[Senate Hearing 113-362]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 113-362



                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE


                             FIRST SESSION


                           NOVEMBER 20, 2013


    Printed for the use of the Committee on Commerce, Science, and 


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                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri           KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK WARNER, Virginia                DAN COATS, Indiana
MARK BEGICH, Alaska                  TIM SCOTT, South Carolina
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
BRIAN SCHATZ, Hawaii                 DEB FISCHER, Nebraska
EDWARD MARKEY, Massachusetts         RON JOHNSON, Wisconsin
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator

                            C O N T E N T S

Hearing held on November 20, 2013................................     1
Statement of Senator Rockefeller.................................     1
Statement of Senator Thune.......................................     3
    Prepared statement of the American Financial Services 
      Association................................................     5
Statement of Senator Nelson......................................     9
Statement of Senator Ayotte......................................    46
Statement of Senator Markey......................................    48


Hon. Robert E. Cooper, Jr., Attorney General, State of Tennessee.     9
    Prepared statement...........................................    12
Hollister K. Petraeus, Assistant Director, Consumer Financial 
  Protection Bureau, Office of Servicemember Affairs.............    15
    Prepared statement...........................................    17
Charles Harwood, Deputy Director, Federal Trade Commission's 
  Bureau of Consumer Protection..................................    23
    Prepared statement...........................................    25
Deanna R. Nelson, Assistant Attorney General In Charge (Watertown 
  Regional), State of New York, Office of Attorney General Eric 
  T. Schneiderman................................................    31
    Prepared statement...........................................    33
Dwain Alexander II, Senior Civilian Attorney, Region Legal 
  Service Office, Mid-Atlantic, U.S. Navy........................    36
    Prepared statement...........................................    38


Michael S. Archer, prepared statement............................    57
National Independent Automobile Dealers Association (NIADA), 
  prepared statement.............................................    64
Response to written questions submitted by Hon. Amy Klobuchar to 
  Deanna R. Nelson...............................................    66



                      WEDNESDAY, NOVEMBER 20, 2013

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:35 p.m. in room 
SR-253, Russell Senate Office Building, Senator John D. 
Rockefeller IV, Chairman of the Committee, presiding.


    The Chairman. The tall man has come.
    Senator Thune. That's you.
    The Chairman. No, that's you. And the hearing is called to 
    This month, we--and this is a subject which I want to dive 
deeply into. This will not be the only hearing. There are 
scoundrels out there and they have to be uncovered and whatever 
one does next.
    This month, we celebrate Veteran's Day and the remarkable 
men and women who make extraordinary sacrifices protecting our 
country. As we honor the service and the bravery they have 
shown in conflicts across the world, we should remember their 
challenges on the home front as well. Thus begins my statement.
    Like the rest of us, our soldiers, airmen, sailors, and 
marines are consumers and young ones at that. Not experienced 
ones at that, for the most part. And vulnerable to consumer 
practices at that, for the most part. They buy homes; they buy 
cars, computers, and other products essential to maintaining a 
    We're going to learn today their steady paychecks and 
relative job security make our servicewomen and men appealing 
targets for unscrupulous businesses--I've got other words I'd 
like to use; pitching predatory loan products. Holly Petraeus, 
you know all about this. That's not something any of us should 
be proud of but it is the fact. I'm not sure that this has been 
dealt with in any committee before, but it's going to be dealt 
one in this one and at length.
    One of the essential promises we make to those who put 
their lives on the line to protect our freedom is that we will, 
in turn, honor their service when they are at home. To uphold 
this pledge we must make sure that we understand the unique 
challenges they face when they act as consumers and that their 
special role in our society may require some special 
protections, whether that's regulations or whether that's laws, 
remains to be seen.
    Rigorous training requirements and the relative isolation 
of some bases can make it tough for our military servicemen to 
comparison shop for goods and financing options. Frequent moves 
demanded by the job, which can include months on end in war 
zones, hence their victims overseas as well as here, can make 
tracking bills and negotiating with debt collectors virtually 
    Beyond that, our soldiers, airmen, sailors, and marines may 
also be particularly vulnerable to aggressive debt collection 
techniques. For example, many members of the military need 
security clearances to perform their jobs. We have heard 
reports about unscrupulous debt collectors who, in violation of 
Federal law, threaten to put military servicemembers' security 
clearances at risk by disclosing their debts to their 
commanding officers. Well, bravo, for those wonderful little 
companies that choose to do that.
    Today, we're going to explore financial issues affecting 
the economic well-being of military households practicing 
involving small dollar loan products that carry extremely high 
long-term costs and aggressive debt collection tactics our 
servicemen may face when bills come due.
    Many families across the country face emergency expenses 
and times when their monthly budgets just don't cover it all. 
There are a variety of lenders that want to help. They offer 
their products to help them bridge those financial moments and 
gaps. Then it becomes a very different story; however, when 
these products involve predatory components such as egregiously 
high interest rates, which in some cases top 300 percent, high 
fees or waivers of sudden rights hidden in fine print of 
contracts. We got familiar with that with the health insurance 
industry, or other unfair or deceptive tactics. And it's 
particularly troubling when lenders use geographic proximity to 
military bases and target advertising techniques to encourage 
members of the military to enter into these predatory loans.
    These are young people for the most part. Some of the more 
common small dollar, high cost loan products advertised, 
specifically to military members that I've heard about, include 
the following: payday loans, which take repayment from the 
borrower's next paycheck and carry annual percentage rates of 
200-300 percent; installment loans for cash or retail items, 
like electronics whose interests and fees ultimately can total 
more than the original price of the goods; and auto title 
lending, where the loan is secured by title to a consumer's car 
in which gives lenders leverage to increase loan rates under 
the threat of repossession of the car. We've dealt with that in 
this committee, not so much on servicemembers, but when people 
move and they hire a moving van and the bank comes and picks up 
all their stuff, and then the van goes ten miles down the road 
and pulls onto an off-road and phones them and saying, ``I'm 
sorry, we didn't charge what we were meant to. You either pay 
us or we're out of here.'' It's a lovely world.
    Other concerning practices include various deceptive 
schemes used to cell automobiles to our service men and women. 
One example of a recent predatory scheme targeting military 
members was uncovered by one of our witnesses today, Tennessee 
Attorney General Robert Cooper. General Cooper will discuss in 
more detail his inquiry showed that electronics retailer, 
SmartBuy, which stores on the outskirts of military bases, 
pushed installment loans of consumer products such as computers 
to military members at inflated rates through deceptive tactics 
such as undisclosed fees and high interest rates.
    Despite protections in state and Federal laws, consumer 
advocates report that military servicemen are still being 
harmed by these predatory practices. One recent news account 
highlighted the case of a marine staff sergeant who took out an 
auto title loan for $1,600 and not realizing that the fine 
print of the contract required him to pay back more than 
$17,000 over two and a half years. So, obviously, he fell 
behind in his payments and his car was repossessed and sold at 
auction. How we honor our servicemen and women.
    A Federal law called the Military Lending Act is supposed 
to protect servicemembers from this kind of abuse, but did not 
appear to apply in this case because MLA only covers loans with 
a term of 6 months or less. This is clearly a loophole that 
needs to be closed.
    Today, we're going to learn about more trends in unfair and 
predatory business practices from a group of individuals who 
are leading the charge to promote consumer protection for our 
military. They have been working very hard, the group of folks 
in front of me, to promote partnerships among consumer 
advocates at the base, state, and Federal level. And I hope 
that the testimony today will help inform us about the best 
ways that we can possibly do to build on these efforts.
    Our military is always prepared to give full measure. That 
is our soldiers. We owe them the same when it comes to 
protecting them from unscrupulous practices at home. And I just 
want to say, unnecessarily but necessary to me, I spent 10 
years in the Veterans' Committee trying to prove, but finally 
successfully, that when the Department of Defense, not 
necessarily looking after these folks that I'm talking about, 
doing something called the Gulf War syndrome. You may remember 
it. Soldiers, sailors, and other who were in Iraq were told to 
take something called ``pyridostigmine bromide'' which had not 
been cleared by the FDA, even for animals. They were forced to 
take it by our DOD every single day and tens and tens and tens 
of thousands, hundreds of thousands of people couldn't sleep; 
broke out in rashes; they couldn't read a newspaper; their 
marriages broke up, and the DOD continually refused to say that 
it was their fault or that there was any problem. And ten years 
later, no thanks to DOD, they admitted that they had been 
    The distinguished Ranking Member, Senator Thune, from the 
urban state of South Dakota.

                 STATEMENT OF HON. JOHN THUNE, 

    Senator Thune. Thank you, Mr. Chairman, for holding this 
hearing to examine unfair financial practices that may be 
harming our military community; it's something that I'm sure 
all of us, as members of this committee, care about. And I also 
want to thank our witnesses for being here today to testify.
    South Dakota is home to Ellsworth Air Force Base where 
there are more than 9,000 military personnel, family members, 
and civilian employees. In addition, there are 4,250 Air Guard 
and Army Guard members who serve in my home state. I'm proud of 
their courage and grateful for their sacrifice and service to 
our country. I certainly do not want to see them or their 
families subjected to unfair financial practices.
    This hearing will highlight the types of unfair practices 
and financial fraud that may be targeting our military men and 
women; the education and the assistance programs available; and 
the law enforcement efforts undertaken to eliminate the worse 
practices and scams.
    Servicemembers, like all consumers, are not immune to the 
problems encountered by taking on too much debt. However, the 
unique demands of military service may exacerbate the negative 
consequences from too much debt.
    For servicemembers, unlike ordinary consumers, failing to 
pay any kind of debt is considered an offense under the Uniform 
Code of Military Justice, which could lead to a loss of a 
security clearance or even result in administrative discharge.
    Admiral Mike Mullen, then Chief of Naval Operations, was 
quoted voicing strong concerns about these issues in a June 
2006 article of Sea Power where he stated and I quote, ``A 
sailor's financial readiness directly impacts unit readiness 
and the navy's ability to accomplish its mission.'' As 
mentioned in the article, financial difficulties were the 
number one reason that sailors were losing their security 
clearance and this was affecting the availability of 
servicemembers for overseas deployments.
    Due to the efforts of Senators Jim Talent and Bill Nelson, 
Congress took notice of those challenges and enacted the 
Military Lending Act in 2006, which is an important step in 
protecting against predatory lenders. While that law has 
largely been a success, the Department of Defense is currently 
considering whether its rule implementing the Military Lending 
Act needs to be updated.
    The Department of Defense takes the issue of financial 
readiness seriously. I appreciate that the department has made 
great strides to enhance its education training and counseling 
by beginning financial training right from the start, during 
basic training, and continuing throughout the servicemember's 
    As the issue of whether further solutions are warranted is 
examined, it is important to ensure that there's proper balance 
with access to appropriate credit while also protecting 
servicemembers from unfair practices and outright fraud.
    I hope we can use this hearing today to highlight the 
financial assistance and education efforts that are available 
to servicemembers to make informed decisions and to protect 
against fraud. For instance, the military has legal assistance 
offices that offer financial education counseling. I look 
forward to hearing from Captain Alexander, who serves in the 
Navy's mid-Atlantic Regional Legal Service Office, about his 
role in supporting and advising servicemembers when they fall 
victim to financial fraud.
    I also look forward to hearing more about the consumer 
protection initiative from the Federal Trade Commission and the 
Consumer Financial Protection Bureau. We're privileged to have 
Mrs. Holly Petraeus here today to tell us of her efforts with 
the Office of Servicemember Affairs at the CFPB. I know that 
she has visited personally with the servicemembers stationed at 
Ellsworth, as well as dozens of other military installations.
    I'd also like to call attention to Military Consumer 
Protection Day which was held for the first time this past 
July. Its website provides education and resources to 
servicemembers and their families to protect them against 
    In closing, we can all agree that financial readiness is an 
important issue for our military and our national security, and 
that these brave men and women that protect all over the world 
should not be the victims of unfair practices at home.
    So Mr. Chairman, I thank you again for holding this hearing 
and I look forward to hearing from our witnesses and what 
certain states are doing to rein in unscrupulous practices. I 
would ask too, I have a statement here by the American 
Financial Services Association, that I'd like to have included 
as part of the record.
    [The information referred to follows:]

   Prepared Statement of the American Financial Services Association
Statement of Interest
    The American Financial Services Association (``AFSA'') is pleased 
to file these comments to the Senate Commerce Committee on the occasion 
of its hearing on ``Soldiers as Consumers: Predatory and Unfair 
Business Practices Harming the Military Community.''
    AFSA is the national trade association for the consumer credit 
industry, protecting access to credit and consumer choice. The 
association encourages and maintains ethical business practices and 
supports financial education for consumers of all ages. AFSA has 
provided services to its members for over 95 years. AFSA's 350 member 
companies include consumer and commercial finance companies, vehicle 
finance companies including the captives, credit card issuers, mortgage 
lenders, industrial banks, and other financial service firms that lend 
to consumers and small businesses.
    AFSA member companies offer many types of consumer credit products, 
including credit cards, vehicle loans and leases, personal installment 
loans and mortgages (together hereinafter referred to as ``consumer 
installment credit''). AFSA members are responsible for providing 
roughly 80 percent of the Nation's vehicle financing. In general, 
finance companies represent one of every five dollars of consumer 
credit outstanding.
    AFSA is very appreciative of the Committee's desire to examine the 
financial issues and concerns faced by military servicemembers and 
their families. We are sensitive to the hardship that is placed on 
military families with repeated deployments, especially for dual career 
spouses, and the financial difficulties created by frequent moves.
    AFSA works continuously with regulators at the state and Federal 
levels to ensure that servicemembers and their families are protected 
against unscrupulous lending practices.
AFSA Members Strive to Understand and Meet the Needs of Servicemembers 
        and their Families
    AFSA members serve servicemembers and their families by offering 
beneficial forms of consumer installment credit, which:

   Have existed for over a hundred years;

   Are based on the borrower's ability to pay;

   Are paid in equal monthly installments of principal and 
        interest like traditional mortgages, which give borrowers a 
        roadmap out of debt; and

   Are fully regulated by Federal and state laws, and the 
        Federal and state agencies empowered to enforce those laws.

    Additionally, AFSA members report to the credit bureaus to allow 
responsible borrowers to improve their credit score, and provide a 
number of financial literacy programs including the AFSA Educational 
Foundation's (``AFSAEF'') MoneySKILL program.
    AFSA members endeavor to provide the best customer service to all 
of their customers, including servicemembers and their families. We 
always attempt to assist all of our customers, servicemembers and 
civilians alike, in times of hardship and inconvenience to work out 
financial solutions to their problems. We realize that condoning 
harmful lending practices to servicemembers and their families 
endangers the good actors in the lending industry. We strive to comply 
with all regulations and statutes, including the Military Lending Act 
and the Servicemembers Civil Relief Act.
    It is imperative to ensure that servicemembers and their families 
have access to a full range of legitimate and fair credit 
opportunities. Burdensome restrictions on legitimate practices serve to 
limit the range of financial products that are available to 
servicemembers and their families. This reduces competition and moves 
counter to the objective of empowering servicemembers and their 
    The key to protecting servicemembers and their families is 
transparency--simple, clear, plain-language disclosures and terms that 
are fair, without tricks or traps. Finance companies use plain-language 
disclosures for servicemembers and civilian borrowers alike. Along 
these lines, AFSA members' practices include: (1) letting the borrower 
see the cost of the loan in simple terms; and (2) if ancillary products 
are offered by the lender, such as credit insurance, providing a clear 
statement of the cost and the optional nature of these products, and 
obtaining affirmative consent if the consumer chooses to purchase them.
    We want servicemembers and their families to continue to have 
access to affordable, safe and disciplined consumer installment credit. 
AFSA is willing to meet with the entire military chain of command to 
inform them about our members' financial products and seek their advice 
on additional guidelines that may be needed to encourage even better 
lending practices. We are also eager to work with the Department of 
Defense (``DOD'') and the military branches to support efforts on 
financial education.
    AFSA hopes to be a resource to the Consumer Financial Protection 
Bureau's (``CFPB'') Office of Servicemember Affairs in order to 
encourage standards of ethics and ensure that servicemembers and their 
families are not targeted by unfair lending practices. Leveraging our 
industry's resources can increase the ability of the CFPB to ensure 
that servicemembers and their families are treated fairly.
    Occasionally, concerns about potentially abusive practices are 
brought to the attention of AFSA and its members. Whether these 
concerns relate to civilian or military consumers, we take such matters 
very seriously. AFSA members strive to respond promptly to individual 
customer complaints as soon as they are made aware of them. However, 
oftentimes generalized observations are made about lending practices 
based upon anecdotal examples that do not represent industry norms. 
Furthermore, observations relating to certain types of short-term 
credit products that AFSA members do not offer have sometimes been 
applied to traditional installment loans, which, as discussed below, 
carry significantly different features. Traditional installment loans 
are underwritten strictly based upon the borrower's ability to repay 
and they are structured under a more disciplined debt reduction 
schedule than the newer hyper-lending products--which have been where 
problems have arisen for servicemembers who become trapped in a cycle 
of debt.
    In general, the rare cases of alleged illegal behavior could, and 
should, be addressed under existing consumer protection statutes and 
regulations, or the criminal code, at the state and Federal levels. 
Where there is empirical data to support a pattern or practice of such 
behavior, AFSA and its members are extremely interested to know about 
it so that we may take steps proactively to address shortcomings in 
compliance with the law.
Defense Department Regulation Protects Military Community from Risky 
        Forms of Credit
    In 2006, Congress enacted provisions in Section 670 of the John 
Warner National Defense Authorization Act for Fiscal Year 2007 
(commonly known as the ``Military Lending Act'' or ``MLA'') to cap the 
annual percentage rate (``APR'') at 36 percent and impose other 
limitations on certain consumer loans to servicemembers and their 
dependents, with the objective of protecting military households from 
becoming trapped in a cycle of debt.\1\
    \1\ 10 USC 987. Terms of Consumer Credit Extended to Members and 
Dependents: Limitations. Public Law 109-364. October 17, 2006.
    Implementing regulations promulgated by the DOD in 2007 (``Final 
Rule'') contain limitations on and requirements for certain types of 
consumer credit extended to covered borrowers--which include active-
duty servicemembers and their spouses, children and other dependents. 
The Final Rule applies to payday loans, vehicle title loans and tax 
refund anticipation loans.\2\
    \2\ 32 CFR 232. Limitations on Terms of Consumer Credit Extended to 
Service Members and Dependents; Final Rule. August 31, 2007.
DOD Rule Sufficiently Protects Servicemembers and their Families
    In its only report following the issuance of the Final Rule, the 
DOD itself said that the rule is achieving its intended purpose.\3\
    \3\ Department of Defense Report on Implementation of Limitations 
on Terms of Consumer Credit Extended to Service Members and Dependents. 
July 22, 2008.
    Assessing the effectiveness of the Final Rule, Col. Paul Kantwill, 
Director of Legal Policy in the Office of the Under Secretary of 
Defense (Personnel & Readiness), stated the following in his June 2012 
testimony to the Senate Banking Committee:\4\
    \4\ Kantwill, Col. Paul. Testimony before U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, Hearing on ``Empowering and 
Protecting Servicemembers, Veterans and their Families in the Consumer 
Financial Marketplace.'' June 26, 2012.

        With the assistance of the seven Federal financial regulatory 
        agencies, DOD was able to draft and release a regulation within 
        the prescribed time limitation seen as acceptable and workable 
        by both the consumer advocates and the mainstream financial 
        industry providers. . . Annually, the Department has sent a 
        representative to the national conference of state regulators 
        to ensure there are no difficulties in obtaining compliance 
        from the covered creditors. Each year the regulators have 
        reported that their examinations have found compliance with the 
        Rule and no need for enforcement action.

    At a November 2011 hearing, Admiral Steve Abbot, USN (Ret.), the 
President of the Navy-Marine Corps Relief Society, told the Banking 
Committee that ``the Military Lending Act (MLA), which became effective 
in October 2007, has dramatically curtailed payday loans to active duty 
servicemembers.'' This would seem to suggest that existing statute is 
serving its purpose.\5\
    \5\ Abbot, Admiral Steve, USN (Ret). Testimony before U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, Hearing on 
``Empowering and Protecting Servicemembers, Veterans and their Families 
in the Consumer Financial Marketplace.'' November 3, 2011.
Officials Warn of Unintended Consequences of Restricting Access to 
    As Holly Petraeus, Assistant Director of the CFPB's Office of 
Servicemember Affairs, stated in her testimony at the very same 
hearing, it is imperative that any laws or regulations that 
policymakers may propose in the future do not result in unintended 
consequences.\6\ The inadvertent risk of restricting the availability 
of legitimate and appropriate credit products to deserving 
servicemembers and their families would be far more devastating than 
most people recognize. It was this concern that prompted the DOD to 
limit the scope of the Final Rule to payday loans, vehicle title loans 
and tax refund anticipation loans.
    \6\ Petraeus, Hollister K. Testimony before U.S. Senate Committee 
on Banking, Housing, and Urban Affairs, Hearing on ``Empowering and 
Protecting Servicemembers, Veterans and their Families in the Consumer 
Financial Marketplace.'' November 3, 2011.
    Further, in responding to a question from a member of the Banking 
Committee, Mrs. Petraeus expressed concern about the unintended 
consequences of extending the existing 36 percent APR rate cap beyond 
the products covered by the Final Rule. AFSA shares that concern and 
urges policymakers to consider the consequences of regulating useful, 
desirable forms of consumer credit out of existence for the military 
    Finally, Defense Secretary Leon Panetta expressed satisfaction with 
current policy when he responded to a question posed by Sen. Vitter 
upon his June 2011 confirmation hearing about whether the Department 
saw a need to expand the scope of the regulation:\7\
    \7\ Panetta, Hon. Leon E. Response to Questions for the Record 
submitted by Sen. David Vitter, Hearing before the U.S. Senate 
Committee on Armed Services. June 9, 2011.

        No, the DOD has not changed its policy and does not intend at 
        this time to include other lenders within the coverage of the 
        regulation. The Department proposes to help ensure that Service 
        members and their families receive fair protections by working 
        with Federal and state governments on existing and proposed 
        policies impacting all consumers. The goal is to try to 
        eliminate the need to identify Service members and their 
        families for protections, which may create unintentional 
        barriers to credit.

    AFSA notes that in the Final Rule, the DOD recognized the problems 
servicemembers and their families were facing from various new forms of 
harmful consumer credit and proposed regulations to protect them. The 
DOD saw the importance of implementing strong protections without 
unduly restricting access to valuable and beneficial traditional credit 
products for servicemembers and their dependents. AFSA agrees with the 
DOD that some newer forms of credit can be harmful to servicemembers, 
as detailed in the Department's 2006 report to Congress that motivated 
enactment of the MLA.\8\ Payday loans, in particular, are a relatively 
new type of consumer credit, having originated and evolved primarily in 
recent years. By contrast, the consumer finance industry has been 
providing military servicemembers with fair and reasonably-priced 
access to credit in a safe and responsible manner for over a century in 
the form of traditional installment loans.
    \8\ Department of Defense Report on Predatory Lending Practices 
Directed at Members of the Armed Forces and their Dependents. August 9, 
Policymakers should Tread Carefully before Restricting Credit to the 
    AFSA does not believe that further limiting access to credit for 
military households is wise or necessary at this juncture. To do so 
could create undue financial stress where none currently exists. 
Foreclosing upon the ability of servicemembers and their families to 
obtain traditional credit products could force them into the hands of 
non-traditional lenders--some of which are domiciled overseas and 
operate on the Internet, outside the reach of U.S. regulators--or even 
worse, underground and unregulated lenders (commonly known as ``loan 
sharks''). Such a misstep would be detrimental to military personnel 
readiness, something that should be avoided at all costs.
    The DOD understands the importance of maintaining access to 
beneficial credit as a compelling need for its personnel. In its Final 
Rule, the DOD notes ``the potential for unintended consequences that 
could adversely affect credit availability if it were to adopt a 
broadly applicable regulation.'' \9\ The DOD looked to identify the key 
problems and to use the authority granted by the MLA to define 
``consumer credit'' in a way that achieves the intent of Congress while 
preserving the availability of beneficial forms of credit to military 
    \9\ 32 CFR 232. Limitations on Terms of Consumer Credit Extended to 
Service Members and Dependents; Final Rule. August 31, 2007.
Traditional Installment Loans
Installment Loans are Beneficial to Servicemembers and their Families
    Traditional installment lending provides access to reasonably-
priced credit because lenders work with borrowers to determine that 
they have the ability to repay the loan. It is the safest form of 
small-dollar lending. Installment loans utilize amortization as a means 
of protecting borrowers from an endless cycle of debt. The installment 
credit products offered by the member companies of AFSA are not the 
problem--in fact they are often the best solution to the financial 
needs of servicemembers and their families. Installment loans are 
clearly, and have long been, a beneficial and useful service for 
servicemembers and their families.
    The beneficial features of installment loans were also recognized 
by the DOD in the conclusion of its report to Congress on the 
effectiveness of the regulations implementing the MLA: ``Isolating 
detrimental credit products without impeding the availability of 
favorable installment loans was of central concern in developing the 
regulation. Consequently, installment loans that do not fit the 
definition of `consumer credit' in Section 232.3(b). . .are not covered 
by the regulation.'' \10\
    \10\ Department of Defense Report on Implementation of Limitations 
on Terms of Consumer Credit Extended to Service Members and Dependents. 
July 22, 2008.
    Conventional commercial banks, credit unions, and military relief 
societies are not in a position to provide adequate credit to 
servicemembers and their families due to the costs of underwriting and 
servicing small-dollar loans. Banks and credit unions have simply been 
unable to duplicate the traditional installment loan model in an 
economically unsuccessful way. The services' military aid societies 
have neither the mission nor the financial capacity to meet the 
financing needs of a large and diverse military population without a 
significant infusion of charitable donations or taxpayer subsidies. 
While the aid societies do provide critical assistance to 
servicemembers in challenging and difficult circumstances, often with 
nowhere else to turn, they simply are not designed to fulfill the role 
of serving normal small-dollar credit needs in the general marketplace. 
In fact, AFSA members report that many of their clients come to them 
specifically because their credit needs fall outside of the limited 
scope of the general lending guidelines of the military aid societies, 
which are designed to assist in emergencies and special circumstances.
Installment Loans Help Meet the Unique Needs of Servicemembers and 
    Small-dollar, traditional installment loans help meet the needs of 
servicemembers and their families. Some AFSA members lend money to 
servicemembers as they are getting ready to deploy. Servicemembers 
often must borrow in order to procure additional supplies they will 
need in the combat environment, such as body armor. They also borrow 
before they deploy in order to get their households in order and to 
have an amount of emergency cash on hand to be available to their 
spouses and families. An increase in debt consolidation loans is seen 
at this time as well.
    Permanent change-of-station moves, overseas assignments, and 
relocations are some of the more prevalent reasons why servicemembers 
borrow. Often servicemembers say that there is never enough money 
available to move and that they need additional funds to supplement 
what the military provides. Physical moving costs, security deposits 
and new appliances are all expenses that are incurred during a move. 
AFSA members making these loans recognize this ``purpose of loan'' as 
bona fide and as such, are willing to extend small-dollar credit to 
meet these needs.
                                 * * *
    AFSA believes that it is important to ensure that access to 
beneficial forms of credit is preserved for members of the military 
community while, at the same time, ensuring that sensible consumer 
protections are maintained. We appreciate the Commerce Committee 
holding this hearing on aggressive business practices that some 
soldiers and their families face, as well as ways to protect 
servicemembers from abusive behavior. AFSA looks forward to continuing 
to work with Congress and Federal regulators to improve the quality of 
life for military families.
    Please feel free to contact AFSA Executive Vice President Bill 
Himpler with any questions. [email protected]

    The Chairman. So ordered.

