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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

January 2011: 

Payday Lending: 

Federal Law Enforcement Uses a Multilayered Approach to Identify 
Employees in Financial Distress: 

GAO-11-147: 

GAO Highlights: 

Highlights of GAO-11-147, a report to congressional requesters. 

Why GAO Did This Study: 

In the United States, payday lending is estimated to be a slightly 
less than $40 billion a year industry. A payday loan is a small-dollar 
loan that is usually from $100 to $500 and repayable in a short term, 
usually 2 weeks. Consumers can pay fees of $15–20 for every $100 borrowed. 
In 2006 the Department of Defense (DOD) reported on predatory lending, 
including payday lending, and found that these loans impacted military 
readiness and troop morale. Concerns were raised about payday lending to 
federal employees in law enforcement and national security positions at 
four components—Customs and Border Protection (CBP), Immigration and 
Customs Enforcement (ICE), the Transportation Security Administration 
(TSA), and the Federal Bureau of Investigation (FBI). GAO examined (1) 
how these federal law enforcement agencies become aware of employees who 
are potential security risks due to financial problems, including payday 
lending, and (2) various alternatives to payday lending.  GAO reviewed 
federal policies and procedures for collecting financial information and 
reviewed data from and interviewed representatives of the payday loan 
industry, depository institutions, consumer groups, nonprofits, and trade 
organizations. 

GAO makes no recommendations in this report. We provided copies of the 
draft report to entities we reviewed and they provided technical comments 
that we incorporated.

What GAO Found: 

Federal agencies—including the Department of Homeland Security (DHS) components 
CBP, ICE, and TSA, and FBI—use a multilayered approach to assess applicants and 
employees for suitability and review certain employees for security clearances. 
As part of this process, the financial history of an applicant or employee is 
reviewed to identify those who may be in financial distress. The Office of 
Personnel Management specifies the minimum standards and procedures by which 
agencies conduct the investigations. In reviewing an applicant’s or employee’s 
financial profile, agencies primarily use credit reports from the three major 
credit reporting bureaus. Through this review, DHS and FBI officials stated that 
they are able to identify employees with financial problems although the primary 
data sources of financial information typically do not capture information on 
whether an individual has used a payday loan. In looking at an applicant or 
employee’s financial history, officials at CBP, ICE, TSA, and FBI told GAO that 
they weighed an individual’s risky financial debts or behaviors against the 
extent, circumstances, and severity of such debts and behavior. Agency officials 
stressed that they were not as concerned with individuals using payday loans as 
with patterns of debt or risky financial behavior, or how payday lending might 
contribute to such patterns. Despite payday lending not regularly being reported 
to major credit bureaus, agency officials felt confident that they captured an 
adequate amount of both applicants’ and current employees’ financial information 
to make accurate suitability and security clearance decisions. Data GAO collected 
on employee pay levels and a limited sample of data from the payday loan industry 
further suggest limited use of payday lending by employees who reported employment 
at CBP, ICE, TSA, or FBI. 

Depository institutions, employers, and nonprofit organizations have developed a 
range of different products and mechanisms to provide short-term credit to those 
that need it. Some products may serve as alternatives to payday loans—mimicking 
some of the terms and conditions of these transactions but generally offering lower 
interest rates—while other products are offered to establish long-term relationships 
with borrowers or meet a need for short-term credit in the community where they are 
offered. Despite the different product offerings, the number of institutions offering 
small-dollar loan products is still relatively small. A number of institutions cited 
challenges to offering such products which include credit risk and concerns about the 
profitability of the product. Recent actions, including changes in federal legislation 
(for instance, to provide a loan loss reserve fund to help small lenders offset credit 
risk) as well as efforts by the Federal Deposit Insurance Corporation and National Credit 
Union Administration to increase depository institution interest in offering such products, 
could encourage greater availability of small-dollar loans.  


View [hyperlink, http://www.gao.gov/products/GAO-11-147] or key components. For more 
information, contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov.


