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entitled 'Military Personnel: DoD's Predatory Lending Report Addressed 
Mandated Issues, but Support Is Limited for Some Findings and 
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August 31, 2007: 

The Honorable Tim Johnson: 
Chairman: 
Subcommittee on Financial Institutions: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Lindsey Graham: 
Ranking Member: 
Subcommittee on Personnel: 
Committee on Armed Services: 
United States Senate: 

Subject: Military Personnel: DOD's Predatory Lending Report Addressed 
Mandated Issues, but Support Is Limited for Some Findings and 
Recommendations: 

Serious financial problems can adversely affect unit morale and 
readiness as well as servicemembers' credit histories and military 
careers. If servicemembers experience serious financial problems, they 
may be subject to adverse actions such as loss of security clearances, 
criminal or nonjudicial sanctions, or adverse personnel actions 
including possible discharge from the military. The Department of 
Defense's (DOD) Social Compact, which is part of its human capital 
plan, notes that mission readiness and quality of life depend on 
whether servicemembers use their financial resources 
responsibly.[Footnote 1] For these reasons, Congress and DOD officials 
have expressed concerns about servicemembers' financial conditions. DOD 
is particularly concerned about the use and effects of certain consumer 
loans that DOD identified as being predatory. 

In April 2005, we reported about problems servicemembers were 
experiencing with personal financial management and the steps that DOD 
was taking to address those issues.[Footnote 2] In another April 2005 
report, we noted that DOD did not know the extent to which 
servicemembers were using consumer loans that DOD considered to be 
predatory, nor the effects of that usage.[Footnote 3] Our report noted 
that DOD expressed concerns about four types of loans it labeled as 
predatory--payday, rent-to-own, automobile title pawn, and tax refund 
loans. These financial products are typically offered by lenders that 
are outside the system of federally insured financial institutions. 
Although "predatory lending" has no precise definition, some practices 
(such as charging excessive fees or interest rates and repeatedly 
refinancing loans without economic gain for the borrower) are widely 
regarded as predatory. We also reported that DOD and active duty 
servicemembers have not fully used DOD's existing tools for curbing the 
use and effects of predatory lending practices. To correct identified 
problems in DOD's programs for addressing predatory lending practices, 
we recommended actions that would (1) clarify to servicemembers that 
DOD does not endorse the advertisers in installation newspapers and (2) 
make greater use of Armed Forces Disciplinary Control Boards which can 
place businesses off limits to servicemembers if the businesses 
adversely affect the servicemembers' health, safety, morals, welfare, 
morale, and discipline. DOD concurred with the first recommendation and 
partially concurred with our second recommendation, noting constraints 
faced in using the boards. 

The 2006 National Defense Authorization Act required DOD to issue a 
report on predatory lending directed at servicemembers and their 
dependents.[Footnote 4] The mandate required DOD's report to include: 
(1) a description of the prevalence of predatory lending practices 
directed at servicemembers and their families; (2) an assessment of the 
effects of predatory lending on servicemembers and their families; (3) 
a description of DOD's strategies and programs to educate 
servicemembers and their families about predatory practices; (4) a 
description of DOD's strategies and programs to reduce or eliminate the 
prevalence of predatory lending practices directed at servicemembers 
and their families, as well as the negative effects of such practices; 
and (5) recommendations for additional legislative and administrative 
action to reduce or eliminate predatory lending practices. The act 
further specified that DOD was to prepare its report in consultation 
with the Secretary of the Treasury, the Chairman of the Federal 
Reserve, the Chairman of the Federal Deposit Insurance Corporation, and 
representatives from military charity organizations, and consumer 
groups and submit it to Congress within 180 days of the legislation's 
enactment. DOD issued the mandated report on August 9, 2006.[Footnote 
5] Following the submission of DOD's report, Congress added a new 
section to Title 10 of the U.S. Code which sets out a number of 
limitations and requirements related to terms of consumer credit 
extended to servicemembers and their dependents.[Footnote 6] Many of 
the provisions in this section mirror the recommendations in DOD's 
report. This statute required the Secretary of Defense to create 
regulations to implement the new provisions, and, in response to that 
requirement, DOD has published in the Federal Register some proposed 
rule changes that would limit the terms of consumer credit extended to 
servicemembers and their dependents.[Footnote 7] These proposed 
regulations are expected to be effective October 1, 2007. 

Following the publication of DOD's 2006 report, private-sector groups 
associated with segments of the financial industry raised concerns 
about the report's preparation, quality, and recommendations. You 
requested that we review DOD's 2006 report on predatory lending 
practices. Specifically, we evaluated DOD's approach and support in 
preparing its mandated report on predatory lending practices. This 
report documents findings that we briefed to your offices on August 17, 
2007. Enclosure I contains the briefing slides we presented. This 
briefing contributes to a larger GAO body of work on compensation and 
financial conditions of military personnel (see the list of related GAO 
products at the end of this report). 

In conducting our review, we limited the scope of our work to the types 
of loans that DOD identified as being predatory in its mandated 2006 
report. We examined legislation that mandated the DOD report and 
regulations such as governmentwide and DOD-wide standards for data 
quality. In addition to reviewing DOD's predatory lending report and 
the reports cited in that study, we reviewed GAO, Congressional 
Research Service, and Federal Deposit Insurance Corporation Office of 
the Inspector General reports on related issues. We developed a tool to 
systematize our analysis of the quality of research studies and data 
sources DOD used as support in its report. We interviewed 
representatives and obtained documents from DOD and the federal 
agencies, military charity organizations, and consumer groups involved 
in the preparation of DOD's report as well as other groups whose 
perspectives were different from those provided in the DOD report. As 
an additional means for examining the support for DOD's report, we 
conducted a site visit at one installation for each of the four active 
duty services. Enclosure II describes our scope and methodology in more 
detail. We performed our work between March 2007 and August 2007 in 
accordance with generally accepted government auditing standards. 