                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, may I ask you a question?
    Why in the world would the Department of Defense constrict 
the definition of consumer credit from the very broad consumer 
protection bill that we, with the Joint Chiefs of Staff urging 
us, passed in 2006?
    The Chairman. I do not know the answer to that question, as 
I do not know the answer to--to me a rather shocking thing. I 
think in most parts in the Department of Defense, maybe not all 
of the services but most of them, that when soldiers and men 
and women leave the military--their time is up, they don't get 
a health checkup--they get no health checkup. So if the person 
has PTSD, it's going to be for somebody else to find out. If 
the person has mental health problems, it's going to be for 
somebody else to find. I can't answer your question and I can't 
answer my question.
    It's a very, very good group and I thank you very, very 
much for coming. Let's start with the Honorable Robert Cooper, 
the Attorney General for the State of Tennessee.

                       STATE OF TENNESSEE

    Mr. Cooper. Thank you, Mr. Chairman.
    Chairman Rockefeller, Ranking Member Thune, Committee 
members, it's an honor to be included with this distinguished 
panel today. And I congratulate the Committee Chair and this 
committee for taking on this important subject.
    I want to use my limited time to talk about a case, as you 
alluded to, that we handled in the Tennessee Attorney General's 
Office against companies that were targeting soldiers in 
Tennessee with numerous unlawful business practices. And after 
I've done that, I want to touch on just a few lessons that we 
have learned from that litigation.
    The lawsuit began in 2005 when the Tennessee Attorney 
General's Office filed a complaint in state court, obtained a 
temporary restraining order, an asset freeze, and other relief 
against Britlee Inc., a seller of computers and other 
electronics, and Rome Finance Company, which was financing 
these sales.
    These companies were targeting active duty soldiers at Fort 
Campbell, which is on the Tennessee-Kentucky border north of 
Nashville. Our lawsuit alleged that Rome Finance and Britlee 
both engaged in numerous unlawful practices. And some of those 
included: First, operating without appropriate licenses in 
Tennessee, claiming their prices on computers and electronics 
were a great deal but instead price gouging soldiers by marking 
up their products by as much as 300 percent of the 
manufacturers recommended price; falsely representing that 
their products were new when, in fact, many were returns, 
liquidation purchases, and defective equipment; falsely 
claiming that they were offering zero percent financing, this 
was called at different times free financing, 100 percent 
military financing, special programs for servicemembers, but it 
was really a 19.2 percent APR not counting other hidden fees in 
contract terms that were in the arrangement; and then engaging 
in abusive collection practices, including contacting superior 
    And when we filed the lawsuit, Rome Finance responded with 
an aggressive litigation strategy and engaged in extensive 
misconduct during discovery; refusing to produce documents, 
destroying records, and walking out on depositions. However, 
the most egregious example of abusive conduct by Rome during 
the litigation was that it continued for several months, 
despite notice from our office, to attempt collection on the 
account of a deceased soldier whose body was found on the 
streets of Baghdad after being tortured and beheaded. 
Responding to this, the state court judge observed in his 
decision, ``While the thought of what these soldier's families 
had to endure when these soldiers were killed in action is 
unbearable, the thought that their families and loved ones had 
to endure months and months of unnecessary collection billings 
from Rome is beyond comprehension.'' And as an addendum to our 
written statement we have included the findings and conclusion 
of the court.
    Now, three years after the complaint was filed, in August 
2008, the court granted the ultimate sanction for Rome 
Finances's litigation misconduct, which is that it entered a 
default judgment against the company. At the hearing that day 
the state presented its case, submitted proof of the amount of 
restitution owed to the soldiers who had done business with 
these companies and the court ordered that restitution. It also 
ordered the companies to stop all collections against soldiers; 
dismissed all collections lawsuits; ordered Rome to clear up 
all affected credit bureau records for the soldiers; remaining 
debts were ordered canceled; and the soldiers were allowed to 
keep their computers.
    I'd like to say that the case was over at that point, but 
it wasn't. Rome Finance then went to California where it was 
incorporated and file a Chapter 11 bankruptcy in an attempt to 
enjoin the state court proceedings. Fortunately, that failed 
and, while those bankruptcy proceedings are still underway, we 
negotiated with the trustee in the case to obtain approval for 
the disbursement of $2.2 million from Rome's assets. And that 
money has been used to provide restitution to almost 4,000 
soldiers who bought merchandise from these companies. And I 
will say that, before the hearing from Ms. Nelson, these two 
companies are now doing business in New York and are the 
subject of investigation by that office.
    Now let me talk about some of the lessons that we've 
learned from this litigation. First, many unscrupulous business 
that now prey on our military and their families no longer fit 
the profile of a local business on the strip outside the main 
gate. While Britlee did have a kiosk in the local mall, which 
was near Fort Campbell, Rome, Britlee and their strategic 
partners were sophisticated, nationwide operations with tens of 
millions of dollars in cash-flow. They had financial resource 
and expertise not only to hide their assets, but to close and 
reopen where opportunity called; such as in New York.
    Second point deals with some of the obstacles that we ran 
into in prosecution. In our case, Rome Finance falsely claimed 
that it was a duly licensed consumer lender in California. It 
was not. When these companies failed to register, that puts an 
even greater burden on state regulators who have administrative 
procedures to deal with license entities, but then have to go 
to court to close down those who are operating outside the 
regulatory framework.
    Another enforcement obstacle is the cost of proceeding 
against these national operations. Here, as I said, the company 
went to California to file bankruptcy to escape the Tennessee 
judgment. And as a result, our lawyers had to go to California 
several times. This was not cheap. Fortunately, we had the 
resources to pursue this, but it can be a real financial 
challenge for State Attorneys Generals to obtain judgments and 
then have to chase the defendant, not around the state to 
collect, but around the country.
    Now, let me shift this discussion to the people we are 
trying protect, that is our service men and women. A number of 
factors, which the Committee has alluded to, make the soldiers 
at Fort Campbell and other bases vulnerable to sophisticated 
operators like Rome/Britlee. Many younger soldiers are simply 
less experienced and less sophisticated about financial 
matters. A large number of soldiers who purchased computers 
from Britlee were motivated purchasers about to be deployed and 
desperate to have some means to communicate back home. And 
then, once soldiers were locked into these abusive financial 
agreements, they were afraid that their consumer dispute would 
be viewed negatively by their commanders and would harm their 
advancement so they were hesitant to report or complain.
    Now, another significant problem encountered by soldiers 
involved the use of allotments; automatic deductions from their 
paychecks. Rome/Britlee made effective use of this tool; had 
the soldiers making a purchase go online on the spot, access 
their military pay accounts, and setup pay accounts in 
Kentucky. Predictably, these payments were very difficult to 
stop even after the court enjoined further collection.
    But if I wanted to point out one thing in the brief time I 
have left, is the importance of financial education of young 
soldiers and communication with young soldiers and their 
families. They need to understand not only how to manage, but 
to feel comfortable talking about their problems. We became 
involved in this case only because a number of soldiers 
complained to the Consumer Affairs Counselors at Fort Campbell 
who then brought it to our attention. If the counselors had not 
been doing their job, talking to soldiers and as well doing 
their job in talking to our office, this case may not have come 
to light. So that communication needs to go on, not only within 
the base but also between the base and state enforcement 
authorities like the Attorney General's Office.
    During the litigation, we met and talked regularly at Fort 
Campbell, with the Commanding General, General McConville, down 
the chain of command to the civilian--consumer protection 
teams. And we are currently working with the Consumer Affairs 
counselors to develop training material on consumer protection 
issues tailored specifically to military bases.
    So, that communication is extraordinarily important. That's 
one reason why it's so important to have Holly Petraeus leading 
the effort at CFPB to protect servicemembers. She and I have 
visited Fort Campbell together, other bases in Tennessee. She 
spoke earlier at a bipartisan conference of State Attorneys 
General in Nashville that dealt with issues facing military 
faces in the south. And I can personally attest to her unique 
ability to facilitate communication between military and 
civilian authorities.
    So, training in financial literacy is important to all 
aspects of society, but it's particularly important to 
maintaining military force readiness and morale so that are men 
and women in uniform can focus on their mission and not worry 
about their financial condition. Fort Campbell is doing a good 
job, but we understand that the military can't assume the 
entire burden and that's why we need a strong partnership among 
the military, Federal agencies, state consumer offices, and 
State Attorneys General to protect our men and women in uniform 
from consumer fraud.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Cooper follows:]

    Prepared Statement of Robert E. Cooper, Jr., Attorney General, 
                           State of Tennessee
    Good afternoon Chairman Rockefeller, Ranking Member John Thune and 
members of the Committee. It is an honor to be included on this 
distinguished panel and to testify before you today. I congratulate the 
Committee for its leadership on this important issue. I want to use my 
limited time to discuss a judgment obtained by the office of the 
Tennessee Attorney General against companies that were targeting 
soldiers at the Ft. Campbell army base with numerous unlawful 
practices. I will conclude with some lessons learned from this six-year 
legal battle.
    The lawsuit began in 2005 when the Tennessee Attorney General's 
office obtained a Temporary Restraining Order (TRO), an asset freeze, 
and other relief against Britlee, Inc., a seller of computers and other 
electronics, and Rome Finance Company, which financed these sales.
    Our lawsuit alleged that Rome Finance and Britlee both engaged in 
numerous unlawful practices including:

   operating without appropriate licenses in Tennessee;

   price-gouging soldiers;

   falsely representing their products were new when in fact 
        many were returns, liquidation purchases, and defective 

   claiming their prices on computers and electronics were a 
        great deal, but marking up their products as high as 300 
        percent of MSRP;

   falsely claiming they were offering 0 percent financing, but 
        really charging 19.2 percent APR;

   concealing additional costs and contract terms; and

   engaging in abusive collection practices, including 
        contacting superior officers.

    Rome Finance adopted an aggressive litigation strategy and engaged 
in misconduct during discovery. However, the most egregious example of 
abusive conduct by Rome was that it continued for seven months, despite 
notice from our office, to attempt collection on the account of a 
deceased soldier whose body was found on the streets of Baghdad after 
being tortured and beheaded. State Circuit Court Judge R. Ross Hicks 
observed in his decision, ``While the thought of what these soldier's 
families had to endure when these soldiers were killed in action is 
unbearable, the thought that their families and loved ones had to 
endure months and months of unnecessary collection billings from Rome 
is beyond comprehension.'' \1\
    \1\ State of Tennessee ex rel. Robert E. Cooper, Jr., Attorney 
General v. Britlee, Inc., et al., Case No. 50500795,slip op. at 43 
(Montgomery County Cir. Ct, Dec. 18, 2008 Findings of Fact and 
Conclusions of Law).
    On August 11, 2008, the court granted the ultimate sanction for 
Rome Finances's litigation misconduct--a default judgment. At a hearing 
that day, the State presented its case against Rome and submitted proof 
of the amount of restitution to which the soldiers were entitled. The 
court ordered the companies to stop all collections against soldiers, 
dismissed all collections lawsuits, and ordered Rome to clear up all 
affected credit bureau records for the soldiers. Remaining debts were 
ordered cancelled, and the soldiers were allowed to keep their 
    Rome Finance then filed Chapter 11 bankruptcy in California in a 
failed attempt to enjoin the state court proceeding. Because of Rome's 
misconduct that had been documented in our case, a trustee was 
appointed in the bankruptcy proceeding with the support of the U.S. 
Department of Justice. Those bankruptcy proceedings are still under 
way, but my office was able to negotiate and obtain approval from the 
bankruptcy trustee for the disbursement of $2.2 million from Rome's 
assets, which has been used to provide restitution to almost 4,000 
soldiers who had bought merchandise from these companies.
    Unbeknownst to the State, after we obtained the TRO, Rome Finance 
and Britlee created a host of new entities to do additional business in 
other states, and Rome began transferring receivables to its new 
entities. We were subsequently contacted by the New York Attorney 
General's Watertown office in connection with its investigation of the 
new Rome and Britlee entities that were operating near a military base 
in New York.
    This is the first lesson learned from the Rome/Britlee case. Many 
unscrupulous businesses that prey on our military and their families no 
longer fit the profile of the local business on ``the strip'' outside 
the main gate. In this case, Britlee set up kiosks in the local mall 
alongside reputable merchants. More important, the retailer and its 
strategic partners in finance were sophisticated, nationwide operations 
with tens of millions of dollars in cash flow. They had the financial 
resources and expertise not only to hide assets but to close and re-
open where opportunity called.
    Shifting operations around the country is easier when a company 
doesn't worry about obtaining proper licenses and lies about its 
licensing status when caught. For example, Rome Finance falsely claimed 
it was a duly licensed consumer lender in California. This practice 
puts an even greater burden on regulators, who have administrative 
procedures to deal with licensed entities but have to seek a court 
order to close down those operating outside the regulatory framework.
    The defendants in our case engaged in an aggressive litigation 
strategy, including filing bankruptcy in California, to avoid paying 
the Tennessee court's substantial judgment. This tactic required our 
lawyers to make several trips to California. Fortunately, my office had 
the resources and staff time available for this case. Litigation 
against companies experienced in preying on the military is difficult 
and time-consuming. It can be a challenge for state Attorneys General 
who, although they may win a judgment in state court, have limited 
resources available to chase defendants around the country.
    Defendants in this and other cases who prey on our men and women in 
uniform will go to great lengths to stay in business because it is very 
lucrative. Discovery in our case revealed that the defendants were 
funded by a network of sophisticated investors attracted by high rates 
of return. Unfortunately, many young soldiers are less sophisticated 
about finance and are especially vulnerable. A large number of soldiers 
who purchased computers from Britlee were about to be deployed to Iraq 
and were desperate to have some means to communicate back home. 
Unscrupulous retailers and lenders know that soldiers will hesitate to 
report them to regulators and are afraid consumer disputes will be 
viewed negatively by their commanders and will harm their advancement.
    Another problem encountered by soldiers in the Rome/Britlee case 
involved the use of allotments. An allotment is an automatic deduction 
made from a soldier's military-pay account which is sent to a third 
party. Allotments can be discretionary (where the soldiers instructs 
the military where to send some or all of his money) and non-
discretionary (where the soldier's pay is allotted to someone else by 
mandate, such as court-ordered child support). This system of 
allotments through a third-party bank is commonly used by military 
predatory lenders because allotments made to ``entities'' must be made 
by electronic transfer or direct deposit and are difficult to stop once 
they have started.
    In this case, Britlee required soldiers making a purchase at its 
mall kiosk to go online on the spot, access their military pay accounts 
(known My Pay accounts), and set up bank accounts at First Citizens 
Bank in Kentucky. The bank was designated to receive regular allotment 
payments from the soldiers' military pay, which the bank would then 
send to Rome Finance every month on behalf of the soldiers. 
Predictably, these payments were very difficult to stop even after the 
court enjoined further collections.
    Perhaps the most important lesson learned from the Rome/Britlee 
lawsuit is the importance of financial education and communication with 
young soldiers and their families. The Attorney General's office became 
involved in this case at the request of the Consumer Affairs Counselors 
at Ft. Campbell after a number of soldiers complained to them about 
Rome/Britlee. During the litigation, our office communicated regularly 
with Ft. Campbell, from the Commander down the chain of command to the 
civilian consumer protection team. We meet regularly with Ft. 
Campbell's Consumer Affairs Counselors and are currently working with 
them to develop training materials on consumer protection issues 
tailored specifically to military bases.
    There is no substitute for a close working relationship and 
communication between civilian and military authorities to protect our 
military from predatory and unfair practices. That is one reason it is 
so important to have Holly Petraeus leading the effort at the Consumer 
Financial Protection Bureau to protect servicemembers. Ms. Petraeus and 
I have visited Ft. Campbell and military facilities in Memphis 
together. She spoke earlier this year at a bipartisan conference my 
office hosted for the southern region of the National Association of 
Attorneys General on consumer and other legal issues facing the many 
military bases in the South. I can personally attest to her unique 
ability to facilitate communication between the military and civilian 
consumer protection authorities.
    A 2009 investigation by this Committee highlighted unique 
challenges the Internet presents in the area of consumer protection. 
Young soldiers and their families, often living in places far away from 
friends and family, are prime targets for every kind of digital fraud, 
unfair business practice, and predatory lending. In the Rome/Britlee 
litigation, we had the advantage that our defendants could be sued and 
had assets within the United States. Unfortunately, bad actors using 
the Internet, especially those on servers from non-U.S. jurisdictions, 
can be impossible to stop. Even if you obtain a judgment, it is 
virtually impossible to enforce.
    These difficulties in enforcement highlight the need for broader 
financial literacy education, so that consumers, both civilians and 
military, do not fall prey to these frauds. Tennessee is one of the few 
states that mandate financial literacy training for high school 
students. In fact, a member of my staff helps to lead the program that 
educates teachers around our state on this subject. More and more 
private sector employers are realizing that financial literacy is 
essential to a stable and efficient workforce. And financial literacy 
is just as important to maintaining military force readiness and 
morale, so that our servicemen and women can focus on their mission 
without the distraction of unnecessary financial issues. Ft. Campbell 
is doing a good job in this area, but we cannot expect the military to 
assume the entire burden. We need a strong partnership among the 
military, Federal agencies, state consumer offices, and state attorneys 
general to protect our men and women in uniform from consumer fraud.

    Mr. Chairman. Thank you very, very much, General Cooper.
    Ms. Holly Petraeus has been with us before. Everybody 
admires her for what she does. She's the Assistant Director of 
the Consumer Financial Protection Bureau for the Office of 
Servicemember Affairs. She's a hard charger. She knows what she 
is talking about. And I would not want to be on the wrong side 
of her ledger.
    Please proceed.


                     SERVICEMEMBER AFFAIRS

    Ms. Petraeus. Thank you, Chairman Rockefeller, Ranking 
Member Thune, and distinguished members of the Committee. I 
appreciate the opportunity to testify today.
    For those of you who are not familiar with the Office of 
Servicemember Affairs, we are responsible for educating 
servicemembers and their families to make better informed 
financial decision; from monitoring complaints to the bureau; 
from servicemembers and their families; and for coordinating 
with other Federal and state agencies on consumer protection 
measures for the military.
    Obviously, although we address many consumer protection 
issues, my mission ties in very directly to the issue of 
predatory lending to the military. And I've lived on or near 
military bases my entire life and seen that strip outside the 
gates, offering everything from furniture to used cars to 
electronics to jewelry and the high-cost credit to pay for 
them. But in the early 2000s, there was an alarming increase in 
the number of businesses offering payday loans, and a 
corresponding increase in the number of servicemembers taking 
advantage of that easy money, often without the ability to 
repay what they borrowed.
    The Pentagon took note that indebtedness was beginning to 
take a serious toll on military readiness as did the media. And 
two academics undertook a major study in 2005, looking at the 
geographic distribution of payday lenders across the United 
States. Professors Chris Peterson and Steven Graves described 
``An environment where servicemembers are literally surrounded 
by lenders clamoring to charge annual rates averaging around 
450 percent. Payday lenders crowd around the gates of military 
bases like bears on a trout stream.''
    In 2006, at the request of Congress, the Department of 
Defense published a report on predatory lending practices 
directed at members of the armed forces and their dependence. 
It found that ``Predatory lending undermines military 
readiness, harms the morale of troops and their families, and 
adds to the cost of fielding in all volunteer fighting force.''
    Congress passed the bipartisan Talent-Nelson Amendment, 
also known as the Military Lending Act or MLA, and it was 
signed into law in 2006. And I should note with appreciation 
that one of the authors, Senator Bill Nelson, is on this 
committee and here today.
    The MLA caps the rate on consumer credit to a covered 
member of the armed forces or a dependent of a covered member 
at 36 percent and creates other consumer protections as well. 
The Department of Defense was given the task of writing the 
regulations for the Military Lending Act and opted to define 
consumer credit as only three types of loans defined fairly 
narrowly. They are payday loans: closed-end loans with terms of 
91 days or fewer for $2,000 or less; auto title loans: closed-
end loans of terms of 181 days or fewer; and tax refunded 
participation loans, which are closed-end credit.
    For those products that fall within the Department's 
definitions, the law has had a positive impact. But, the 
concern now is that lenders have easily found ways to get 
outside of the definitions.
    In my almost three years at the Bureau I have been to more 
than 70 bases and National Guard units. Here are just a few of 
the stories I've hear: The spouse of a wounded warrior in the 
Illinois National Guard took out an auto title loan of $2,575 
at an APR of 300 percent. The finance charges on the loan were 
over $5,000. The loan was not subject to the MLA because it was 
longer than 181 days.
    Servicemembers from North Carolina and Delaware each took 
out loans at 584 percent. The loans were not subject to the 
Act's protections because they were open-end lines of credit.
    At Joint Base McGuire-Dix-Lakehurst, in New Jersey, a 
sailor had one loan at 499 percent and another at 197 percent; 
neither covered by the MLA. He was paying over 66 percent of 
his take-home pay on those two loans.
    Concerns about the effectiveness of the current rule have 
led to renewed interest from Congress. Recently, thanks in 
large part to the efforts of Senators Reed, Blumenthal and 
others; we have seen updates to the Act which provided 
enforcement authority for the Act of Federal regulators, 
including the Bureau.
    And our efforts are already reaping dividends when it comes 
to enforcing the Act. Just this morning, the Bureau announced 
an enforcement action against a large national payday lender, 
Cash America, which had made loans in violation of the MLA to 
hundreds of servicemembers or their dependents. As part of the 
enforcement action, the lender refunded loan and loan-related 
fees for a total amount of approximately $33,550. It also put 
additional compliance mechanisms in place and agreed to 
increase training on the MLA for its customer service 
    This is a great example of what can be achieved through the 
combined efforts of the Bureau's supervisory and enforcement 
areas; a significant change in a large payday lenders 
appreciation of, in compliance with, the MLA. I still have real 
concerns; however, about the ability of lenders to easily evade 
the current MLA regulations. The original rule was effective 
for those products that it covered, but over the past 6 years 
we have seen significant changes in the type of products 
offered and the contours of state law. And I think it's 
critically important to ensure that the MLA protections keep 
    I believe that any approach that has strict definitions 
that define individual products will fall victim to the same 
evasive tactics that are plaguing the current rule. I also 
believe that, from a military financial readiness point of 
view, it makes no difference whether the loan is made by a 
depository institution or a non-depository institution, nor 
does it matter whether the loan is structured as open or 
closed-end. A loan with a sky-high interest rate and burdensome 
fees has the same adverse impact on military financial 
readiness no matter who offers it.
    In sum, the underlying goals of protecting military and 
financial readiness, led to the passage of the MLA in 2006, are 
as important today as they were when the act was originally 
passed. And I think we should all be indignant when we hear our 
servicemembers trapped in outrageous loans and realize that 
there's little we can do under the current regulations because 
they are just longer than 91 days or structured as open-end 
credit. We owe it to our servicemembers and their families to 
do the best possible job of crafting the rules that properly 
implement the intent of the Military Lending Act.
    I look forward to working with you, the department, and all 
stakeholders who have an interest in accomplishing these goals.
    Thank you.
    [The prepared statement of Ms. Petraeus follows:]

   Prepared Statement of Hollister K. Petraeus, Assistant Director, 
 Consumer Financial Protection Bureau, Office of Servicemember Affairs
    Chairman Rockefeller, Ranking Member Thune, and distinguished 
Members of the Committee, I'd like to thank you for the opportunity to 
speak with you today concerning consumer protection for the military, 
particularly in the area of predatory lending to servicemembers and 
their families.
    Many of you already know me as I've testified before you on other 
committees, and I've also had the opportunity to visit with some of you 
in your home States. But for those of you who are not familiar with my 
office, the Office of Servicemember Affairs at the Consumer Financial 
Protection Bureau (Bureau or CFPB), I'd like to take a few moments to 
tell you what we do.
    As laid out in the Dodd-Frank Act, the Office of Servicemember 
Affairs at the Bureau is responsible for:

   Developing and implementing initiatives to educate and 
        empower servicemembers and their families to make better-
        informed decisions regarding consumer financial products and 

   Monitoring complaints submitted by servicemembers and their 
        families about consumer financial products and services, and 
        the responses to those complaints; and

   Coordinating the efforts of Federal and State agencies, as 
        appropriate, regarding consumer protection measures relating to 
        consumer financial products and services offered to, or used 
        by, servicemembers and their families.

