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Lawmaker wants GAO study on defense lending

By John Poirier
Friday, January 12, 2007; 6:55 PM

WASHINGTON (Reuters) - A senior U.S. lawmaker has asked congressional auditors to examine if recommendations in a 2006 Department of Defense predatory lending report are justified, according to a letter obtained by Reuters on Friday.

Sen. Tim Johnson, the second-ranking Democrat on the Senate Banking Committee, sent a letter to the head of the Government Accountability Office, David Walker, asking him to investigate how the DoD prepared its report.

Among the recommendations from the August 9, 2006 report is that annual interest rates, inclusive of fees, for consumer loans, including credit cards and payday loans, should be capped at 36 percent.

"I am writing to request that you conduct a thorough investigation of how this report was prepared," the South Dakota Democrat wrote in a December 7, 2006, letter to Walker.

"It is my understanding that a number of parties believe that much of the report is biased and based on erroneous data and faulty analysis," he said.

Johnson said the Pentagon's report fails to present a balanced or accurate analysis of the nature of abusive lending practices by various lenders to military personnel.

The banking industry was caught flatfooted when a provision was inserted into the Pentagon's reauthorization bill that imposed such a cap, which is aimed at curbing payday loans to military personnel and their families.

Pentagon spokesman Maj. Stewart Upton said the department will continue to work hard to limit the impact of payday lenders. "Predatory loans, particularly those that can accelerate a cycle of debt, can result in degraded mission readiness," he said.

But the Community Financial Services Association of America, a trade group for payday lenders, said it is disappointed that the military wants to deny its members a financial option.

"Servicepeopl? will soon be forced to get risky Internet loans from unregulated businesses as well as more costly products from installment lenders," Steven Schlein, a CFSA spokesman, said.

Bank lobbyists urged the Pentagon to narrowly apply the law to payday lenders, which impose high rates for small, short-term loans.

Banks also fear that imposing such a cap could have a spillover effect beyond the military. Federal Deposit Insurance Corporation Chairman Sheila Bair recently said in a Reuters interview that the law has created a lot of "angst" in the banking industry.

Jim Tozzi, a former deputy administrator for the office of information and regulatory affairs at the U.S. Office of Management and Budget, said the DoD report is incomplete because it failed to define predatory lending but said the law is in place.

"The law says everyone is covered and that law is in effect now and credit cards are covered," said Tozzi, who now heads the Center of Regulatory Affairs, an industry funded watchdog.

The Pentagon in consultation with the federal banking regulatory agencies is drafting the rules. The law requires that the new rules are implemented by October 1.

A spokeswoman for Johnson said it could take the GAO up to two months to issue a report in response to the request.

(Additional reporting by Kristin Roberts)

 2007 Reuters