Military Personnel: DOD's Tools for Curbing the Use and Effects  
of Predatory Lending Not Fully Utilized (26-APR-05, GAO-05-349). 
                                                                 
The Department of Defense (DOD) has expressed concerns about	 
servicemembers' use of predatory consumer loans as well as their 
overall financial conditions. "Predatory lending" has no precise 
definition but describes cases where a lender takes unfair	 
advantage of a borrower, sometimes through deception, fraud, or  
terms such as very high interest or fees. Serious financial	 
problems can adversely affect unit morale and readiness as well  
as servicemembers' credit history and military career. DOD has	 
tools such as off-limits lists to help curb the use and effects  
of predatory loans. GAO answered two questions: (1) To what	 
extent do active duty servicemembers use consumer loans 	 
considered to be predatory in nature? and (2) Are DOD and active 
duty servicemembers fully utilizing the tools that DOD has to	 
curb the use and effects of predatory lending practices?	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-349 					        
    ACCNO:   A22723						        
  TITLE:     Military Personnel: DOD's Tools for Curbing the Use and  
Effects of Predatory Lending Not Fully Utilized 		 
     DATE:   04/26/2005 
  SUBJECT:   Data collection					 
	     Fees						 
	     Fraud						 
	     Loan interest rates				 
	     Loans						 
	     Military personnel 				 
	     Surveys						 
	     Personal loans					 
	     Predatory lending					 

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GAO-05-349

                 United States Government Accountability Office

           GAO	Report to the Honorable Richard J. Durbin, U.S. Senate

April 2005

MILITARY PERSONNEL

DOD's Tools for Curbing the Use and Effects of Predatory Lending Not Fully
                                    Utilized

                                       a

GAO-05-349

[IMG]

April 2005

MILITARY PERSONNEL

DOD's Tools for Curbing the Use and Effects of Predatory Lending Not Fully
Utilized

  What GAO Found

The extent to which active duty servicemembers use consumer loans
considered to be predatory and the effects of that borrowing are unknown.
The only DOD-wide data come from surveys. In a 2004 survey, 12 percent of
servicemembers said they or their spouse had used, during the last 12
months, at least one of four types of loans: payday, rent-to-own,
automobile title pawn, or tax refund, which DOD says can often be
associated with predatory lending practices. DOD is unable to quantify the
extent to which the loans have associated predatory practices, the
frequency of such borrowing, the amounts borrowed, or the effects of the
loans. Although not generalizable, participants in GAO's 60 focus groups
at 13 bases in the United States and Germany identified problems resulting
from the use of short-term consumer loans, but other participants
described the loans as quick, easy, and obtainable by servicemembers with
bad credit. Privacy concerns and the reluctance of servicemembers to
reveal financial problems make it difficult to quantify the use and
effects of predatory lending.

DOD and active duty servicemembers are not fully utilizing DOD's tools for
curbing the use and effects of predatory lending practices. At some of the
installations that we visited, the Armed Forces Disciplinary Control
Board- a panel that can recommend to an installation commander that a
business be placed off-limits to servicemembers-had not met in over a
year. Fort Drum's board, for example, had not met in about 4 years, even
though the New York Attorney General had filed two lending-related
lawsuits against businesses on behalf of servicemembers and some of their
family members at Fort Drum. DOD officials told us the reasons for boards
not meeting or making recommendations include high deployment levels and
the effort required to place a business on an off-limits list. Other
commanders effectively changed businesses' predatory practices by using
their board's recommendations to place or threaten to place the businesses
off-limits. In addition, DOD is not always providing a clear message
regarding advertising in installation publications. Participants in GAO's
focus groups said they were confused because DOD-provided financial
management training (described in our 2005 report, Military Personnel:
More DOD Actions Needed to Address Servicemembers' Personal Financial
Management Issues) warned them against using payday lenders but some
installation newspapers carried advertisements for such businesses. These
problems occur even though a DOD instruction requires (1) a disclaimer
indicating that the advertisement does not constitute endorsement by the
U.S. government and (2) a review by public affairs staff to determine if
the advertisement might be detrimental to servicemembers. Our review of
some installation newspapers showed possible reasons for the confusion;
the disclaimers were often not prominently displayed or were located away
from the advertisements. DOD also offers servicemembers free legal review
of contracts and other financial transactions, but servicemembers often do
not use the reviews until problems result. Recently, DOD began exploring
additional on-installation alternatives to payday loans.

United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Use of Consumer Loans That Are Considered Predatory Is

Unknown, but Sources Say Predatory Lenders May Be Targeting Servicemembers
DOD's Tools for Curbing the Use and Effects of Predatory Lending

Underutilized Conclusions Recommendations for Executive Action Agency
Comments and Our Evaluation

1 3 5

7

12 18 18 19

Appendixes                                                              
                Appendix I:             Scope and Methodology              21 
                            Predatory Lending Findings from GAO-Led Focus  
               Appendix II:                     Groups                     
                                       Held at 13 Installations            24 
              Appendix III:    Comments from the Department of Defense     30 
              Appendix IV:      GAO Contact and Staff Acknowledgments      36 
                Appendix V:              Related GAO Products              37 

Table Table 1:	Installations in the United States and Germany Where GAO
Conducted Site Visits from May to October 2004

Figure Figure 1:	The Number of Servicemembers in Each State and Whether or
Not the State Has Payday Lending Laws with Interest Caps or Other
Prohibitions

Abbreviations

DOD Department of Defense
PFM personal financial management

Contents

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

April 26, 2005

The Honorable Richard J. Durbin United States Senate

Dear Senator Durbin:

The Department of Defense (DOD) has expressed continuing concerns about
servicemembers' use of predatory consumer loans. These loans can result in
financial problems that may lead to severe negative consequences for the
military as a whole (e.g., decreases in unit readiness and morale) as well
as for the servicemembers themselves (e.g., criminal and adverse personnel
actions, including possible discharge from the military). "Predatory
lending" has no precise definition, but is generally used to describe
cases in which a lender takes unfair advantage of a borrower, sometimes
through deception, fraud, or manipulation, to make a loan that contains
terms that are disadvantageous to the borrower.1 DOD policy officials have
expressed concerns over certain types of high-cost, shortterm consumer
loans that are typically provided by lenders who lie outside the system of
federally insured financial institutions. These include payday loans,
rent-to-own loans, automobile title pawn loans, and tax refund loans.

DOD has a number of tools to address the use and effects of loans that it
considers predatory. These tools include: (1) the Armed Forces
Disciplinary Control Boards,2 which can make recommendations to
installation commanders who can then use or threaten to use their
"off-limits" authority to prohibit servicemembers from using a business
that engages in predatory lending practices; (2) free legal assistance
with

1See GAO, Consumer Protection: Federal and State Agencies Face Challenges
in Combating Predatory Lending, GAO-04-280 (Washington, D.C.: Jan. 30,
2004). The cited report addresses home mortgage lending and equity loans,
but our work did not. Nevertheless, some lending practices are widely
acknowledged to be predatory and include charging excessive fees and
interest rates, repeatedly rolling over or refinancing loans without
economic gain for the borrower, falsifying documents, and intentionally
misinforming borrowers about the terms of their loans.