    Obviously my mission ties in very directly to the issues that you'd 
like to address today. Before I go into what we're doing at the Bureau 
when it comes to predatory lending, however, I'd like to add a little 
historical perspective. Before I came to the Bureau, I was at the 
Council of Better Business Bureaus from 2004 to 2010, running their BBB 
Military Line program. In that role, I had a ringside seat for the 
fight to create and pass the original Military Lending Act (MLA), which 
was designed to protect servicemembers from the predatory lenders that 
were springing up around military bases in ever-increasing numbers.
    I've lived on or near military installations my entire life, and 
it's a fact that a great many of them have a ``strip'' of businesses 
outside the gates, offering military families everything from furniture 
to used cars to electronics to jewelry--and the high-cost credit to pay 
for them, as well. But in the early 2000s there was an alarming 
increase in the number of businesses offering the new phenomenon of 
``payday loans,'' and a corresponding increase in the number of 
servicemembers taking advantage of that easy money, often without the 
ability to repay what they borrowed. To cite evidence from one of the 
military relief societies: ``In 2001, Navy-Marine Corps Relief Society 
provided only $5,000 to 9 servicemembers falling victim to the 
predatory lending industry. In 2006, Navy-Marine Corps Relief Society 
provided over 1.37 million dollars to military members and/or families 
who were victimized by predatory lenders.'' \1\
    \1\ http://www.cnic.navy.mil/regions/ndw/installations/
    The Pentagon took notice of the fact that indebtedness was 
beginning to take a serious toll on military readiness. On May 3, 2006, 
Adm. Mike Mullen, [then] Chief of Naval Operations wrote in an 
administrative memo to Navy personnel: ``A sailor's financial readiness 
directly impacts unit readiness and the Navy's ability to accomplish 
its mission. . . . I am concerned with the number of sailors who are 
taken advantage of by predatory lending practices, the most common of 
which is the payday loan.'' \2\ The national news media also took note: 
``Thousands of U.S. troops are being barred from overseas duty because 
they are so deep in debt they are considered security risks, according 
to an Associated Press review of military records.'' \3\
    \2\ Navy League, Sea Power Magazine, June 2006
    \3\ http://www.nbcnews.com/id/15337932/ns/us_news-military/t/debt-
    And two academics undertook a major study of the problem in 2005, 
looking at the geographic distribution of payday lenders across the 
U.S. to see if there was, in fact, a disproportionate number of payday 
lenders targeting military personnel.\4\ Professors Chris Peterson and 
Steven Graves examined the density of payday lenders in 20 states. 
Their work described ``an environment where servicemembers are 
literally surrounded by lenders clamoring to charge annual rates 
averaging around 450 percent.'' \5\ They showed that even considering 
other variables such as income and ethnicity, the counties and zip 
codes that had the greatest overrepresentation of payday lenders tended 
to have one thing in common: proximity to large military populations. 
For example, in California, Texas, Virginia, and Washington (states 
with large servicemember populations), the study showed at least 60 
percent of the 20 highest payday lending zip codes were associated with 
military installations. To quote Peterson and Graves: ``payday lenders 
crowd around the gates of military bases like bears on a trout 
stream.'' \6\
    \4\ 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, 672 (2005) http://www.law.fsu.edu/faculty/
    \5\ Graves & Peterson, p. 153.
    \6\ Graves & Peterson, p. 145.
    By 2005, the use of high-cost credit targeting servicemembers was 
being discussed in the halls of Congress, and Senator Elizabeth Dole 
requested that the Department of Defense (Department or DOD) report on 
predatory lending practices. On August 9, 2006 the Department did just 
that, publishing a report entitled ``Report On Predatory Lending 
Practices Directed at Members of the Armed Forces and Their 
Dependents.'' The report found that: ``predatory lending undermines 
military readiness, harms the morale of troops and their families, and 
adds to the cost of fielding an all-volunteer fighting force. 
Education, counseling, assistance from Aid Societies, and sound 
alternatives are necessary but not sufficient to protect Service 
members from predatory lending practices or products that are 
aggressively marketed to consumers in general and to military personnel 
directly.'' \7\
    \7\ http://www.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf
    Senator Dole stated at a Senate Banking hearing to discuss the 
report: ``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. . . .'' \8\
    \8\ http://www.gpo.gov/fdsys/pkg/CHRG-109shrg50303/html/CHRG-
    Then-Undersecretary of Defense for Personnel and Readiness David 
Chu at that same hearing stated: ``We need legislative action, to get 
to the bottom line because without it, we cannot curtail the migration 
of this set of predatory practice to other products.'' \9\
    \9\ Ibid.
    Congress passed the bipartisan Talent-Nelson Amendment (also known 
as the Military Lending Act) in 2006 and it was signed into law on 
October 17, 2006 (P.L. 109-364) (10 U.S.C. 987)--and I should note, 
with appreciation, that one of the authors, Senator Bill Nelson, is on 
this Committee. Senator Talent said of the amendment, ``The fact is, 
predatory payday lenders are targeting American troops and are trying 
to make a buck off of their service to our country. We rely on the 
military to protect us, and we have just taken a significant step to 
protect them from predatory lenders.'' \10\
    \10\ http://www.gpo.gov/fdsys/pkg/CREC-2006-06-22/pdf/CREC-2006-06-
    The Talent-Nelson Amendment does two important things for military 
consumers: (1) it expressly caps the rate at which a creditor extends 
consumer credit to a covered member of the armed forces or a dependent 
of a covered member, prohibiting annual percentage rates, including 
fees, greater than thirty-six percent; and (2) it creates a series of 
consumer protections for covered members and dependents (for example, a 
prohibition on the mandatory use of an allotment to repay the debt and 
a prohibition on requiring a covered member or dependent to submit to 
arbitration to resolve disputes related to the credit contract).
    DOD was given the task of drafting implementing regulations (32 
C.F.R. Part 232) for the Military Lending Act, and they were published 
on August 31, 2007. DOD opted to define consumer credit covered by the 
Act to include only three types of consumer loans, and to define those 
fairly narrowly. In general, the three types of loans are:

   Payday loans: closed-end loans with terms of 91 days or 
        fewer, for $2,000 or less;

   Auto title loans: closed-end loans with terms of 181 days or 
        fewer; and

   Refund anticipation loans: closed-end credit.

    I think it is widely accepted that for those products that fall 
within the Department's definition of ``consumer credit'' the law has 
had a positive impact. When the Consumer Federation of America took a 
look at the Military Lending Act five years after implementation, they 
concluded: ``To the extent products met these definitions, the law has 
been largely effective in curbing predatory payday, car title, and tax 
refund lending to covered borrowers.'' \11\ However, the MLA's 
protections only apply if the credit product falls within the DOD's 
limited definition of consumer credit. For example, even if a 
servicemember or their spouse takes out a payday loan with a military 
annual percentage rate (MAPR) in excess of 36 percent, agencies with 
administrative enforcement authority under the law are unable to 
enforce the protections of the MLA if that loan is for a term greater 
than 91 days, over $2,000, or structured as open-end credit.
    \11\ http://www.consumerfed.org/pdfs/
    The increasing concern now is that lenders have easily found ways 
to get outside of the definitions in the current DOD rule implementing 
the MLA. As I testified before the Senate Banking Committee in June 
2012: ``I hear from financial counselors on the installations about the 
prevalence of payday-like products that are specifically marketed to 
military families--often with patriotic-sounding names and the American 
flags on the website to match, but with a sky-high interest rate for 
the servicemember who takes out the loan. And the Internet is full of 
`military loans,' some outright scams and others with very high 
interest rates. Although the Military Lending Act put a 36 percent cap 
on the annual percentage rate of certain types of loans to the active-
duty military, some lenders have found ways to get outside of the 
definitions in the Department of Defense (DOD) rule implementing the 
Military Lending Act.'' \12\
    \12\ http://www.consumerfinance.gov/newsroom/written-testimony-of-
    In some states, state law allows a broad range of high-cost credit 
products that fall outside of the narrow band of products covered by 
the current rule. For example, California, Texas, and Virginia--
together home to more than a third of our active-duty servicemembers--
all permit auto title loans of longer than 181days as well as high-cost 
installment loans. And in many states across the country, banks offer 
deposit-advance loans--lines of credit offered in connection with a 
borrower's deposit account. As discussed in more detail in the Bureau's 
recent white paper on payday loans and deposit advance products, when 
the Bureau used a special fee-based APR calculation in order to help 
compare deposit advance products to payday loans for purposes of the 
paper, it found that that APR could exceed 300 percent.
    In my almost three years at the Bureau I have had the opportunity 
to visit more than 70 bases and National Guard Units. And at nearly 
every stop issues related to high-cost lending come up. Here are just a 
few of the stories I've heard on the road:

   The spouse of a wounded warrior in the Illinois National 
        Guard took out an auto title loan of $2,575 at an APR of 300 
        percent. The finance charges on the loan were $5,720.24 for a 
        total amount of $8,295.24. The loan was not subject to the 
        Act's protections under the current rule because it had a term 
        longer than 181 days.

   At the Airman and Family Readiness Center at Travis Air 
        Force Base, California I heard about a servicemember who 
        borrowed $6,000. He financed this amount for 36 months at 
        102.47 percent APR. The loan cost the servicemember $13,463.04 
        and was secured by the title of his car. The loan was not 
        subject to the MLA's protections under the current rule because 
        it was for a term longer than 181 days.

   From one of the military aid societies I heard about 
        servicemembers from North Carolina and Delaware who each took 
        out loans at an APR of 584.68 percent. The loans were not 
        subject to the Act's protections under the current rule because 
        they were structured as open-end lines of credit.

   A JAG at Marine Corps Recruit Depot-San Diego had a client 
        who took out an auto title loan of $10,000. The terms of the 
        loan were 36 months with an APR of 101.9 percent. The Marine 
        used his military ID to get the loan, so they were aware of his 
        military status, but because the amount and duration of the 
        loan exceeded the parameters of loans covered by the current 
        rule the protections of the Act did not apply.

   A community readiness consultant at Joint Base McGuire-Dix-
        Lakehurst in New Jersey told me about a sailor with severe debt 
        problems. He had one loan from a military-specific lender with 
        an APR at 499 percent. This loan was not subject to the 
        protections of the Military Lending Act because it was 
        structured as an open-end line of credit. The sailor had a 
        second loan at an APR of 197 percent with a balance of over 
        $1,500. This loan was not subject to the Act's protections 
        under the current rule because it was for a term longer than 91 
        days. The sailor was paying over 66 percent of his take-home 
        pay trying to pay off these two loans.

    There are also studies that have been done about the continued 
prevalence of high-cost lenders targeting military families. As part of 
its latest research on payday lending, The Pew Charitable Trusts found 
that: ``5.9 percent of payday and auto title loan borrowers live in a 
household that includes current members of the Armed Services. 
Comparatively, 2.5 percent of U.S. households overall are active duty, 
in the National Guard, or in training. This difference is statistically 
significant.'' \13\
    \13\ Letter from Nick Bourke, Project Director, the Pew Charitable 
Trusts to Holly Petraeus, February 26, 2013.
    And DOD has also reported that: ``(U)nscrupulous lenders have 
sought, and are seeking, to create products and services which fall 
outside of the MLA and the enforcement actions mentioned above. Several 
years removed from its enactment, however, our financial counselors and 
legal assistance attorneys still see clients who have payday or vehicle 
title loans. They also report that Internet and overseas opportunities 
exist to evade the law, and that some unscrupulous lenders--and even 
borrowers--still attempt to skirt or evade the law, by entering into 
loans that charge interest greater than 36 percent and contain terms 
that have been modified to avoid falling under the MLA. Creditors and 
lenders still attempt to avoid the MLA by utilizing procedures or 
modifying products to fall outside of the regulation.'' \14\
    \14\ http://www.veterans.senate.gov/
    Concerns about the effectiveness of the current rule have led to 
renewed interest from Congress. Recently, thanks in large part to the 
efforts of Senators Reed, Blumenthal, and others, we have seen updates 
to the Act through amendments signed into law in January of this year. 
Based on those amendments, DOD is taking another look at the 
effectiveness of the MLA, which may include rewriting the rule as 
appropriate. And they provided enforcement authority for the Act to 
Federal regulators, including the Bureau. As a result, in September the 
Bureau announced amendments to our Supervision and Examination Manual 
incorporating the requirements of the Military Lending Act so our 
Supervision teams can be actively checking for compliance with the Act. 
We also released guidelines to our examiners on how to identify 
consumer harm and risks related to Military Lending Act violations when 
supervising payday lenders.\15\
    \15\ http://www.consumerfinance.gov/newsroom/cfpb-lays-out-
    I am happy to report that the Bureau's efforts are already reaping 
dividends when it comes to enforcing the protections of the Act. The 
Bureau announced just this morning an enforcement action against a 
large national payday lender which had made loans in violation of the 
MLA to hundreds of servicemembers or their dependents.
    The examination of this lender uncovered that the company's large 
online payday lending subsidiary had mistakenly disabled its DOD 
database check during a software update in 2011--contributing to it 
having made 335 loans to active-duty military or dependents in 
violation of the MLA's Military Annual Percentage Rate (MAPR) 
provisions. The Bureau's examination also found that the company had 
made another 27 loans to protected military applicants during an 18-
month period because the DOD eligibility check came back positive after 
the loan was already funded.
    As part of the enforcement action, the lender refunded loan and 
loan-related fees on all identified loans, for a total amount of 
approximately $33,550. It also put additional compliance mechanisms in 
place and agreed to increased training on the MLA for its customer-
service representatives. This is a great example of what can be 
achieved through the combined efforts of the Bureau's supervisory and 
enforcement areas: a significant change in a large payday lender's 
appreciation of, and compliance with, the MLA.
    DOD has now begun exploring potential revisions to its existing 
regulation. It put an Advance Notice of Proposed Rulemaking (ANPR) in 
the Federal Register on June 17, 2013, requesting input from 
counselors, legal assistance attorneys, servicemembers, consumer 
protection advocacy groups, representatives of the financial services 
industry, and other interested parties.
    The comments submitted in response detailed many of the concerns 
about evasion of the provisions of the MLA:

   The Colorado Attorney General wrote: ``Given the narrow 
        definitions, lenders have easily circumvented the purpose and 
        protections intended by [the] MLA by simply offering 92 day 
        loans, loans for $2001, or by structuring the loans as open-end 
        credit.'' \16\
    \16\ http://www.regulations.gov/#!documentDetail;D=DOD-2013-OS-

   Separately, a bipartisan group of 13 Attorneys General 
        wrote: ``While the MLA has been largely successful in curbing 
        abusive lending in those categories covered by the Department's 
        current rules, the narrow categories and definitions create 
        large loopholes that permit lenders to fashion abusive or 
        predatory transactions that avoid the MLA's protections.'' \17\
    \17\ http://www.regulations.gov/#!documentDetail;D=DOD-2013-OS-

   Consumer advocates in Texas wrote: ``Store visits conducted 
        by Texas Appleseed in Killeen, Texas reveal that some 
        storefronts surrounding military bases have pivoted to offering 
        high-cost multiple-payment products to servicemembers. For 
        example, at least one national payday lender with two locations 
        in Killeen, both within three miles of Fort Hood, offers six-
        month multiple-payment payday loans up to $3000 with a fee of 
        $22 for every $100 borrowed. Combined with $36.26 in interest 
        and fees, a $1500 multiple-payment loan therefore costs the 
        borrower $386.26 if the loan is paid back on schedule for an 
        annual percentage rate of 581.72 percent. The MLA does not 
        include these multiple-payment payday loans, even though they 
        contribute to the cycle of debt.'' \18\
    \18\ http://www.regulations.gov/#!documentDetail;D=DOD-2013-OS-
0133-0016 (accessed July 31, 2013)

   Comments from the head of the Illinois Department of Veteran 
        Affairs extended beyond the active-duty population: 
        ``Approximately one out of every ten veterans reported having 
        more than $40,000 in unsecured debt. For many veterans, some of 
        this debt is acquired while on active -duty, often from high-
        cost lenders that frequently target military bases.'' She also 
        noted that in Illinois, ``the current Department of Defense 
        rule does not apply to all forms of payday lending permitted by 
        state law. . . .'' \19\
    \19\ http://www.regulations.gov/#!documentDetail;D=DOD-2013-OS-
0133-0006 (internal citation omitted)

   23 of your Senate colleagues also weighed in: ``Due to the 
        narrow definition of consumer credit, certain lenders are 
        offering predatory loan products to servicemembers at 
        exorbitant triple-digit effective interest rates and loan 
        products that do not include the additional protections 
        envisioned by the law. As such, a wide range of credit that is 
        structured as open-ended versus closed-ended or that otherwise 
        is structured to evade the limitations set forth in the current 
        regulations fall completely outside the law's intended 
        prohibitions.'' \20\
    \20\ http://www.regulations.gov/#!documentDetail;D=DOD-2013-OS-

    The Department has since asked a group of Federal agencies, 
including the Bureau, the Department of the Treasury, the Federal 
Deposit Insurance Corporation, the Federal Reserve Board of Governors, 
the Office of the Comptroller of the Currency, the National Credit 
Union Administration, and the Federal Trade Commission, to assist it as 
it takes a fresh look at the MLA rule. In July of this year, Col. Paul 
Kantwill, Director of Legal Policy, Office of the Undersecretary for 
Personnel and Readiness, Department of Defense, testified before the 
Senate Veteran Affairs Committee: ``the Department has assembled the 
Prudential Regulatory Agencies and the CFPB to explore revisions to the 
regulation. We have established a team of skilled economists and 
analysts to assist us in this initial rulemaking, in addition to a 
similarly-skilled team of drafters.'' \21\ We are pleased to be helping 
the Department as they undertake this effort, and fully support the 
efforts of the Department and the working group.
    \21\ http://www.veterans.senate.gov/
    Some parties have raised concerns about changes to the MLA 
regulations severely limiting access to credit for servicemembers. In 
fact, servicemembers do have lower-cost, less risky alternatives that 
are available to them, and that DOD encourages them to utilize.
    For one thing, each branch of the service is supported by what is 
called a military relief society \22\, which offers small no-interest 
loans and grants to servicemembers in need of emergency funds. In 2012, 
the relief societies provided $142.2 million in no-cost loans and 
grants to 159,745 clients.
    \22\ Army Emergency Relief, Navy-Marine Corps Relief Society, Air 
Force Aid Society, Coast Guard Mutual Assistance
    As the Department noted however back in 2006: ``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 
servicemembers can and will consider other alternatives.'' \23\
    \23\ http://www.gpo.gov/fdsys/pkg/CHRG-109shrg50303/html/CHRG-
    In December of 2011, my office held a full-day Financial Fitness 
forum where one of the panels specifically discussed alternatives to 
high-cost, high-risk loan products.\24\ Many of the programs that were 
highlighted at that forum were discussed as part of the Department's 
original report to Congress in 2006--where the DOD listed 24 different 
alternatives to high-cost loans. \25\
    \24\ http://files.consumerfinance.gov/f/201209_cfpb_Financial-
    \25\ http://www.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf
    The bottom line, from my perspective based on what I have seen and 
heard in recent years, is that I have real concerns about the ability 
of lenders to easily evade the current MLA regulations. The original 
rule was effective for those products that it covered, but over the 
past 6 years we have seen significant changes in the type of products 
offered and the contours of state law, and I think it's critically 
important to ensure that the MLA protections keep up. I believe that 
any approach that has strict definitions that define individual 
products will fall victim to the same evasive tactics that are plaguing 
the current rule. And I know this is a shared concern with the 
    I also believe that from a military financial readiness point of 
view it makes no difference whether the loan is made by a depository 
institution or a non-depository institution, nor does it matter whether 
the loan is structured as open-or closed-end. A loan with a sky-high 
interest rate, onerous arbitration requirements, and burdensome fees 
has the same adverse impact on military financial readiness no matter 
who offers it.
    Also, as Senator Talent said back in 2006: ``Our troops deserve 
uniform, national protection against abusive financial practices that 
target them.'' I do not see the logic in a soldier at Fort Drum, New 
York having different protections from one at Fort Hood, Texas.
    I've heard quite frequently that DOD should fall back on financial 
education or command influence to deal with these issues. In fact, that 
was in some of the responses to the ANPR. On that subject I agree with 
what the Department wrote in the original preamble to the regulation:

        ``It is not sufficient for the Department to train Service 
        members on how best to use their financial resources. Financial 
        protections are an important part of fulfilling the 
        Department's compact with Service members and their families.'' 
    \26\ http://www.gpo.gov/fdsys/pkg/FR-2007-08-31/pdf/07-4264.pdf

    In sum, the underlying goals of protecting military and financial 
readiness that led to passage of the MLA in 2006 are as important today 
as they were when the Act was originally passed. I think we should all 
be indignant when we hear of servicemembers trapped in outrageous loans 
and realize that there is little we can do under the current 
regulations because they are just longer than 91 days or structured as 
open-end credit. We owe it to our servicemembers and their families to 
do the best possible job of crafting rules that properly implement the 
intent of the Military Lending Act.
    I'll close with a quote from Senator Elizabeth Dole who was a 
leader in getting the original Act passed: ``Supporting our 
servicemembers means more than providing the equipment and training 
necessary for fighting. . . . We should also support their livelihood 
and their families, and predatory lending can seriously harm both.'' 
\27\ I look forward to working with you, the Department and all 
stakeholders who have an interest in accomplishing these goals.
    \27\ http://www.gpo.gov/fdsys/pkg/CHRG-109shrg50303/html/CHRG-
    Thank you.

    The Chairman. Thank you very much, Ms. Petraeus.
    Mr. Charles Harwood, I have down Charles and I have down 


    Mr. Harwood. Chuck.
    The Chairman. Chuck, OK.
    Mr. Harwood. Chuck, please. Thank you.
    The Chairman. Mr. Chuck Harwood is Deputy Director of the 
Federal Trade Commission's Bureau of Consumer Protection, which 
    You have about 1,000 people working?
    Mr. Harwood. I wish.
    The Chairman. No. No. I don't mean you personally but----
    Mr. Harwood. The Bureau of Consumer Protection is about 
400-500 people; somewhere in that range.
    The Chairman. OK.
    Mr. Harwood. Yes.
    The Chairman. All right.
    Mr. Harwood. A thousand would be good though.
    The Chairman. Yes.
    Mr. Harwood. Yes.
    The Chairman. You love sequester, don't you?
    Mr. Harwood. Yes.
    The Chairman. Please proceed.
    Mr. Harwood. Thank you.
    Chairman Rockefeller, Ranking Member Thune, and 
distinguished members of the Committee, thank you for the 
opportunity to describe the FTC's consumer protection efforts 
on behalf of servicemembers and their families. The 
Commission's official views are in the written statement that's 
been submitted to the Committee. My oral statement and answers 
to any questions are my views.
    The FTC is dedicated to protecting servicemembers, 
veterans, and their families from fraudulent deceptive 
practices. This summer, for example, the Commission brought a 
case against one of the Nation's largest veterans home loan 
refinancers. The defendant, Morgan Investors Corporation, 
allegedly misrepresented cost and potential savings or free 
financing services offered to veterans, continued to call 
military consumers in violation of Do Not Call, and falsely 
implied that loans were from the VA.
    Notably, this is the commission's first action enforcing 
the Mortgage Acts and Practices-Advertising rule which, I 
believe, members of this committee helped us with. And they 
violated the rule by--we alleged by falsely representing that 
low-interest fixed-rate mortgages were available at no cost and 
by misrepresenting government affiliation.
    The FTC obtained a sizable $7.5 million civil penalty as 
well as strong injunctive relief to remedy the violations.
    In addition to deceptive schemes targeting military 
consumers, perpetrators of scams directed at the general 
population have been known to tailor their representations to 
the unique circumstances of military consumers. For example, in 
FTC v. Goldman Schwartz, the Commission presented evidence that 
a defendant debt collector used military related threats when 
attempting to collect from military consumers. One military 
consumer reported that the collector identified him as ``a 
military liaison,'' and threatened to disclose the purported 
debt to the consumer's commander, told the consumer that 
indebtedness is grounds for dismissal from the military, and 
that the collector would ruin the consumer's military career.
    An important resource in law enforcement actions like these 
is the FTC's Consumer Sentinel Complaint Network; it's a secure 
online database of more than 8 million consumer complaints. In 
2002, the FTC and DOD jointly created military Sentinel, a sub 
part of consumer Sentinel. Among other things, Military 
Sentinel centralized the online collection of fraud complaints 
from the DOD and military communities.
    Data from Consumer Sentinel and Military Sentinel shows 
that the top financial services complaint categories military 
consumers are debt collection, unlawful banking or lending 
practices, and scams offering mortgage foreclosure relief or 
debt management services. Now, these complaint categories are 
also FTC law enforcement priorities.
    Since 2008, the FTC has filed 42 foreclosure relief cases, 
34 debt relief cases, 20 payday lending cases, and 22 debt 
collection cases. Complimenting these consumer protection law 
enforcement efforts is the Commission's robust consumer 
education program. On its webpage, For Military Families, the 
Commission has assembled FTC materials that address the 
consumer challenges faced by servicemembers, veterans, and 
their families. For example, visitors to the page will find new 
FTC guidance about selecting a college particularly when using 
post-9/11 GI benefits. Visitors will also find, among other 
things, information about payday loans, credit reports, active 
duty alerts and deceptive schemes associated with veteran's 
    To expand the reach of our education efforts, the 
Commission relies on strong partnerships, such as the 
initiative we launched this year. On July 17, at events around 
the country, the FTC and others including DOD, Military Saves, 
and my colleagues at the CFPB, posted the first Military 
Consumer Protection Day to increase awareness of consumer 
protection issues that affects servicemembers, military 
families, veterans and even civilians in the military 
    Participating agencies and organizations further promoted 
the many free resources that are the first line of defense 
against fraud and it helped consumers make better informed 
money management decisions. We're already planning for our 
Military Consumer Protection Day 2014 and we know we'll be even 
bigger and better than last one.
    Finally, the FTC also coordinates with its partners on 
military consumer protection policy initiatives. For example, 
through an interagency group, the commission is coordinating 
with DOD, CFPB, and others on possible amendments to DOD's 
military lending rule which we've already discussed. The 
recently amended Act also gives the FTC enforcement authority 
regarding refund anticipation payday and auto title loans.
    The Commission--and I should add its staff as well--is 
grateful for the sacrifices that servicemembers and their 
families make and all of us are dedicated to providing them 
with pure-less consumer protection services.
    Thank you very much.
    [The prepared statement of Mr. Harwood follows:]

