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. In the August 2004 DOD survey,  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. 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. These included payday loans, rent-to-own transactions,  and automobile title pawns. 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 off- limits lists to servicemembers, boards at other installations we visited  rarely met or made such recommendations. 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. 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. Third, significant effort may be required to put businesses on off- limits lists. 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. A DOD instruction requires installation  publications to run disclaimers warning readers that advertisements do not  constitute endorsement by the U.S. government. Among other things, the  public affairs staff is to review advertisements and identify any that may be  detrimental to DOD personnel or their family members. 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. Recommendations for Executive Action

We are making the following two recommendations to the Secretary of  Defense:  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. 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. Example: Some Marines feel that a business would not take  advantage of them because they are in the military. Related GAO Products

Military Personnel: More DOD Actions Needed to Address  Servicemembers’ Personal Financial Management Issues.
Why GAO Did This Study

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?

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.