[End of section] 

Contents: 

Letter: 

Background: 

DHS Components and FBI Use a Multilayered Approach to Assess 
Applicants' and Employees' Financial Situations and Identify Those Who 
Are In Financial Distress: 

Small-Dollar Alternatives to Payday Loans Are Limited in Scope but 
Recent Actions May Encourage Broader Availability: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Federal Law Enforcement Salaries Compared with Median 
Household Income of Average Payday Loan Borrower: 

Appendix III: Summary of Payday Loans by Employees at Four Federal Law 
Enforcement Agencies: 

Appendix IV: Comments from the National Credit Union Administration: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Comparison of Costs to Consumers of Obtaining a Payday Loan 
versus Bank Overdraft Fees, Based on a 14-Day Term as of November 2008: 

Table 2: FDIC's Safe, Affordable, and Feasible Template for Small- 
Dollar Loans: 

Table 3: Number of Payday Loan Customers at Five Payday Loan Companies 
from January 1, 2010, to July 31, 2010, Who Identified Their Employer 
as One of Four Federal Law Enforcement Agencies: 

Table 4: Number of Payday Loan Transactions Conducted from January 1, 
2010, to July 31, 2010, at Five Payday Loan Companies by Individuals 
Who Identified Their Employer as One of Four Federal Agencies: 

Figures: 

Figure 1: Example of a Storefront Payday Loan Transaction: 

Figure 2: Example of an Online Payday Loan Transaction: 

Figure 3: Sample SF-86 Financial Questions: 

Figure 4: Federal Law Enforcement Salaries at Four Agencies Compared 
with the Median Household Income of the Average Payday Loan Borrower 
Based on Fiscal Year 2009 Personnel Data: 

Abbreviations: 

APR: annual percentage rate: 

ATM: automated teller machine: 

CBP: Customs and Border Protection: 

CDFI: Community Development Financial Institutions Fund: 

CRA: Community Reinvestment Act of 1977: 

DHS: Department of Homeland Security: 

DOD: Department of Defense: 

EAP: employee assistance program: 

FBI: Federal Bureau of Investigation: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

FTC: Federal Trade Commission: 

HHS: Department of Health and Human Services: 

ICE: Immigration and Customs Enforcement: 

LEO-GS: Law Enforcement Officer-General Schedule: 

NCUA: National Credit Union Administration: 

OPM: Office of Personnel Management: 

TSA: Transportation Security Administration: 

SF-86: OPM Standard Form 86: 

TSP: Thrift Savings Plan: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

January 26, 2011: 

The Honorable Darrell Issa: 
Chairman: 
Committee on Oversight and Government Reform: 
House of Representatives: 

The Honorable Brian Bilbray: 
House of Representatives: 

In the United States, payday lending is estimated to be a slightly 
less than $40 billion a year industry. Generally defined, a payday 
loan is a single payment, short-term loan based on a personal check 
held for future deposit or electronic access to a personal checking 
account. Payday loans are available in most states, require minimal 
documentation, and can be approved within minutes. Industry 
representatives and studies report that the typical loan is usually 
for $100-500 and a 14-day term, and the cost to the consumer for this 
short-term credit can be expensive compared to some other small-dollar 
loans. Payday lenders with whom we spoke said that loans are priced at 
a fixed-dollar fee ranging from $15-20 per $100 borrowed, which is 
equivalent to an annual percentage rate (APR) of 300-600 percent. If a 
borrower is unable to repay the loan or does not have enough money in 
a checking account to cover the loan on the due date, the borrower 
generally can pay an additional fee to extend ("roll over") the loan-- 
for example, for another 2 weeks if legally permissible in the state 
where the loan was taken out. If borrowers extend a loan multiple 
times or obtain consecutive loans, the payday loan cycle can continue 
for weeks or months, costing the borrower much more than the initial 
amount borrowed. For example, a $100 loan rolled over three times 
could end up costing a borrower $60 in fees as opposed to the $15 the 
customer initially paid. A number of consumer advocacy groups contend 
that payday loans are predatory due to the fees charged and a concern 
that borrowers will not be able to repay loans when they are due, 
trapping the borrowers in a cycle of debt. A 2009 report from the 
Center for Responsible Lending found that of the 19 million payday 
loan borrowers in the United States, nearly 12 million became trapped 
in the payday loan cycle and ended up with at least five payday loans 
per year.[Footnote 1] The payday loan industry counters that it is 
providing a much needed service, without which consumers would incur 
even greater costs, such as fees for bounced checks or late fees on 
credit cards. According to the Center for American Progress and payday 
loan industry studies, many people who use payday loans do so for a 
variety of reasons such as gaining same-day access to needed cash and 
avoiding late and overdraft fees for bills or on bounced checks. 