   Prepared Statement of the Federal Trade Commission, delivered by 
  Charles A. Harwood, Deputy Director, Bureau of Consumer Protection, 
                        Federal Trade Commission
    Chairman Rockefeller, Ranking Member Thune, and distinguished 
members of the Committee, I am Charles A. Harwood, Deputy Director of 
the Bureau of Consumer Protection of the Federal Trade Commission 
(``Commission'' or ``FTC'').\1\ I appreciate the opportunity to present 
the Commission's testimony on consumer protection issues impacting 
servicemembers and their families and the Commission's work in this 
    \1\ This written statement presents the views of the Federal Trade 
Commission. Oral statements and responses to questions reflect the 
views of the speaker and do not necessarily reflect the views of the 
Commission or any Commissioner.
    All consumers, including servicemembers, are potential targets for 
fraudsters, and combating fraud is a critical component of the 
Commission's consumer protection mission. That said, certain scams are 
more likely to target the military community, in part because military 
families may relocate frequently and many servicemembers--for the first 
time--are living on their own and earning a paycheck. Moreover, frauds 
against military consumers can undermine military readiness and troop 
morale. Accordingly, the Commission's efforts to eliminate such scams 
through aggressive enforcement and a vigorous, ongoing educational 
campaign are an important part of our consumer protection work.
    This testimony outlines the areas of fraud that are most likely to 
affect the military community, describes our general enforcement in 
these areas, and lists some of the FTC's military-specific consumer 
education and outreach efforts.
II. Fraud Threats to Military Consumers
    The FTC's consumer protection initiatives include combatting fraud 
in various areas that affect servicemembers, veterans, and their 
families. For example, just this summer, the Commission brought a case 
alleging that one of the Nation's largest refinancers of veterans' home 
loans made misleading claims directed at current and former 
servicemembers.\2\ In the case, which was the first action to enforce 
the Mortgage Acts and Practices--Advertising Rule (MAP Rule), the 
Commission alleged the company violated by falsely representing that 
low interest, fixed-rate mortgages were available at no cost.\3\ The 
Commission also alleged that the company violated the Do Not Call 
provisions of the Commission's Telemarketing Sales Rule. To resolve the 
allegations, the company agreed to pay a $7.5 million civil penalty, 
the largest fine the Commission has ever obtained in a case alleging Do 
Not Call violations.
    \2\ United States v. Mortgage Investors Corp. of Ohio, Inc., No. 
8:13-cv-01647-SDM-TGW (M.D. Fla. June 25, 2013), available at http://
    \3\ The MAP Rule was promulgated by the FTC and recodified by the 
Consumer Financial Protection Bureau as Mortgage Acts and Practices--
Advertising (Regulation N). See Mortgage Acts and Practices--
Advertising Rule, 16 C.F.R. Part 321, recodified as Mortgage Acts and 
Practices--Advertising (Regulation N), 12 C.F.R. Part 1014. The 
Mortgage Investors complaint included alleged violations of the MAP 
Rule and Regulation N.
    Enforcement actions like these often flow from the Commission's 
active monitoring of the marketplace, which allows us to understand, 
identify, and ultimately eliminate threats to both military consumers 
and the public at large. As part of this monitoring, the Commission 
relies on the complaints we collect directly from consumers, our law 
enforcement experience, and collaborative initiatives with law 
enforcement partners, consumer groups, industry, academics, and others.
    One of our most powerful tools in obtaining information about 
frauds is the FTC's Consumer Sentinel Complaint Network, a secure 
online database of more than 8 million consumer complaints available 
only to law enforcement. The database includes complaints that are 
reported directly to the FTC as well as to dozens of state law 
enforcement organizations, other Federal agencies, and non-governmental 
organizations such as the Better Business Bureau. These complaints act 
as an invaluable investigative tool for the thousands of federal, 
state, and local law enforcement agencies that have registered as 
members of Consumer Sentinel.
    To ensure that servicemembers and their families can easily file 
consumer protection complaints with the FTC, in 2002 the FTC and the 
Department of Defense (DOD) jointly created Military Sentinel, a subset 
of Consumer Sentinel. Military Sentinel centralized the online 
collection of fraud complaints from the DOD and military communities. 
It also allows complaints to be recorded by branch of service and 
installation, giving government agencies--including DOD law enforcers 
and policymakers--vital information to better protect servicemembers 
and military civilians.\4\
    \4\ In 2011, the FTC's main Consumer Sentinel website was revamped 
to ensure that visitors to this complaint portal can provide the same 
military-specific demographic information. As a result, the Military 
Sentinel portals for different parts of the U.S. Armed Forces now 
direct visitors to the main Consumer Sentinel website.
    The Commission is also working with the Departments of Veterans 
Affairs, Defense, Education, and Justice, and the Consumer Financial 
Protection Bureau (CFPB) to collect, through an online complaint 
system, feedback on problems with educational institutions experienced 
by the military community.\5\ Veterans, servicemembers, and their 
families pursuing higher education through the Post-9/11 GI Bill and 
other education benefits can provide feedback on their schools through 
gibill.va.gov/feedback. When feedback is received, agencies will 
contact the school on behalf of the student and request a response 
within 90 days, and the complaints will be forwarded to Consumer 
    \5\ This initiative was launched pursuant to Executive Order 13607 
(Apr. 27, 2012), available at http://www.gpo.gov/fdsys/pkg/FR-2012-05-
02/pdf/2012-10715.pdf. The order addresses reports of misleading or 
predatory behavior towards military consumers and their families.
    Data from Consumer Sentinel shows that the FTC received more than 
42,200 fraud complaints from the military community out of the more 
than 1 million fraud complaints received in calendar year 2012.\6\ The 
top complaint categories for military consumers were: debt collection; 
imposter scams;\7\ fraud involving offers of prizes, sweepstakes, or 
gifts; unlawful banking or lending practices; and scams that offer 
mortgage foreclosure relief or debt management services.\8\
    \6\ These figures exclude Do Not Call registry and identity theft 
    \7\ These involve scams in which the perpetrators pose as a friend, 
family member, or romantic interest, or claim an affiliation with a 
company or government agency, in order to induce people to send money 
or divulge personal information.
    \8\ Complaint data for 2013 shows similar patterns. From January 1, 
2013 to September 30, 2013, we received approximately 33,923 fraud 
complaints from military consumers. Top complaint categories included: 
imposter scams (9,209); debt collection (4,174); banks and lenders 
(3,194); and prizes/sweepstakes/lotteries (2,225).


    Notably, these complaint trends largely mirror those of the general 
population and include some of the FTC's highest consumer protection 
priorities--which we further describe below.\9\
    \9\ One exception to this comparison is mortgage foreclosure relief 
and debt management services. This was the sixth highest complaint 
category for military members, in contrast to the fifteenth highest for 
the population as a whole.
    In particular, many of these categories touch on the FTC's 
aggressive work to stop frauds related to consumer financial products 
and services, which has been one of the FTC's top priorities--
particularly in the wake of the economic downturn. Since 2008, the FTC 
has been especially active in halting frauds targeting financially 
distressed consumers. We have brought:

   42 cases and obtained monetary judgments totaling more than 
        $190 million in the mortgage foreclosure relief area;

   34 cases and obtained more than $300 million in judgments in 
        debt relief matters;

   20 cases and obtained over $120 million in monetary 
        judgments protecting payday loan borrowers victimized by 
        deceptive or unfair practices; and

   22 cases and obtained more than $165 million in debt 
        collection monetary judgments.\10\
    \10\ The monetary judgment amounts listed in this testimony include 
judgments that were suspended based on defendants' ability to pay.

    In addition, the FTC has continued its efforts to eliminate fraud 
in the other areas raised in the complaints. For instance, since 2009, 
the FTC brought 22 law enforcement actions targeting purveyors of 
fraudulent business opportunity, work at home, and job scams, and filed 
8 actions against scams offering prizes or sweepstakes.
    The FTC's enforcement work has protected hundreds of thousands of 
consumers from unlawful practices, including members of the military 
community. In some instances, the FTC takes action against scammers 
that target the general population but tailor their practices to 
deceive military consumers. For example, in FTC v. Goldman Schwartz, 
the Commission presented evidence that a defendant debt collector that 
allegedly used a series of unlawful tactics in attempting to collect 
debts from consumers, used military-specific threats when attempting to 
collect from military consumers.\11\ One military consumer reported 
that the collector identified itself as a ``military liaison,'' 
threatened to disclose a purported debt to the consumer's commander, 
and told the consumer that indebtedness is grounds for dismissal from 
the military and that the collector would ruin the consumer's military 
career. Similarly, in FTC v. NHS Systems, Inc., the Commission 
presented evidence that fraudulent telemarketers that preyed on the 
general public obtained some military consumers' financial information 
by falsely claiming to be calling from the IRS to offer special tax 
rebate checks to servicemembers.\12\
    \11\ FTC v. Goldman Schwartz, Inc., No. 4:13-cv-00106 (S.D. Tex. 
Jan. 14, 2013).
    \12\ FTC v. NHS Systems, Inc., No. 09cv2215 (E.D. Pa. May 15, 
    The FTC also targets frauds that specifically focus on 
servicemembers, veterans, and their families. As noted above, earlier 
this year the FTC filed a case against one of the Nation's leading 
refinancers of veteran's home loans, which led to a settlement in which 
the refinancer agreed to pay a $7.5 million civil penalty.\13\ In 
offering refinancing services to current and former military consumers, 
the defendants allegedly: misrepresented the costs and potential 
savings of the services; continued to call military consumers, even 
after the consumers had informed the defendants that they did not wish 
to receive further calls or that their telephone numbers were listed 
with the National Do Not Call Registry; and implied that the loans they 
offered would come from Veterans Affairs or another government source. 
Along with the $7.5 million civil penalty, as part of the settlement 
the defendants agreed to an order imposing strong injunctive relief.
    \13\ See supra note 2.
    Additionally, the FTC's enforcement work extends to scams that 
target military families indirectly, including scams that prey on 
consumers that want to assist the U.S. Armed Forces community. For 
instance, as part of a coordinated federal-state crackdown on 
fraudulent telemarketers, the FTC brought an end to an allegedly sham 
non-profit that falsely claimed to provide financial assistance to the 
families of American soldiers fighting overseas. The Commission alleged 
that the defendants falsely claimed that donations would be used to 
provide care packages to veterans in VA hospitals and to support 
veteran's memorials.\14\ As part of a settlement to resolve the FTC's 
allegations, the defendants agreed to a monetary judgment of more than 
$13 million and an order prohibiting future deceptive conduct.\15\
    \14\ See FTC v. Am. Veterans Relief Foundation, Inc., No. CV09-3533 
(C.D. Cal. June 3, 2009).
    \15\ This judgment was partially suspended based on the defendants' 
inability to pay the full amount.
    Finally, the Commission's enforcement work addresses practices of 
importance to the military community. For example, buying a car can be 
one of the most expensive and complicated financial transactions a 
military consumer will make. Since 2011, the FTC has brought 11 auto-
related actions, involving a variety of unlawful conduct.\16\ Many of 
these cases targeted practices that were identified in a series of 
three public roundtables that the Commission held on consumers' 
experiences when buying, financing and leasing motor vehicles.\17\ Some 
of the roundtable panels specifically addressed practices that target 
military consumers, including various sales pitches geared to 
servicemembers and made on or near military bases, or on the 
Internet.\18\ As part of the roundtables, the Commission also invited 
(and received) public comment on how these and other practices may 
impact members of the military.\19\
    \16\ See, e.g., FTC v. Matthew J. Loewen, No. 12-CV-1207 MJP (W.D. 
Wa. Oct. 29, 2013) (Final Judgment and Permanent Injunction); FTC, FTC 
Halts Two Automobile Dealers' Deceptive Ads, Sept. 3, 2013, available 
at http://www.ftc.gov/opa/2013/09/autoads.shtm; FTC, FTC Charges that 
Auto Loan Schemes Falsely Promised They Could Stop Consumers' Cars from 
Being Repossessed, April 4, 2012, available at http://ftc.gov/opa/2012/
04/autoloans.shtm; FTC, FTC Charges Businesses Exposed Sensitive 
Information on Peer-to-Peer File-Sharing Networks, Putting Thousands of 
Consumers at Risk, June 7, 2012, available at http://www.ftc.gov/opa/
2012/06/epn-franklin.shtm; FTC, FTC Takes Action To Stop Deceptive Car 
Dealership Ads, Mar. 14, 2012, available at http://www.ftc.gov/opa/
    \17\ See Public Roundtables: Protecting Consumers in the Sale and 
Leasing of Motor Vehicles, Notice announcing public roundtables, 
requesting participation, and providing opportunity for comment, 76 
Fed. Reg. 14014 (Mar. 15, 2011).
    \18\ The second roundtable particularly focused on these issues, 
and included several consumer military advocates on the discussion 
panels. Agendas, transcripts, and webcasts from the roundtables are 
available online. See http://www.ftc.gov/bcp/workshops/motorvehicles.
    \19\ See http://ftc.gov/os/comments/motorvehicleroundtable/
III. Military Consumer Education and Outreach
    In addition to aggressive law enforcement, consumer education and 
outreach is an essential tool in our consumer protection and fraud 
prevention work. The Commission's education and outreach program 
reaches tens of millions of people a year, mostly through our websites, 
where people can access print, video, and audio information.\20\ The 
FTC is widely known for its clear, understandable information and 
practical advice on dozens of consumer protection issues, including 
many issues affecting military consumers.
    \20\ Consumer information can be found in English at http://
www.consumer.ftc.gov and in Spanish at http://www.consumidor.ftc.gov.
    To better reach out to servicemembers and their relatives, the FTC 
maintains a For Military Families page on its consumer education 
website.\21\ The page gathers the Commission's resources for 
servicemembers, veterans, and their families in one place to help them 
quickly find the consumer information of most use to them. These 
resources include materials that focus on the unique challenges faced 
by military families and emphasize the special rights that military 
families have when dealing with certain consumer protection issues. For 
example, the FTC released a consumer education post just a couple of 
weeks ago that provides information to veterans on how to avoid 
pitfalls in picking the right college.\22\ The post includes advice on 
how to determine whether a school will provide credit for military 
training and how to find out more about the veteran-specific resources 
available from a school.
    \21\ FTC Consumer Information, Military Families, available at 
    \22\ FTC Consumer Information, Choosing a College: 8 Questions to 
Ask, available at http://www.consumer.ftc.gov/articles/0395-choosing-
    Some of the FTC's other military-specific resources include 
information on:

   understanding the protections that servicemembers and their 
        dependents have with respect to payday loans (and certain other 
    \23\ FTC Consumer Information, Payday Loans, available at http://

   placing an active duty alert on a credit report, so as to 
        better prevent creditors or collectors from attempting to 
        collect a debt while a servicemember is overseas, in violation 
        of the Servicemembers Civil Relief Act;\24\
    \24\ FTC Consumer Information, Active Duty Alerts, available at 

   protecting personal information and limiting the harm from 
        identity theft;\25\
    \25\ FTC Consumer Information, Identity Theft: Military Personnel & 
Families, available at http://www.consumer.ftc.gov/articles/pdf-0016-

   identifying dishonest pension advisors that try to bilk 
        money out of veterans over 65 by providing poor (and often very 
        harmful) advice about veteran's pensions;\26\ and
    \26\ FTC Consumer Information, Veterans' Pensions: Protect Your 
Money From Poachers, available at http://www.consumer.ftc.gov/articles/

   spotting and avoiding scams that claim to be soliciting 
        donations to support military veterans and families of active-
        duty personnel.\27\
    \27\ FTC Consumer Information, Charitable Solicitations for Vet & 
Military Families, available at http://www.consumer.ftc.gov/articles/

    These resources comprise one component of the Commission's 
continuing effort to assist military communities in identifying, 
eliminating, and avoiding fraud.
    To ensure that such educational materials have the maximum impact, 
we work with an extensive network of partnerships with other agencies, 
industry groups, consumer advocates, and community organizations to 
leverage resources and reach as many consumers as possible. For 
example, the FTC works with the DOD to disseminate articles, podcasts 
and blog posts using MilitaryOneSource.mil (a counseling hotline and 
website), military media, resource fairs, and other special 
projects.\28\ Since 2009, the FTC has presented more than 30 podcasts 
and scores of webinars to servicemembers, their families, and the 
financial counselors that serve them.\29\
    \28\ For instance, in 2009 the Naval Criminal Investigative 
Services co-branded an FTC identity theft brochure and distributed 
200,000 copies to naval personnel throughout the world as part of a 
three-month program focusing on identity theft prevention and recovery.
    \29\ FTC staff have presented webinars for and recorded podcasts 
for servicemembers and families through DOD's MilitaryOneSource.mil; 
recorded podcasts and blog posts for DOD's Defense Media Directorate 
(New Media) and other military media; and presented webinars for DOD's 
contractors who provide financial counseling to the military community.
    In the last several years, the FTC has expanded its existing 
partnerships with several military agencies and organizations, 
including the DOD and the CFPB. Staff from the FTC and these agencies 
meet regularly to discuss coordination and collaborative efforts. For 
example, the CFPB's Office of Servicemember Affairs shared the FTC's 
new article on how veterans can protect their pensions with hundreds of 
leaders in the military community.
    We are constantly searching for new and better ways to build on 
these partnerships. For instance, in 2012, the FTC launched a pilot 
program to improve our consumer protection outreach and assistance to 
military legal service personnel.\30\ The program focused on the Navy's 
Mid-Atlantic Regional Legal Services Office, the largest of the U.S. 
Navy's commands. As part of the program, the FTC provided the Office 
with access to Consumer Sentinel as a law enforcement agency, 
established a dedicated e-mail contact at the FTC to enable the Office 
to receive timely assistance with consumer protection issues, and 
collaborated with the Office to create a 60 to 90 minute video loop of 
consumer protection materials. The FTC hopes that these efforts will 
help us create a blueprint for furthering our consumer protection 
outreach to the military.
    \30\ The project was part of the 2012-2013 FTC Excellence in 
Government Leadership Fellows Project, a leadership development program 
run by the Partnership for Public Service.
    More recently, the Commission and its partners--DOD, CFPB's Office 
of Servicemember Affairs, and Military Saves \31\--launched a campaign 
to empower servicemembers, veterans and their families with free 
consumer resources. On July 17 of this year, the FTC and other campaign 
organizers hosted ``Military Consumer Protection Day 2013'' to kick off 
the campaign.\32\ As part of the campaign, the FTC created a website, 
military.ncpw.gov, that offers free tips and tools from government 
agencies, consumer and military advocacy groups, and non-profit 
organizations. The site is designed to inform the military community 
and veterans about consumer issues, such as managing money, dealing 
with credit and debt, building savings, making wise buying decisions, 
protecting personal information and avoiding fraud in the marketplace. 
We regularly update the site and blog with new information from the FTC 
and partners. Commanders, military financial counselors, and other 
trusted sources in the community can download or order materials and an 
outreach toolkit with a sample press release, newsletter article, 
flyer, and social media posts to help spread the word in the military 
and veteran communities. Planning is underway for Military Consumer 
Protection Day 2014 with a growing list of partners.\33\
    \31\ Military Saves is a part of the DOD's Financial Readiness 
Campaign and has been a partner with DOD since 2003. Military Saves is 
a social marketing campaign to persuade, motivate, and encourage 
military families to save money every month, and to work with leaders 
and organizations to be aggressive in promoting automatic savings.
    \32\ FTC, FTC, Partners to Kick Off First Military Consumer 
Protection Day July 17, http://www.ftc.gov/opa/2013/07/mcpd.shtm.
    \33\ Other organizations that partnered on Military Consumer 
Protection Day 2013 included: Federal agencies (Department of Justice's 
Civil Division, Consumer Product Safety Commission, FINRA Investor 
Education Foundation, Food and Drug Administration, Department of 
Housing and Urban Development, Securities and Exchange Commission, 
Social Security Administration, U.S. Postal Inspection Service); state 
and local agencies (the offices of the Attorneys General of California, 
Colorado, Illinois, Massachusetts, New Mexico, North Carolina, Ohio, 
Washington, Hawaii and the Los Angeles County Department of Consumer 
Affairs); military and related organizations (Blue Star Families, 
National Association of Black Veterans, National Military Family 
Association, Coast Guard Office of Work-Life, Veterans Enterprises 
Service and Training); legal services (Pinetree Legal Assistance, 
Stateside Legal); consumer advocates (National Association of Consumer 
Advocates); and industry self-regulatory organizations (Better Business 
Bureau's Military Line, FINRA Investor Education Foundation, National 
Futures Association).
    The FTC also coordinates with its partners on military consumer 
protection policy initiatives. For example, the Commission is currently 
coordinating with the DOD via an interagency group on possible 
amendments to the DOD's military lending rule,\34\ which would be 
issued pursuant to the recently amended Military Lending Act.\35\ The 
Military Lending Act restricts covered loans, including certain payday 
loans by, for example, setting a 36 percent rate cap. Among other 
things, the amended Military Lending Act also establishes 
administrative and civil liability for violations, and gives the FTC 
enforcement authority for entities subject to its jurisdiction.\36\ In 
addition to coordinating with DOD regarding that agency's possible 
amendments to their rule, the Commission's staff is reviewing 
complaints and other information for possible violations of these 
    \34\ Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents, 32 C.F.R. Part 232.
    \35\ See John Warner National Defense Authorization Act for Fiscal 
Year 2007 (``NDAA 2007'' or ``Military Lending Act''), Pub. L. 109-364, 
as amended by the National Defense Authorization Act for Fiscal Year 
2013 (``NDAA 2013'' or ``amended Military Lending Act''), Pub. L. 112-
239, codified in 10 U.S.C. Sec. 987. Under the NDAA 2013, DOD is 
directed to consult with the Commission and other agencies at least 
every two years, in prescribing regulations under the Act. See 10 
U.S.C. Sec. 987(h)(3).
    \36\ See 10 U.S.C. Sec. 987(f).
IV. Conclusion
    The Commission will continue to take action to protect 
servicemembers and the broader military community from fraud and 
related threats and looks forward to working with you on this important 

    The Chairman. Thank you, sir.
    Ms. Deanna Nelson, Assistant Attorney General in charge of 
the Watertown Regional Office of the New York Attorney 
General's Office.
    So can I call you General Nelson?


    Ms. Nelson. You probably better not, Senator.
    The Chairman. OK.
    Assistant General Nelson?
    The Chairman. All right. Deputy General Nelson, please.
    Ms. Nelson. Thank you.
    It is an honor to be here, Chairman Rockefeller and Ranking 
Member Thune and distinguished members of the Committee. This 
is a very important issue to Attorney General Schneiderman, and 
he is pleased that we can be represented on this panel.
    My office sits outside the gates of Fort Drum, New York, 
which houses approximately 20,000 active military duty, 
families, soldiers. It's one of the most frequently deployed 
bases in the Nation. My office could probably spend all of its 
time focusing on consumer issues for soldiers because there are 
just so many different ways in which they're being victimized 
by unscrupulous businesses who are really only looking to make 
a buck.
    One of the first and largest cases under my tenure of the 
office has been the SmartBuy case, and General Cooper 
accurately points out that these are the same cast of 
characters who were doing business in Tennessee.
    As they were being shut down in Tennessee, they had changed 
their names and setup outside the gates of Fort Drum at our 
local mall under the name of SmartBuy. They had setup the exact 
same scheme, a beautiful marquee in the mall with lots of 
military focus. We would not have known that this was a problem 
in our area, but for the fact that soldiers had come into my 
office seeking help because they didn't know why the computer 
wasn't paid off yet.
    I think that an important item for everyone on this 
committee to recognize is that sometimes these predatory 
lending products do not look predatory on their face. So when 
we initially looked at this contract we realized that it was 
showing an interest rate of approximately 19 percent. Anyone 
that has done this sort of work is used to seeing triple 
digits. So we didn't quite understand what was going on until 
we dug into the transaction itself.
    I think this is an important consideration for the 
Committee and for other legislative bodies that are looking at 
the Military Lending Act, to say perhaps it's not the number; 
you have to look the transaction itself. And for example, in 
these SmartBuy transactions and many other transactions which 
target military, whether they're selling jewelry, whether their 
selling continuing education products, the devil is in the 
detail and you need look at the value of the underlying 
    What we had found was that the computer was merely the bait 
to get a soldier to sign on the dotted line. When we'd sent our 
consumer representative out to look at this marquee and see if 
we could get more clues as to what was going on, we realized 
that they wouldn't sell her a computer. She was an older woman 
who had worked with our office for a long time and they 
suggested she go to Wal-Mart, which was likely where they had 
purchased the computer in the first place.
    As we called some of the staff of this organization into 
our office to get more details, we learned that's exactly what 
they were doing--buying these computers from Costco or Wal-Mart 
or Sam's club, remarketing them (just taking off the labels and 
putting on a new sticker so it appeared that it was something 
that they were selling directly), tripled the price, and then 
took the 19 percent interest on the inflated price. So, when we 
dug into the transaction itself, you realize that the computer 
may have been an $800 computer that was being sold for $2,400, 
but even that wasn't obvious to soldiers themselves because the 
prices were proprietary to these military per paycheck payment. 
So if he wanted to buy this computer, it might have been $60 
per pay period or $120 per month, which seemed reasonable to 
    So as long as they could get that soldier to sign on the 
dotted line, setup an allotment payment, get their bank 
information--which could happen in less than 10 minutes--that's 
all that they were interested in doing. And they're not the 
only ones.
    Looking around, just for this particular group of 
characters, we found them in multiple other states. We were 
able to shut them down in New York, but at the same time they 
were doing business in Texas, California, Colorado, North 
Carolina, South Carolina, Oklahoma, Georgia. And the point is, 
is that they were operating under different names in these 
places. So if you ran Britlee Incorporated in the Secretary of 
State's records for that state, you wouldn't find them. They 
had different names but the exact same scam.
    The Attorney General wanted to make sure that this 
committee understood that you have to look at more than just 
the face of a contract and realize that $3,000 worth of debt is 
not secured by a $600 computer, and to make sure that going 
forward the regulations that are ultimately put into place are 
going to take into account the true nature of the transaction 
and understand that these scam artists, which is what they are, 
are going to find ways to redraft existing agreements so that 
they can continue to tap into those soldiers' paychecks and 
make sure that they get paid. They have something that they can 
sell and invest in.
    So I'm very pleased that this committee is digging into 
this issue and is going to take steps to take care of our 
soldiers in this way because they're getting attacked on many 
different fronts.
    Thank you very much for your attention on this matter.
    [The prepared statement of Ms. Nelson follows:]

 Prepared Statement of Deanna R. Nelson, Assistant Attorney General In 
  Charge (Watertown Regional), State of New York, Office of Attorney 
                      General Eric T. Schneiderman
    General Schneiderman's Watertown Regional Office sits outside the 
gates of the 10th Mountain Division, Fort Drum, New York. Fort Drum is 
one of the most deployed Army bases in the country. It is a light 
infantry division, home to approximately 20,000-active duty soldiers.
    A large proportion of the regional work involves assisting soldiers 
who have fallen victim to predatory lenders and other shady business 
practices. These same soldiers are also frequently the target of 
abusive collection tactics. Many times the soldiers' financial 
indignities have accrued over time from both online financial predators 
and unscrupulous businesses that target soldiers on posts across the 
country. These debts follow military families with each change in duty 
station, and often subject soldiers to sky-high interest accumulation 
upon return from deployment.
    We are very sensitive to the fact that soldiers are different and 
more vulnerable than most other consumer groups:

   Soldiers' rate of pay is ascertainable by the marks on their 

   Soldiers receive regular paychecks which can be tapped 
        directly by allotment;

   There is no administrative recourse for a soldier once an 
        allotment has been paid out;

   Soldiers are routinely requested to provide access to their 
        commanders for collection efforts;

   If a soldier stops an allotment or challenges a contract, 
        they are opening themselves to the possibility of disciplinary 
        action, loss of rank or security clearance from their 

   Soldiers are moving frequently which makes it difficult to 
        commence legal action or defend legal action on questionable or 
        fraudulent ``debts.''

   Very often the fraud is not obvious on the face of the 
        transaction, and neither the soldier nor command is in a ready 
        position to raise an effective defense.