Summary: 

DOD issued a report on predatory lending that addressed the mandated 
issues, but it contained limited support for some of its findings and 
recommendations. As required by the mandate in the 2006 National 
Defense Authorization Act, DOD issued its report in August 2006 
addressing the five required elements after consulting with the 
organizations and groups specified in the act. Among the points that 
DOD made are that predatory lending practices are prevalent and target 
military personnel and that the department is exerting significant 
effort to educate servicemembers on the potential dangers of using 
predatory loans. All mandated organizations and groups stated that they 
had commented on DOD's report, although DOD appears to have consulted 
with military charity organizations and consumer groups more than with 
the federal agencies identified in the report. DOD's report did not 
describe the content and extent of the consultations or make note of 
any concerns raised by those groups. The report's authors indicated 
that they had to rely largely on previously gathered data and may have 
done some things differently if they had had more time. Additionally, 
representatives for one of the consulted federal agencies noted that 
DOD faced a short timeframe to prepare its report and basically met the 
legislative requirements. Even though DOD provided several sources 
illustrating the negative effect that predatory loans have on 
servicemembers, our evaluation of the DOD report revealed 
methodological problems in some of its analyses and in some of the 
studies cited in its report, particularly for the description of the 
prevalence and assessment of the effects of predatory lending 
practices. For example, the DOD report's prevalence section provided 
several metrics that did not directly assess whether servicemembers 
actually (1) used the loan type and (2) considered the associated 
lending practices to be predatory. As we noted in our 2005 report on 
predatory lending, the extent to which active duty servicemembers use 
consumer loans considered to be predatory and the effects of such 
borrowing are unknown, but some of the information provided in the DOD 
report and obtained during our 2007 site visits suggests that some 
servicemembers can pay substantial sums for the loans. DOD's report 
also showed the percentages of servicemembers who use loans that it had 
characterized as predatory and the percentage of servicemembers who 
experienced financial difficulties. It did not include an analysis of 
the relationship between the two types of information. In its sections 
on education and strategies to reduce or eliminate the prevalence and 
negative effects of predatory lending practices, the DOD report 
documented the broad array of financial education classes and other 
programs offered. While the report linked the large numbers of 
financial education classes and materials provided to servicemembers 
and their families to increased awareness and reduced usage of 
predatory loans,. DOD has not implemented procedures for evaluating 
outcomes from its training programs as we recommended in 2005. For 
example, tools such as required personal financial management training 
for all servicemembers arriving at their first duty station, 
alternative loan programs from military charity organizations, and 
financial counseling are readily available to servicemembers; however, 
our 2005 report noted and our site visits in 2007 found that some 
servicemembers underutilize these resources because, in part, they do 
not want their command to know about their financial problems. DOD's 
report included six recommendations for additional legislative and 
administrative actions, such as setting a 36 percent annual percentage 
rate cap for loans to military borrowers and requiring unambiguous and 
uniform price disclosures. While these recommendations may have merit, 
they were not directly linked to the report's findings, were based on 
research studies that had some methodological problems, or did not 
address implementation issues. Similarly, DOD proposed the 
recommendations without discussing the feasibility of implementing and 
enforcing the recommendations. While DOD's report addressed the 
requirements in the mandate, the shortcomings we identified in some of 
the methods and approach indicate that caution is necessary when 
interpreting the findings for some areas of DOD's report. 

Agency Comments and Our Evaluation: 

On August 21, 2007, we provided a draft of this report to DOD for 
review and comment. The Office of the Under Secretary of Defense for 
Personnel and Readiness provided the following comments. 

"The Department stands by the content and recommendations in its August 
9th, 2006, Report to Congress on Predatory Lending Practices Directed 
at Members of the Armed Forces and Their Dependents. While more 
research is always a laudable objective, GAO's existing findings, as it 
acknowledges, point to the same conclusion the Department and the 
Congress reached: We need to act to protect our Service personnel from 
predatory lending practices." 

Contrary to DOD's comments, our report neither acknowledged nor 
disagreed with DOD's conclusion stated above. While actions may be 
needed to protect servicemembers from predatory lending practices, our 
report did not endorse or reject any action recommended in DOD's 
report. The scope of our work was limited to evaluating DOD's approach 
and support in preparing its mandated report on predatory lending 
practices. 

Contrary to DOD's comments, our report neither acknowledged nor 
disagreed with DOD's conclusion stated above. While actions may be 
needed to protect servicemembers from predatory lending practices, our 
report did not endorse or reject any action recommended in DOD's 
report. The scope of our work was limited to evaluating DOD's approach 
and support in preparing its mandated report on predatory lending 
practices.  

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 4 days 
after its issue date. At that time, we will provide copies of this 
report to interested congressional committees and the Secretary of 
Defense. We will also make copies available to others upon request. 
This report will be available at no charge on GAO's Web site at 
[hyperlink, http://www.gao.gov]. 

If you have any questions about this report or need additional 
information, please contact me at (202) 512-3604 or farrellb@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Key contributors 
to this report are listed in Enclosure III. 