2For the joint service instruction, see AR190-2, OPNAVIST1620.2A,
AFI31-213, MCO1620.2C, COMDTINST1620.1D, Armed Forces Disciplinary Control
Boards and Off-Installations Liaison and Operations (June 1993). Under
this joint policy, installation commanders, at their discretion, may
establish such boards to advise and make recommendations to the commanders
on matters concerning eliminating conditions around their installations
that are adversely affecting the health, safety, welfare, morale, and
discipline of the Armed Forces.

contracts and other financial transactions; and (3) personal financial
management (PFM) programs that offer servicemembers assistance, such as
financial management training and counseling. In addition, DOD has
encouraged servicemembers to seek, for example, payday loan alternatives
available from on-installation banks, on-installation credit unions, and
service-affiliated relief/aid societies.3

This report supplements the information we provided to you in our February
2004 report on bankruptcies among active duty servicemembers, and our
April 2005 report on the financial conditions of deployed servicemembers
and the financial management assistance and training provided to
servicemembers.4 For this report, we agreed with your staff to answer two
questions: (1) To what extent do active duty servicemembers use consumer
loans considered to be predatory in nature? and (2) Are DOD and active
duty servicemembers fully utilizing the tools that DOD has to curb the use
and effects of predatory lending practices?

In addressing these two questions, we limited the scope of our work to
active duty personnel and emphasized junior enlisted servicemembers (i.e.,
pay grades E1 to E4) because DOD and service officials have indicated that
this subgroup-whose basic pay currently ranges from about $1,200 to $1,900
per month-is most likely to encounter financial problems. Numerous methods
were used to gather and assess information for this work.5 We examined DOD
and service policies and tools for assisting servicemembers with their
financial management, establishing and using Armed Forces Disciplinary
Control Boards, and advertising in installation publications. In addition,
we reviewed reports by GAO, other congressional research offices, DOD, and
other organizations. We contacted the Federal Trade Commission to
ascertain what data were available through Military Sentinel regarding the
types of consumer complaints servicemembers filed against businesses. We
interviewed DOD and service policy officials and officials from
organizations such as the Consumer Federation of America-

3See GAO, Military Personnel: More DOD Actions Needed to Address
Servicemembers' Personal Financial Management Issues, GAO-05-348
(Washington, D.C.: Apr. 26, 2005) for information about the military's PFM
training and counseling, as well as other components of the PFM programs.
These programs are part of DOD's core family support programs that are
used to address the adverse effects associated with personal financial
problems.

4See GAO-05-348 and GAO, Military Personnel: Bankruptcy Filings among
Active Duty Service Members, GAO-04-465R (Washington, D.C.: Feb. 27,
2004).

5The data for this work were gathered at the same time as the data used in
GAO-05-348.

a consumer advocacy group-and the Community Financial Services Association
of America-a payday lending association-to understand the different
perspectives about servicemembers' use of short-term consumer loans.
During site visits to 13 military installations in the United States and
Germany, we requested documents pertaining to predatory lending such as
guidance or instructions regarding predatory lending activities at the
installations and training materials; used structured questionnaires to
gather data from a variety of personnel on the 13 installations: command
leaders, PFM program managers, command financial counselors, legal
assistance attorneys, senior noncommissioned officers (pay grades E8 to
E9), chaplains, and staff from the military relief/aid societies; and
conducted 60 focus groups composed of over 400 junior (pay grades E1 to
E4) and senior (pay grades E5 to E9) enlisted servicemembers, company
grade officers (pay grade O1 to O3), and servicemembers' spouses. In
addition, we administered a questionnaire to participants in the focus
groups to collect supplemental information. While data from these four
types of homogeneously composed focus groups are not generalizable to the
entire DOD population of active duty servicemembers, the data provide
context for understanding lending/borrowing and PFM issues. In addition,
we conducted group interviews of personnel affiliated with the PFM
programs while they attended a November 2004 conference. We reviewed 14
installation newspapers and examined the disclaimers and advertisements in
these newspapers during the course of our review. We reviewed information
in DOD's August 2004 active duty survey related to findings for four types
of loans: payday, rent-to-own, automobile title pawn, and tax refund,
which DOD says may include predatory practices. The August 2004 survey had
a response rate of 40 percent. DOD has conducted and reported on research
to assess the impact of this response rate on overall estimates. They
found that, among other characteristics, junior enlisted personnel (E1 to
E4), servicemembers who do not have a college degree, and members in
services other than the Air Force were more likely to be nonrespondents.
We found the data sufficiently reliable to address our objectives. We
performed our work from March 2004 through February 2005 in accordance
with generally accepted government auditing standards.

Results in Brief	The extent to which active duty servicemembers use
consumer loans considered to be predatory in nature and the effects of
such borrowing are unknown, but many sources suggest that providers of
such loans may be targeting servicemembers. The only DOD-wide data come
from surveys that have low response rates that make findings projected to
the population

of all active duty servicemembers or subgroups thereof tenuous. In a 2004
survey, 12 percent of servicemembers said they or their spouse had used,
during the last 12 months, at least one of four types of loans: payday,
rentto-own, automobile title pawn, and tax return, which DOD says can
often be associated with predatory lending practices. DOD is unable to
quantify the extent to which the loans have associated predatory
practices, the frequency of borrowing, the amounts borrowed, or the
effects of the loans. Although not generalizable, participants in GAO's 60
focus groups at 13 bases in the United States and Germany identified
problems such as high fees and debt collection methods resulting from the
use of these types of short-term consumer loans, but other participants
described the loans as quick, easy, and obtainable by servicemembers with
bad credit. Privacy concerns and the reluctance of servicemembers to
reveal financial problems make it difficult to quantify the use and
effects of predatory lending. While DOD is unable to quantify usage and
effects, consumer advocates, state government officials, DOD officials,
and servicemembers in our focus groups indicated that military personnel
are being targeted by some predatory lenders and are adversely affected
when they use businesses that employ predatory lending practices.

DOD and active duty servicemembers are not fully utilizing DOD's tools for
curbing the use and effects of predatory lending practices. While
commanders at some installations we visited have changed the illegal or
unfair practices of some businesses by using recommendations from Armed
Forces Disciplinary Control Boards to place or threaten to place
businesses off-limits to servicemembers, boards at three installations we
visited had not met in over a year. For example, Fort Drum's board had not
met in about 4 years, even though the New York Attorney General had filed
two lending-related lawsuits against businesses on behalf of
servicemembers and some of their family members at Fort Drum. Installation
officials told us the reasons for boards not meeting or making
recommendations include high deployment levels and the effort required to
place a business on the off-limits list. A second tool that DOD is
underutilizing pertains to advertisements in installations' newspapers.
Participants in GAO's focus groups said they were confused because
DODprovided financial management training warned them against using payday
lenders but some installation newspapers carried advertisements for such
businesses. These problems occur even though a DOD instruction requires
(1) a disclaimer indicating that the advertisement does not constitute
endorsement by the U.S. government and (2) a review by public affairs
staff to determine if the advertisement might be detrimental to
servicemembers. Our review of some installation newspapers showed that the
confusion and

incorrect assumptions may be, in part, the result of the disclaimers often
being located away from the advertisement or not being prominently
displayed. Third, servicemembers typically have not made full use of free
DOD-provided legal assistance before signing contracts and other financial
documents, but they sometimes use the assistance after financial problems
develop. According to servicemembers and legal assistance attorneys,
military personnel may avoid the DOD-provided legal assistance for fear
that their career progression would be limited if the command were to
learn of their financial problems. Recently, DOD has explored additional
on-installation alternatives to payday loans, like special loan programs
offered by on-installation credit unions and banks.

We are making two recommendations to improve DOD's ability to curb the use
and effects of predatory lending practices: (1) amend existing regulations
to require at least semiannual meetings of the Armed Forces Disciplinary
Control Boards and (2) clarify regulations pertaining to advertisements in
installation publications to require more prominent disclaimers and
additional steps to ensure advertisements reflect stated DOD policies. In
commenting on a draft of this report, DOD concurred with our
recommendations.

