I write to supplement my responses at 
the hearing.
    The finance charge for a payday advance is largely a function of 
the lender's costs (principally occupancy and personnel expenses). An 
FDIC study cited in my prepared remarks estimates that the these costs 
are approximately $13-$14 per $100 of loan principal advanced.\ 1\ 
Thus, a finance charge of $15 per $100 to the consumer is, to use your 
term, entirely ``conscionable'' and results in a very normal profit 
margin to the lender.
---------------------------------------------------------------------------
    \ 1\ Mark Flannery and Katherine Samolyk, Payday Lending: Do the 
Costs Justify the Price? FDIC Center for Financial Research Working 
Paper No. 2005-09. http://www.fdic.gov/bank/analytical/cfr/
workingpapers.html#payday (visited August 29, 2006).
---------------------------------------------------------------------------
    There is considerable evidence that the industry's margins are not 
exorbitant, insofar as most of the largest operators are public 
companies and have readily ascertainable, audited profit figures. The 
absence of inappropriate profits makes sense when you consider that, 
unlike an installment or mortgage lender--which is able to recoup its 
costs through finance charges collected over a period of three, five or 
even thirty years--a payday lender must recover its entire costs of 
origination and servicing over the initial two-week typical loan term.
    Moreover, the industry is nearly perfectly competitive. With over 
22,000 retail outlets (and innumerable Internet-based providers), and 
very low barriers to entry, prices would be expected to converge toward 
lenders' marginal costs--and indeed that is precisely what has 
occurred. To phrase it differently, if the payday lending business were 
``unconscionably'' profitable, lenders would be expected to flood the 
market and drive interest rates down.
    Consumers can (and do) readily comparison shop because the industry 
universally quotes pricing both as a finance charge in dollars and as 
an annual percentage rate (as required by the Truth In Lending Act).
    Finally, you asked why it might be appropriate for a young service 
member to borrow at the seemingly high annual percentage rates charged 
by payday lenders. Just as commuters understand that taxicabs are 
valuable and convenient when used for short-term travel needs but too 
expensive for extended trips, consumers understand that payday advances 
are useful when utilized for short-term needs but inappropriate for 
long-term borrowings. To America's working middle class, the payday-
advance product serves as a dignified, discreet and cost-efficient 
``financial taxi'' to tide the borrower over to his next payday when 
faced with an unexpected cash need.
    Although it is tempting to cite high annualized interest rates as 
problematic, the use of annualized rates is inappropriate when 
comparing extremely short-term credit options. The vast majority of 
military borrowers have payday-loan credit outstanding for only a few 
weeks per year.\2\
---------------------------------------------------------------------------
    \ 2\ William O. Brown, Jr. and Charles B. Cushman, Payday Loan 
Attitudes and Usage Among Enlisted Military Personnel (2006). Available 
at http://www.consumercreditresearchfoundation.org/files/
060628MilitaryPDLSurvey.pdf (visited August 29, 2006).
---------------------------------------------------------------------------
    Rollovers were mentioned at the hearing as a potential problem, but 
36 of the 38 states that permit payday lending have strict statutory 
limitations on rollovers. For example, Florida forbids all rollovers. 
Fla. Stat. Ann. Sec. 560.404(18). In contrast to this reality, the 
technical APR computation requires an assumption that the loan will be 
rolled over 25 times (even though the permitted number of rollovers is 
zero). The actual interest rate on the loan is 15%, but the theoretical 
APR figure is 391%. Thus, I am sure that you can understand how we 
believe that focusing on the APR is extremely misleading and typically 
presents a distorted picture of the real cost of payday loans.
    As noted in my prepared remarks, analysis of the cost of payday-
advance credit must take into account the cost to the borrower of not 
obtaining such credit. Faced with the alternative of writing a check 
that may ``bounce'' or of a utility disconnect--often with implicit 
annualized costs in excess of 1,400% when expressed in APR terms for 
purposes of comparison--or being unable to afford repairs to a car 
needed for commuting to work, the modest cost of a short-term payday 
advance will almost always represent a good tradeoff for the 
borrower.\3\
---------------------------------------------------------------------------
    \3\ ``Critics also contend that [overdraft] bounce protection fees, 
as high as $37 per transaction, are little more than high-priced 
credit. `If a bank lends you $100 and charges you a $20 fee--and then 
you pay the money back in two weeks--that's an annualized rate of 
520%,' notes Jean Ann Fox, director for consumer protection at the 
Consumer Federation of America in Washington. `It's worse than a payday 
loan.' ''--Business Week, May 2, 2005.
---------------------------------------------------------------------------
    The following table shows how a payday loan may be advantageous 
when compared with other forms of credit that a middle-income military 
consumer may choose:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Credit card    Late/Disconnect    $100 Bounced
                         Credit alternative                            $100 Payday     $100 Overdraft    late fee on      fee on $100       check NSF/
                                                                         advance         protection       $100 bill       utility bill       merchant
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fee................................................................          $15.00           $26.90           $32.61           $46.16           $53.68
Effective APR......................................................            391%             701%             850%           1,203%           1,400%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Against this backdrop, a payday loan may be a very wise choice for 
a service member.
    We respectfully urge you that there are two sides to this issue, 
and the DoD report contains only one of them. We will work diligently 
with you and your staff to make sure that you can make an informed and 
principled decision regarding this matter.
    Thank you for you courtesies at the hearing and for your efforts on 
behalf of our service members and our nation.

        Very truly yours,
                                       /s/ Hilary B. Miller