Brenda S. Farrell: 

Director: 
Defense Capabilities and Management: 

[End of section] 

Enclosure I: 

Briefing Slides: 

Military Personnel: DODís Predatory Lending Report Addressed Mandated 
Issues, but Support Limited for Some Findings and Recommendations: 

Briefing to Congressional Requesters: 
August 17, 2007: 

Outline of Briefing: 

Introduction/Background: 

Objective, Scope, and Methodology: 

GAO Observations: 

DOD Consultations during Report Preparation: 
DOD Addressed Five Elements in Its Report:[Footnote 8] 
Description of the prevalence of predatory lending practices, 
Assessment of the effects of the practices,  
Description of DODís strategy and programs to educate servicemembers 
and their families regarding the practices,  
Description of DODís strategy and programs to reduce or eliminate the 
prevalence and negative effects of the practices, and: 
Recommendations for additional legislative and administrative action to 
reduce or eliminate the practices.  

The Department of Defenseís (DOD) Social Compact, which is part of its 
human capital plan, notes that mission readiness and quality of life 
depend on whether servicemembers use their financial resources 
responsibly.[Footnote 9] 

If servicemembers experience serious financial problems, they may be 
subject to adverse actions such as loss of security clearances, 
criminal or non-judicial sanctions, or adverse personnel actions 
including possible discharge from the military.

Serious financial problems can adversely affect unit morale and 
readiness as well as servicemembersí credit histories and military 
careers.[Footnote 10] 

In our April 2005 report that addressed predatory lending practices and 
servicemembers,[Footnote 11] we noted:

ďPredatory lendingĒ has no precise definition, but some practices (such 
as charging excessive fees or interest rates and repeatedly refinancing 
loans without economic gain for borrower) are widely regarded as 
predatory. 

DOD officials expressed concerns about four types of consumer loans 
(payday, rent-to-own, automobile title pawn, and refund anticipation) 
that DOD labeled as predatory. These loans are typically provided by 
lenders that are outside the system of federally insured financial 
institutions. These loans provide alternative access to cash for 
consumers with low incomes or poor credit records, and generally do so 
without standard credit checks. The fees charged for these types of 
loans are generally much higher than those charged by traditional 
financial institutions, and other loan terms and conditions are often 
unfavorable to the borrower. Descriptive information on these four 
types of consumer loans follows. 

* Payday loans, according to the Federal Deposit Insurance Corporation 
(FDIC), are small, short-term loans that borrowers promise to repay out 
of their next paycheck or deposit of funds. These loans typically have 
high fees and are often rolled over repeatedly, which can make the cost 
of borrowingóexpressed as an annual percentage rateóextremely high. 
[Footnote 12]

* Rent-to-own loans, according to the Federal Trade Commission, provide 
immediate access to household goods (such as furniture and appliances) 
for a relatively low weekly or monthly payment, typically without any 
down payment or credit check. Consumers have the option of purchasing 
the goods by continuing to pay ďrentĒ for a specified period of time; 
however, the effective cost of the goods may be two to three times 
higher than the retail price.[Footnote 13]  

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

* Refund anticipation loans provide cash loans against the borrowerís 
expected income tax refund.

DOD did not know the extent to which servicemembers use consumer loans 
that it considered to be predatory or what the effects of that 
borrowing were, at the time of our April 2005 report. 

Although DOD had tools in place to curb the use and effects of 
predatory lending practices in 2005, DOD and active duty servicemembers 
had not fully used its tools, such as a panel that can place a business 
off-limits to servicemembers.

The National Defense Authorization Act for Fiscal Year 2006 mandated 
DOD to submit a report on predatory lending practices directed at 
servicemembers and their families and required: [Footnote 14] 

Consultation with the Secretary of the Treasury, the Chairman of the 
Federal Reserve, the Chairman of the FDIC, military charity 
organizations, and consumer organizations; 

Information on the following five elements regarding predatory lending 
practices directed at servicemembers and their families: 

* Description of the prevalence of predatory lending practices, 

* Assessment of the effects of the practices,  

* Description of DODís strategy and programs to educate servicemembers 
and their families regarding the practices,  
 
* Description of DODís strategy and programs to reduce or eliminate the 
prevalence and negative effects of the practices, and: 

* Recommendations for additional legislative and administrative action 
to reduce or eliminate the practices; and: 

Issuance of the report no later than 180 days after enactment of the 
legislation.

DOD published its Report on Predatory Lending Practices Directed at 
Members of the Armed Forces and Their Dependents on August 9, 2006. 
Among the points made in the report were: 

The report had been prepared with assistance from the specific agencies 
and types of organizations specified in the mandate. 

Predatory lending practices are prevalent and target military 
personnel. 

Efforts are on-going to persuade servicemembers ďnot to fall victim to 
the lure of easy credit to solve their financial concernsĒ and to 
consider better options. 

The department is exerting significant effort to educate servicemembers 
on the potential dangers of using predatory loans and better ways of 
managing their finances. 

Commanders are using the methods available to them (such as loans 
available from military charity organizations) to curtail the 
prevalence of predatory loans. 

DOD is seeking protections for servicemembers by proposing six 
recommendations for statutory controls. 

Objective, Scope, and Methodology: 

Objective: 
 
For this report, we evaluated DODís approach and support in preparing 
its mandated report on predatory lending practices. 

Scope: 

We limited our work to the types of loans that DOD identified as being 
predatory in its mandated report. We focused on active duty 
servicemembers based on DODís use of survey results and other data on 
active duty servicemembers. 