Background	DOD officials have expressed concern that servicemembers are
often the victims of predatory lending practices by certain types of
lenders who typically lie outside the system of traditional financial
institutions such as banks. These lenders offer alternative access to cash
for consumers with low incomes or poor credit records, and generally do so
without standard credit checks. The fees charged for these alternative
loans are generally much higher than those charged by traditional
financial institutions, and other terms and conditions of such loans are
often unfavorable to the borrower. As a result, some federal, state, and
consumer advocacy agencies have expressed concern that many of these
alternative loans could include predatory practices. The most common of
these loans include the following:

o 	Payday loans, according to the Federal Deposit Insurance Corporation,
are small, short-term loans that borrowers promise to repay out of their
next paycheck or deposit of funds. These loans typically have high fees
and are often rolled over repeatedly, which can make the cost of
borrowing-expressed as an annual percentage rate-extremely high.6

o 	Rent-to-own loans, according to the Federal Trade Commission, provide
immediate access to household goods (such as furniture and appliances) for
a relatively low weekly or monthly payment, typically without any down
payment or credit check. Consumers have the option of purchasing the goods
by continuing to pay "rent" for a specified period of time-however; the
effective cost of the goods may be two to three times the retail price.7

o 	Automobile title pawns provide short-term loans to borrowers who give
the lender the title to their car as collateral for the loan. Effective
interest rates are generally very high.

o 	Tax refund loans provide cash loans against the borrower's expected
income tax refund.

Senior DOD and service officials have noted that such loans may have
associated predatory lending practices, which can be detrimental to
servicemembers who choose these loans as a way to overcome immediate needs
for cash. The fees for loans such as the payday loans provide a general
indication of the loans' potential detrimental financial effects on
servicemembers' finances. The Community Financial Services Association of
America, a payday-advance trade association, which says that it represents
more than half of the payday advance industry, developed a set of best
practices for its member companies. Among other things, the association's
best practices limit the number of extensions for outstanding

6According to the Federal Reserve Bank of Philadelphia, fees for a payday
loan range from $15 to $30 on each $100 advanced. If the fee is $15 to
borrow $100 for 14 days, the annualized percentage rate for that loan is
391 percent. If the borrower extends the 14-day loan four times beyond the
initial loan, the 70-day loan of $100 would result in paying $75 in fees
in addition to repaying the borrowed $100.

7Survey of Rent-to-Own Customers, Federal Trade Commission Bureau of
Economics Staff Report (undated).

advances.8 Association representatives noted that borrowers select payday
loans over other alternatives for a number of reasons. For example, in
some instances, the officials stated that the individual may not have the
good credit history required to borrow from a bank or credit union. In
other instances, an individual might use a payday loan to avoid a bounced
check fee, late payment penalty, or reconnection fees associated with the
late payment of a utility bill. The Congressional Research Service
estimated that the number of payday loan offices nationwide increased from
approximately 300 in 1992 to almost 15,000 in 2002, and the total dollar
volume of payday loans in 2002 was about $25 billion.9

  Use of Consumer Loans That Are Considered Predatory Is Unknown, but Sources
  Say Predatory Lenders May Be Targeting Servicemembers

The extent to which active duty servicemembers use consumer loans
considered to be predatory and the effects of such borrowing are unknown,
but many sources suggest that predatory lenders may be targeting
servicemembers. While DOD has some data on servicemembers' use of four
types of loans, DOD is unable to quantify the extent to which these types
of loans have associated predatory practices, the frequency of borrowing,
the amounts borrowed, or the effects of the loans. Information from our
focus groups, however, provided insights to some of these issues. Although
DOD is unable to quantify usage and effects, consumer advocates, state
government officials, DOD officials, and servicemembers in our focus
groups indicated that military personnel are being targeted by some
predatory lenders.

8The association's Web site (www.cfsa.net) states that "a member will
comply with State laws on rollovers (the extension of an outstanding
advance by payment of only a fee). In States where rollovers are not
specifically allowed, a member will not under any circumstances allow a
customer to do a rollover. In the few States where rollovers are
permitted, a member will limit rollovers to four (4) or the State limit,
whichever is less." The association also established a separate set of
best practices for dealing with military customers and published them on
its Web site.

9See Congressional Research Service, Payday Loans: Federal Regulatory
Initiatives, RS21728 (Washington, D.C.: Feb. 5, 2004).

    DOD Has Limited Data for Quantifying the Extent That Servicemembers Use
    Consumer Loans Considered Predatory

DOD does not have comprehensive data for quantifying the extent to which
servicemembers use consumer loans that are considered predatory in nature
and the effects of such use on servicemembers' finances or their units'
readiness. The only DOD-wide statistics on servicemembers' use of loans
are obtained from surveys. In the August 2004 DOD survey,10 12 percent of
servicemembers indicated that, during the last 12 months, they or their
spouse had used at least one of the four specified types of financial
loans that DOD says may have associated predatory practices. Seven percent
of servicemembers indicated they (or their spouse) had obtained payday
loans; 4 percent had obtained rent-to-own loans, 1 percent had obtained
automobile title pawn loans, and 6 percent had obtained tax refund loans.
While only 2 percent of the officers had used any of the four financial
transactions, 14 percent of the junior and 13 percent of the senior
enlisted servicemembers had used at least one such loan. Although not
generalizable to all active duty servicemembers and their spouses, some of
the more than 400 participants in our 60 focus groups reported
encountering problems when they used the short-term consumer loans; while
other servicemembers said such loans have positive elements such as being
quick, easy, and obtainable even if servicemembers had a bad credit
history (see app. II for example comments).

DOD's efforts to assess predatory lending are hampered by the lack of a
precise definition of predatory lending-a problem shared with other
organizations attempting to quantify the use and effects of predatory
loans. The lack of precision in the definition is found in DOD's
acknowledgement that the four types of loans may (i.e., not always)
contain predatory lending practices, but other DOD statements state that
payday lending is predatory, without including a qualifier. Imprecision in
the definition and the way the questions are asked on surveys can affect
results. For example, the percentage of servicemembers who reported using
the various types of loans may be larger than the percentage of
servicemembers who would have said they obtained a predatory loan, had the
question been oriented somewhat differently. Other important issues not
addressed in the survey but needed to quantify the extent and effects of
borrowing from lenders

10Because the response rate for this survey was 40 percent, uncertainty
exists as to how well the survey findings actually project to the
population of all active duty servicemembers or any subgroup thereof. The
loan-related items presented in this report are only a small portion of
the many and diverse questions on the survey. According to DOD, the
sampling errors for all of the following estimates from the August 2004
survey do not exceed plus or minus 2 percentage points.

that may use predatory lending practices include questions on the
frequency of use, amounts borrowed, negative and positive effects of the
loans, and any problems encountered during the transactions.

DOD, service, and installation officials maintained that obtaining data on
the use and effects of predatory lending are also hampered because of
privacy considerations and the reluctance of most servicemembers to
discuss their financial difficulties with their command. Installation
officials told us that they are likely to learn about servicemembers' use
of the previously cited types of loans only when a situation has become
serious enough to warrant creditors contacting the command or
servicemembers contacting either financial counselors or legal assistance
attorneys on the installations. Because of general privacy concerns, it is
unlikely that all contacts with attorneys and counselors could be provided
in an installation-level statistic.