In response to growing concerns about the impact of servicemembers' 
financial difficulties on unit morale and readiness, in 2006, the 
Department of Defense (DOD) released a report about predatory lending, 
including payday lending, to members of the military.[Footnote 2] DOD 
found that these loans impacted military readiness and troop morale. 
Following the DOD report, you raised questions about payday lending to 
federal employees in law enforcement and national security positions 
at the Federal Bureau of Investigation (FBI) and three components of 
the Department of Homeland Security (DHS)--Customs and Border 
Protection (CBP), Immigration and Customs Enforcement (ICE), and 
Transportation Security Administration (TSA)--and whether these 
employees could pose a security risk if they owed debt to payday 
lenders. In response to your request, this report examines (1) how 
select federal law enforcement agencies become aware of employees who 
are potential security risks due to financial problems, including 
payday lending, and (2) various alternatives to payday lending that 
provide consumers with access to small-dollar loans and more favorable 
interest rates. 

To address these objectives, we met with officials at the Office of 
Personnel Management (OPM) and four federal law enforcement components 
that you identified--CBP, ICE, TSA, and FBI. We obtained information 
and documentation on the policies and processes these agencies follow 
when conducting a suitability or security clearance investigation of 
an applicant or employee. We examined the financial information that 
is collected and analyzed and spoke with investigators and 
adjudicators about how this information is used when determining 
suitability for employment or adjudicating initial or periodic 
security clearances. We also reviewed agency codes of conduct and 
other personnel standards that apply to the financial status of 
federal employees. To understand if employees at these particular 
agencies were seeking help for financial matters we spoke with 
officials at the Department of Health and Human Services (HHS), FBI, 
CBP, ICE, and TSA who oversee the employee assistance programs (EAP). 
When available, we received data from the EAPs on the number of 
employees from these agencies who sought help about financially 
related matters. To understand the types of data payday lenders 
collect and report on borrowers we spoke with members of the payday 
loan industry, representatives from the major credit bureaus, and with 
a company that provides credit-related data that extends beyond 
information offered by the major credit bureaus. To understand if law 
enforcement employees at the three DHS components and FBI have 
salaries that typically fall within the range of those of the average 
payday loan borrower, we collected data on their salary ranges and 
compared them with the median income of a payday loan borrower. For 
more detailed information on our scope and methodology see appendix I. 
For the results of our salary range analysis, see appendix II. With 
the help of a small number of payday lenders, we also conducted a 
limited analysis of payday loan borrowing by employees at the four 
components we reviewed. Five finance companies that offer payday 
loans, including three of the largest, provided data on the number of 
borrowers (from January 1, 2010, to July 31, 2010) who identified CBP, 
ICE, TSA, or FBI as their employer, which we present in appendix III. 
[Footnote 3] However, these data provide only a snapshot of the 
population borrowing from these lenders and cannot be used to project 
prevalence of payday loan use among federal employees or employees at 
the agencies within our scope. 

To understand the alternatives to payday lending that are available to 
consumers needing small-dollar loans, we spoke with representatives of 
a number of banks and credit unions that offer small-dollar loan 
products. Many of these banks participated in the Federal Deposit 
Insurance Corporation's (FDIC) Small-Dollar Loan Pilot Program. We 
identified other models for small-dollar loans such as relationship 
lending (that is, offering loan products in the hope of establishing 
long-term relationships with borrowers), overdraft loans or lines of 
credit, partnership programs, and salary advances. We also interviewed 
consumer groups and trade organizations that conduct research on 
unbanked and underbanked populations to identify alternative models to 
payday lending currently in use or under development. We identified 
other models for small-dollar loans offered by alternative financial 
services providers such as prepaid cards, car title, pawn, and 
installment loans. 