Methodology: 

To address our objective, we:

Examined the 2006 legislation mandating the DOD report and regulations 
such as government-wide and DOD-wide standards for data quality;  

Reviewed reports on related issues from GAO, other agencies, and non- 
governmental organizations;

Constructed and used an evaluation tool to systematically analyze the 
methodological soundness of some research studies and data sources that 
DOD used in its report; 

Interviewed responsible DOD and service officials and representatives 
from the U.S. Treasury, Federal Reserve, FDIC, military charity 
organizations, and consumer organizations that were consulted by DOD in 
its report preparation; 

Held discussions with groups such as the Center for Regulatory 
Effectiveness and a payday lending association to understand 
perspectives that differed from those provided in DODís report; 

Conducted a site visit at one installation for each of the four active 
duty services and used structured protocols to conduct individual 
interviews and group discussions with personnel representing 
installation leadership, legal assistance, finance, senior enlisted 
supervisors, financial counselors and trainers, and the military 
aid/relief unit representatives; and Performed our work between March 
2007 and August 2007 in accordance with generally accepted government 
auditing standards. 

Observations: 

Consultations: 

DODís 2006 report indicated and our follow-up discussions confirmed 
that the mandated agencies and organizations were consulted, but the 
report did not describe the content and extent of the consultations or 
make note of any concerns raised by those groups. 

The representatives for the mandated federal agencies stated that they 
had reviewed a draft of DODís report but did not participate during its 
preparation. 

* Federal Reserve representatives stated that DOD orally described the 
report and gave them a whole draft to review. Federal Reserve staff: 

- provided general comments, but did not help with the reportís 
content, 

- had no official opinion on the report since it was based on DODís 
research and studies of predatory loans on servicemembers, and: 

- did not help DOD formulate the recommendations nor did the Federal 
Reserve endorse them.

* FDIC representatives stated they reviewed the whole draft report and ē
 
- made general comments to DOD, and: 
 
- suggested that DOD add information on both alternative loan products 
and FDICís conference, ďMeeting the Needs: Affordable, Responsible 
Short-Term Lending,Ē which DOD agreed to do. 

* Treasury representatives stated that they reviewed the whole draft 
report after DOD had developed it and: 

- provided general rather than substantive comments on the draft report,

- commented on the potential negative effect that DODís recommended 
limitations on credit may have on overall credit availability to 
servicemembers, and: 

- asked DOD to document in its report that the recommendations apply 
only to military servicemembers. 

Military charity organizationsí officials noted they provided input to 
the reportís authors during its preparation and generally supported its 
content. 

* Army Emergency Relief officials said their comments were editorial, 
and they basically concurred with the draft. 

* Navy/Marine Corps Relief Society officials said they agreed: 
ďwholeheartedlyĒ with DODís recommendations. 

* Air Force Aid Society official noted that the report reflected her 
experience regarding the impact of predatory lending products on young 
military families and concurred with the reportís recommendations. 

Consumer group representatives met with DOD officials and provided the 
history of predatory lending products and research studies.  

* A Consumer Federation of America representative stated she provided ^ 
 
- the information about Internet payday loan and installment lenders 
contained in Appendix 3 of DODís report.
 
- gave feedback about her areas of expertise (such as about payday 
loans), and: 

- did not comment on DODís research. 
 
* A Center for Responsible Lending representative stated that he was 
very conscientious about not wanting to influence DOD and, therefore, 
he and his staff: 

- provided DOD with the history and definition of abusive lending 
practices and a discussion on consumer protection and advocacy, 
 
- had differences of opinion with DOD regarding lending products and 
predatory practices, and: 
 
- were concerned that the recommendations were so strict that the small 
loan product (payday loans) could morph into something else or the 
lenders could find loopholes. 

* A National Association of Consumer Advocates representative provided 
data to DOD and thought that the recommendations in DODís report are 
ďcompletely appropriate.Ē

The 180-day requirement for issuing the DOD report may have contributed 
to some of the concerns identified in this and later sections of our 
evaluation.

* The authors of the DOD report indicated that they had to rely largely 
on previously gathered data and may have done some things differently 
if they had had more time.

* In addition, Treasury representatives noted that DOD faced a short 
timeframe to prepare the report and basically met the legislative 
requirements.

Observations: 

Prevalence: 

The DOD 2006 reportís prevalence section discussed six types of loan 
products with associated predatory practices and provided several 
metrics that did not directly assess whether servicemembers actually 
(1) used the loan type and (2) considered the associated lending 
practices to be predatory.

DODís 2006 report added two types of predatory loansómilitary 
installment loans and Internet lendingóto the four typesópayday loans, 
rent-to-own loans, automobile title pawn loans, and tax refund 
anticipation loansóthat the Department had identified when we published 
our April 2005 report (see GAO-05-349) on predatory lending. 

DOD does not have comprehensive data for quantifying the extent to 
which servicemembers use any of the six types of loan products that DOD 
considers predatory. DODís report identified limitations such as the 
difficulty in ascertaining the use of payday loans by active duty 
servicemembers and their families. We noted similar concerns in our 
2005 report on predatory lending and found similar data limitations 
during our 2007 site visits. 

DODís report inferred the prevalence of predatory lending practices by 
using at least three types of metrics. The accuracy of the inferences 
associated with these metrics is unclear. 
 
* Servicemembersí self-reported usage of a loan product: DOD survey 
results, like those we examined in 2005 (GAO-05-349), illustrate the 
percentages of servicemembers who had payday loans, which may not be 
the same thing as the percentage of servicemembers who would have 
characterized their loans as predatory. However, during our 2007 
discussions with installation leaders and servicemembers, they 
emphasized negative experiences with these types of loans. 

* Geographic proximity of storefronts: DOD also inferred prevalence 
using findings from a research study that examined the geographic 
proximity of loan storefronts to military installations. Our evaluation 
of that study suggests that its descriptive analyses did not provide 
sufficient evidence to support DODís perceptions and conclusions that 
(1) concentration of storefronts around installations suggest 
servicemembers were being targeted more so than other groups of 
potential customers at other locations or (2) proximity implies only 
servicemember usage. Alternatively, civilians working on or near the 
installations could be targets also. While the study did not 
definitively prove that lenders are targeting servicemembers, we 
observed during our 2007 site visits that some lender storefronts are 
in close proximity to bases and their advertising was often targeted to 
servicemembers. 