    Basically, we are dealing with a very honorable class of victims 
who are not likely to cry foul once victimized.
    The identified thread in the predatory lending market is a 
prevalence of unlicensed lenders or high-cost ``military specialty'' 
lenders. These businesses regularly have undisclosed or hidden costs, 
deceptively characterized loan/credit products, include subtle waivers 
of Fair Debt Collection Practices Act protections (e.g., immediate 
access to chain of command), and engage in extremely aggressive 
collection/default activities.
    These characteristics cross many markets targeting soldiers--
electronics, furniture, jewelry, auto detailing/audio/upgrades, auto 
dealerships, ``emergency'' loans, leases, rent-to-own and other 
consumer products.
    For purposes of this Committee's work, the focus of this submission 
will be anecdotal information regarding the anatomy of predatory 
behavior in these transactions--baiting, snagging and collecting.
    All of the predatory businesses take time to identify their market 
and single them out. Typically they are draped in the American flag, 
many times they employ former servicemembers to heighten the trust of 
active duty soldiers, often times they hold themselves out as 
``specializing'' in serving the needs of soldiers or Federal employees. 
The business may have given money to a military support organization in 
order to receive a certificate or plaque of appreciation, which are 
then prominently displayed at a business location or website--again, 
capitalizing on common affinity marketing techniques. These are all 
usual bait presented to our servicemembers, bait placed at the 
fingertips of our soldiers.
    We have seen this in our litigation and investigations. The 
soldiers are targeted for the reasons cited above--they have paychecks, 
they will repay their debts, and they won't complain.
    In one compelling example, the staff of a predatory business was 
trained to only sell to soldiers. When our office sent in a non-
military staff member to explore purchasing from this business, she was 
directed to Walmart. The business was unwilling to sell its wares to 
anyone other than military, and refused any payment other than by 
allotment. In this particular instance, the business (located in the 
local mall), didn't even have a cash register or credit card reader at 
the store locations--only a stack of pre-filled finance agreements.
    Some businesses are willing to accept non-allotment payment, but 
there typically is a very significant financing agreement accompanying 
the transaction, and usually some type of auto-payment required.
    This should beg the question--what is the business selling?
    This office has found time and again that the real product is not 
the truck, the computer, the education program, the sofa, the bedroom 
set, the auto detailing--it is the financing. And, as stated, the 
financing often comes directly out of the soldier's pay, with a back-up 
payment method already in place.
     ``Military paper'' is how this class of product is described, and 
it generally bears no relationship to the value of the product 
financed, thereby maximizing profitability in a shadow industry which 
profits from this type of lending. There is a low entry cost and 
substantial profit.
    What's an unlicensed lender? This is a class of private financing 
which is largely unregulated. It is not per se unauthorized, but it can 
be a black hole for consumers and treacherous territory for soldiers. 
On their face, the amounts are low. The interest rates are ostensibly 
capped. They are theoretically not payday loans because there is a 
tangible product passing hands. Nowhere on the paperwork is there any 
indication that the lender is anything other than a bank or a 
sanctioned loan company. The devil is in the detail.
    In 2010 the New York Attorney General sued SmartBuy and two 
unlicensed, predatory lenders. These were the same cast of characters 
who had just been driven out of Tennessee, now operating under slightly 
different names. There was the bait--electronics, and the hook--
financing. On its face, these were open-ended retail installment 
contracts from a lender, collateralized by the electronics sold. In 
reality, the outrageously high (and undisclosed) interest rates (over 
200 percent) were stuffed into the ``purchase price,'' making the 
stated interest rate appear to be within the range of predictable and 
authorized (10-12 percent). But there was underlying deceit: There were 
undisclosed loan costs associated with the required military allotment 
payment method. The full retail value of the product was never 
disclosed to the consumer. Sales persons soothed soldiers stating that 
the deals and interest rate were comparable to BestBuy. The soldier 
authorized the lender to contact command for a laundry list of issues, 
including collection. There was no way out of the contract even if a 
soldier wanted to return the product within the very short return 
period--there was a very expensive restocking fee which was required to 
be paid in cash. This type of contract skirts Military Lending Act 
protections, and also skirts lending laws.
    Is overpayment a problem? Just because a soldier overpays--even 
dramatically--for a consumer good, does that mean there has been some 
sort of nefarious conduct? Likely, but not necessarily. Yet when the 
true price of a product has been buried in per paycheck price 
explanations, where the true effective interest rates are nowhere 
disclosed, where the contract deceptively bypasses existing state and 
Federal regulations by artfully framing the deal, consumers--and 
soldiers in particular--can be seriously hurt.
    Have you ever pulled your current pay statement as part of a small 
consumer transaction? Short of purchasing a home or seeking a bank 
loan, it is safe to say that most of us have not. This is not the case 
for our service men and women. Routinely they are walked to a computer 
by vendors/lenders and asked to pull their LES (leave and earnings 
statement). Routinely they are asked for a copy of their military 
identification. Routinely they are asked to produce the name and 
contact information of their commander. When addressing soldiers as 
part of financial readiness training, I point out to them that this is 
not acceptable. They are stunned. It is a way of life for our soldiers.
    As part of our SmartBuy investigation, an employee bragged to our 
undercover investigator that it was apparent after reviewing an LES, 
the soldier did not have sufficient unencumbered room for another 
allotment on his pay. The employee cancelled a different allotment in 
order to accommodate the new one. There is competition in this dark 
    As a resident near Fort Drum, I personally went into a rental car 
franchise to rent a vehicle. I presented my driver's license and a 
credit card and was handed a set of keys. At the same time, a young 
Army officer came in to rent a car. He was required to produce his 
driver's license, military identification, credit card, commander's 
name and contact information, and then was walked to a computer to 
print out his last LES. It is not right, and it cultivates the 
opportunity for predatory practices and abusive collection.
    Time and again we are told that these soldiers have bad credit, 
that these are the best and only options available to them, and also 
that without the pressure of a command structure, they will not honor 
their debts. It is simply not true. The reality of the situation is 
that these soldiers are being deliberately placed between a rock and a 
hard place. The hard place is the collections practices.
    When a debt goes into collection, it is a big problem for a 
soldier--they face potential disciplinary action, loss of rank, and 
potential loss of security clearances. Vendors know this, and they 
capitalize on the vulnerability.
    The Fair Debt Collections Practices Act makes clear that debt 
collectors are not to contact third parties (read: employers) regarding 
a debt without express permission granted by the consumer, and the debt 
collector is further not permitted to utilize harassment, abuse, or 
false and misleading representations in the collection of any debt. In 
the experience of our office, these protections are routinely bypassed 
or disregarded.
    These predatory contracts contain provisions permitting the lender 
to directly contact a soldier's chain of command to discuss the debt. 
Soldiers are routinely threatened that their command will be contacted. 
In some extreme instances, soldiers are threatened that military police 
will arrest them should they not recommence payment on debts. This form 
of terrorism is so prevalent that we've seen soldiers harassed for 
debts they have never even incurred--and many times they pay because 
the consequences of taking a stand are so consequential.
    This situation presents problems for our soldiers, and also their 
commanders. I received a call from an officer on post, concerned that 
he was asked to respond and resolve problems on the ``hotline.'' As he 
put it, he regularly received calls from businesses that soldiers were 
not paying on various debts, and there was only one part of that 
equation he had control over--the soldiers. We gave him some tools to 
push back.
    The deception and the predatory behavior are not, however, obvious 
to anyone other than ourselves. We receive complaints from soldiers 
only when they cannot understand why they have already paid over $8,000 
on a computer, but it is not paid off yet. We receive calls when a 
soldier is about to have security clearance terminated because of a 
debt they did not even know they had. We do not get complaints from 
soldiers that they have been paying illegal rates of interest, or were 
duped into a predatory transaction--they simply don't know.
    The inevitable question arises: Is this a group of bad actors, or 
are there systemic failures, or both? In our experience, the answer is 
both. There are always ``frequent fliers'' who cultivate a degree of 
chaos which makes, for example, a move from Tennessee to New York 
nearly imperceptible, and which makes the transactions themselves 
appear legitimate to an uninformed reviewer. There are also abusive 
business and investment models which permit billions of dollars of 
fraud to evade regulatory oversight. These issues deserve our 
collective attention and redress. To this end, by letter dated June 23, 
2013, Attorney General Schneiderman and several other attorneys general 
led by Delaware and Illinois, urged significant reform of the 
implementing regulations for the Military Lending Act. Large loopholes 
must be closed, including modifying the definitions of consumer credit 
to provide more comprehensive protections. The regulations must 
recapture loans which are open-ended or revolving, all auto title 
loans, any bank loan secured by funds on deposit, and all retail sales 
credit loans or other similar rent-to-own transactions. Similarly, age-
old traditions such as payment by allotment must be revisited to review 
their efficacy in our modern age. What once was efficacious may now be 
simply a tool of abuse. The sanitizing role of regulatory oversight 
must also be considered--should billions of dollars of loan work be 
ignored simply because the victims are many and the individual loan 
amounts low? Clearly the answer is no.
    Thank you for your attention to these abusive practices, and your 
dedication to protecting the brave men and women serving in our 

    The Chairman. Senator Nelson just said it is a crying 
shame. That's for sure.
    Well, in the questions, I think we'll have some interesting 
discussion. Now, we come to----
    Oh, no. See, now I'm all confused again because of here, 
retired Navy Captain--then I can't call you Mr. Dwain 
Alexander, can I?
    I've got to call you Captain Alexander.
    The Chairman. Please, we welcome your testimony.


                      ATLANTIC, U.S. NAVY

    Captain Alexander. Thank you, Mr. Chairman.
    Chairman Rockefeller, Ranking Member Thune, and 
distinguished members of the Committee, I'm honored and humbled 
to have the privilege of representing the Navy's Judge Advocate 
    The Chairman. Excuse me, sir. Excuse me, sir.
    I did not mention that you were Legal Assistance Attorney 
for the mid-Atlantic Region legal service office of the United 
States Navy.
    Captain Alexander. Thank you, sir.
    I am honored and humbled to have the privilege of 
representing the Navy's Judge Advocate General's Corps and the 
servicemembers that we support.
    I am a civilian Legal Assistance Attorney, and it's now 
called the Regional Legal Service Office. My job is to enhance 
sailor readiness by addressing legal issues and I want to, 
first, start off by thanking the members of the panel for all 
the fights that you give for the servicemembers that I see 
daily and for the tools that you give us to help us with our 
fight in the front. Thank you.
    Consumer laws are the most complex and contentious issue 
that we address. Consumer issues attack the servicemembers 
finances impacting the individual, his family, unit morale, 
and, in the end, mission readiness and effectiveness. The cost 
of consumer issues on mission readiness is the loss of the 
expense, the training, and manpower investment that goes into 
each sailor along with his role in mission accomplishment.
    I've had clients who purchase two cars in 1 day. It sounds 
perplexing but servicemembers have been trained to trust and 
follow authority and merchants know this and take advantage of 
that. In one case, I was able to cancel the contracts and the 
next day the Carrier Air Wing commander came to the base and to 
our command to thank us and to explain what that impact meant. 
He's the person on the aircraft carrier who is in charge of all 
the air operations. He said that I saved a crew member for him. 
The sailor was being trained to be a shooter on the deck of the 
aircraft carrier, that's the person that directs the planes to 
take off at the appropriate time.
    In his experience, if a sailor had to pay for two vehicles, 
he would have no money. When his shipmates went out, he would 
not be able to go out and eventually he would begin to act out. 
This would become a disciplinary problem and, again in his 
experience, in 6 months they'd probably have to separate that 
servicemember and they'd lose the mission readiness that he 
provided by being part of their team. If he wasn't separated, 
the distraction of his finances could impact his job and the 
fighter jet that he directs on the flight deck of the aircraft 
carrier. For servicemembers, distractions can be dangerous and 
potentially fatal.
    This sailor is not my only client. He's my typical client. 
They are all young, generally junior in rank, most only have a 
high school education. For them, their pay is guaranteed, it's 
recession-proof. So when the recession hit and cars couldn't be 
sold, my guys could buy cars. It's public knowledge, so when 
they go on into a business with a few questions, people know 
how much they make already. And their pay is easy to garnish. 
It's been mentioned they've been removed from their 
surroundings but that means that when they go to shop for a 
car, there's nobody to go with them and help them negotiate or 
say stop. Our sailors are transient; they move every 3 years. 
So there's no history that follows along saying this is a bad 
area or this is a bad business that isn't developed.
    They've been trained to respect and respond to authority 
and that's critical for us in the military. When we ask 
somebody to swab a deck or to charge an enemy position, it's 
not a debatable issue. The problem is that for young people, 
that's not something they turn off. So when they go into a 
business and the retired somebody says, ``You need to do this, 
I'm going to take care of you,'' they comply. And that 
compliance leads to financial troubles.
    Their job is 24/7, it's a professional occupation. We 
regulate every aspect of their life, basically. And so, this is 
what they do and, for most of them, it's who they are. So when 
a debt collector calls the command or threatens to call the 
command and say, ''I'm going to tell your commanding officer 
that you're a dead beat or you're not paying your bills,'' that 
has a very threatening impact. And I've had clients who have 
paid bills that they didn't owe but they had just arrived at 
the command or rather than have their names smudged before the 
commanding officer, they discharge their funds and paid the 
debt. That's just wrong. These factions combine to make the 
servicemember not only a high value target in the consumer 
market, but also very vulnerable to attack by unscrupulous 
    I see four key challenges for servicemembers as consumers: 
Predatory lending, arbitration, Servicemember Civil Relief Act 
waivers, and aggressive debt collection. Thanks to the Military 
Lending Act and other agencies who have helped us with 
education and the education the Navy provides, we've done a 
very good job of educating servicemembers about payday loans 
and that they're not good things to do.
    However, when there appears to be no other option, or the 
other options have been exhausted, they may get this loan. 
Knowing that it's the bad loan is the last thing that's going 
to report. And so, by the time we get an awareness of it, it's 
now a catastrophic event that's being dealt with and that again 
creates a problem for our readiness.
    Beyond payday loans, though, automobile dealerships acting 
as loan brokers do far more damage that I think payday loans 
do. And most of the issues that I see in my practice in Norfolk 
are with the used car dealerships. There are a few franchise 
dealerships that create some issues for us, but used car 
dealerships are the primary ones.
    This one time purchase can be devastating more devastating 
than a series of payday loans. The dealerships are located as 
close to the bases they can be. They will provide false 
information to lenders for the basic allowance for housing or 
the rank to increase the amount of money the servicemember can 
borrow placing them deeper in debt. The loans could be made for 
up to 140 percent of the vehicle's value, which allows them to 
pack along with all types of other accessory items. The dealers 
can receive kickbacks from lenders for higher interest rates. 
Vehicles can be a power--booked so they add in accessories or 
put them in zip codes where there's a higher value for the 
vehicle. Dealerships can require secondary loans to add money 
to the contract. This process makes our sailors the equivalent 
of a money delivery system for the automobile lending industry.
    The same business would then include an arbitration 
provision in its contract. And we use this as a sword to fend 
off liability because servicemembers don't understand what 
arbitration is. They think that maybe I can see you in small 
claims court, but if you say, ``You can't sue me, you signed an 
arbitration agreement,'' my sailors will just go away and pay 
the debt.
    The last offense would be to add an SCR waiver, so that, 
like other businesses, the lender or dealer could get a default 
judgment without servicemember protections. The waiver of this 
orates the readiness protections or the Servicemember's Civil 
Relief Act.
    Education will help avoid many debt traps. However, some 
problems like arbitration and the Servicemember's Civil Relief 
Act waiver and aggressive debt collection are beyond education. 
At my job, we are working with the Federal Trade Commission to 
develop videos that can be shown in the, hurry up and wait 
time; when in the lobby of the medical room or the supply or at 
legal, waiting for services, or you're returning from 
deployment, you can get education on consumer issues and we are 
feeding them that way and we are trying to take care of it. We 
have retired military training on payday loans and that's 
probably why part of those issues have been reduced.
    We work with the Armed Forces Disciplinary Control Board to 
address unscrupulous businesses to the best of our ability. But 
still, these problems create such a hazard for servicemembers 
and some of the issues the servicemember's waiver in the 
arbitration being in the contracts, are things that we can't 
address because they're legal. So we need help to deal with 
    Thank you.
    [The prepared statement of Captain Alexander follows:]

  Prepared Statement of Dwain Alexander II, Senior Civilian Attorney, 
     Region Legal Service Office, Mid-Atlantic, United States Navy
    Chairman Rockefeller, Ranking Member Thune, and distinguished 
members of this Committee, as a legal assistance attorney in the United 
States Navy, I am honored and humbled to have the privilege of 
representing the Navy's Judge Advocate General's Corps and the 
servicemembers we support.
    I am a civilian legal assistance attorney, who, like all uniformed 
and civilian legal assistance attorneys, works to support and enhance 
sailor and mission readiness by addressing their legal readiness 
    Legal issues can be very distracting for many individuals. But for 
active duty servicemembers, legal distractions can be dangerous and 
potentially fatal. We need our servicemen and women focused on their 
primary mission--national defense. Legal assistance services that we 
provide include estate planning, family law and consumer law. Between 
these areas of practice, we cover the majority of servicemember legal 
readiness needs.
    For estate planning services, we draft documents that ensure 
servicemembers' final wishes are expressed. For family law matters, we 
provide advice and counsel on a wide range of domestic topics to help 
servicemembers and dependents understand their legal rights and 
responsibilities. For consumer law, we engage opposing parties, explain 
the law, and the servicemembers' rights. Consumer law stands out as the 
most complex and contentious. Of the three broad areas of legal 
assistance, consumer law matters attack servicemembers' finances. This 
can have a negative impact on the individual, his family, his personal 
and unit morale, and in the end, mission readiness and effectiveness. 
This reflects the reality that while our clients have the desire and 
ability to engage in commerce as a consumer--and engage they do, the 
majority of our clients are young and lack the necessary financial 
savvy needed to avoid some consumer traps.
    I once had a client who purchased two vehicles in one day. While 
this may sound perplexing, consider military psychology. Servicemembers 
have been trained to follow authority. If someone appearing to act with 
authority tells you something you want to hear like, ``the first 
vehicle was from a bad dealer and you could get into trouble for buying 
it'' or ``the contract is not final because you have temporary 
plates,'' and ``I'm a retired master sergeant--I will take care of you 
and return your car so you can buy mine.'' Our experience indicates 
that there is a very good chance that servicemember will comply and 
become liable for a second financial obligation. This situation is 
    In this particular case, I was able to cancel both contracts. The 
next day the Carrier Air Wing Commander came in to thank me and explain 
the impact to his mission. He said that I saved a crew member. The 
sailor was being trained to be a shooter on the deck of an air craft 
carrier. If he had to pay for two vehicles, he would not have any 
money. When his shipmates went out he could not go. He would be working 
just to pay bills and would begin to act out. He would become a 
disciplinary problem, and in six months they would probably have to 
separate him. The negative impact of consumer law on mission readiness 
is that the expense, training and manpower investment the sailor 
represents is lost, as is his role in mission accomplishment.
    This sailor is my typical consumer client. They are young and the 
majority are junior in rank. Most have only a high school education. 
Their pay is guaranteed--recession proof, furlough proof, public 
knowledge, and easy to garnish. They have been removed from familiar 
surroundings and family support systems, and have been trained to 
respect and respond to authority--a critical mindset that is vital to 
the operation of the military. To illustrate--whether we ask the sailor 
to swab the deck or charge an enemy position, there is no option for 
open debate. Our sailors are transient, moving every two to three 
years, so little history of the consumer environment is retained and 
passed on. Their job is a 24/7 professional occupation and an integral 
part of their life. Threats by merchants to contact their command with 
assertions of breach of contract or debt dodging reflect on their 
conduct and judgment and are perceived as potentially career ending. 
These factors combine to make the servicemember not only a ``high value 
target'' in the consumer market place, but also very vulnerable to 
attack by unscrupulous actors.
    The key weapons I see used against servicemembers in my practice 
are: Predatory lending, arbitration clauses, Servicemembers Civil 
Relief Act waivers, and aggressive debt collection.
    There are many predatory lending schemes--from the traditional 
``payday lenders'', to predatory lending related to the automobile 
industry. Consumer education on pay day lenders has reduced the 
negative impacts on our clients. However, an emergency or a few bad 
financial decisions and the payday ``non-loan'' may appear to be a good 
option. Another type of predatory lending loans procured automobile 
dealerships acting as loan brokers. Loan applications made by 
dealerships can contain false information increasing the income of the 
servicemember. These loans can be for up to 140 percent of vehicle's 
value. The dealerships can receive kickbacks from lenders in the forms 
of finance charge sharing. Vehicles can be ``power booked'' to 
artificially increase its value. When the primary and secondary market 
will not provide sufficient funds dealerships can require supplemental 
secondary loans to add money to the contract. This process makes our 
sailors the equivalent of a money delivery system to the auto and 
lending industry. I had a client who purchased a vehicle for 
$11,000.00, the max loan amount from the traditional creditor. The 
dealer wanted more money for the vehicle so he sold the client a dash 
mounted GPS for $2500.00 financed through a secondary subprime lender. 
Other clients are told that additional funds are needed for taxes. In 
another case the dealership sold the vehicle for $5,700.00 but added on 
a service contract for $3,069.00.
    Arbitration is another area of concern. The issue with the 
arbitration is that many servicemembers will not pursue their rights. 
Arbitration can have high costs and require hearings in inconvenient 
forums. It is also an unknown process to the servicemember consumer. 
They do not know the law and when told, ``you cannot sue me because you 
signed an arbitration agreement'' they may not pursue their claim. Many 
auto dealerships have arbitration provisions in their contracts. I 
recently saw a case in which the sailor purchased a vehicle ``As-Is.'' 
He made extensive inquiries about the condition of the vehicle prior to 
purchase and was informed it was in good condition. After purchase he 
found the vehicle had substantial damage that should have been 
disclosed under the Federal Trade Commission's Buyers Guide. The 
contract had an arbitration provision. This dealership used the 
arbitration provision to avoid liability. Arbitration is essentially a 
waiver of the servicemembers right to expeditiously resolve matters in 
trial. In Virginia most of these issues could be addressed in small 
claims or general district court in 45 days at a cost of $48.00. 
General District Court has a jurisdictional of cap of $25,000.00.
    The Servicemember's Civil Relief Act is a great consumer protection 
statute for the military. It acknowledges the importance of the 
servicemember's focus on the mission and provides tools to balance the 
Nation's interest in national security with individual rights. It 
places aspects of civil law matters that could impact mission readiness 
in the hands of commands and servicemembers. However, one section 
exception eviscerates any protections; the Section 517 Waiver. The 
unlimited and unconditioned use of the waiver takes readiness out of 
the hands of servicemembers and commanders and places it in the hands 
of landlords and merchants. In Virginia there is a standard form lease, 
VAR 200. This is a 14 page residential lease that provides a 
reservation of right by the landlord to require a waiver of the SCRA at 
a later time. There are also countless other waiver forms with waivers 
ranging from total to single item like default protection (Section 
521), eviction protection (Section 531) or Lease termination (Section 
535). As an attorney, I can argue the inapplicability or unlawful 
nature of the waiver based upon the knowledge at the time of execution 
and the involuntary nature of the contract provision; my clients will 
not. They will honorably acknowledge that they signed a waiver and 
accept the penalty.
    Once there is an obligation the servicemember can fall prey to 
aggressive debt collection procedures. The type of collection process 
will usually include threats to contact the command or actually contact 
with the command. Because of the importance of the security clearance 
and the competitive nature of promotion, negative comments to a 
servicemember's command will be perceived by the servicemember as a 
threat to his or her career in the Navy. This gives creditors great 
leverage with collections of valid and invalid obligations. For 
example, one client who had transferred from the west to the east coast 
had settled an obligation with a creditor. That debt was resold to 
another collection company who contacted the servicemember. He had just 
moved and could not find his paperwork. Rather than have the creditor 
contact his command, as they had threatened, he paid them $1,000.00.
    There are two keys to addressing the problems protection and 
education. No amount of education can address the arbitration provision 
or waiver when the use is legal and pervasive. A decision between 
signing a waiver with this landlord or living far away or in an unsafe 
area is a choice between two bad options. With arbitration there 
frequently is no choice. The perception that aggressive debt collection 
will impact a servicemember's career is very real to the servicemember. 
Knowing your rights is the first step in meaningful participation in a 
market economy. My office is working with the FTC to make their library 
of informative videos on consumer law available to servicemembers in 
infomercial format in lobbies, waiting rooms, and on ships so that 
while sailors are waiting for the next evolution in their day they can 
receive consumer law tips. We also provide symposiums on consumer law 
for military attorneys, financial counselors and servicemembers.
    We are doing our best to educate on their rights and to protect 
servicemembers when their rights are violated. It is important that the 
law provide the tools necessary to allow servicemembers and those who 
fight for servicemembers to win in an engagement where the enemy is 
consistently changing.
                         Mr. Dwain Alexander II
    Mr. Alexander is the senior supervisory civilian attorney and 
subject matter expert for the Region Legal Service Office, Mid Atlantic 
in Norfolk Virginia.
    He is a native of Kansas City, Missouri. He earned his Bachelor of 
Science Degree from Creighton University in 1982 and his Juris Doctor 
from Creighton University School of Law in 1989. After law school he 
joined the Navy Judge Advocate General's Corps.
    Mr. Alexander left active duty in 1996 and affiliated with the 
Reserves where he attained the rank of Captain. He retired from the 
United States Navy in September of 2013.
    At the Region Legal Service Office, Mid-Atlantic, Mr. Alexander is 
responsible for legal assistance program development, where he tracks 
local, state, and Federal legislation impacting the provision of legal 
services. He provides comments on legislation and agency rulemaking and 
drafts legislative proposals related to the covered areas of practice. 
He develops and maintains inter-service and civilian partnership 
programs with the American Bar Association, the Armed Forces 
Disciplinary Control Board, the National Association of Consumer 
Advocates, the National Consumer Law Center, the Virginia State Bar, 
and local Bar Associations. He mentors, trains, and contributes to the 
professional development of enlisted and staff attorneys at the Navy's 
largest Region Legal Service Office. Mr. Alexander also provides legal 
services to servicemembers and their families. His primary areas of 
practice are estate planning, consumer law, and family law. He has 
represented thousands of clients over his 24 years of service with the 
Navy. Mr. Alexander is a frequent speaker at conferences and legal 
education courses. He is a subject matter expert on servicemembers' 
rights, the Servicemembers Civil Relief Act, automobile transactions 
and automobile fraud.
    Mr. Alexander is the consumer law advisor for the Navy Region Mid-
Atlantic, Armed Forces Disciplinary Control Board. He is a member of 
the American Bar Association's Standing Committee on Legal Assistance 
for Military Personnel and currently serves as Chair of the Military 
Law Section of the Virginia State Bar and Co-Chair of the National 
Association of Consumer Advocates, Military Consumer Justice Project. 
He is a contributing author for several legal publications, including 
the National Consumer Law Center's publication on Collection Actions 
and the American Bar Association's Legal Guide for Military Families.