    Multiple Sources Indicate Some Predatory Lenders May Be Targeting
    Servicemembers

According to some consumer advocates, state officials, DOD officials, and
military personnel, servicemembers are targeted by predatory lenders. A
2003 National Consumer Law Center report stated that junior enlisted
servicemembers are targeted because they have a relatively low but secure
income (with military basic pay that currently ranges from about $1,200 to
$1,900 per month) and tend to be young and financially inexperienced.11
The report further suggested that deploying servicemembers are more
vulnerable targets than their nondeploying peers because the former often
must get their finances in order quickly and leave behind spouses who may
not know how to manage the family's finances. The report noted several
financial practices that it considered "consumer scams" aimed at
servicemembers. These included payday loans, rent-to-own transactions, and
automobile title pawns.

Some state officials have also suggested that payday lenders-a type of
predatory lending according to DOD-target servicemembers. For example, the
Georgia General Assembly has recently determined as part of its new
antipayday lending legislation that despite its illegality, payday lending
was growing in Georgia and having an adverse effect on

11See National Consumer Law Center, Inc., In Harm's Way-At Home: Consumer
Scams and the Direct Targeting of America's Military and Veterans (Boston,
Mass.: May 2003).

servicemembers and others in the state.12 Similarly, the Florida
governor's 2004 statement to the Committee on Senate Armed Services,
Subcommittee on Personnel, noted that Florida had regulated activities of
payday loan and check cashing businesses that traditionally target
servicemembers. In 2004, the Under Secretary of Defense for Personnel and
Readiness posted an issue paper on its Web site13 to the National
Governors Association that addressed payday lending and other personnel
issues. Regarding payday lending, the Under Secretary stated that "Payday
lending practices have proven to be detrimental to servicemembers who have
chosen these loans as a way of overcoming immediate needs for
cash...Statutes that cap small loan interest rates and establish usury
ceilings help protect vulnerable servicemembers from the usury nature of
payday loans and their associated predatory practices."

According to a 2004 Consumer Federation of America study, 15 states
prohibit or limit payday lending through laws on interest rate caps for
small loans, usury laws, or specific prohibitions for check cashers.14 We
did not independently verify that these 15 states, in fact, do prohibit
this activity, nor did we review laws in the other 35 states. Figure 1
shows these 15 states identified by the Consumer Federation of America,
along with information on the number of active duty servicemembers on
installations in each state. Even in those states that prohibit or
otherwise regulate payday loans, servicemembers may be able to obtain such
loans. Another Consumer Federation of America report noted that a growing
number of Web sites deliver small loans, with some lenders using anonymous
domain registrations or residing outside the United States.15

12Official Code of Georgia Annotated Title 16, Chapter 17.

13See DOD Web site http://www.USA4MilitaryFamilies.org.

14 See Consumer Federation of America, Unsafe and Unsound: Payday Lenders
Hide Behind FDIC Bank Charters to Peddle Usury (Washington, D.C.: Mar. 30,
2004). This report noted that 33 states and the District of Columbia
authorize payday loans by law or regulation, and two additional states
have no usury limits on small loans by licensed lenders.

15See Consumer Federation of America, Internet Payday Lending: How
High-Priced Lenders Use the Internet to Mire Borrowers in Debt and Evade
State Consumer Protections (Washington, D.C.: Nov. 30, 2004).

  DOD's Tools for Curbing the Use and Effects of Predatory Lending Underutilized

DOD and servicemembers are underutilizing the tools that DOD has for
curbing predatory lending practices and the effects of such lending. While
commanders at some installations we visited have changed the unfair
practices of businesses by using recommendations from Armed Forces
Disciplinary Control Boards to place or threaten to place businesses on
offlimits lists to servicemembers, boards at other installations we
visited rarely met or made such recommendations. Although installation
newspapers appear to meet current disclaimer requirements by including a
statement noting that the U.S. government does not endorse a business'
products or services, the advertisements may lead to confusion for readers
because the disclaimers are not prominently printed or located near the
advertisement. Additionally, servicemembers typically have not made full
use of free DOD-provided legal assistance before signing contracts and
other financial documents, but they sometimes use the assistance after
financial problems develop. Recently, DOD has sought to expand the tools
available for curbing the use and effects of predatory lending practices
by exploring additional on-installation alternatives to payday loans.

    Armed Forces Disciplinary Control Boards Can Be an Effective Tool for
    Curbing Predatory Lending Practices, but They Are Underutilized

Armed Forces Disciplinary Control Boards and the recommendations that they
make to an installation commander to place businesses off-limits to
servicemembers can be effective tools for avoiding or correcting unfair
practices, but data gathered during some of our site visits to the various
installations revealed few times when boards were used to address
predatory lending practices.16 For example, at three of the installations,
the board had not met for more than a year and, therefore, may not have
adequately addressed whether actions were needed against businesses

16Under current DOD joint policy, if a board concludes that an
establishment has unfair commercial or consumer practices, the
installation commander can prohibit servicemembers from frequenting the
business by placing the entity on an off-limits list. There are several
steps a board completes prior to making a recommendation to the commander
to place an establishment on the off-limits list. These steps include (1)
notifying the owner or manager that the board is considering actions, and
giving the owner or manager time to correct any adverse conditions or
practices; (2) if the adverse conditions are not corrected, giving the
owner or manager the opportunity to appear and present matters before the
board; and (3) recommending an off-limits restriction, if further
investigation indicates that improvements have not been made. These steps,
according to some installation officials, can be time consuming and are
designed to permit the owner or manager to voluntarily correct conditions
or practices before the board recommends placement on an off-limits list.
If a commander places a business on the off-limits list, servicemembers
are prohibited from entering the establishment and face disciplinary
action if they violate this prohibition.

whose practices negatively affected servicemembers. The board at Fort
Bragg, North Carolina, had not met for over a year and the board at Fort
Stewart, Georgia, had not met since 2003 because the Directors for both
boards had deployed to Iraq. The board at Fort Drum, New York, had not met
in about 4 years because the board's Director did not see a reason to
convene. He was not aware of two recent, lending-related lawsuits filed by
the New York Attorney General that had connections with Fort Drum
servicemembers.

o 	The Attorney General settled a lawsuit in 2004 in behalf of 177
plaintiffs-most of whom were Fort Drum servicemembers-involving a
furniture store that had improperly garnished wages pursuant to unlawful
agreements it had required customers to sign at the time of purchase.

o 	The Attorney General filed a lawsuit in 2004 involving catalog sales
stores. He characterized the stores as payday-lending firms that charged
excessive interest rates on loans disguised as payments toward catalog
purchases. Some of the servicemembers and family members at Fort Drum fell
prey to this practice. The Attorney General stated that he found it
particularly troubling that two of the catalog stores were located near
the Fort Drum gate.

The Garrison Commander at Fort Drum and a representative of the board said
that had they known about these cases, they would have considered placing
the businesses on the off-limits list. Legal assistance attorneys at Fort
Drum were, however, aware of the legal actions by the New York Attorney
General. By not making full use of the boards, commanders may not be doing
all they can to help servicemembers avoid businesses that employ predatory
practices.

According to officials at the installations we visited, the boards might
not be used as a tool for dealing with predatory lenders for a variety of
reasons. First, high deployment levels have resulted in commanders
minimizing some administrative duties, such as convening the boards, in
order to use their personnel for other purposes. Second, as long as the
lenders operate within state laws, the boards may determine they have
little basis to recommend placing or threatening to place businesses on
the off-limits lists. Third, significant effort may be required to put
businesses on offlimits lists. At the installations we visited, the
boards' composition included representatives from functional areas like
public works, family community services, legal counsel, safety, and public
affairs.

