Military Personnel:

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

GAO-07-1148R: Published: Aug 31, 2007. Publicly Released: Sep 4, 2007.

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Brenda S. Farrell
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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. 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. The 2006 National Defense Authorization Act required DOD to issue a report on predatory lending directed at servicemembers and their dependents. 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. 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. Congress 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.

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. 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. 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. 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.

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