* Estimated number of active-duty servicemembers with predatory loans: 
DOD used industry data to estimate that servicemembers are three times 
more likely than civilians to have taken out a payday loan, but there 
is no way to verify the accuracy of the industry data. However, our 
analysis of DODís calculations using the industry data found that DODís 
analysis was reasonable with the limitation that industry estimates of 
payday borrowers were not examined. 

As we reported in 2005 (GAO-05-349), DODís efforts to assess the 
prevalence of predatory lending practices directed at servicemembers 
and their families are hampered by: 

* the lack of a precise definition of predatory lendingóa problem 
shared with other organizations attempting to quantify the use and 
effects of predatory loans;

* imprecision in the way questions are asked on DODís surveys; and: 

* privacy considerations and the reluctance of most servicemembers to 
discuss their financial difficulties with their command. 

Observations: 

Effects: 

Although DODís 2006 report did include an analysis of predatory loan 
use and financial difficulties among servicemembers and their families, 
it did not include an analysis of the relationship between the two. 

Analytical and methodological limitations constrain the conclusions 
that can be drawn from the DOD-wide survey results and the case studies 
detailed in the effects section. 

Using the survey results, DOD separately analyzed the percentages of 
active duty servicemembers who had (1) experienced financial problems 
such as bouncing checks and having utilities shut off and (2) used four 
types of predatory loan products.[Footnote 15] However, the report did 
not address the relationship between financial problems and predatory 
loan usage by showing

* the percentages of servicemembers reporting financial problems who 
had predatory loans as compared to those that did not have predatory 
loans, or: 

* the percentages of servicemembers with predatory loans who reported 
financial problems as compared with those that did not report financial 
problems. 

Seventeen anecdotal case studies gathered specifically for the report 
via an installation-level data call were used to provide context on the 
effects of predatory loan use among servicemembers. However, the case 
selection methodology for choosing these 17 cases from the 3,000+ case 
studies was limited in that it provided for only one scenario of 
predatory loan use. 

* Specifically, the installation-level data call requested only "detail 
about a servicememmber and/or a family member who has suffered from a 
predatory loan" rather than requesting examples of both negative and 
positive effects. 

* The report authors acknowledges that the: 

- installation-level data call was not a statistical, generalizable 
sample and: 

- 17 cases studies were selected because they told the "full story" of 
using a predatory loan. 

* Despite these methodological limitations, the case studies do 
illustrate that some servicemembers can pay substantial sums for the 
loans-money that could be used to meet other financial needs. 

As we reported in 2005 (see GAO-05-349), the DOD's inability to 
quantify the effects of using the loan products is due in part to the 
data problems that we discussed earlier in the prevalence section of 
this briefing. Being able to identify the population of servicemembers 
who use the products is essential for determining the negative as well 
as positive effects of using the loans that DOD has characterized as 
predatory. 

Observations: 

Education: 

DODís 2006 report linked the large numbers of financial education 
classes and materials provided to servicemembers and their families to 
increased awareness and reduced usage of predatory loans, but DODólike 
other federal agenciesóhas a continuing need to implement procedures 
for evaluating outcomes from its training programs. 

The report provided statistics documenting the servicesí efforts in 
2005 to educate servicemembers and their families about financial 
issues that included predatory lending. For example, 

* The services offered more than 10,000 classes in which predatory 
lending topics were covered, and external organizations such as on- 
installation banks and credit unions offered more than 1,000 additional 
courses on these topics.

* Together, the services and the external organizations distributed 
nearly 225,000 pieces of financial education materials. 

* The services delivered nearly 1,000 news articles addressing 
predatory lending to local base papers and base bulletins, and they 
promulgated more than 150 policy memos addressing financial issues. 

The report emphasizes that financial education occurs throughout the 
military.

* DOD requires all servicemembers to take personal financial management 
training within 3 months of arriving at the first permanent duty 
station.

* Prior to assuming a leadership role as a supervisor, officers and 
noncommissioned officers receive financial training and are expected to 
demonstrate a basic understanding of related policies and practices 
designed to protect junior servicemembers. 

* The DOD report shows that while servicemembersí families are also 
offered financial training, they attended at much lower levels than did 
servicemembers. During our 2007 site visits, installation personnel 
noted that it is difficult to get family members to attend the 
voluntary financial management classes.

Since May 2003, DODís Financial Readiness Campaign has partnered with 
approximately 20 federal agencies and nonprofit organizations to 
provide materials and assistance to the services and, among other 
things, increase financial awareness and abilities, increase savings, 
and reduce dependence on credit.
 
As we reported in 2005 (GAO-05-348), some junior enlisted 
servicemembers are not receiving the required personal financial 
management training.

* Our 2007 site visits found that the services do not consistently 
track attendance to ensure that all servicemembers attend the required 
training.

* Our discussions with senior noncommissioned officers and other 
program officials at four installations visited in 2007 found that 
financial education training may not occur because of competing needs 
such as completing deployment-related training. 

We also noted in our 2005 report (GAO-05-348) that DOD does not have 
outcome-related measures to determine whether personal financial 
management training helps servicemembers manage their finances better. 