In contrast, businesses near two other installations we visited changed
their lending practices after boards recommended that commanders place or
threaten to place businesses on off-limits lists. The Commander of the
Navy Region Southwest's board identified actions that were based on the
board's recommendations against businesses committing illegal acts or
taking unfair advantage of servicemembers. For example, in October 2002, a
company was placed off-limits because it represented itself as a
government agency when arranging loan-repayment allotments with
servicemembers, threatened debtors with court-martial for nonpayment, and
wrote loans that had interest rates of 60 percent. Similarly, the board at
Camp Lejeune, North Carolina, threatened to take action against a lender
that was charging 33.1 percent interest and requiring servicemembers to
waive their rights set forth by the Servicemembers Civil Relief Act.17 The
business avoided being placed on the installation's off-limits list by
terminating two employees and changing some of its business practices.

    Advertising in Installation Newspapers Could Confuse Servicemembers about
    Whether the Military Endorses Payday Lenders

In some instances, DOD is not providing a clear message about whether it
endorses advertisers in official installation newspapers. Some
servicemembers in our focus groups said they were confused about whether
the military endorses the businesses that advertise in installation
newspapers, and the confusion could lead servicemembers to use a type of
business that DOD has labeled as potentially having predatory lending
practices. Earlier, a 2003 Army publication stated that payday loan
advertisements appear in official and unofficial military publications,
and readers often incorrectly assume that military officials have approved
the businesses and their claims.18 A DOD instruction requires installation
publications to run disclaimers warning readers that advertisements do not
constitute endorsement by the U.S. government. The instruction also
requires public affairs staffs to oversee the appropriateness of
advertisements in installation publications.19 Among other things, the
public affairs staff is to review advertisements and identify any that may
be

1750 U.S.C. App. S: 501. The act, among other things, caps the annual
interest at 6 percent on debts incurred prior to a person's entry into
active duty military service and sets forth procedures for requesting such
a reduction.

18See "Consumer Scams: Are You Getting Ripped Off?" Hot Topics, Vol. 5,
No. 4 (2003). U.S. Army publication by the Office of the Chief of Public
Affairs.

19DOD Instruction 5120.4, Enclosure 4, Department of Defense Newspapers,
Magazines and Civilian Enterprise Publications (June 16, 1997).

detrimental to DOD personnel or their family members. If an advertisement
is found to be detrimental, the public affairs staff is to take steps to
either have the advertisement removed by the publisher or report the
situation to the installation commander who can act to preclude
distribution of the publication on the installation.

Servicemembers' confusion about businesses' advertisements may have
multiple causes. First, readers may not see the advertising disclaimer. We
reviewed 14 installation newspapers and found that all of them contained a
disclaimer; however, we also observed that the disclaimers were typically
(1) included only once in the newspaper, (2) listed with other
administrative notices such as statements identifying the publisher and
the availability of advertised items, and (3) located remotely from many
of the advertisements. Second, advertisements for some types of businesses
may run contrary to official DOD statements about the use of those
businesses. Servicemembers participating in our focus groups said they
were confused because DOD officials and information provided during PFM
training warned against using payday lenders but such lenders were allowed
to advertise in installation newspapers. We observed two such
advertisements for a payday lender during our review of the 14
installation newspapers, and PFM program managers wrote comments about
this issue when responding to a GAO survey of all PFM managers. Third,
there is confusion about which businesses do and do not use predatory
lending practices. For example, the PFM program manager at one
installation identified a particular car financing business as predatory,
but the PFM program manager at another installation sometimes directs
servicemembers to this same business when they have had past credit
problems that limit their loan options. Fourth, legal assistance attorneys
on some of the installations we visited told us that lenders and other
businesses are free to advertise in the newspapers. A potential negative
effect of the confusion regarding whether businesses are approved and
endorsed by the installation is that servicemembers may use types of
businesses that DOD policy officials have determined to be predatory,
rather than seeking assistance through alternatives such as military
relief/aid societies identified by the installation PFM program manager
and staff.

Servicemembers Do Not Servicemembers do not take full advantage of free
DOD-provided legal Make Full Use of Free DOD-assistance on contracts and
other financial documents. Legal assistance Provided Legal Assistance
attorneys at the 13 installations we visited stated that servicemembers

rarely seek their assistance before entering into financial contracts
forfor Financial Issues goods or services such as purchasing cars or
lifetime film developing.

The attorneys said that servicemembers are more likely to seek their
assistance after encountering problems such as the following selected
examples:

o 	Used car dealers offered low interest rates for financing a vehicle,
but the contract stated that the interest rate could be converted to a
higher rate later if the lender did not approve the loan. Servicemembers
were later called to sign a new contract with a higher rate. By that time,
some servicemembers found it difficult to terminate the transaction
because their trade-in vehicles had been sold.

o 	Used car dealers refused to allow servicemembers to take their
contracts to a legal assistance attorney for review. In one such instance,
a servicemember signed a contract to pay $30,000 for a car with a blue
book value of $12,000.

o 	A company used car titles as collateral on loans and required
servicemembers to provide an extra set of keys to the cars so that they
could be easily repossessed if the loans were not paid. This type of
transaction can result in triple-digit interest.

During our interviews, legal assistance attorneys said they provide
preventive briefings to incoming and deploying servicemembers to address
financial issues such as car buying, payday loans, and debt management
during deployment. In some cases, they might take actions to assist
servicemembers who have financial problems. Depending on the
circumstances, they may represent servicemembers in local court involving
consumer cases that affect the military community. In addition, while most
legal assistance attorneys do not represent servicemembers in bankruptcy
cases, they may provide servicemembers with information on bankruptcy,
advice about whether filing is appropriate, and a reference to an
offinstallation civilian attorney.

Legal assistance attorneys, as well as other personnel in our interviews
and focus groups, noted reasons why servicemembers might not take greater
advantage of the free legal assistance before entering into business
agreements. They stated that junior enlisted servicemembers who want their
purchases or loans immediately may not take the time to visit the
attorney's office for such a review. Additionally, the legal assistance
attorneys noted that servicemembers feared information would get back to
the command about their financial problem and limit their career
progression.

    DOD Is Exploring On-Installation Alternatives to Payday Loans

DOD, service, and installation officials are exploring on-installation
alternatives to payday loans for those servicemembers with financial
problems. In 2004, DOD said it surveyed approximately 150 defense credit
unions and received responses from 48. Of those responding, which may not
be representative of all defense credit unions due to the low response
rate, 29 credit unions said that they offer an alternative to payday
lending. The alternatives, which can be shared with other on-installation
credit unions and banks as well as PFM program managers and command
financial counselors, included (1) low-cost, short-term lines of credit;
(2) short-term signature loans or small unsecured signature loans; and (3)
availability of funds 2 days before the servicemember's normal pay date.

Some of the PFM program managers at the 13 installations we visited had
also worked with on-installation credit unions and banks to obtain payday
loan alternatives, which included special loan programs or overdraft
protection of up to $500 for customers with "less-than perfect" credit
histories. One credit union that we visited advertised a loan alternative
called QuickCash, which had an annual percentage rate of 18 percent. To
use QuickCash, servicemembers were required to join the credit union,
apply for the loan, and have the repayment deducted from their account the
following pay period. Some of the on-installation credit unions also offer
seminars and training to assist servicemembers in finding lending
alternatives.