We conducted this performance audit from June 2009 through January 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

Payday lenders are one of many providers of alternative financial 
services--products or services that operate outside of federally 
insured banks, credit unions, and thrifts.[Footnote 4] Because payday 
lenders do not usually check a borrower's credit or report to the 
major credit bureaus, payday loans may be an attractive option to 
those with poor credit history or who are concerned that a depository 
institution may deny them a traditional loan. According to payday 
lenders, they generally assume their customers have unfavorable credit 
histories and therefore do not typically pull credit reports as the 
reports would not provide much additional information for assessing 
the risks of lending to the customers and are expensive for the lender 
relative to the loan amount. 

The majority of payday loan transactions take place at a payday loan 
storefront (see figure 1). While the details of the process may vary 
according to relevant state laws, industry documents and interviews 
with industry officials show that a customer interested in obtaining a 
loan would bring identification, a pay stub, and a bank statement to 
the storefront. Once the customer completes the application form, 
industry officials told us that the loan could be approved within 
minutes and the borrower would write a post-dated check to the lender 
for the amount of the loan plus the fee. The customer signs an 
agreement to repay the loan, usually in 14 days, according to industry 
studies and representatives with whom we spoke. The customer then 
obtains the loan in the form of cash or check. On the day that the 
loan is due, the customer needs to return to the lender with cash for 
the loan and fee amount and reclaim the postdated check. According to 
industry officials, in some states, the lender must deposit the check 
the borrower wrote so the borrower need not return to pick up the 
postdated check. Some states permit rollover of a loan for an 
additional fee. This would allow a borrower who still needs the cash 
or is unable to repay the loan in full at the time it is due to extend 
the loan for an additional fee. Some states allow borrowers to pay off 
one loan and obtain a new loan on the same day, while other states 
require a cooling off period before a customer can take out another 
loan.[Footnote 5] 

Figure 1: Example of a Storefront Payday Loan Transaction: 

[Refer to PDF for image: illustration] 

Payday loan customer visits storefront with identification, pay stub, 
bank statement, etc. (Identification and income verification 
requirements vary by storefront). Loan customer fills out application, 
signs agreement, and writes a check. 

Repayment date: 14 days after the loan. 

Customer receives cash or check for advance. 

14 days pass. 

Customer returns on repayment date with cash and reclaims check. 

Sources: GAO (analysis); Art Explosion (images). 

[End of figure] 

According to industry representatives, a growing number of lenders 
also offer payday loan services online (see figure 2). The online 
transaction incorporates the applicant's permission for electronic 
payment and repayment debit. 

Figure 2: Example of an Online Payday Loan Transaction: 

[Refer to PDF for image: illustration] 

Payday loan customer: 

Completes online form including personal, pay, employment, and bank 
account information. 

Permission for loan deposit and payment debit (upon due date). 

Loan agreement (signed and faxed or sent electronically). 

Automated clearing house: 

Lender: Funding deposited electronically (same day or within 24 hours) 
to loan customer's bank account. 

14 days pass. 

Payment automatically debited on due date from loan customer's bank 
account to lender. 

Sources: GAO (analysis); Art Explosion (images). 

[End of figure] 

Academic and industry studies have shown that many different types of 
people use payday loans. According to a study of 2007 survey data 
collected by the Federal Reserve, the median age of a payday loan 
borrower is 36 years old with a median household income of $32,712; in 
comparison, the payday loan industry reports average income ranges 
from $25,000 to $50,000.[Footnote 6] According to our discussions with 
industry representatives, the recent economic downturn may have pushed 
this income range higher.[Footnote 7] Industry representatives have 
told us and studies have shown, that those who use payday loans do so 
for a variety of reasons, but most often use them for unexpected 
emergency expenses.[Footnote 8] See appendix II for a comparison of 
the average payday loan borrower's income with the midpoint salary 
range of federal employees at FBI and the three DHS components we 
reviewed. 