* We therefore recommended that DOD: 

- develop and implement, in conjunction with the services, a DOD-wide 
oversight framework with a results-oriented evaluation plan for the 
personal financial management programs and formalize DODís oversight 
role by including evaluation and reporting requirements in the personal 
financial management instruction; and: 

- require the services to develop and implement a tactical plan with 
time-based milestones to show how the appropriate service policy office 
will monitor financial management training and thereby ensure that 
junior enlisted servicemembers receive the required training. 

* Although DOD concurred with these recommendations, it has not 
implemented them.

Shortcomings in training evaluation are not unique to DOD. In a 2006 
GAO letter [Footnote 16] to Congressional leadership suggesting high 
priority areas of oversight for the 110th Congress, we noted a need to 
enhance and improve all federal agenciesí abilities to evaluate 
financial literacy programs and determine if they promote positive 
behavioral change. 

Observations: 

Strategy: 

DODís 2006 report describes a broad array of tools provided to 
servicemembers to help reduce or eliminate the prevalence and effects 
of predatory lending practices; however, some of the tools may be under-
utilized.

The report noted that DOD has worked with the military charity 
organizations and on-installation banks and credit unions to provide 
alternatives to predatory loans. For instance, 

* The military charity organizations indicated that they provided about 
100,000 grants and no-interest loans worth nearly $90 million to 
servicemembers in 2005.

* 24 on-installation financial institutions documented examples of 
small, short-term, and lowered interest alternatives that they made 
available specifically for servicemembers. 

* Despite these substantial efforts and available resources, our 2005 
report (GAO-05-349) as well as site visits in 2007 found that 
servicemembers may choose to use non-DOD resources if, for example, 
they do not want the command to be aware of their financial conditions. 

Free credit counseling and debt management services are another part of 
DODís strategy to reduce or eliminate the prevalence and effects of 
predatory lending practices.

* Installations provide credit counseling through family support 
programs. 

* DOD also makes confidential, 24-hour, 7-days-a-week credit counseling 
available through toll-free telephone and Web access to DODís Military 
OneSource.

* Although not mentioned in DODís report, information obtained in our 
2007 site visits also indicated that military charity organizations may 
similarly help servicemembers with tasks such as developing budgets as 
a step in awarding a grant or no-interest loan. 

* The DOD report additionally cites special emphases that Navy and 
Marine Corps leaders have placed on eliminating any stigma that might 
have formerly been associated with servicemember financial problems. 
During our 2007 site visits, several installation leaders stated that 
they are encouraging servicemembers to use available installation 
resources, such as command personal financial specialists and military 
charity organizations, without fear of repercussions. 

The DOD report reiterates a point previously made in our 2005 report 
(GAO-05-349)óArmed Forces Disciplinary Control Boards have been used in 
a limited number of instances to place or threaten to place a lender 
off- limits to servicemembers. One reason for this infrequent use is 
that the boards may have little basis to take actions against lenders 
that DOD considers as predatory if the lenders operate within state 
laws. 

Even though DOD has a robust set of tools for curbing predatory lending 
practices and their effects, our 2005 report (GAO-05-349) concluded 
that servicemembers under-utilize those resources. 

* We found that free legal assistanceóa useful tool that was not 
mentioned in the DOD reportóis available to review contracts and other 
financial documents, but servicemembers might not use this assistance. 

* We identified multiple reasons for the under-utilization, such as 
servicemembersí desires to make purchases immediately. 

Observations: 

Recommendations: 

DODís 2006 report included six recommendations for additional 
legislative and administrative actions; while these recommendations may 
have merit, they were not directly linked to the reportís findings, 
were based on research studies that had some methodological problems, 
or did not address implementation issues. 

In the DOD report section that preceded the recommendations, DOD 
concluded that it cannot prevent predatory lending without assistance 
from Congress, the state legislatures, and federal and state 
enforcement agencies. DOD also commented on issues such as rollover of 
loans and usury laws. 

DODís report provided six recommendations that it concluded will 
protect servicemembers and their families from predatory lending abuses:

* Require unambiguous and uniform price disclosure for extension of 
credit, 

* Require a federal ceiling on the cost of credit to military 
borrowers, 

* Prohibit extending credit without regard to ability to repay,

* Prohibit provisions in loan contracts that require servicemembers and 
their families to waive their rights to take legal action,

* Prohibit contract clauses that require servicemembers and their 
families to waive any special legal protections, and

* Prohibit states from discriminating against servicemembers and their 
families stationed within their borders and prohibit lenders from 
making loans to servicemembers that violate state consumer lending 
protections. 

There is limited transparency to show the basis for some of the 
recommendations in the DOD report. 

* After being unable to identify a clear link between reported findings 
and recommendations, we asked the DOD authors to identify the portions 
of the report supporting each recommendation. 

* Although DOD subsequently provided us with a list of pages containing 
information purported to support each recommendation, we were still 
unable to link some recommendations to supporting documentation. 

Methodological problems in some of DODís analyses and in some of the 
studies cited in DODís report suggest that some recommendations may not 
be grounded in sound research. 

* Throughout this evaluation, we have noted some methodological 
concerns such as those associated with the measurement of prevalence 
and effects.

* Other methodological problems were also present. For example, 

- DOD based some of its recommendations on Appendix 3 of its report; 
however, the methodology used to select the Web sites of lenders listed 
in this appendix was not statistically representative of a defined 
universe of such lenders. For example, Appendix 3 notes that the 18 
listed are a small sample of Internet lenders. DODís report states that 
an on-line search for ďmilitary loansĒ got more than 38 million hits. 
Therefore, the findings based on this appendix cannot be generalized 
beyond the 18 sites that were reviewed. 

- DOD combined information from two samples and drew generalizations 
that were not methodologically sound about payday loan use by all 
enlisted personnel. 