Other alternatives to payday loans include pay advances and military
relief/aid society grants and no interest loans to servicemembers.20 Some
servicemembers in our focus groups stated that they would not use these
types of installation-related alternatives because the alternatives take
too long, are intrusive because the financial institution or relief/aid
society required in-depth financial information in the loan or grant
application, or may be career limiting if the command found out the
servicemembers were having financial problems. The Army Emergency Relief
Society has attempted to address the time and intrusiveness concerns with
its test program, Commander's Referral, for active duty soldiers lacking
funds to

20These are provided during emergencies, which include nonreceipt or loss
of pay, funeral expenses for dependents, repair of a primary vehicle, and
payment of rent to prevent eviction. See AR-930-4, Army Emergency Relief
(Aug. 30, 1994) section 2-11 (Categories of authorized emergency financial
assistance); and Air Force Instruction 36-3109, Air Force Aid Society
(Mar. 5, 2004). The Navy and Marine Corps Relief Society officials said
they do not have an instruction.

meet monthly obligations of $500 or less. After the commander approves the
loans, the servicemembers can expect to receive funds quickly.
Noncommissioned officers in our individual interviews and focus groups
said the program still does not address servicemembers' fears that
revealing financial problems to the command can jeopardize their careers.

Conclusions	Although we have cited examples where installation commanders
changed the predatory practices of businesses by adding or threatening to
add the lenders to an off-limits list, other installation commanders we
visited have made only limited use of their Armed Forces Disciplinary
Control Board for such purposes. The fact that some boards have not met
for a year or more seems to run contrary to DOD, service, and installation
efforts to curb the use and effects of predatory lending practices. As we
have discussed, failure to utilize this valuable tool fully and
appropriately for curbing unfair or illegal commercial or consumer
practices can have negative, but difficult-to-quantify, consequences on
servicemembers' finances as well as unit morale and readiness.
Furthermore, although military installations appear to be meeting current
requirements regarding disclaimers for advertisements in installation
publications, the location of the disclaimer has resulted in unclear
messages to some servicemembers about whether inclusion of certain
advertisements constitutes approval or endorsement of the business by DOD.
In addition, some servicemembers have been confused when the content of
some advertisements is contrary to official DOD statements regarding the
use of lenders who may use predatory lending practices. This confusion is
particularly problematic because it may harm DOD's efforts to reduce the
use and effects of predatory lending practices.

  Recommendations for Executive Action

We are making the following two recommendations to the Secretary of
Defense:

o 	To improve DOD's ability to curb the use and effects of predatory
lending practices, we recommend that the Secretary of Defense direct the
Under Secretary of Defense for Personnel and Readiness to amend existing
regulations to require installation commanders to convene the Armed Forces
Disciplinary Control Boards at least semiannually to investigate and make
recommendations to commanders on matters related to eliminating conditions
which adversely affect the health, safety, morals, welfare, morale, and
discipline of the Armed Forces, to

include servicemembers' use of lenders who may use predatory lending
practices.

o 	 To ensure DOD provides servicemembers a clear message about whether it
endorses advertisers in official installation newspapers that may use
predatory lending practices, we recommend that the Secretary of Defense
direct the Assistant Secretary of Defense for Public Affairs to clarify
the regulations pertaining to advertisements in installation publications
by requiring disclaimers to be more prominent and taking steps to ensure
advertisements reflect stated DOD policies regarding what it considers to
be predatory lending.

  Agency Comments and Our Evaluation

In written comments on a draft of this report, DOD concurred with our
recommendation to clarify regulations pertaining to advertisements in
installation publications and partially concurred with our recommendation
to amend regulations to require at least semiannual meetings of the Armed
Forces Disciplinary Control Boards.

In its comments, DOD noted that it is in the initial stages of staffing
and coordinating changes to the Armed Forces Disciplinary Control Boards'
joint regulations and will take two actions-require boards to meet four
(instead of two) times a year and direct that businesses on the off-limits
list for one service be off-limits for all services. Although DOD's
comments dealt primarily with the issue of payday lending, the intent of
our recommendation was to address all types of consumer predatory lending
encountered by servicemembers. Moreover, DOD's actions will go even
further than our recommendation suggested. DOD also noted that the boards'
process would be an ineffectual deterrent against payday lenders for
several reasons. For example, it stated that the boards' process would be
ineffectual because of the difficulty in providing adequate oversight of
all payday lending businesses and noted that installation commanders may
have to develop criteria outside of state statutes for the 35 states where
payday lending is legal. Our draft report had already noted that boards
may have little basis for recommending or threatening to place businesses
on an off-limits list when lenders operate within state laws. Our
recommendation will (1) require the boards to meet regularly and (2)
provide installation commanders additional focus and oversight into
conditions that may adversely affect servicemembers on their
installations. Implementing our recommendation does not require
installation commanders to monitor all payday lending businesses; instead,
it is intended to provide commanders with a routine process for reviewing
and taking appropriate action against

those lenders that adversely affect servicemembers on the commanders'
installation.

DOD's comments are reprinted in appendix III. DOD also provided technical
comments, which we incorporated in the final report as appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time we will send copies of the report to
the Secretary of Defense and interested congressional committees. We will
also make copies available to others upon request. This report will be
available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions regarding this report, please
contact me at (202) 512-5559 ([email protected]) or Jack E. Edwards at
(202) 5128246 ([email protected]). Other staff members who made key
contributions to this report are listed in appendix IV.

Sincerely yours,

Derek B. Stewart Director, Defense Capabilities and Management

Appendix I

Scope and Methodology

In addressing the objectives of this engagement on predatory lending, we
limited our scope to active duty servicemembers because we have previously
issued a number of reports on the compensation, benefits, and pay-related
problems of reservists.1 While performing our work, we visited 13
installations with high deployment levels, as identified by service
officials (see table 1).2 During these site visits to installations in the
United States and Germany, special emphasis was given to ascertaining the
financial conditions of junior enlisted servicemembers because the
Department of Defense (DOD) and service officials have reported that this
subgroup is more likely to encounter financial problems.

Table 1: Installations in the United States and Germany Where GAO
Conducted Site Visits from May to October 2004

Service Installation

            Army Fort Bragg, North Carolina Fort Campbell, Kentucky

Fort Drum, New York

                             Fort Lewis, Washington

Fort Stewart, Georgia

 Ray Barracks, Friedberg, Germany Navy Naval Air Station Jacksonville, Florida
 Naval Station San Diego, California Marine Corps Camp Lejeune, North Carolina

Camp Pendleton, California

Air Force Bolling Air Force Base, Washington, D.C.

Langley Air Force Base, Virginia

Ramstein Air Base, Germany

Source: GAO.

To address servicemembers use of consumer loans considered to be predatory
in nature, we reviewed and analyzed laws, policies, and

1Our work focused on active duty servicemembers. The Related GAO Products
section at the end of this report lists several products that focus on
reservists and their compensation, benefits, and pay-related problems that
result from deployment.

2To facilitate efficient data collection, the data for this engagement
were gathered at the same time as those used to prepare GAO-05-348.