The National Conference of State Legislatures reported that in 2010, 
40 states and the District of Columbia had established payday lending 
laws and industry analysts estimated that there were approximately 
20,600 stores offering payday loans. The industry comprises a handful 
of large publicly traded payday lenders and thousands of private 
companies, many of them small businesses with one or two storefront 
locations. According to those that have studied the industry, 
nationally, the largest 16 companies (some privately held) own about 
half of the stores. Recently, the industry received attention when a 
report from a consumer organization disclosed that many of the larger 
publicly traded companies were owned in part by some of the biggest 
banks.[Footnote 9] 

Payday lenders are regulated at the state level and each state can set 
restrictions on the APR and fees lenders can charge. In recent years, 
a number of states have limited (through market-based prohibitions 
such as caps on fees and APRs) or prohibited payday lending.[Footnote 
10] At the federal level, as part of the John Warner National Defense 
Authorization Act for Fiscal Year 2007, the maximum APR payday lenders 
can charge members of the armed forces and their dependents was 
limited to 36 percent, including all fees and charges connected with 
making the loan.[Footnote 11] However, federal and state regulators 
indicated that borrowers still can obtain payday loans online. Online 
lending is largely unregulated and the universe of online lenders is 
unknown. Payday lenders generally must abide by certain federal 
disclosure requirements as outlined in The Truth in Lending Act. 
[Footnote 12] The Federal Trade Commission (FTC) investigates and 
enforces the Truth in Lending Act and Regulation Z against payday 
lenders who do not make the disclosures those laws require.[Footnote 
13] Additionally, under the FTC Act, the FTC investigates payday 
lenders engaged in potentially unfair or deceptive acts or practices 
and takes law enforcement action when appropriate.[Footnote 14] 
Recently, FTC has received an increased number of complaints related 
to debt collection practices of payday lenders. The FTC has taken law 
enforcement actions against some of these entities, such as its 2010 
lawsuit against a payday loan operation that the FTC alleges was 
illegally trying to garnish consumers' wages by making false 
representations to consumers' employers.[Footnote 15] Federal and 
state officials we spoke with, however, said these investigations are 
difficult to conduct due to limited information available on payday 
lenders. According to industry officials, some states require payday 
lenders to register and contribute information to state run databases 
on the loans they provide but most states do not have such 
requirements. The resulting lack of any comprehensive data makes it 
difficult to assess the true size of the industry, its various product 
offerings, and its business practices. The recently created federal 
Bureau of Consumer Financial Protection has been granted oversight 
responsibility for payday lenders. More specifically, payday lenders 
are defined as "covered persons" under the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, which created the new bureau and 
gives it authority to monitor payday loan operations and require 
reporting of information from payday lenders. However, it is as yet 
unclear how this new bureau will exercise this authority.[Footnote 16] 

DHS Components and FBI Use a Multilayered Approach to Assess 
Applicants' and Employees' Financial Situations and Identify Those Who 
Are In Financial Distress: 

To assess applicants and employees suitability for employment and 
review certain employees for security clearances, DHS components and 
FBI use a multilayered approach for gathering information as part of 
their background investigations. This process includes assessing the 
financial history of an applicant or employee to identify those who 
may be in financial distress. As part of this assessment, DHS 
components and FBI review credit reports and employment history going 
back several years. Agencies also corroborate information collected 
through other sources such as personal references. The agencies 
periodically repeat initial investigations to ensure employees remain 
suitable for federal employment or a clearance, with good financial 
standing being one of the recurring issues of interest. While DHS 
components and FBI told us they are able to identify employees with 
financial problems through these reviews, the primary data sources 
used to collect financial information may not capture the use of 
payday loans among employees. Federal investigators and adjudicators 
reported that when looking at finances, they are most concerned with 
instances of debt and delinquency that cannot be reasonably explained 
or mitigated by the employee. Officials at CBP, ICE, TSA, and FBI view 
the use of payday loans among employees as a minimal security issue in 
both suitability and security clearances due to the status of a payday 
loan as a legally permissible financial product and relatively low 
rates of use observed among their employees. Our analysis of data from 
the payday loan industry further suggests relatively low rates of 
payday loan use by employees who reported employment at CBP, ICE, TSA, 
and FBI. 