Financial markets specialists at GAO examined the six recommendations 
and noted DODís report did not address the feasibility of implementing 
and enforcing the recommendations, which could cause challenges. 

While DODís report included a strategy for personal finance to increase 
servicemembersí awareness, it did not identify any additional changes 
that could be made to DODís current financial education programs that 
would make these programs more beneficial. 

[End of section] 

Enclosure II: 

Scope & Methodology: 

Scope: 

In conducting our evaluation of DOD's report on predatory lending, we 
limited the scope of our work to the types of loans that DOD identified 
as being predatory in its mandated report. This includes payday loans, 
rent-to-own loans, automobile title pawns, tax refund loans, and 
military installment loans, and Internet lending. Our work focused on 
active duty servicemembers as in our April 2005 reports. While DOD's 
report does not specify that some parts of its report pertain to only 
active or reserve personnel, we focused on active duty servicemembers 
based on DOD's use of survey results and other data on active duty 
servicemembers. 

Methodology: 

To address our objective, which was to examine the approach and support 
for DOD's report, we examined legislation that mandated the DOD report 
and regulations such as governmentwide and DOD-wide standards for data 
quality. In addition to reviewing DOD's predatory lending report and 
the reports cited in that study, we reviewed and analyzed findings and 
perspectives contained in publications on related issues by GAO, the 
Congressional Research Service, Federal Reserve Board staff in 
Washington, D.C., Federal Deposit Insurance Corporation's Office of 
Inspector General, consumer groups (Consumer Federation of America and 
Center for Responsible Lending), and an association (Community 
Financial Services Association of America) that says it represents more 
than 50 percent of payday lenders. DOD, service, and installation 
officials also provided additional views and documents pertaining to 
the prevalence and effects of predatory lending practices, programs and 
current strategies to educate servicemembers and their families about 
those practices, current strategies and programs for reducing or 
eliminating the prevalence and effect of predatory lending practices, 
and recommendations for legislative and administrative actions to 
reduce or eliminate the prevalence and effects of predatory lending 
practices. 

In addressing our objective, we conducted interviews with and obtained 
documents from the officials in DOD's Office of the Under Secretary of 
Defense for Personnel and Readiness who were responsible for preparing 
the report, and service policy officials. We also interviewed 
representatives from organizations that DOD consulted while developing 
its report (see table 1), and in some cases obtained related 
documentary evidence concerning their input during DOD's preparation of 
its report. We also held discussions with groups such as the Center for 
Regulatory Effectiveness and Community Financial Services Association 
of America, a payday lending association, to understand perspectives 
that were different from those provided in the DOD report. Additional 
perspectives were obtained from the public comments that other groups 
(e.g., other consumer groups and the lending industry) provided in 
response to proposed regulations that DOD published in the Federal 
Register proposed regulation submitted by DOD on April 11, 2007. 

Table 1: Organizations Supplying Information about Their Consultations 
with DOD during the Preparation of Its Mandated Report: 

Type of organization: Federal agencies; 
Organization and location of the representative(s): Federal Reserve, 
Washington, D.C. 

Type of organization: Federal agencies; 
Organization and location of the representative(s): Treasury 
Department, Washington, D.C. 

Type of organization: Federal agencies; 
Organization and location of the representative(s): Federal Deposit 
Insurance Corporation, Washington, D.C. 

Type of organization: Military charities; 
Organization and location of the representative(s): Army Emergency 
Relief, Alexandria, , Virginia. 

Type of organization: Military charities; 
Organization and location of the representative(s): Navy/Marine Corps 
Relief Society, Arlington, Virginia. 

Type of organization: Military charities; 
Organization and location of the representative(s): Air Force Aid 
Society, Arlington, Virginia. 

Type of organization: Consumer groups; 
Organization and location of the representative(s): Consumer Federation 
of America, Washington, D.C. 

Type of organization: Consumer groups;
Organization and location of the representative(s): Center for 
Responsible Lending, Washington, D.C. 

Type of organization: Consumer groups;
Organization and location of the representative(s): National 
Association of Consumer Advocates, Washington, D.C. 

Type of organization: Consumer groups;
Organization and location of the representative(s): National Consumer 
Law Center, Boston, Massachusetts. 

Source: GAO. 

[End of table] 

To further address our objective, we conducted site visits at the four 
installations shown in table 2. The team decided to select a 
nonprobability sample of four military installations--one per active 
duty DOD service. The criteria for selection included (1) installations 
with high personnel tempo; (2) installations from different services in 
the same geographic area for comparison between services; and (3) at 
least one installation that GAO visited during prior work on predatory 
lending for comparison across time.[Footnote 17] Our findings from 
these site visits cannot be generalized to the population of all 
military personnel; however, these site visits provided us with 
additional information for our evaluation. During these site visits, we 
requested documents (such as training materials) pertaining to DOD's 
current efforts to minimize or eliminate the use and effects of 
predatory lending practices. We conducted individual interviews with 
seven types of officials at each base: installation leaders, personal 
financial management program managers, installation finance officials, 
command financial counselors, legal assistance attorneys, public 
affairs staff, and military charity organization officials. We used a 
structured protocol for conducting group discussions with more than 60 
senior enlisted personnel at the four installations to gather anecdotal 
data from servicemembers about their experiences with the types of 
loans DOD identified as predatory. 

Table 2: Locations Where GAO Conducted a Site Visit: 

Service: Army; 
Location: Fort Lewis, Washington. 

Service: Navy; 
Location: Navy Region Southwest, San Diego, California. 

Service: Marine Corps; 
Location: Camp Pendleton, California. 

Service: Air Force; 
Location: McChord Air Force Base, Washington. 