Appendix I Scope and Methodology

directives-such as the Servicemembers Civil Relief Act3 and DOD's
Financial Management Regulation 7000.14R, Volume7A. We also reviewed and
analyzed lending-related findings and perspectives contained in
publications issued by GAO, DOD, Congressional Research Service, Federal
Reserve Bank of Philadelphia, Federal Deposit Insurance Corporation,
Federal Trade Commission, state government officials, consumer groups
(Consumer Federation of America and National Consumer Law Center), and an
association that says it represents around 50 percent of payday lenders
(Community Financial Services Association of America). We reviewed a 2004
Consumer Federation of America study, which cited 15 states that prohibit
or limit payday lending through laws on interest rate caps for small
loans, usury laws, or specific prohibitions for check cashers.4 We did not
independently verify that these 15 states, in fact, do prohibit this
activity, nor did we review laws in the other 35 states. We also contacted
the Federal Trade Commission and ascertained that its Military Sentinel
database has little information on servicemembers' complaints against
businesses. We interviewed DOD and service policy officials, as well as
representatives of consumer groups and a payday association. During our 13
site visits, we developed and used structured questionnaires for
interviews with seven types of officials: installation leaders, personal
financial management (PFM) program managers, command financial counselors,
senior noncommissioned officers (pay grades E8 to E9), legal assistance
attorneys, chaplains, and relief/aid societies. We used a structured
protocol for conducting 60 focus groups with over 400 individuals who met
in four homogeneous types of groups: junior enlisted servicemembers (pay
grades E1 to E4), noncommissioned officers (pay grades E5 to E9),
company-grade officers (pay grades O1 to O3), and spouses of
servicemembers. In addition, we constructed, pretested, and administered a
survey to participants in the focus groups to collect supplemental
information that may have been difficult to collect in a group setting. We
also obtained data from an August 2004 DOD-wide survey5 to assess its
reliability and determine prevalence rates for four types of loans that
DOD says may contain predatory practices. The August

350 U.S.C. App. S: 501.

4See Consumer Federation of America, Unsafe and Unsound: Payday Lenders
Hide Behind FDIC Bank Charters to Peddle Usury (Washington, D.C.: Mar. 30,
2004).

5The target population for all active duty Status of Forces Surveys
consists of active duty members of the Army, Navy, Marine Corps, and Air
Force, excluding National Guard and Reserve members who (1) have at least
6 months of service at the time the questionnaire is first fielded, and
are (2) below flag rank.

Appendix I Scope and Methodology

2004 survey had a response rate of 40 percent. DOD has conducted and
reported on research to assess the impact of this response rate on overall
estimates. They found that, among other characteristics, junior enlisted
personnel (E1 to E4), servicemembers who do not have a college degree, and
members in services other than the Air Force were more likely to be
nonrespondents. We have no reason to believe that potential non-response
bias in the estimates, not otherwise accounted for by DOD's research, is
substantial for the variables we studied in this report. Therefore, we
concluded the data to be sufficiently reliable to address our objectives.
We found the data sufficiently reliable to address our objectives. This
information was supplemented with information obtained from three group
discussions with a total of 50 personnel affiliated with the PFM programs
while they attended a November 2004 conference.

To assess whether DOD was fully utilizing the tools that it has to curb
the use and effects of predatory lending practices, we obtained
information from the laws, policies, directives, and reports that were
used to address servicemembers' use of loans that DOD considered to be
predatory in nature. DOD and service policy officials identified DOD's
primary tools for curbing the use and effects of predatory loans. These
individuals also supplied their perspectives on how fully utilized those
tools were. Similarly, individual interviews and focus groups with others
who supplied information on the question related to servicemembers' use of
consumer loans also provided their perspectives on how fully the tools
were used, the effects of underutilizing the tools, and possible reasons
that some tools were not used more fully. In addition, we examined
official installation newspapers to determine whether they contained
disclaimers and advertisements for loans that DOD officials say may
contain predatory practices. This examination of newspapers was just a
cursory review and was not based on any sort of random sampling.
Interviews with representatives of on-installation credit unions and
national military relief/aid societies provided input about alternatives
to payday loans.

We performed our work from March 2004 through February 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Predatory Lending Findings from GAO-Led Focus Groups Held at 13 Installations

We held focus group sessions at the 13 military installations we visited
during the course of this engagement to obtain servicemembers'
perspectives on a broad range of topics, including the impact of
deployment on servicemembers' finances and the types of lenders military
families use, along with the personal financial management (PFM) training
and assistance provided to servicemembers by the Department of Defense
(DOD) and service programs (see app. I for a list of installations
visited). Servicemembers who participated in the focus groups were divided
into three groups: junior enlisted personnel (pay grades E1 through E4),
senior enlisted personnel (pay grades E5 through E9), and junior officers
(pay grades O1 through O3). Although we requested to meet with
servicemembers who had returned from a deployment within the last 12
months, some servicemembers who had not yet deployed also participated in
the focus groups. At some installations, we also held separate focus
groups with spouses of servicemembers. Most of the focus groups consisted
of 6 to 12 participants.

We developed a standard protocol, with seven central questions and several
follow-up questions, to assist the GAO moderator in leading the focus
group discussions. The protocol was pretested during our first
installation visit, and, after minor changes, was used at the remaining 12
installations. During each focus group session, the GAO moderator posed
questions to participants who, in turn, provided their perspectives on the
topics presented. We essentially used the same questions for each focus
group, with some slight variations to questions posed to the spouse
groups. Questions and sample responses are listed below.

We sorted the 2,090 summary statements resulting from the 60 focus groups
into categories of themes through a systematic content analysis. First,
our staff reviewed the responses and agreed on response categories. Then,
two staff members independently placed responses into the appropriate
response categories. A third staff member resolved any discrepancies.

In this report, we provide focus group participants' statements for only
question 5-the one that asked participants about their experiences with
predatory lenders.1 Before the question was asked we attempted to provide
participants with a general context for answering the question by reading

1See GAO-05-348, app. II, for participants' answers on the other six
questions asked in the focus groups.

Appendix II
Predatory Lending Findings from GAO-Led
Focus Groups Held at 13 Installations

the following information: "Now we would like to talk about specific
problems with predatory lenders. These include lenders that charge
excessive fees and interest rates and those that lend without regard to
borrowers' ability to repay-usually lending to those with limited income
or poor or no credit. Some payday lenders and fast checking places that
charge high interest rates may fall into this category. Or a predatory
lender could be a lender that commits outright fraud or deception-for
example, falsifying documents or intentionally misinforming the borrowers
about the terms of a loan, which may occur with unscrupulous car dealers."

The themes and the number of installations for which a statement about a
theme was cited are provided in italics below. Also, two examples of the
statements categorized in the theme are provided. Only those themes cited
at a minimum of three installations are presented. The number of
installations-rather than the number of statements-is provided because (1)
the focus of this engagement was on DOD-wide issues and (2) a lengthy
discussion in a single focus group may have generated numerous comments.

5.	What kinds of experiences have your fellow servicemembers or
subordinates had with predatory lenders?

A. Other issue regarding experiences with predatory lenders (N = 13)

o 	Example: Businesses will tell young Marines that they can buy an item
for a certain amount each month. They keep the Marine focused on the low
monthly payments and not on the interest rate or the terms of the loan.

o 	Example: Some Marines feel that a business would not take advantage of
them because they are in the military. This leads them to be more trusting
of the local businesses than they should be, which in turn, leads the
businesses to take advantage of them.

B. Predatory lender used-car dealers (N = 11)

o 	Example: Most of the participants stated that the car dealerships
around base were the worst predatory lenders because they charge high
interest rates and often provide cars that are "lemons." They said that
most of the sales people at the dealerships are former personnel who know
how to talk to servicemembers to obtain their trust. Servicemembers do not
expect this.

Appendix II
Predatory Lending Findings from GAO-Led
Focus Groups Held at 13 Installations

o 	Example: One captain had a Marine in his unit who signed a contract
with a car dealer for a loan with a 26 percent interest rate. The captain
took the Marine to the Marine Credit Union and got him a new loan with 9.5
percent interest.