    The Chairman. Thank you very much, sir.
    I'm going to ask Ms. Petraeus and Mr. Harwood a question, 
but I almost question my question before I ask it.
    I want you to talk a little bit about what, I mean, you've 
all talked about, most of you, about the vulnerability, the 
young age. There are families who are in the process of moving, 
they're going back overseas again, the soldier is, again, so, I 
mean, there's confusion. You know, people don't understand the 
terminology; they're not accustomed to dealing with them. And 
I'm just looking at some of the ads that these companies send 
out and they all look like they were, you know, representatives 
working right out of Chuck Hagel's office. I mean, they're all 
military and they're all serving U.S. military around the world 
since 1999. And then they have a testimony from one very 
wonderful-looking woman soldier, and she says, ``After there 
was a mistake with my pay, I didn't know how to make ends 
meet.'' So you're with her, right? ``Luckily, they understood 
my situation and were willing to help me when I needed it. 
Thanks for helping me.'' Well, here it is, written. And people 
are going to fall for that. They're going to fall for that.
    So my question to you, Ms. Petraeus and Mr. Harwood--two 
different consumer protection agencies, so to speak--what can 
you do in outreach and education? What is it really possible to 
do? I mean, these folks are changing, they get a video display 
or whatever; I mean, how can you really reach them?
    Ms. Petraeus. Well, Chairman, I think you're always going 
to have to have a combination of both education and protection. 
When it does come to education and outreach, there are a 
variety of things that can be done. I think you've heard some 
today. We are doing our best, at our agency, to do kind of a 
combination of things. I personally have gone to 70 different 
military installations, in part, to put a face on the bureau 
and what we do. I ask to hear about their financial issues, but 
if it is a large group of young servicemembers, I also throw in 
a little bit of consumer protection common sense when I talk to 
them as well. We are developing some education products, one to 
be delivered even before they get to basic training because 
basic training is kind of a stressful time to absorb good 
financial education; you're tired, you're stressed, you're 
scared of the drill instructor and you may just not be hearing 
that good information. So, we're going to do a little product 
that can be accessed by computer before they even get there 
with some basic common sense----
    The Chairman. But what would be the setting for that? I 
mean, they would be out in the field practicing marksmanship, 
or do they----
    Ms. Petraeus. No, no. The delayed entry is when they've 
committed to join the military but they have not yet gone to 
boot camp.
    The Chairman. Oh.
    Ms. Petraeus. So the only contact they really have at that 
point is with their recruiter. And we will work with the 
Department of Defense so the recruiter will deliver to them 
this website, go to this website, take this short financial 
course and show me that you did it. So we're hoping, again, to 
catch them before they even get that first military paycheck or 
get that first trip to the local mall when they're at basic 
training and may be tempted by that kiosk that they find there.
    So we're hoping that's one approach that might help. We are 
also working, certainly, with other Federal and State agencies. 
I've had 16 state attorneys general go with me personally to 
military installations to say, we are here to protect you in 
this state as consumers. We work with the FTC, as you've heard. 
I've worked with the National Conference of State Legislatures 
and a number of the non-profits that play in the military 
    We're also doing some train the trainer efforts from our 
office, doing webinar video events for those who deal with 
military issues like the financial program managers, the JAGs 
and the education service officers, trying to give them the 
latest information about current rules and regulations that are 
in effect. We have a military listserv, we, you know, put out 
regular publications. We also helped re-write the Transition 
Assistance Program for those who are transitioning out of the 
    So there are a variety of things that can be done. We can 
always do more, we can always do better and again, education is 
essential, but I think it does have to be combined with the 
protection of loss as well.
    The Chairman. Protection of rules and regulation or 
protection of loss?
    Ms. Petraeus. Yes. All of the above.
    The Chairman. OK.
    Mr. Harwood. I couldn't agree more with what Ms. Petraeus 
said. I think tackling this problem is a combination of 
education and law enforcement. And, you know, on the law 
enforcement side, I can tell you that there are some laws and 
rules that already would apply to misrepresenting affiliation 
with the military. I talked about a case at the FTC filed this 
summer involving Mortgage Investors Corp. in which they 
misrepresented they were affiliated with the VA in connection 
with the loans that they were issuing. Those misrepresentations 
violated the Mortgage Advertising Practices Act and that 
obviously--to have that language in there was helpful in our 
law enforcement efforts.
    Representations about affiliation--misrepresenting 
affiliations with a government agency or military entity would 
also violate the Mortgage Assistance Relief Services Rule that 
the FTC recently promulgated, or was actually promulgated 
several years ago. Both those rules still are enforceable by 
the FTC. They were also, actually, they've been transferred 
down to CFPB and the CFPB also has the authority to enforce 
both those rules. And affiliations like the kind we're talking 
about except affiliations that would be in violation of those. 
More generally, on the enforcement side, a representation about 
being affiliated with a government entity when the scammer is 
not would violate the FTC Act and we've had cases over the 
years that involve that as well.
    So all of those things are, that's the law enforcement 
side. And it's obviously critically important to do that 
because you're right, and I think you alluded this in your 
question. The problem is that by representing they're somehow, 
these folks are somehow affiliated with a legitimate agency, 
they get instant credibility with the consumers, in this case, 
military consumers, and they may well let their guard down and 
not be as aggressive in terms of the questions they might ask 
and not be as attuned to the, you know, to, sort of, some of 
the educational messages that we normally would try to get them 
to think about.
    But education is also still an important part. And I think 
you asked Ms. Petraeus about some of the educational efforts 
we've made. I actually wanted to go back to something that Mr. 
Alexander mentioned where he talked about one of our new 
educational initiatives we've been experimenting with, 
specifically in Norfolk, and that is the idea that we can use 
wait time in the military. It turns out that servicemembers 
spend a lot of time waiting and not doing a lot except waiting. 
And the idea that we've been working on with, actually, with 
Mr. Alexander, closely, is the idea we can use those wait time 
opportunities to deliver educational messages about a variety 
of scams and problems we're seeing. And, you know, through 
videos in waiting rooms, on ships as they're coming back into 
shore, those are all great opportunities for us to, with Mr. 
Alexander's help and the help of his organization, to let 
soldiers know about the kinds--and sailors, in this case, know 
about the kinds of scams that may be targeting them, including 
scams that are purporting to be affiliated with the military. 
Thank you.
    The Chairman. I hear you, but I'm trying to think of these 
soldiers. I mean, you don't really learn how people can take 
advantage of you until they have taken advantage of you and you 
lost your security, you know, the three cars that you paid for 
you never bought. I mean, you have to go through it. I'm not 
sure it's in the nature of 22-year-olds and 25-year-olds who 
are, you know, in the middle of preparations for war, going 
back to war, that sort of a discussion, a lecture in a waiting 
room--I'll get to you, sir. On his time, though.
    The Chairman. Because I'm taking all of his time already. 
That they'll listen, they'll learn, but will it actually make 
them sharp when confronted by these scumbags, as I would call 
them? And so what I was thinking is, are we doing it the right 
way? In other words, if you have all of these service men and 
women, all potential victims, all going to be in these camps, 
military camps, surrounded, as you say, surrounded by 
SmartBuys, my new favorite company. Why can't we go after, 
General--well, I just asked a question and then John Thune can 
do whatever he wants with it.
    Go after the perpetrators. I remember during the health 
insurance matters in this committee. We had these outrageous 
charges being charged on, you know, sophisticated, 
unsophisticated people. And it wasn't really until we ran into 
a little group called Ingenix, which nobody had ever heard of, 
which turned out that they were sort of setting the rates for 
all insurance companies all across the country but people 
didn't want to admit it. When they got taken to court in the 
City of New York, I believe, maybe state of New York, and they 
ended up paying, I think, $350 million, that, I think, SmartBuy 
might understand.
    So it's a question of human nature evolving into sufficient 
sophistication. Or is it a question of us jumping on the 
perpetrators with a clear track record of who they might be at 
the proper time? And actually, you don't even have to answer 
that, because I'm 5 minutes over my time. So Senator Thune will 
carry on.
    Senator Thune. You're just getting rolling, Mr. Chairman.
    The Chairman. I know, I was.
    Senator Thune. Thank you.
    Captain Alexander, my understanding is that the Armed 
Forces Disciplinary Control Board identifies to base commanders 
businesses that may be especially harmful to servicemembers and 
places such businesses off-limits to servicemembers. Can you 
elaborate how you work with the board to identify businesses 
that may be placed on the off-limits list?
    Captain Alexander. Yes, sir.
    We have a consumer complaint form that we have sent out to 
all the commands in the area, so whether it's a command 
financial specialist at the command advising the servicemember 
on an issue that they see, are they coming to our office? The 
first step is to document what the problem is by putting it on 
that form. The front part of that form is also the notification 
to the Armed Forces Disciplinary Control Board that there is a 
problem. The precepts of the Board say we can't take on 
individual issues, so we can't take on this sailor's case, but 
if we get three or four or a very egregious act that we think 
could be impacting multiple servicemembers, then the board will 
send an invitation for that party to come forth and explain 
what the process is. This is one of the reasons why we've been 
very successful in addressing some of the car dealers in our 
area is that when you put one car dealer off-limits, their 
sales may drop from 40 or 60 cars a month to 12 and that 
impacts their bottom line and then they begin to think about 
restructuring the way they do their processes. So we work with 
the Board carefully in doing that, in documenting the cases and 
then in bringing them to the Board for action against 
individual businesses that are causing problems, sir.
    Senator Thune. Ms. Petraeus, thank you, by the way for your 
personal visits. You mentioned in your testimony that during 
your visits to different bases, issues related to high-cost 
lending come up at nearly every stop. And I'm wondering if the 
CFPB has collected or released any statistics on the number of 
servicemembers affected by these issues, and what does the data 
suggest or reflect in terms of trends in the past few years? Is 
this problem getting much worse? Has it stayed the same?
    Ms. Petraeus. We are a young agency, so our data is --what 
we've found out from our complaints that have been filed with 
us by servicemembers, we've gotten, at this point, just over 
11,000 complaints from servicemembers and mortgages top the 
list, challenges with mortgages. But we only started taking 
complaints about debt collection several months ago and that's 
already trending upwards so fast, it's the number two complaint 
item that we're getting. So I think there's definitely a sign 
there that that is something that impacts servicemembers quite 
a bit.
    And in fact, it's rather timely because we just did put out 
an advance notice of proposal we're making on debt collection 
and we are soliciting comments from the public through the 10th 
of February, so we certainly are very interested in having a 
military component to the comments that we receive. Because 
anecdotally and from what we've gotten in our military 
complaints, it's pretty obvious that debt collection is one of 
the biggest challenges that servicemembers seem to be impacted 
    Senator Thune. And do you see, from base to base or state 
to state, differences? And what do you attribute those to if 
you do?
    Ms. Petraeus. It would be hard for me to expound on that 
right now. I think, certainly, I see differences between some 
of the issues that impact, for example, the National Guard, the 
Reserves, versus active duty. They're definitely more impacted 
by employment issues and GI Bill issues; heavily marketed to by 
for-profit colleges. When they go to use their GI Bill, that's 
something that we've heard a lot about from the Guard.
    So, state by state, we could certainly take a look at the 
complaints and get back to you on that, but I haven't seen any, 
you know, any dramatic differences from one state to the next.
    Senator Thune. OK. Do you work with the Bureau's Office of 
Consumer Response to encourage servicemembers to file 
complaints regarding their concerns and then to help ensure the 
resolution of those complaints from servicemembers?
    Ms. Petraeus. Yes, very much so. I do have two folks within 
my office working on consumer response issues. One of them 
pretty much does a full-time job working with the Office of 
Consumer Response. She is a recent Army JAG, so she's a really 
excellent person to be doing this because she has a real 
knowledge of the laws that affect the military and can be value 
added, both in their review of complaints that come through but 
also in training up our Consumer Response folks on some of the 
military-specific issues that may come in with complaints.
    Senator Thune. And does the CFPB share the information 
about these complaints with military officials?
    Ms. Petraeus. If there's a Servicemembers Civil Relief Act 
component, especially since that's something we don't enforce, 
we do share that with DOD and the Department of Justice, Civil 
Rights Division. We have a real three-way conversation with 
them. In fact, one of the first things we did was sign a joint 
statement of principles with those two entities so we would be 
sure that there were no military complaints that would fall 
through the cracks just because it wasn't an area that we 
specifically covered.
    Senator Thune. OK.
    And I would just direct this to the panel in its entirety 
and whoever would like to answer, but not all short-term loans 
are, by definition, predatory. So if a servicemember is looking 
for a short-term loan, what types of things should they be on 
the lookout for?
    Mr. Cooper. Ranking Member Thune, I would suggest a couple 
of things.
    Obviously, in a transactional situation where there is 
high-pressure sales tactics, that ought to be a red flag. If 
it's a you have to sign now or you'll lose the deal, then 
that's clearly a red flag. And I would encourage a 
servicemember who is presented with any sort of contract or 
finance agreement that in any way is confusing to ask for the 
opportunity to take it back to the base and have someone look 
at it. And if the merchant's unwilling to do that, I would say 
that's a very big red flag.
    Senator Thune. All right.
    Anyone else want to add anything else to that?
    Ms. Petraeus. I'd like to just weigh in.
    The first thing that they sometimes forget to consider is 
that every branch of the service has a Military Relief Society 
that makes emergency loans and grants at zero percent interest. 
So if it's a true emergency, that should be the first place 
they're looking. And sadly, sometimes it's not. In fact, when I 
was up at Fort Drum, we had a young soldier who just got up at 
the Town Hall to tell his story, which was that he needed a 
loan, it was a family emergency, he didn't even think to go on-
post; he went on the Internet. And he got a horribly expensive 
loan and ended up paying more in fees than the loan was 
actually for and he could've gotten a zero-interest loan had he 
known to go on-post. So that's the first place I would like 
them to look if it's a true emergency. Obviously, possibly 
their on-base bank or credit union would be another source of a 
loan at reasonable rates.
    But definitely what I don't want them to be doing is 
trolling the Internet and looking for one of those tens of 
thousands or even millions of offers that offer military 
    Senator Thune. Right.
    Ms. Petraeus.--and are very bad deals.
    Senator Thune. OK. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Thune.
    Senator Ayotte?


    Senator Ayotte. Thank you, Mr. Chairman. I want to thank 
you and the Ranking Member for this important hearing and all 
of you for being here.
    And it's good to see you, General Cooper. We had the 
opportunity to serve together when I was New Hampshire AG. I 
wanted to ask you as an Attorney General: This issue came to my 
attention as well. In fact, New Hampshire made the decision, 
while I was Attorney General, to cap the interest rates at 36 
percent because there were examples of payday-type loans where 
people were paying as high as 500 percent. And so, I was very 
interested, as I looked at your testimony, about the case that 
you brought against Rome Finance and Britlee. Did you do that 
under the Consumer Protection Act as an unfair and deceptive 
practice? That is a tool that many attorneys general have and I 
wondered if you felt that was a sufficient tool? Many of the 
attorneys general were using this tool to try to go after 
businesses within their jurisdiction that were using these 
predatory lending practices.
    Mr. Cooper. Yes, Senator Ayotte, very good to see you again 
also, and enjoyed very much serving with you as fellow state 
    And yes, to answer your question, our lawsuit was brought 
under our Tennessee Consumer Protection Act, saying that these 
practices were false and misleading.
    Senator Ayotte. And how is that? Has that been a good tool 
for AGs? Is it a sufficient enough tool? And I guess I'll pose, 
as well, to others on the panel here. The way I see this right 
now, we've got the authority of the state AGs under their 
Consumer Protection Act; you've got action that the FTC could 
take; and then we now have the CFPB working on this issue--Ms. 
Petraeus, thank you for everything that you're doing on this.
    And so, how do the three fit together to make sure that 
we're maximizing our coordination? I know all of you were 
talking about education and I fully agree. Part of what we do 
on our Consumer Protection Act is just make examples of people 
so that other people can understand not to fall for a scam or 
not to be put in a situation that is bad, particularly for our 
men and women in uniform. So I just wanted to get all of your 
thoughts. Do you think the Consumer Protection Act is a good 
vehicle at the state level? And then, what do you think about 
the three agencies working together to make sure that we're 
doing the right thing, and we're getting the message out?
    Mr. Cooper. Yes, I suspect that the effectiveness of the 
State Consumer Protection Acts will vary from state to state. 
We find ours to be a very effective tool, both in terms of, you 
know, what it prohibits at the state level. And we also take 
the position that, you know, where action also violates a 
comparable Federal statute, the MLA or something else, that 
that would also be a violation of the state law because it is 
in violation of the Federal law. And that, I guess, leads----
    Senator Ayotte. Can you also get treble damages and some--
    Mr. Cooper. Yes, we also get treble damages where we have 
the ability to seek injunctive relief, to seek restitution. So 
we have a variety of tools in that tool bag. But we do work 
closely with the FTC, with the CFPB, whenever we can partner 
with a Federal partner particularly on, as we encounter more 
and more of these companies that are national in scope. And 
where, you know, we need to go all over the Nation to pursue 
it, that it's so much easier and so much more effective when we 
can do that with the FTC or do that with the CFPB or our other 
Federal agencies.
    Senator Ayotte. Ms. Petraeus, Mr. Harwood, how do you see 
us all interacting together on such an important issue?
    Ms. Petraeus. Well, I think you're absolutely right; we 
should be working in harness as best we can. Again, I certainly 
value what the AGs do at the state level. And sometimes state 
laws may go farther than the Federal law and they can be very 
effective and that's part of why I attempt to horn in on their 
conferences whenever I can and talk to them and remind them 
what we do. We also have certainly partnered with the FTC. The 
FTC and the CFPB did a joint sweep of some really egregious 
mortgage advertisements that resulted in a number of warning 
letters and also some potential future enforcement actions. So 
I think we can be very effective together and also in 
combination with you. And there are gaps in the law where 
things aren't covered, either at the state or the Federal 
    Mr. Harwood. I mean, I would just second or third, I guess, 
what the others have said.
    My experience has been that on all levels, cooperation has 
been very strong. In terms of information sharing, the FTC's 
consumer complaint database is shared widely with state 
attorneys general, with the CFPB. Data that goes in from us is 
available to CFPB, it's available to state attorneys general; 
indeed, it's available to military law enforcement.
    Second, with regard to enforcement efforts, there's a long 
history of joint enforcement efforts. As I was sitting here, I 
was reminded of some work that I worked on in 2009 that 
involved deceptive charity scams, and some of which were 
related to raising money for military causes. That sweep, which 
we announced in mid-2009, involved multiple state efforts. It 
was a great example of where states had more authority than we 
did in some situations because they have a better--they have 
stronger charities laws, so they targeted the scam charities 
and we targeted some of the fundraisers that were engaged in 
    Senator Ayotte. I'm glad you raised that point. I know my 
time is up, but you're absolutely right because, for example, 
when I served as Attorney General, I had a consumer protection 
bureau, I had a charitable bureau as well that had authority to 
regulate charities. So the two working together can give 
greater authority sometimes under state law and I'm glad to 
hear that we're looking to see which agency is the best to deal 
with to make sure that we hold these people accountable and 
then get the message out to let people know that these bad 
actors are out there and they shouldn't go down that road. 
Thank you.
    The Chairman. Thank you, Senator Ayotte.
    We have been joined by Senator Markey.