DHS Components and FBI Primarily Rely on Initial and Ongoing 
Suitability and Security Clearance Investigations to Learn about 
Applicants' or Employees' Financial Situations: 

DHS components and FBI collect information--relating to personal 
character and conduct, educational and work experience, and financial 
situation--about prospective or current employees through one or more 
of three general processes: initial suitability investigations, 
initial security clearance processes, and ongoing or periodic 
reinvestigations (for continued suitability or renewal of security 
clearances).[Footnote 17] According to federal regulations, 
suitability investigations generally serve as initial investigations 
on all applicants for federal employment who are offered employment. 
[Footnote 18] DHS components and FBI conduct further reviews of 
information collected in the initial investigation for positions that 
require employees to work with national security information.[Footnote 
19] To gain access to such information, employees must acquire and 
maintain a national security clearance. Security clearance 
investigations are conducted to the level of classification that the 
position requires.[Footnote 20] For example, an employee whose 
position is expected to have regular access to information classified 
at the top-secret level would require a clearance at this level. 
According to all officials with whom we spoke at the DHS components 
and FBI, suitability and security clearance investigations are 
multilayered processes, although they can overlap. However, final 
determinations on suitability and security clearances can be mutually 
exclusive. For example, an employee may pass the suitability 
investigation and later be denied a security clearance, or while 
passing the security clearance investigation at one agency, an 
employee also could be deemed unsuitable for employment in a 
particular position. DHS and FBI personnel or contractors conduct both 
suitability and security investigations. Due to the overlapping nature 
of suitability and national security investigations at some agencies, 
the same investigation may be used for both purposes. 

DHS Components and FBI Use Multiple Sources to Gather Financial 
Information for Suitability Investigations, but the Primary Sources of 
Financial Information They Use May Not Identify Payday Loan Use: 

For the agencies we reviewed, suitability investigations generally 
involve verifying birth and education records and employment and 
military history (if applicable) and reviewing criminal and credit 
history. Investigations also may include interviews with the 
applicant's friends, colleagues, or neighbors and any current or 
former spouse.[Footnote 21] Officials at FBI and CBP told us that they 
may use polygraphs to further assess the reliability of applicants' 
statements. In relation to the financial part of the review, 
suitability investigators seek to determine whether prospective 
employees are in good financial standing, exhibit a pattern of 
irresponsible financial behavior such as habitual gambling, or fail to 
disclose financial problems relating to assets and debts. For example, 
CBP investigators stated that they especially would be concerned if 
they found out that a border agent appeared to be living beyond his or 
her means based on the expected salary of a border agent. 
Investigators also would be interested if a border agent who passed 
the initial suitability investigation suddenly adopted a more affluent 
lifestyle as this may indicate the agent had taken money from criminal 
elements such as human or drug traffickers. If financial issues arise 
during the background investigation, applicants must mitigate the 
concerns of adjudicators by showing evidence of current efforts to 
resolve the issue. For example, an applicant could provide evidence 
that he or she recently received an inheritance that could account for 
a sudden change in lifestyle. But under certain circumstances, an 
individual's financial situation can be used as a basis for finding 
him or her unsuitable for federal employment. For example, an 
applicant who is found to be in default on federal student loans 
automatically would be found unsuitable for employment at FBI. 
[Footnote 22] The more stringent threshold is in part due to the fact 
that the FBI requires a top-secret security clearance for all 
employees. 