Source: GAO. 

[End of table] 

Part of our assessment of DOD's report involved a review of the overall 
report methodology as well as a review of the methodology of key 
research studies and data sources cited in the report. Specifically, we 
focused our review on research studies that were critical to the 
report's message and the data sources used by DOD. We discussed these 
data sources with the DOD report authors to gain a better understanding 
of how and why they were selected for use. At least two internal 
methods experts, with support from statisticians as appropriate, 
reviewed these reports and data sources for the reasonableness and 
rigor of their data collection and analysis methods. Our review focused 
on the validity of the results and conclusions in relation to how they 
were used in the DOD report. 

We performed our work between March 2007 and August 2007 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Enclosure III: 

GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Brenda S. Farrell, (202) 512-3604 or farrellb@gao.gov: 

Acknowledgments: 

In addition to the individual named above, Jack E. Edwards, Assistant 
Director; Pat L Bohan; Nora Boretti; Renee S. Brown; Cody Goebel; K. 
Nicole Harms; Ron La Due Lake; Charles W. Perdue; S. Andrew Stavisky; 
Elizabeth W. Wood; and Yiling Wong made key contributions to this 
report. 

Related GAO Reports: 

Guard and Reserve Personnel: Fiscal, Security, and Human Capital 
Challenges Should be Considered in Developing a Revised Business Model 
for the Reserve Component. GAO-07-984. Washington, D.C.: June 20, 2007. 

Military Personnel: DOD Needs to Establish a Strategy and Improve 
Transparency over Reserve and National Guard Compensation to Manage 
Significant Growth in Cost. GAO-07-828. Washington, D.C.: June 20, 
2007. 

Military Personnel: DOD Has Taken Steps to Address Servicemembers' 
Financial Needs, but Additional Effort is Warranted. GAO-06-749T. 
Washington, D.C.: May 18, 2006. 

Financial Product Sales: Actions Needed to Protect Military Members. 
GAO-06-245T. Washington, D.C.: November 17, 2005. 

Financial Product Sales: Actions Needed to Better Protect Military 
Members. GAO-06-23. Washington, D.C.: November 2, 2005. 

Military Personnel: DOD Needs Better Controls over Supplemental Life 
Insurance Solicitation Policies Involving Servicemembers. GAO-05-696. 
Washington, D.C.: June 29, 2005. 

Military Personnel: DOD's Comments on GAO's Report on More DOD Actions 
Needed to Address Servicemembers' Personal Financial Management Issues. 
GAO-05-638R. Washington D.C.: May 11, 2005. 

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

Military Personnel: DOD Tools for Curbing the Use and Effects of 
Predatory Lending Not Fully Utilized. GAO-05-349. Washington, D.C.: 
April 26, 2007. 

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

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

Military Personnel: DOD Needs More Data Before It Can Determine if 
Costly Changes to the Reserve Retirement System Are Warranted. GAO-04- 
1005. Washington, D.C.: September 15, 2004. 

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

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

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

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

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

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

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

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

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

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

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

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

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

Footnotes: 

[1] DOD's Social Compact is a long-term quality of life strategy for 
the department. It promotes the advancement of the military community 
through the reciprocal ties that bind servicemembers, the military 
mission, and military families by responding to their quality of life 
needs as individuals and as members of a larger community. See DOD, 
Office of Military Community and Family Policy, A New Social Compact: A 
Reciprocal Partnership between the Department of Defense, Service 
Members and Families (July 2002). 

[2] GAO, Military Personnel: More DOD Actions Needed to Address 
Servicemembers' Personal Financial Management Issues, GAO-05-348 
(Washington, D.C.: Apr. 26, 2005). 

[3] GAO, Military Personnel: DOD's Tools for Curbing the Use and 
Effects of Predatory Lending Not Fully Utilized, GAO-05-349 
(Washington, D.C.: Apr. 26, 2005). 

[4] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163, ß 579 (2006). 

[5] DOD, Report On Predatory Lending Practices Directed at Members of 
the Armed Forces and Their Dependents (Washington, D.C.: Aug. 9, 2006). 

[6] The John Warner National Defense Authorization Act for Fiscal Year 
2007, Pub. L. No. 109-364, ß 670 (2006), added Section 987 to Title 10 
of the U.S. Code. 

[7] Limitations on Terms of Consumer Credit Extended to Service Members 
and Dependents, 72 Fed. Reg. 18157 (proposed Apr. 11, 2007) (to be 
codified at 32 C.F.R. pt. 232). 

[8] The mandate required DOD to report on predatory lending practices 
directed at servicemembers and families for each element. Our 
observations are typically applicable to both servicemembers and 
families, except for some unique points about education training for 
family members. 

[9] DOD, Office of Military Community and Family Policy, A New Social 
Compact: A Reciprocal Partnership between the Department of Defense, 
Service Members and Families (July 2002).

[10] GAO, Military Personnel: More DOD Actions Needed to Address 
Servicemembersí Personal Financial Management Issues, GAO-05-348 
(Washington, D.C.: Apr. 26, 2005). 

[11] GAO, Military Personnel: DODís Tools for Curbing the Use and 
Effects of Predatory Lending Not Fully Utilized, GAO-05-349 
(Washington, D.C.: Apr. 26, 2005). 

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

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

[14] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163, ß 579 (2006). 

[15] The active duty survey gathered information about the four types 
of lending products DOD identified as predatory in 2005. 

[16] GAO, Potential Oversight Issues: Suggested Areas for Oversight for 
the 110th Congress, GAO-07-235R (Washington, D.C.: Nov. 17, 2006). 

[17] GAO-05-348 and GAO-05-349. 

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