    Senator Markey. Thank you, Mr. Chairman, very much. And 
thank you for holding this very important hearing, you know, 
because people who serve us in the military, they're heroes, 
but heroes need help, you know? They make us secure but they 
actually live with insecurity in terms of their own personal 
financial circumstances.
    And so we have a responsibility to put in place the kinds 
of programs that help to ensure that that security is there and 
we have to make sure that there's a safety net ready so that 
they don't have to run to predatory payday lenders. And I think 
that's something that I'd like to talk a little bit about here 
today because members of our military have to resort to 
financing from these predatory lenders all too often.
    We know that military servicemembers are three times more 
likely than civilians to use predatory payday loans that charge 
exorbitant rates that's three times what civilians use. Twenty-
seven percent of military families carry $10,000 or more in 
credit card debt compared to only 16 percent for civilian 
families. Ten percent of military families carry more than 
$20,000 in debt compared to only seven percent of civilian 
families. And more than half of military servicemembers are not 
saving for the future and have trouble paying their monthly 
    And that's why, this morning, I reintroduced my Military 
Savings Act, which is legislation I previously introduced in 
the House of Representatives. And the bill would promote 
savings rates among military servicemembers and decrease their 
need to turn to predatory payday lenders in times of financial 
crisis. The bill establishes a pilot program in which financial 
institutions operating on military bases will offer innovative 
financial products to help troops and their families improve 
their financial situations. And they can include a new kind of 
savings account that automatically deposits a portion of their 
additional income that the servicemember earns while on 
deployment into a savings account rather than going entirely 
into a checking account. And that bill has now been endorsed by 
the Consumer Federation of America.
    So, Ms. Petraeus, I'd just like to ask you: What is your 
feeling about a program like that, that could be put in place 
in order to give additional protections for servicemembers?
    Ms. Petraeus. Well, Senator, thank you for your concern for 
military and their families and the financial challenges that 
they do face.
    I think anything that promotes innovative products that 
will help them save is a good thing. And we did hold a 
Financial Fitness Forum about 6 months after I started at the 
CFPB to get some best practices from some of the financial 
institutions that serve the military. And I was certainly very 
interested in the ones that combined both, you know, a fair 
deal with a potential savings component. Because the truth is, 
if you need to borrow it today and you're not saving anything 
for the next time, you're going to be out there borrowing it 
again and we need to work on anything we can to help break that 
cycle of repeated borrowing and never setting anything aside.
    So I look forward to seeing that, the results of a pilot 
like this.
    Senator Markey. Thank you.
    Mr. Harwood, your views on a pilot project like----
    Mr. Harwood. I find the idea to be very intriguing. The 
idea that you would, you know, be with, through legislation, 
encourage a broader range of financial products and services on 
these installations. Obviously, the FTC is both a consumer 
protection and a trust agency. On the trust side, we love 
competition, we love to see more options available for 
consumers, we love to see, for example, our choices. This would 
do that.
    Senator Markey. Thank you.
    Mr. Harwood. Yes.
    Senator Markey. Any other comments from other of the 
panelists, in terms of creating that kind of a program for 
servicemembers? Ms. Nelson?
    Ms. Nelson. I think, obviously, a variety of products is a 
fabulous idea and I think that's a really great step, Senator. 
And I think that transparency of these products, too, which 
seems to be lacking in a lot of financial products soldiers are 
looking at, is going to be a key component to the success of 
something like that so that the soldiers can easily compare, 
make wise consumer decisions, and not get themselves in 
problems down the road.
    So I think that is an excellent idea in terms of creating 
the diversity.
    Senator Markey. Thank you.
    Anyone else? Yes, Mr. Cooper.
    Mr. Cooper. Yes, Senator Markey, no, I think I would just 
add my voice to these that anything we can do, as we've 
discussed before in terms of promoting financial literacy and 
education among the troop members will be of great benefit to 
them and to morale and to the effectiveness of the troops.
    So I think this is a wonderful idea.
    Senator Markey. Good. Thank you so much.
    So, I thank you, Mr. Chairman. I think this is a very 
important subject area. We know that this is a real problem out 
there. And we know that three million people have served in the 
Iraq wars and Afghanistan, which is unbelievable, the number is 
so huge. And we know what a high percentage of them are coming 
back with medical issues. I put some 20 percent of them with 
traumatic brain injury. And we just have a responsibility in 
the totality of their financial situation to try put in place 
the kinds of programs that will help them and their families. 
And I thank you for this very important hearing.
    The Chairman. Thank you, Senator Markey.
    I'm still conflicted, OK? So you've got to help set me 
straight. Captain Alexander, I'm going to call you. You work 
with the Guard, you talk with the folks and they hear you, they 
believe you, but does it prepare them for these creeps that are 
going to descend on them? I mean, one's kind of a generalized 
warning and you hope they're listening and all the rest of it. 
But see, I'm torn between that approach and between getting all 
the attorney generals in the United States at one of their 
semi-annual--how many meetings do you have?
    Mr. Cooper. We have one every late February/early March 
here in D.C., which would be perfect for that sort of 
    The Chairman. Well, I mean, I'm just torn between the whole 
kind of--and as I say that, I'm being rude, because you're 
working so hard, all of you, to get the word out and to educate 
people and to create stress so that they'll be alert and avoid 
some of these problems. But I keep coming back to what you 
said, and that is that they're kids. You used the word 22, 23, 
24, 25; that's a kid, in terms of this kind of stuff. They 
haven't settled back out of the military and therefore into a 
neighborhood where they, in the course of being in that 
neighborhood, are warned by other people in that neighborhood 
who have been taken advantage of in certain ways so that 
they're alert, then. Because they're solid, they're rooted, 
they're at home and they're a different kind of receptor and 
might have a different kind of reaction. But you're trying to 
get to them and to reach out to them and to educate them.
    On the other side is if the attorney generals, attorneys 
general--it took me a long time to learn that--all get together 
and you just pick out, you know, there's a whole bunch of smart 
guys in some of this testimony and you know they're out there. 
And again, we ran into the same thing in health insurance. They 
took advantage of anybody in any way that they could, just like 
the moving companies. Anybody they could get, they took 
advantage of. They're out there. They're not a secret.
    Now, you indicated that you followed them around the 
country and everywhere that you went, they were there. Now, 
that's SmartBuy. That sounds like something that attorneys 
general could get together and say, you know, we've got ample 
evidence of what they've done and the troubles they've caused; 
let's clamp down on them, let's sue them, let's take them to 
court. Let's do an Ingenix on them. Because that will ring loud 
and clear. I think it will; I mean, they're maybe such small 
scumbag operations that they don't read the newspapers; they 
don't follow the Legal Times or whatever it is. They don't know 
what they're running into. But I'm just torn by it. I mean, 
each of them seems to be important and I have this need to come 
down on one side or the other and I think I'm probably wrong in 
that you have to do it both, but a lot of this is about 
outreach and education and I want to see some of it.
    And General Cooper, you're already there. Assistant 
Attorney General Nelson, you're already there. You take people 
to court. And you know who they are. And you know what their 
track records are. Or, if you don't, you have your people do 
the research to find out who these little companies or semi-big 
companies or whatever they are, what they do. And you save all 
that time in the mess hall when people are sort of at peace and 
they're listening. But they still don't know what they're going 
to run into until they run into it. And then the outreach 
didn't work. Or, if you're lucky, the outreach did work and 
they were really bright and they picked up and took notes and, 
you know, held their own.
    But I just don't think there's anything like setting 
examples when people are taken to court and get sued. And these 
companies lose. Now, in that case, the soldiers and sailors, 
men and women, don't necessarily know that, but you've cutoff 
the perpetrator. You've helped, or at least reduced, the power 
of the perpetrator and they become less aggressive. And I want 
you to help me understand those two philosophies and why it is 
that I'm sort of prejudice towards the more aggressive one but 
in so saying, I'm putting down one that absolutely has to 
happen, which is the outreach and the education. But, you know, 
I'm assuming that you know who the SmartBuys are. And you can 
go after them. Or am I wrong?
    Captain Alexander. Mr. Chairman, I think you have to have 
    If you educate the servicemember, they may still fall prey, 
but they can identify the issue, maybe after the fact. When in 
the military, we train and we train and then we do an 
engagement. For Consumer Law, there is no training except for 
life. You go out there and you live it and you pick up that 
this was bad and you don't do it again, hopefully. And so, we 
educate them. They may fall prey, but after that they can say, 
I know something was wrong here and they can call someone and 
tell them, then they can be the witnesses to bring the case 
that you want to bring.
    I think you have to make an example also and I think the 
businesses do a cost-benefit analysis. They're going to look at 
something and say, I'm making lots of money, it's not costing 
me much risk. If you can increase the risk in that business 
balance sheet, then they're going to stop doing it or maybe 
find out a less harmful way of doing it. And that's something 
we need for the enforcement side.
    The Chairman. Please. Ms. Nelson.
    Ms. Nelson. If I may, Chairman; I think there's a third 
part of the solution that maybe needs to be mentioned here and 
that is, additional tools.
    The attorneys general bringing lawsuits is something we 
enjoy doing, it's one of the exciting things when you can crack 
down on the bad guys and hopefully have some good effect. One 
of the things in this area though, sir, is that there are some 
lapses. We need some additional tools in our arsenal to be able 
to bring those types of cases and to be able to track those bad 
guys. Because frankly, all you need to become an unlicensed 
lender is a Xerox copy machine to copy off the new forms. 
They're very transient, very difficult to get a hold of. So a 
technical phrase that we use in the attorneys general field is 
    Ms. Nelson. And it's, as soon as you crack down on one of 
these operators, you've got another one. When we shut down 
SmartBuy in New York state, a competitor in Oklahoma actually 
went and elbowed SmartBuy out of the mall there with these news 
articles and set up shop in that void. I think that an 
additional tool in that equation that you're formulating, 
education, enforcement, is also some stronger tools to track 
these unlicensed lenders, to have some registries so we can 
locate them quickly so we know who we're dealing with. Because 
frankly, many times the soldiers won't know they've been ripped 
    The Chairman. All right. Well then, let's say SmartBuy is 
pushed aside, as you say, in whatever state and somebody comes 
in and takes their place. Now, is that somebody who's 
completely off your radar screen?
    Ms. Nelson. That's an excellent example, sir, and in that 
particular case, it was a business by the name of TECHsmart who 
came out as a California corporation with locations throughout 
the country, including in Georgia. My office contacted the 
Georgia Consumer Protection Bureau at the Governor's office and 
they took enforcement action against TECHsmart in Georgia; 
forced them out of Georgia. They're not in New York state at 
this point in time.
    So one of the challenges that the state attorney generals 
would find is jurisdictional. We have states that we're 
responsible for and sometimes you're able to get a national hit 
on a case. For example, in SmartBuy, Integrity Financial of 
North Carolina, was one of the unlicensed lenders. As part of a 
negotiated settlement, we were able to cancel, cut down 
contracts nationally. That doesn't always happen.
    The Chairman. How did you do that?
    Ms. Nelson. It was a bargaining. It was fine negotiating--
    The Chairman. A settlement?
    Ms. Nelson. Yes.
    The Chairman. All right. Well now, have you heard of this 
Military Financial? Have any of you heard of Military 
Financial? Because those are all the ads that I held up.
    Ms. Petraeus. I'd just like to say, if you Google the term 
``military loans,'' which I did this afternoon shortly before I 
came over here, I got 72 million responses. And many of them 
are lenders on the Internet who use military or flag-waving, 
you know, in their advertisements. And a great many of them are 
outrageously expensive but they're like those ads that you held 
up. I won't speak to that particular company, but I can tell 
you there are an incredible number of them on the Internet. And 
it's very easy to put up a website and it's very easy to change 
your name of your company. So it's a scourge; we've got to 
educate people not to use them.
    Some of them are outright scams, advanced fee scams, where 
you're told you have to put down a deposit to get the loan 
because your credit's not good. And once you send off that 
money, of course, you never hear from them again. And so we 
have to teach folks a red flag is always if somebody you don't 
know requires you to send money to them in advance for 
something they're going to do for you, that's most likely to be 
a bad thing. But these folks are very persuasive, it's what 
they do. And it's their model. And if they do get enforced 
against somewhere, they will go back to doing what they know 
how to do and they'll just do it in another state under another 
    The Chairman. Do they tend to be companies of more than 10 
or 12 people?
    Ms. Petraeus. You know, it's hard to say. I remember one 
scam that was being run out of Kentucky when I was at the 
Better Business Bureau. It was actually offering to sell 
military ribbon racks, you know, that you put your decorations 
on, on your uniform? And that was just a guy and his girlfriend 
in a broken down old house somewhere in Kentucky. But they knew 
how to set up a nice website and they made a lot of money. So 
it doesn't take much.
    Mr. Cooper. Mr. Chairman, if I could address your quandary?
    The Chairman. Please.
    Mr. Cooper. I would say that you do have to look at both 
elements of that equation: Education and enforcement. I would 
throw communication in there also. But enforcement needs to be 
diligent. It has a great deterrent effect and not only shuts 
down the particular company you're going after, it sends a 
signal to others in that business. But there are some drawbacks 
here. Keep in mind that our litigation with Rome/Britlee took 3 
years to get to judgment, longer than that to actually collect 
on the judgment. By that point, particularly with regard to 
military personnel, accomplishing restitution was a challenge 
because a number of the people who perhaps had made these 
purchases between 2005 and prior had moved on.
    Some of them were still in the military service; some of 
them were retired. It was a real challenge to track down those 
names. We found a lot of them with the help of the DOD and Fort 
Campbell and got the checks out, but it took a lot of effort. 
So, you know, it's not ideal just to focus on enforcement. You 
know, for those people, they would have been much better off 
had they kind of been educated up front and known to stay away 
from something like this.
    You know, when they say education needs to start well 
before the soldier enlists with the Army or Navy or whichever 
branch of the service. In Tennessee, we're one of the few 
states where financial literacy training is a required part of 
the high school curriculum. Frankly, that's something that I'd 
like to see a greater number of states do. You have to get that 
training early so that, you know, when they find themselves 
moving into their career, you've got a base to build on. So 
that's a point I would make on that.
    And then finally, communication. The AGs do work well 
together in all 50 states in sharing information. We have 
multi-state efforts in various consumer matters. We have 
recently created a working group specifically on military 
matters that will facilitate not just learning about what is 
going on in New York or Tennessee, but also where it crosses 
state lines to combine our efforts to go after that. And that 
is something that I think the AGs have a good track record on.
    The Chairman. And that's helpful.
    You know, there's another way that occurs to me, which is 
simply to embarrass. Frankly, that's one of the things that we 
will do from time to time on this committee because we have an 
investigations unit, we have subpoena power. And let's say 
SmartBuy, whatever 20 states they're in, et cetera, it's 
obviously not small. And you can send a U.S. Marshal to deliver 
a subpoena, right? I'm not a lawyer. So you have to say yes, 
I'm right, if I'm right.
    Mr. Cooper. Yes, we can get subpoenas served.
    The Chairman. Yes. OK. Or you get a couple of them and we 
have a hearing asking them to explain themselves. And you try 
really hard to get good press attendance. And you embarrass 
them; you take them out of the closet and then go after them. 
Now, let me ask you this question: If one were to do that, to 
say, SmartBuy, to ask them to come to a hearing, they would 
say, no. So you issue a subpoena and it's delivered. They could 
say, no? They couldn't. They could be in contempt, right?
    Mr. Cooper. Yes.
    The Chairman. See, I'm trying to find some way to get them 
to be seen as the scumbags that I think they are. And 
particularly when they, you know, have one name one day and 
another name the next day to stay ahead of whatever pursuit.
    Mr. Cooper. Mr. Chairman, I think that a case like that 
would be a great case study and an opportunity to educate not 
just about that particular operation, but generally how these 
operations work.
    The Chairman. Yes. Yes, exactly.
    I don't know; it's hard. And you all work at it so hard, 
you know? I mean, it's something to really make an American 
citizen angry that this is happening. To those young men and 
women--or anybody, for that matter--and, you know, just as 
they're serving us, they're getting shafted under our watch in 
this country. Or if some of them get shafted when they're 
overseas, right? That can happen, too. There's just got to be a 
way somehow to combine our forces.
    You can't do more outreach. I mean, you only have a certain 
number of people in education and that is going to work and 
there are going to be some smarter people that sort of fit into 
that and accept that and therefore are alerted to it and can 
stand up against it and ask the right questions and refuse to 
sign or whatever. But there's just nothing like the law. The 
power of an attorney general, I mean, in West Virginia, when I 
call it--Senator Thune, coming from an urban state, I tend to 
do that, I think he's rather tired of it, because West Virginia 
is, I think, even more rural than South Dakota. But an attorney 
general in West Virginia has vast power. And we have a lot of 
companies, including a lot of coal companies, who are evading 
this and doing that and attorney generals can do amazing 
    Well, I mean, I'm hearing what you're saying and I'm 
hearing that it has to be all of the above. So maybe we'd 
better not draw this out, but simply let me thank you for what 
you're doing. And please feel my frustration because I wasn't 
as familiar with this as I should have been until I prepared 
for this hearing. And I'm just absolutely outraged by it. And 
it would seem to be something that one could stop. The FTC, for 
heaven's sake; your organization, Ms. Petraeus; you know. 
Attorney general's office here in Washington; all the attorney 
generals gathered; plot strategies; I don't know. I don't know.
    Anyway, it's a terrible thing to do to our men and women 
who serve us. And I regret it greatly. But what I do not regret 
at all is the five of you coming here today and giving your 
time to help educate us while this brain trust behind me, we'll 
go to work and try to see what we can come up with.
    Is that OK, Mr. Harwood?
    Mr. Harwood. The FTC would be happy to work with you on 
ideas in this area and hopefully we can come up with something 
that will be effective.
    The Chairman. This has nothing to do with anything, but----
    The Chairman.--do you know that in the Dodd-Frank Bill 
their intention was to get rid of the FTC?
    Mr. Harwood. I heard that, yes.
    The Chairman. Yes, well it was.
    Mr. Harwood. I chose not to believe it, but I did hear it.
    The Chairman. No, it was. And I had several conversations 
with Chris Dodd and he didn't want to do it, but then he became 
convinced that, because they were talking about putting your 
organization at that time down on the Federal Reserve Building. 
And as I drive by it, I just see a lawn. I mean, I don't know 
what they were going to do. So you fight to keep the FTC and 
Chris Dodd finally agreed, yes, it's better to have two sets of 
eyes rather than one set of eyes. Especially if one set isn't 
up and running yet.
    But, gosh, we have to do something about this. And you are, 
and I'm just sitting here moaning that it happens at all. But 
such is life and such is our free enterprise system at the 
edges and we will persist. So this hearing is adjourned.
    [Whereupon, at 4:17 p.m., the hearing was adjourned.]
                            A P P E N D I X

                Prepared Statement of Michael S. Archer
    To the Honorable Chairman, Commerce Committee, United States Senate

    1. I am grateful for the opportunity to comment concerning the 
Military Lending Act (10 U.S.C. 987), the Servicemember Civil Relief 
Act (50 U.S.C. Appendix 501 et seq.), and other legislative matters 
concerning the financial protection of military servicemembers. In 
short, I believe that expansion of the protection afforded by the MLA 
is long overdue, and that changes to the SCRA are necessary, 
particularly concerning waiver, lease termination, and forced 
arbitration. I also suggest enhancements to consumer protection 
concerning abusive debt collection practices.
    2. My background. Before moving on to more specific and detailed 
analysis, you should be aware that I have considerable experience in 
dealing with predatory lenders and others on a mission to separate 
servicemembers from their paycheck. I am a retired judge advocate, 
having served in the U.S. Marine Corps for twenty years, including four 
assignments as officer in charge of legal assistance: in Yuma, Arizona; 
Camp Lejeune, North Carolina, and twice in Okinawa, Japan. Under 10 
U.S.C. 1044 and regulations promulgated by the Judge Advocate General 
of the Navy, the legal assistance section is directed to assist 
servicemembers and their dependents with civil legal matters and to 
conduct a consumer education and preventative law program. About two 
years after my military retirement, the billet of OIC Legal Assistance 
became a civilian position at Camp Lejeune, following a nationwide 
trend among all the armed forces. I was chosen to serve in that 
position in October 2004 and was then chosen to serve as the Regional 
Director of Legal Assistance for Marine Corps Installations East. I 
have been a member of the North Carolina State Bar standing committee 
on Legal Assistance for Military Personnel (NC LAMP) since 1995 and in 
2006 I was honored to receive the State Bar's Distinguished Service 
Award for legal assistance to military personnel. In 2012, I received 
the Distinguished Service Award for Legal Assistance from the American 
Bar Association Committee on Legal Assistance for Military Personnel 
    3. Disclaimer. My experiences as a Marine Officer, Judge Advocate, 
and Department of Defense civil servant over the past thirty years have 
been critical in the formation of my views concerning predatory lending 
and other consumer issues. Nonetheless, the views expressed herein are 
my own as a private citizen and do not necessarily represent the views 
of the Department of Defense, the Marine Corps or any of their 
respective instrumentalities.
The Military Lending Act
    4. The Military Lending Act, Overview

    In October 2006, Congress enacted the Military Lending Act (MLA) to 
ameliorate serious and persistent financial harm incurred by troops, 
particularly junior troops, resulting from unfair, deceptive, or 
abusive lending products. The MLA authorized the Secretary of Defense, 
within limitations, to regulate certain types of lending. The SECDEF 
exercised this authority very sparingly, covering only car title loans, 
refund anticipation loans, and payday loans, and even excluding some of 
them through narrowly drafted definitions (32 CFR 232). The senior 
attorney of each of the armed forces objected to this minimalist 
approach, recommending far more robust protections. In a joint letter 
dated August 29, 2007, the service JAGs recommended coverage of 
installment loans and rent-to-own transactions, as do I. In addition, 
with perfect 20/20 hindsight, I also recommend closing loopholes in 
existing protections that have been widely exploited by lenders to the 
detriment of our troops.
    5. The Military Lending Act and/or its implementing regulation 
should include payday loans, refund anticipation loans, car title 
loans, rent-to-own transactions, and installment loans regardless of 
whether the extension of credit is open ended or closed ended.

    a. The current law only addresses a subset of car title loans, 
refund anticipation loans, and payday loans. Such loans are only 
covered by the MLA if, in addition to other limitations concerning loan 
duration, they are considered closed ended credit. It seems to me that 
payday, car title and refund anticipation loans in excess of 36 
percent, often in triple digit interest range, are inherently harmful 
and should be regulated by the MLA regardless of whether they are open 
or closed ended credit.
    b. Over the past several years, I have seen schemes whereby lenders 
extend closed ended credit, but pretend that the transaction is open 
ended, thereby avoiding Truth in Lending Act (TILA) requirements to 
disclose the annual percentage rate of interest, total finance charges, 
and total expense after all the payments have been made. By the same 
expedient of simply labeling closed ended transactions as open ended, 
lenders can also evade the requirements of the MLA regulation to 
disclose to the borrower, orally and in writing (a) the annual 
percentage rate of interest, (b) any information required to be 
disclosed under TILA, and (c) a clear description of the payment 
obligations of the borrower. This practice of disguising closed ended 
transactions is particularly prone to involve service member credit 
    For example:

   Sellers of consumer electronics, targeting military 
        servicemembers, finance the sale of a single transaction, fail 
        to provide the consumer with any opportunity whatsoever for 
        additional credit, and yet couch their contracts in terms of an 
        open ended transaction. In some cases, young troops receive a 
        letter from the lender after the transaction, revoking the 
        supposed credit that they really never had in the first place.

   Sellers of a water filtration system solicit sales door to 
        door in military towns, telling troops that the system costs a 
        certain price, and that it can be paid off in three years. 
        There is no opportunity whatsoever to make additional purchases 
        with this so called open ended credit. The contracts for this 
        discrete sale nonetheless state that they are for revolving 
        (open ended) credit, give only a monthly percentage, and fail 
        to provide the total interest, number of payments, or total 
        cost, as would be required by TILA for close ended credit 

   A Virginia car dealer charges 300 percent interest in auto 
        purchase loans. The loan is structured, nominally, as open 
        ended. Thus, even if the MLA were amended to include auto 
        purchase loans, this particular loan would be excluded from 
        coverage under current definitions because it is ``open 

   Some banks have apparently decided to make payday loans to 
        their depositors. In this scheme, after the designated time 
        period, generally around ten days, the bank repays itself the 
        principal and interest from the depositor's account. If the 
        depositor does not have sufficient funds to make the required 
        payment, the depositor is assessed a penalty as well. The 
        customer can chose to borrow under such plans with the click of 
        a button and with no disclosure whatsoever of rate or amount of 
        interest. These transactions are generally immune from state 
        regulation because the bank is either an out of state of 
        national bank. These transactions are claimed to be open ended 
        and thereby immune from the current MLA regulation.

    c. Perhaps most importantly, we should not again underestimate the 
willingness or capacity of lenders to devise additional schemes to 
exclude more and more loans under existing regulations simply by 
calling transactions open-ended or by structural subterfuges designed 
to disguise essentially closed ended transactions as open ended.
    6. In crafting the next generation of lending restrictions under 
the MLA, we should not lose sight of payday lenders' demonstrated 
capacity for creative evasion.

    If history has taught us anything, it is that we can be certain 
that if there is any ambiguity, lack of enforcement, loophole, or 
wiggle room of any kind, payday lenders will take advantage of it to 
continue lending at interest rates that begin at around 390 percent. 
The sordid history of payday lending in North Carolina is a 
constructive lesson in lender deceit and evasion, summarized below.

   Prior to 1997, North Carolina had no law specifically 
        addressing payday loans. In practice, payday lenders made two 
        week loans at about 390 percent interest, marketing heavy to 
        servicemembers and often located near military installations. 
        An opinion of the North Carolina Attorney General of January 
        24, 1992 declared that payday loans were indeed loans, subject 
        to the requirements of the North Carolina Consumer Finance Act 
        which, among other things, prohibits the outrageous sort of 
        interest rate characteristic of payday loans. Lenders ignored 
        this opinion and continued to extend predatory payday loans 

   Payday lenders used various ruses to pretend that their 
        transactions were not loans. Some made the absurd assertion 
        that they were simply cashing checks and not making loans at 
        all, that all of their customers just so happened to write 
        checks in the same denominations; e.g., multiples of one 
        hundred, and that in each case the 15-20 percent taken out was 
        not a loan at all but rather a ``fee'' for this wonderful check 
        cashing service supposedly paid willingly by idiots who chose 
        to pay this exorbitant fee rather than use the free check 
        cashing services on base or any of the convenient ATMs on or 
        off base.

   Some payday lenders heavily advertised the delayed deposit 
        feature, had business names suggesting that they provided 
        loans, verbally told customers that they were lending money, 
        required customers to provide the name and phone number of 
        their commanding officers, and then extended a loan, but 
        required all borrowers to sign a false statement indicating 
        that they had sufficient funds in their account to cover the 
        check . . . as if anyone in their right mind would pay 15 
        percent of the face value of a check just to cash it.

   Other lenders used a somewhat more elaborate ruse. They 
        would sell telephone calling cards or some other trinkets to 
        borrowers who wanted to cash checks at inflated rates. For 
        example, a client would provide a $100 check and in exchange 
        receive a phone card worth $15 (sold for $30), $70 cash, and a 
        promise that the check would not be presented for payment until 
        the next military payday (which occur every two weeks). These 
        lenders would then claim that they didn't make any loans; they 
        merely sold telephone calling cards. The payday lenders would 
        have us believe that the fact that the card was overpriced in 
        the amount of 15 percent of the face amount of the check, that 
        every purchaser of phone cards voluntarily chose to write a 
        check over the amount of the purchase, and that the phone card 
        cost was always the same percentage of the check amount in 
        every case.

   In 1997, North Carolina began an experiment concerning 
        payday lending, authorizing the practice, but limiting the loan 
        amount to a maximum of $300 and the interest rate to 15 percent 
        of the face value of the loan. The NC Commissioner of Banks was 
        directed to report on payday lending. In the absence of further 
        legislative approval, payday lending was set to expire July 31, 
        2001. The February 22, 2001 Banking Commission report to the 
        General Assembly reported 8,911 violations of various aspects 
        of the payday lending law by licensees and found ten unlicensed 
        payday lenders. Of course, consumers were harmed, as they 
        always are, by loans at excessive interest rates, regardless of 
        whether the practice is lawful.

   After the North Carolina law authorizing payday lending was 
        allowed to sunset, payday lending continued in the state 
        practically unabated. In addition to reverting to the pre-
        legislation schemes, payday lenders entered into dubious and 
        tenuous relationships with out of state banks as a means of 
        evading state regulation. It took several actions (and several 
        years) by the North Carolina Attorney General and the North 
        Carolina Commissioner of Banks to thwart these schemes.

   In recent years, payday lenders have been knocking on the 
        statehouse doors again, pushing for legislation that would 
        authorize payday lending. In an attempt to placate military 
        interests, some of these proposals suggested exclusion of 
        payday loans to servicemembers and their families. The North 
        Carolina Commanders' Council, comprised of every installation 
        commander in the state, unanimously rejected this approach. In 
        a letter dated March 11, 2013, the NCCC wrote that ``The 
        Council does not opposed S89 [NC Senate bill authorizing payday 
        lending] merely because of its inconsistency with Federal law. 
        We believe that any law authorizing payday lending in this 
        state will make the extension of such credit to our troops, 
        their dependents, and the greater military community more 
        likely. Further, we do not underestimate the established 
        ingenuity of payday lenders to exploit loopholes in state and 
        Federal laws.''

    7. The MLA and its implementing regulation should apply to rent-to-
own (RTO) purchases.

    In a joint letter to the Secretary of Defense, the Judge Advocates 
General of every branch of the armed forces (``Implementation of 
Section 670 of the FY 2007 NDAA,'' Memorandum for Under Secretary of 
Defense for Personnel and Readiness, dated 29 August 2007) recommended 
that the MLA implementing regulation be reviewed to ``implement all of 
the financial protections for servicemembers and their dependents 
contemplated by [the MLA].'' These senior military legal advisors 
specifically recommended that the regulations include RTO transactions 
and installment loans, products identified by the Department of Defense 
to be particularly problematic (along with payday loans, car title 
loans, and refund anticipation loans). The American Bar Association 
voiced similar concerns. (ABA Govt Affairs Office Acting Director 
Denise A Cardmon ltr June 11, 2007)
    By and large, RTO presents lenders with an opportunity to charge 
triple digit interest, for the purchase of used property, all without 
disclosing any aspect of interest charged, including rates and without 
any equity established by the consumer's periodic payments. RTO 
customers rent furniture, consumer electronics, or other property and, 
after a designated number of months, may purchase the property by 
paying an additional fee. When all of the costs are added up, the 
consumer winds up paying far more than if the purchase had been made 
outright, and even more than if the purchase had been made with a 
credit card or a high interest installment loan. If evaluated as 
interest, these extra costs amount to extraordinarily high interest, 
far in excess of that authorized by the MLA. The Maryland Attorney 
General provided the following examples: If a $400 washing machine were 
purchased on an 18 month installment plan at the maximum authorized 
interest in that state (24 percent APR) the total cost to the consumer 
would be $480. The same transaction made under a typical 18 month RTO 
plan, would cost over a thousand dollars more, and it might even be for 
a used machine! In another example, a Maryland consumer purchased a 
used computer with a cash price of $649. But by making the purchase 
though an RTO contract calling for 52 weekly payments, the price 
skyrocketed to $1,364. ``Rent to Own: Worth the Convenience?'' Maryland 
Attorney General on line January/February 2003, last accessed July 22 
2013. http://www.oag.state.md.us/consumer/edge109.htm
    Not only is the consumer charged extraordinary interest, without 
any interest disclosures, but the property may be repossessed and sold. 
Furthermore, unlike with straight financing of the sale, the RTO 
repossession and sale will proceed without any reimbursement, credit, 
or consideration at all of the consumer's monthly ``rent'' payments, 
which do not establish any owner equity in the property.
    Make no mistake about it, most RTO transactions are loans. Between 
December 1998 and February 1999, the Federal Trade Commission surveyed 
500 RTO customers and found that 70 percent ultimately purchased the 
property. (``Survey of Rent-to-Own Customers: Federal Trade Commission 
Bureau of Economics Staff Report,'' James M. Lacko, Signe Mary 
McKernan, and Manoj Hastak April 2000)
    The MLA exempts from its coverage, ``a loan procured in the course 
of purchasing a car or other personal property when that loan is 
offered for the express purpose of financing the purchase and is 
secured by the car or personal property procured.'' RTO vendors may 
attempt to claim that they fit within this exemption. However, Congress 
never intended to exempt RTO. As the Service JAGs noted, the MLA was 
based on the August 9, 2006 Department of Defense Report to Congress, 
which identified five predatory practices, including RTO. Furthermore, 
the RTO is significantly different in character than exempted purchase 
money security agreement. It is not a loan for the ``express purpose'' 
of financing a purchase; rather, it has the additional feature of 
rental payments. The initial payments are rent and not installment 
payments; they do not establish any consumer equity, and there is no 
obligation to make a purchase. How convenient for RTO vendors to insist 
that the RTO transaction is not a loan for the purpose of TILA (thus 
avoiding its mandatory disclosures), but that RTO is a loan (with the 
property as security) for the purposes of the MLA. In any event, the 
MLA is hardly a model of clarity concerning its treatment of RTO 
transactions and should be amended to make it clear that RTO 
transactions are included within its coverage.
    8. RTO stores should be specifically prohibited from renting or 
selling computers or any other consumer electronics that spy on the 

    Basic fairness and common sense dictate that when you rent or 
purchase a computer, the seller should not be using the computer to 
photograph consumers, obtain personal information, and log the 
consumer's keystrokes, all without consumer knowledge or consent. Yet 
this is precisely what seven RTO companies did, at least until they 
were caught and sanctioned by the Federal Trade Commission. ``FTC 
Approves Final Order Settling Charges Against Software and Rent to Own 
Companies Accused of Computer Spying,'' FTC News Release April 15, 2013 
    Inclusion of such a prohibition in the MLA implementing regulation, 
with serious civil and criminal penalties for the violation thereof, 
will stand as clear and unambiguous warning and deterrent to RTO stores 
(which apparently need such motivation) and will provide servicemembers 
with an additional and more efficient remedy then currently exist. 
Furthermore, not only do servicemembers deserve such heightened 
protection, but national security demands it. The opportunity for RTO 
stores and their partners to gather intelligence data and to blackmail 
troops via computer spying should not be ignored.
    9. The MLA should apply to installment loans.