C. Predatory lender used-payday lenders (N = 10)

o 	Example: A master sergeant got caught in the check-cashing cycle. He
would write a check at one payday lender in order to cover a check written
at another lender the previous week.

o 	Example: One participant shared that when he was a younger Marine he
got caught up with a payday lender. The problem did not resolve itself
until he deployed and was not able to go to the lender anymore.

D. Reason for using predatory lender-get fast cash and no hassle (N = 10)

o 	Example: People use payday lenders because they are quick and easy. All
soldiers have to do is to provide their leave and earnings statement and
they get the money.

o 	Example: Most of the participants say they know people that have used a
payday lender and those soldiers use them because they have bad credit and
can get quick cash.

E. Predatory lender targeting-close proximity and clustering around bases
(N = 9)

o 	Example: It is almost impossible to be unaware of lenders and
dealerships because many are clustered in close proximity to the
installation. They also distribute flyers and use pervasive advertising in
local and installation papers.

o 	Example: The stores and car lots near the installation have signs that
say "E1 and up approved" or "all military approved" to get the attention
of the military servicemembers.

Appendix II
Predatory Lending Findings from GAO-Led
Focus Groups Held at 13 Installations

F. Command role when contacted by creditors (N = 8)

o 	Example: The noncommissioned officers sometimes offer to go with the
junior enlisted to places like car dealers; but, the young soldiers do not
take them up on these offers.

o 	Example: One participant said that debt collectors do call his house
and the command. He noted that one lender called him nine times in one day
and his chief petty officer eventually asked the lender to stop harassing
his sailor.

G. Predatory lender targeting-advertising in installation/local newspaper
(N = 7)

o 	Example: Soldiers are being targeted by predatory lenders in a variety
of ways; for example, flyers are left on parked cars at the barracks,
advertising is present at installation functions, and words such as
"military" are used on every piece of advertising to make the
servicemember believe that the company is part of or supported by the
military. The servicemember would normally trust lenders associated with
the military.

o 	Example: Most predatory lenders have signs that say "Military Approved"
or commercials that say the same thing or "E1 and above approved."

H. Reason for using predatory lender-urgent need (N = 6)

o 	Example: Many soldiers use payday lenders because they are in a bind
for money and they know these lenders can provide quick cash.

o 	Example: Soldiers will use a payday lender because they need money for
a child, the kids, the house payment, etc. In many cases, it does not
matter why they need it; they just need it. So, they go where they can get
cash the fastest and the easiest way possible.

I. Predatory lender used-furniture/rent-to-own (N = 6)

o 	Example: One of the participants stated that he had obtained a loan to
purchase a new washer and dryer. The loan had a 55 percent interest rate
and the appliances cost a lot more than they should have.

Appendix II
Predatory Lending Findings from GAO-Led
Focus Groups Held at 13 Installations

o 	Example: Rent-to-own businesses are widely used by soldiers. One
soldier ended up paying $3,000 for an $800 washer and dryer set.

J. No problem with predatory lenders (N = 5)

o 	Example: There have not been any problems with predatory lenders
lately. The state of Florida has been using legislation to shut them down.

o 	Example: The participants said that they had never encountered an
officer who had to use payday lenders or predatory lenders. According to
the participants, most of the officers' problems come when they have a
bitter divorce.

K. Reason for using predatory lender-other reasons (N = 5)

o 	Example: One soldier stated that his credit was so bad that he had no
other option but to use high interest rate lenders. He stated that, "I
have bad credit and I will always get bad credit."

o 	Example: One participant said he has several friends that use payday
lenders because they are E1s or E2s and don't make much money.

L. Predatory lender targeting-employing former military members (N = 4)

o 	Example: The people running and working for the predatory businesses
are usually former military servicemembers who use their knowledge of the
system to take advantage of Marines.

o 	Example: Many times the predatory lenders are veterans, former Marines,
or retirees. Using these types of people gives the younger Marines a false
sense of trust and then the lenders will take advantage of the
servicemember or stab the servicemember in the back.

M. Reason for using predatory lender-command will not know financial
conditions (N = 3)

o 	Example: When a soldier needs money, a payday loan can be used without
notifying the chain of command. Any form of assistance from

Appendix II
Predatory Lending Findings from GAO-Led
Focus Groups Held at 13 Installations

the Army requires a soldier to obtain approval from a dozen people before
they can get any money.

o 	Example: The most significant reason that people use payday lenders is
privacy. The spouses stated that to obtain assistance through the Air
Force, you must use the chain of command to obtain approval. By doing so,
everyone in the unit will know your business.

                                  Appendix III

                    Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix IV

                     GAO Contact and Staff Acknowledgments

GAO Contact Jack E. Edwards (202) 512-8246

Acknowledgments	In addition to the individual named above, Leslie
Bharadwaja, Alissa Czyz, Marion A. Gatling, Gregg Justice, III, David
Mayfield, Brian Pegram, Minette Richardson, Terry Richardson, and Allen
Westheimer made key contributions to this report.

Appendix V

Related GAO Products

Military Personnel: More DOD Actions Needed to Address Servicemembers'
Personal Financial Management Issues. GAO-05-348. Washington, D.C.: April
26, 2005.

Credit Reporting Literacy: Consumers Understood the Basics but Could
Benefit from Targeted Educational Efforts. GAO-05-223. Washington, D.C.:
March 16, 2005.

DOD Systems Modernization: Management of Integrated Military Human Capital
Program Needs Additional Improvements. GAO-05-189. Washington, D.C.:
February 11, 2005.

Highlights of a GAO Forum: The Federal Government's Role in Improving
Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004.

Military Personnel: DOD Needs More Data Before It Can Determine if Costly
Changes to the Reserve Retirement System Are Warranted. GAO04-1005.
Washington, D.C.: September 15, 2004.

Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced
Significant Pay Problems. GAO-04-911. Washington, D.C.: August 20, 2004.

Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced
Significant Pay Problems. GAO-04-990T. Washington, D.C.: July 20, 2004.

Military Personnel: Survivor Benefits for Servicemembers and Federal,
State, and City Government Employees. GAO-04-814. Washington, D.C.: July
15, 2004.

Military Personnel: DOD Has Not Implemented the High Deployment Allowance
that Could Compensate Servicemembers Deployed Frequently for Short
Periods. GAO-04-805. Washington, D.C.: June 25, 2004.

Military Personnel: Active Duty Compensation and Its Tax Treatment.
GAO-04-721R. Washington, D.C.: May 7, 2004.

Military Personnel: Observations Related to Reserve Compensation,
Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.
GAO-04-582T. Washington, D.C.: March 24, 2004.

Appendix V
Related GAO Products

Military Personnel: Bankruptcy Filings among Active Duty Service Members.
GAO-04-465R. Washington, D.C.: February 27, 2004.

Military Pay: Army National Guard Personnel Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-413T. Washington, D.C.:
January 28, 2004.

Military Personnel: DOD Needs More Effective Controls to Better Assess the
Progress of the Selective Reenlistment Bonus Program. GAO-04-86.
Washington, D.C.: November 13, 2003.

Military Pay: Army National Guard Personnel Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.:
November 13, 2003.

Military Personnel: DFAS Has Not Met All Information Technology
Requirements for Its New Pay System. GAO-04-149R. Washington, D.C.:
October 20, 2003.

Military Personnel: DOD Needs More Data to Address Financial and Health
Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.: September
10, 2003.

Military Personnel: DOD Needs to Assess Certain Factors in Determining
Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions.
GAO-03-554. Washington, D.C.: April 29, 2003.

Military Personnel: Management and Oversight of Selective Reenlistment
Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: November
25, 2002.

Military Personnel: Active Duty Benefits Reflect Changing Demographics,
but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.:
September 18, 2002.

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