The specific sources of financial information that agencies review 
during suitability investigations can vary between agencies, but FBI 
and DHS component officials with whom we spoke told us their 
adjudicators use reports from one or more of the major credit 
reporting bureaus as the primary sources for documenting an 
applicant's financial situation. Credit reports typically contain a 
record of an applicant's payment history on outstanding debts, credit 
cards, auto loans, mortgages, and recent bankruptcies. If an entry on 
an applicant's credit report raises a concern, agency officials told 
us that they would follow governmentwide guidance and might conduct 
follow-up interviews of the applicant and persons the applicant 
identified as references and review other information such as civil 
judgments or wage garnishments against the individual. Additionally, 
investigators might access reports from the Financial Crimes 
Enforcement Network at the Department of the Treasury.[Footnote 23] 
Some DHS components also have codes of conduct that specify 
established debt thresholds based on position and mission areas that 
may be of particular concern. For example, all law enforcement 
components in DHS (which include CBP, ICE, and TSA) would conduct 
further investigations or request further information depending on the 
circumstances of the case, if applicants exceeded thresholds relating 
to delinquent debt. 

However, the sources of information on which DHS components and FBI 
rely--such as credit reports and information collected from 
interviews--likely would not provide information on whether an 
applicant had used or currently has an outstanding payday loan. Payday 
lenders with which we spoke explained that they generally do not 
report to the major credit bureaus because of the nature of their 
business model. That is, payday lenders assume that their customers 
have low credit scores and cannot or choose not to take a loan from a 
traditional lender; otherwise, they would not need a payday loan. 
Additionally, short time frames and the recurring nature of payday 
loans generally make them nonreportable to the major credit bureaus. 
Unless some evidence of a payday loan were to be uncovered by an 
investigative interview with either the applicant or an applicant's 
reference, it is unlikely that an investigator would know of the 
existence of the payday loan. DHS and FBI officials with whom we spoke 
did not recall any instances of payday lending being reported or 
disclosed during suitability investigations. For example, officials at 
two components said that they could not recall any instances of payday 
lending being reported or disclosed during suitability investigations. 
The officials did note that they have seen an increase recently in 
financial problems, particularly problems with mortgages and 
foreclosures. Nevertheless, officials believed that investigators have 
been able to identify those individuals who are under serious 
financial distress. 

The Security Clearance Process Similarly Uses Multiple Sources to 
Gather Financial Information, and DHS Components and FBI Focus on 
Situations That Cannot Be Explained by Mitigating Factors: 

Officials we spoke with at DHS components and FBI reported that during 
the security clearance process their focus was on assessing employees' 
financial situations in light of a standard that balances derogatory 
information against mitigating factors. DHS components and FBI can 
review the same information in the security clearance process as in 
suitability investigations. Similar to suitability investigations, in 
reviewing an applicant's financial profile for a national security 
clearance, agencies primarily use credit reports from the three major 
credit reporting bureaus, further supported with follow-up interviews 
with personal references and the applicants themselves. 

As part of the security clearance process, applicants also must fill 
out OPM Standard Form 86 (SF-86).[Footnote 24] An applicant must 
report all current financial obligations, debts, and liabilities 
including student loans, auto loans, and unsecured debts as well as 
the applicant's payment history, including all current delinquencies 
of 90 days and all debts in the past 7 years that had been delinquent 
for 180 days or more. Some disclosures must go beyond 7 years, for 
example, employees who are undergoing more extensive background 
investigations must extend disclosures of criminal histories for the 
past 10 years, and all employees must disclose any past gambling 
problems. See figure 3 for examples of the questions on the form. 
However, it is unlikely that the SF-86 would capture payday lending 
unless employees had a current payday loan at the time they completed 
the SF-86. Due to the short-term nature of a payday loan (typically 14 
days), unless applicants recently had taken out or rolled over a 
payday loan at the time they were filling out the SF-86, they would 
not be required to disclose it at the time. A rolled-over payday loan 
might not be considered a delinquent debt if it was structured as a 
new loan created to pay off the previous payday loan. 