    As noted by the service JAGs, the August 2006 Department of Defense 
Report to Congress military identified installment loans as a problem 
transaction. Both the JAGs and the ABA expressed concern about its 
exclusion from the original implementation regulation.
    Installment lenders market high cost loans to troops. For example:

   A car title lender charges 400 percent interest, but has a 
        32 month payback period, thus evading the MLA because the 
        duration of the loan exceeds the definition of a car title 
        loan. It is therefor an installment loan, unregulated by the 

   A South Carolina lender whose name indicates that it is 
        specifically targeting troops, charges 80 percent interest, 
        requires payment via military allotment (and authorization for 
        bank draft if the allotment fails for any reason), and requires 
        ``consent'' to contact the borrowers command Its contracts 
        claim that Delaware law applies. This installment loan is not 
        addressed by the MLA.

   Another lender, operating on-line, charges 359 percent 
        interest and claims that the law of the Chippewa Tribe of 
        Montana applies. These loans are installment loans exempt from 
        MLA coverage.

   Another lender whose name indicates that it is specifically 
        marketing to troops, charges 80 percent interest and claims 
        that the law of Nevada (no state usury statute) applies. The 
        lender requires payment via payroll allotment, with bank draft 
        authority if the allotment fails. The loan contract also 
        purports to waive the protections of the SCRA. The payback 
        period is 12 months; ergo, it is an installment loan exempt 
        from MLA coverage.

   A lender outside Ft Hood, Texas charges over 580 percent 
        APR, requires payment every two weeks, but has a loan period in 
        excess of 90 days and is therefore considered an installment 
        loan, outside the ambit of MLA coverage.

    In addition to evasion of the MLA by virtue of being installment 
loans, many lenders use choice of law and venue provisions in their 
contracts purporting to invoke the law of an anti-consumer state rather 
than the state in which the borrower, the lender, and the transaction 
are actually located. The difficulty of enforcing state law is made 
even more complicated if the loan in made on line. Thus, the law of the 
least consumer friendly states may be exported to the rest of the 
country. Coverage of installment loans by the MLA can help stop this 
race to the bottom.
    Installment loan products are often sold in conjunction with 
additional high cost, low value products such as collateral insurance, 
credit life insurance, and disability insurance. The typical sale 
involves the lender's agent preparing a contract including all of 
products, which are also financed at the high contract APR. As a 
practical matter, in the face of these tactics, lender salesmanship, 
and consumer desperation, it takes a savvy junior troop to opt out of 
these add--ons. When the purchase of these products is folded into the 
cost of the loan, their cost should be included in calculating the 
military annual percentage rate (MAPR) of interest.
    If purchase of these or any other add on products is not required 
as a condition of obtaining credit, the consumer should be advised by 
clear and conspicuous disclosures, separate from the loan contract, 
that purchase of the add on is not required to obtain credit or to 
obtain credit at the contract rate.
    In any event, lenders should be prohibited from selling disability 
insurance to troops in connection with installment loans, particularly 
short term loans (two years or less). The purpose of disability 
insurance is to secure monthly payments in the event that the borrower 
is injured so badly that he cannot work and therefore loses employment 
income. This rationale makes no sense in the context of a military 
borrower, who will continue to be paid despite injury, and if 
discharged medically from the armed forces (generally a very lengthy 
process, during which he will receive full pay) he will likely be 
entitled to either a severance pay or a monthly disability payment from 
the Department of Veteran's Affairs.
    9. Debt Collection: Covered commercial creditors should be 
prohibited from contacting commanders and other third parties absent 
written permission by the debtor given after default.

    One of the reasons that troops are targeted for predatory loans is 
the perception, and the reality, that they can be manipulated into 
compliance with unreasonable demands by threats to contact their 
military superiors. The Federal Fair Debt Collection Practices Act (15 
U.S.C. 1601 et seq.) already prohibits debt collectors from providing 
debt information to third parties, such as employers. North Carolina 
law contains similar prohibitions against debt collection agencies; 
i.e., those in the business of collecting debts for others (NC Gen Stat 
58-7-1 through 130), but wisely goes further and applies this principal 
to commercial creditors collecting their own debts (NC Gen Stat 75-50 
through 56). NC commercial creditors are prohibited from providing debt 
information to third parties absent consumer consent given in writing 
after default. Such purported consent to contact commanders, provided 
in credit applications and other documents prior to default, is void 
and of no effect. Debt collection threats and harassment is harmful to 
troops whether perpetrated by debt collectors or creditors, and both be 
covered by the MLA.
    Service members are vulnerable to such threats because such contact 
can sour the critical relationship between troop and superior, and 
troops may perceive, in some cases rightly so, that creditor 
complaints, even if inaccurate, may adversely affect subjective 
performance and conduct ratings, assignment, reenlistment, and 
promotion decisions, and may even result in disciplinary action. The 
MLA should, like NC law, prohibit such debt collection contact with 
third parties, thereby extending the protection to all states. In 
addition, such fine tuning of the MLA can help prevent lenders from 
evading state debt collection law by the artifice of contractually 
citing another state's law as governing.
    Lenders in military towns often require loan applicants to execute 
written consent to provide debt collection information to military 
authorities. Not only should such contact be prohibited, but the 
practice of even asking for pre-default consent should be clearly 
prohibited as well. Such written consent, even if void and ineffective 
as a matter of law, is a veiled threat, giving the false impression 
that such command contact is authorized. These bogus consent provisions 
are nearly ubiquitous in military lending contracts, even in states 
that declare such pre default consent void.
    10. The MLA should prohibit unreasonable choice of venue 

    At least one creditor selling products near Camp Lejeune, North 
Carolina and other military installations, heavily markets to service 
members has a choice of venue provision in its standard contract 
requiring any lawsuit by the creditor or the borrower must be initiated 
in Virginia, notwithstanding that the parties and the transaction are 
all in North Carolina. This business sells various products in which it 
takes a security interest, and is therefore exempt from the MLA. Such a 
contractual provision likely does not actually deprive North Carolina 
jurisdiction, which is governed by its long arm statute (NC Gen Stat 1-
75.4). However, such contractual language provides an additional hurdle 
for military litigants to overcome. More importantly, such a provision 
serves as a deterrent to unsophisticated troops (and for that matter, 
unsophisticated attorneys) from bringing meritorious cases before the 
local courts. With litigation costs and rigorous, dangerous, and time 
consuming military duties already serving as barriers to the courtroom, 
lenders should be prohibited from further sealing the door on 
litigation tighter with contracts that purport to require that cases be 
initiated in some state distant from the borrower. Nor should creditors 
be allowed to initiate litigation against military consumers in 
distant, inconvenient states where it is more difficult to respond.
    11. The MLA should cover payday, RTO, refund anticipation loans, 
installment loans, and vehicle title loans regardless of the duration 
of the loan.

    The short duration of MLA covered loans is an important factor in 
making them difficult for borrowers to repay. However, a far more 
important factor in making these loans harmful is their exorbitant 
interest. The regulation should be amended to prevent lenders from 
evading the MLA interest cap by adjusting the duration of the loan. 
Under the current regulation, a payday loan of 91 days or less is 
covered; a payday loan of 92 days or more is not covered. A vehicle 
title loan of 181 days is covered; a vehicle title loan of 182 days is 
not. These provisions should be amended to cover all payday and title 
loans regardless of duration. Likewise, RTO and installment loan 
interest should be limited by the MLA regardless of the duration of the 
The Servicemember Civil Relief Act
    13. SCRA Overview. The Soldiers and Sailors Civil Relief Act, 
amended and renamed the Servicemember Civil Relief Act (SCRA) in 2003, 
has long protected troops from financial harm at home as they tend to 
the Nation's defense. The SCRA has had an equally long history of 
revisions found necessary in the light of experience. To cite just a 
few examples, the SCRA was amended, twice, to include protection 
concerning wireless telephone service contracts, unheard of by the 
original drafters of the World War II era legislation. Another change, 
the specific, statutory enshrinement of a private and public right of 
action to enforce the SCRA, was enacted in direct response to Federal 
litigation in Michigan. Evasions and attempted evasions by lenders and 
other businesses resulted in still other amendments; for example: 
addition of language requiring lenders to forgive, and not just to 
defer, excess interest on loans covered by SCRA section 527. Likewise, 
section 535 has undergone multiple changes, some of them to reign in 
landlord evasions, first by providing that the troop's termination of 
his lease obligations also terminated his spouse's obligations, and 
later to provide that in the notice to quit, written verification of 
qualifying orders by the commander was a sufficient substitute for the 
production of military orders themselves. The SCRA has often had to be 
amended in the light of changed circumstances and experience; such is 
the case once again.
    14. SCRA Section 535 should be expanded to authorize lease 
termination in the event of the service member's death.

    Section 535 of the SCRA provides that a military tenant has the 
right to terminate a residential lease early if the lease was entered 
into prior to military service or the lease was entered into while on 
active duty and the service member thereafter receives orders to 
deploy, or the service member signs the lease while on active duty and 
thereafter receives orders to go to a new duty station. It does NOT 
provide for any lease termination rights in the event that the service 
member is killed. The grieving widow is stuck trying to find another 
renter in order to mitigate damages or paying the rent through the end 
of the lease term. When I proposed such an amendment to the NC General 
Assembly, the law passed unanimously in both houses and was signed by 
the Governor on June 26, 2012 [NC House Bill 971, 2011-12 legislative 
session codified as NC Gen Stat 42-45(a)(3)]. Of course, this North 
Carolina legislation has no effect in the other 49 states.
    15. The SCRA 535 definition of Permanent Change of Station (PCS) 
orders should be tied to the military definition of PCS orders.

    Section 535 of the SCRA, as noted above, provides a right to 
terminate a lease early in the event that a civilian tenant thereafter 
becomes a member of the armed forces, or a military tenant receives 
deployment or permanent change of station (PCS) orders. But what orders 
exactly does PCS include? Certainly, it includes orders from Camp 
Lejeune, North Carolina to Camp Pendleton, California as the term PCS 
is commonly used. But does it include orders upon retirement or release 
from active duty? The Joint Federal Travel Regulations (JFTR) at 
section U5000, which govern this matter within the armed forces, 
defines PCS orders to include all of these items. Accordingly, these 
types of orders should, likewise, give rise to lease termination 
authority under SCRA section 535, which was the position taken by the 
U.S. Department of Justice in the case of U.S. v Empirian Property 
Management, Inc. (D. Nebraska, March 8, 2012), which settled in favor 
of all the tenants. However, the U.S. DOJ does not have the resources 
to sue to enforce this position on every landlord that doesn't want to 
let a service member out of his/her lease in accordance with the law 
and uses the lack of a definition of PCS in SCRA section 535to the 
detriment of service members. Why not therefore import the definition 
of PCS Orders at SCRA section 535 to the definition found in the 
pertinent military regulation?
    16. SCRA 535 should authorize a right to residential lease 
termination upon the service member's acceptance of government quarters 
on the installation.

    Upon receipt of orders to their new duty station, troops may find, 
as I did during my career, that there is a waiting list to get into 
base quarters. Accordingly, service members obtain private rental 
quarters outside the installation. However, it is exceedingly unlikely 
that base quarters will become available precisely at the time that the 
off base residential lease expires, resulting in a difficult choice for 
the service member. Moving onto the installation allows the service 
member to enjoy its myriad advantages: decent housing, DOD Schools, 
better security, nearby medical care, child care, physical fitness and 
recreational facilities; a responsible landlord, and avoidance of the 
twice daily crush of traffic traversing the installation gate. However, 
taking advantage of the opportunity to live on base generally requires 
the service member to breach the existing residential lease, risking 
liability for paying rent through the remainder of the lease term if 
another renter is not found. SCRA section 535 should authorize lease 
termination for taking base quarters, thereby relieving the service 
member of this dilemma. Virginia law provides some protection in this 
regard, authorizing lease termination if the service member is ordered 
to base quarters (VA Code Ann 55-248.21:1). Florida law is even better 
and should serve as a model, providing such protection in the event 
that the service member is ordered to government quarters or if he 
voluntarily elects government quarters, the more typical situation (FL 
Stat 83: 682).
    17. The SCRA should prohibit forced arbitration in contracts with 
service members.

    Increasingly, important financial transactions are characterized by 
the consumer's waiver of the right to trial and the right to 
participate in a class action lawsuit, in favor of arbitration. The 
arbitration is ``forced,'' in the sense that the party with all the 
bargaining power writes the contract and the consumer is forced into it 
as a condition of making the transaction. You want to finance, or even 
purchase, a car, you need to ``agree'' to give up your day in court. It 
is easy to predict the expansion of forced arbitration, say to leases, 
mortgages, credit cards, all forms of consumer credit, and other 
consumer transactions.
    Setting aside for the moment the questions of arbitrator bias in 
favor of the large corporation for whom he is dependent on additional 
business, and the over all fairness of forced arbitration, the practice 
also effectively causes the service member to give up many of his 
rights under the SCRA, which applies to ``any judicial or 
administrative proceeding commenced in any [civil] court or agency in 
any jurisdiction subject to this Act (SCRA section 512b). It does not 
apply to arbitration.
    The most basic protection that service members possess under the 
SCRA is the protection against losing in court because military duties 
prevent him from showing up. The SCRA requires the plaintiff to assert 
the military status of the defendant, and provides that military 
defendant some protection against default judgments, the right to 
reopen erroneously entered default judgments, and the right to delay 
proceedings as military exigencies require. Such SCRA protections are 
inapplicable to arbitration.
    Lenders, particularly car dealers, are apt to extol the virtues of 
arbitration as a means of resolving disputes without the costs 
associated with trial. I have my doubts concerning the fairness and 
supposed efficiencies of arbitration. In addition, the class action 
lawsuit may be the only effective remedy when many consumers are 
harmed, but the amount in dispute in any individual case does not 
practically justify individual action. However, assuming, arguendo, 
that arbitration is indeed a fair and efficient means of resolving 
consumer disputes, prohibition of forced arbitration would not stop 
parties from entering into a more voluntary agreements after the 
dispute arises, rather than as a condition in the original contract.
    I also find it particularly instructive that when auto 
manufacturers imposed arbitration on auto dealers as a condition of 
obtaining a franchise, the auto dealers complained of the unfairness of 
this practice and successfully lobbied Congress for a special 
exemption, the Motor Vehicle Franchise Contract Fairness Act [15 U.S.C. 
1226(a)(2)]. The same auto dealers now routinely impose on their 
consumers what they themselves viewed as intolerable.
    18. The SARA should not be waivable.

    SCRA section 517 provides that it may be waived, so long as the 
waiver is in writing, is executing during or after the service member's 
military service, is executed in an instrument separate from the 
obligation to which it applies, and is in at least 12 point type. Thus, 
members can sign away protections concerning foreclosure, repossession, 
residential leases termination, default judgments, interest rate 
limitations, delays in civil hearings, protection of insurance, etc. 
This ``voluntary'' stripping of all SCRA rights in contracts of 
adhesion imposed on unsophisticated and relatively powerless troops 
should be prevented by prohibiting waiver of SCRA rights by the 
Debt Collection
    19. The Far Debt Collection Practices Act (15 U.S.C. 1692 et seq.) 
should apply to commercial creditors collecting their own debts as well 
as debt collectors hired to collect the debts of others. Why do we 
prohibit debt collectors to abuse and harass consumers but allow 
commercial creditors to do so? North Carolina has separate statutes 
prohibiting debt collection abuse from debt collection agencies and 
consumer creditors, NC Gen Stat 58-70-1 et seq., and NC Gen Stat 75-50 
et seq., respectively. If this approach is not deemed politically 
feasible, perhaps a more narrow approach may be taken, for example, 
prohibiting commercial creditors from contacting the obligor's military 
    20. Contacting the debtor's military supervisors for the purpose of 
collecting a debt, threatening to do so, or providing contractual, pre-
default ``consent'' to do so should be specifically prohibited.
    Again, I offer my sincere thanks for the opportunity to offer 
comments and suggestions on these important matters concerning the 
welfare of our troops.
   Prepared Statement of the National Independent Automobile Dealers 
                          Association (NIADA)
    Mr. Chairman and Members of the Committee, my name is Steve Jordan, 
Executive Vice President of the National Independent Automobile Dealers 
Association (NIADA) with headquarters in Arlington, Texas. On behalf of 
the Association, I appreciate the opportunity to submit this statement 
for the record regarding the Committee's November 20th hearing on 
``Soldiers as Consumers: Predatory and Unfair Business Practices 
Harming the Military Community.''
    The National Independent Automobile Dealers Association represents 
more than 17,000 members who are connected to the automobile industry 
in some form or fashion, but primarily independent dealers who own 
dealerships across America that are not affiliated with a manufacturer.
    They are businessmen and women who subscribe to a code of ethics 
that emphasizes honor, integrity and fair dealing. More than 40 percent 
of these dealers have been in business for more than 20 years, and 
almost 50 percent have five or fewer employees. They are the small car 
store that survives in the best of times and the worst of times because 
they are a part of their communities as fathers, mothers, Better 
Business Bureau members, Chamber of Commerce members, city councilmen, 
school board members, churchgoers, youth organization sponsors and 
coaches, and task force members who look for ways to make our cities 
and our towns better places to live.
    If they are fortunate enough to have a military installation near 
their business, they strive to reach out and include the active 
personnel and the veterans who call our communities home. The military 
residents in turn volunteer for Special Olympics, literacy councils 
that provide free tutoring, school field days and Relay for Life, to 
name just a few.
    NIADA's leadership is committed to these service members and the 
citizens within the communities they represent. Our mission states that 
as a not-for-profit organization we will ``anticipate, recognize and 
respond to current and future issues and needs of the independent motor 
vehicle industry and the consumer.'' The NIADA Foundation's goal goes 
further by pledging ``to improve the used motor vehicle industry by 
informing consumers, educating dealers and training individuals and 
companies associated with the industry.''
    NIADA stands ready to use our current resources, including our 
education and training staff, state association directors--many of whom 
are veterans--and our Automotive Consumer Television Network, which is 
available to anyone via the Internet at http://niadatv.com/
autoconsumer/, to address the needs of car-buying military personnel--
active or retired.
    In that regard we have produced a simple to understand video that 
explains the car-buying process for active service members or those 
returning to civilian life. The video, ``Car Buying Tips for Military 
Service Members,'' is available for viewing on Automotive Consumer 
Television, our Internet TV network providing industry information and 
education for consumers, as well as NIADA.TV and NIADA.com.
    It is similar to the one NIADA produced several years ago targeting 
the teenager buying his/her first car.
    Additional service member oriented plans include coordinating a 
speakers bureau with our state associations, tapping local dealers who 
will serve as resources to conduct safe car-buying seminars for local 
military installations, and providing NIADA education and training 
staff that will work with state associations in addressing proper 
military protocol at military installations.
    In addition, I am enclosing some specific examples of the ways our 
members have been responsive and helpful to the military community, as 

        From a dealer in North Carolina:

                ``We give all active military a $500 discount on any 
                vehicle in our inventory. In 21 years I don't remember 
                any negative situations with JAG. In fact, I have been 
                involved in a couple of situations to try and help 
                resolve problems soldiers were having with other 
                businesses. We have supported various military 
                charities, events, families and especially those 
                serving overseas. We strictly adhere to the 
                Servicemembers Civil Relief Act (SCRA). In fact, we 
                have had several situations where service members have 
                requested relief under the Act and were not covered 
                according to the SCRA. However, we accommodated their 
                requests even though we had no obligation to do so 
                (that has included reducing their rate as well as the 
                early termination of a lease). We welcome soldiers to 
                bring in their SGT and/or 1st SGT when discussing the 
                terms of their financing.''

        From a dealer in California:

                ``There was a customer who went to Afghanistan. He 
                wanted to sell his car, a Toyota RAV4, but he didn't 
                have time to do it. He left it here and told me what he 
                wanted for it. I sold it a week or 10 days later and 
                deposited the money into his account. He got back to me 
                and said he got it and said thank you very much. 
                Another guy who went to Afghanistan, he had bought a 
                truck from me. When they go overseas, they have to park 
                their cars somewhere on the base, and they have to pay 
                a minimum of $100 a month for a storage fee. He told me 
                he didn't want to pay $100, so I said, `OK, leave it 
                with us.' So we kept it on our lot. Every other day 
                we'd start the car to make sure it was running, we kept 
                it charged up, we washed it. When he got back the car 
                was running and in good shape.''

        From Vets-Cars:

                ``Vets-Cars, an association of auto dealers whose 
                mission is to help veterans, military personnel and 
                their families in the car-buying process. Vets-Cars 
                includes about 200 dealers in 25 states, among them 
                several NIADA members. ``We ask the dealers to pledge 
                to our code of conduct as to how they are going to 
                treat military car buyers. Everything has to be 
                transparent and up front. There's a famous quote from 
                Theodore Roosevelt: ``A man who's willing to shed his 
                blood for his country should be offered a fair and 
                square deal afterward.'' And that's pretty much the 
                bedrock of our association. And we monitor our dealers. 
                We make sure they're doing the right things. We have on 
                our website what we call the ``After Action Report''--a 
                customer satisfaction survey. Our agreement with our 
                dealers specifically states two or more unresolved 
                issues with veteran or military buyers and we can't 
                have them in our program.''

        From a dealer in Texas:

                ``Some of the things I do for the military--most of the 
                time, their issues are with the down payment. So I'll 
                do a deferred down payment for them. Maybe I'll let 
                them put 50 percent down and hold the car and let them 
                make payments on the down payment until they get what 
                they need to take possession of the vehicle. I vouch 
                for some of them with sub-prime credit lenders--I'll 
                let them take the vehicle and let the finance company 
                know that I'll back it up for the first couple of 
                months. I have soldiers come to me for advice on 
                purchasing a vehicle whether they're buying it from me 
                or not. I try to point them in the right direction. A 
                lot of soldiers come to me for advice, since I'm a 
                retired 1st Sgt. and I get a lot of recommendations. 
                They come down here and talk to me. I tell them, first 
                of all, buy something you want. Don't buy something 
                somebody's pushing you into just to make a sale. They 
                respect that. A lot of them purchase vehicles from me 
                and some don't, but I still advise them.''

        From another dealer in California:

                ``There are a lot of individual cases. For example, a 
                military guy came in to try to trade in a Jetta. The 
                reason he wanted to trade it in was because it didn't 
                run. He had bought it from someone else. So we're like, 
                ``Dude, you know we can't do anything for you. But I'll 
                tell you what I will do. Why don't you bring it to our 
                shop and we'll go ahead and fix your car for you and we 
                won't charge you.'' There are a lot of things like 
                that. It happens all the time. We stored a car for 
                eight months for a soldier who couldn't pay $100 a 
                month for storage--we kept his battery charged, kept 
                his truck running. We've consigned cars for them and 
                deposited the money in their account when they were in 
                Afghanistan. We've sold their cars for them. We're the 
                poster child for supporting the military in the used 
                car business.''

    In closing, NIADA stands ready to assist all service members, 
including those returning to civilian life, and the Senate Commerce 
Committee any way we possibly can.
    Thank you.
   Response to Written Questions Submitted by Hon. Amy Klobuchar to 
                            Deanna R. Nelson
    Question 1. Ms. Nelson, you mentioned that soldiers are more 
vulnerable than other consumer groups because of their regular 
paychecks and allotments as well as their fear of disciplinary action 
for challenging a collection or stopping an allotment. What more can we 
do to deter bad actors from targeting soldiers? What further action 
should Congress take?
    Answer. These are excellent questions, Senator Klobuchar. Because 
soldiers are often between a rock and a hard place--having provided 
automatic payments and also being duty--bound to maintain financial 
good standing--steps to provide some space between are needed to even 
the playing field. There are legislative steps which would assist 
soldiers in these situations.
    One would be to strengthen the Federal Servicemembers Civil Relief 
Act and the Fair Debt Collection Practices Act to prohibit creditors as 
well as third--party debt collectors from contacting a soldier's chain 
of command with regard to a debt unless that debt has been reduced to 
judgment, and proper protocol is followed. At present there is nothing 
in the Servicemembers Civil Relief Act which protects soldiers from 
direct pursuit by nefarious creditors. Further the FDCPA does not 
extend its protections to individuals being harassed by creditors 
themselves--only third party debt collectors. By broadening the 
definition of a ``debt collector'' to any creditors, soldiers and all 
consumers would be afforded additional protection from these predators 
which have learned that by contacting a soldier's chain of command they 
dramatically increase their leverage for payment of disputed debts.
    Another measure would be to prohibit reporting a soldier's alleged 
debt to a credit reporting agency unless the soldier has been given 
notice and debt has been reduced to judgment. There is a lot of abuse 
of the credit reporting system as a debt collection tool, particularly 
with soldiers who move frequently and many times are unaware of action 
taken against them in local courts, or are unable to comply with forum 
selection clauses in contracts. Similarly, many times the first notice 
a soldier has of an alleged debt is by reviewing a credit report. 
Unfortunately, a negative credit report can have disastrous impact upon 
a soldier's security clearance or position in the military even where 
the debt itself is questionable.
    A third consideration would be to take a hard look at the military 
allotment payment system to evaluate its need in a modern society where 
soldiers now have access to several methods of auto pay. Allotment 
payments do not protect soldiers the way credit card or even debit card 
payments do, for example, there is no recourse for the soldier if a 
payment is disputed. At minimum, prohibiting businesses and individuals 
from contractually requiring payment by allotment would be a step 
    By increasing the accountability of our soldiers' business 
partners, we can level the playing field and increase the fairness to 

    Question 2. Ms. Nelson, in the case of products being sold to 
soldiers through financing plans, businesses should be required to be 
transparent about the retail value of the product so that the consumer 
knows what he or she should be paying. How can states or the Federal 
government better protect soldiers and consumers, perhaps by requiring 
transparency at purchase?
    Answer. At present, Senator Klobuchar, there is no legislation 
which compels retailers to disclose the MSRP of most classes of 
consumer goods. It is therefore easier to hide large mark ups over the 
typical retail price. Disclosure of the actual MSRP or average retail 
selling price would make these deceptive sales easier for a consumer to