Figure 3: Sample SF-86 Financial Questions: 

[Refer to PDF for image: illustration] 

SF-86: 

A. Have you had a judgment entered against you? 

B. Have you defaulted on any type of loan? 

C. Have you had any account or credit card suspended, charged off, or 
canceled for failing to pay as agreed? 

D. Have you had your wages, benefits, or assets garnished or attached 
for any reason? 

E. Are you currently over 90 days delinquent on any debt(s)? 

F. Have you EVER experienced financial problems due to gambling? 

G. Do you have or have you Ever had any foreign financial businesses, 
foreign bank accounts, or other foreign financial interests of which 
you have direct control or direct ownership? 
Yes: 
No: 
Type of financial interest: 
Amount of funds (U.S. dollars): 

H. Do you have or have you had any foreign financial interests that 
someone controls on your behalf? 
Yes: 
No: 
Type of financial interest and name of party who controls it: 
Amount of funds (U.S. dollars): 

I. Do you own or have you owned real estate in a foreign country? 
Yes: 
No: 
Type of property and date(s) owned: 
Location of property: 
Estimated value of property (U.S. dollars): 

J. Do you receive or have you received any educational, medical, 
retirement, social welfare, or other such benefits from a foreign 
country? 
Yes: 
No: 
Type of benefit: 
Estimated value (U.S. dollars): 

Source: Examples of questions from Standard Form 86 Questionnaire for 
National Security Positions, revised July 2008. 

[End of figure] 

Furthermore, DHS components we reviewed (CBP, ICE, and TSA) reported 
that they have set discrete standards and reporting requirements 
relating to certain positions and clearances or types of debt. For 
example, one TSA security official stated that once employees have 
active security clearances, they must report any substantial changes 
to their finances or any debts on which they are 120 days or more past 
due. The three DHS components that we reviewed (CBP, ICE, and TSA) set 
an adjudicative threshold for individuals required to maintain a 
higher clearance.[Footnote 25] 

Although DHS components and FBI may consider much of the same 
financial information for suitability investigations and security 
clearances, the security clearance process explicitly balances 
financial liabilities against mitigating factors in its assessment 
framework.[Footnote 26] According to governmentwide guidelines titled 
Adjudicative Guidelines for Determining Eligibility for Access to 
Classified Information, in processing security clearances, 
adjudicators apply a subjective "whole person standard" that considers 
multiple factors.[Footnote 27] According to DHS and FBI, both agencies 
use governmentwide guidelines for processing national security 
clearance applications. When adjudicating an applicant's financial 
profile, federal agencies must consider the five derogatory financial 
factors in Guideline F (Financial Considerations), which are: 

1. A history of not meeting financial obligations. 

2. Deceptive or illegal financial practices such as embezzlement, 
employee theft, check fraud, income tax evasion, expense account 
fraud, filing deceptive loan statements, and other intentional 
financial breaches of trust. 

3. Inability or unwillingness to satisfy debts. 

4. Unexplained affluence. 

5. Financial problems that are linked to drug abuse, alcoholism, 
gambling problems, or other issues of security concern. 

The presence of derogatory factors can be mitigated or favorably 
addressed by any of the following factors: 

1. The behavior was not recent. 

2. It was an isolated incident. 

3. The conditions that resulted in the behavior were largely beyond 
the person's control. 

4. The person has received or is receiving counseling for the problem 
and there are clear indications that the problem is being resolved, or 
under control. 

5. Affluence resulted from a legal source. 

6. The individual initiated a good-faith effort to repay overdue 
creditors or otherwise resolve debts. 

DHS components we reviewed and FBI stated that in their interpretation 
of Guideline F, they were most concerned with delinquencies, 
bankruptcies, defaults, wage garnishment, and other debt collection 
actions that could not be explained by one of the mitigating factors. 
Two components (CBP and FBI), interpreted this guidance and other, 
nonfinancial factors (established by Executive Order No. 12968) to 
permit them to adjudicate each application on a case-by-case basis, 
with CBP indicating that any derogatory factor to surface could be 
mitigated by the employee using the whole person standard. 

Finally, we asked DHS components and FBI how many applicants or 
employees were denied security clearances because of financial 
reasons. While not all the components with which we spoke track this 
information, they reported anecdotally they believed the number to be 
small. 

DHS Components and FBI Conduct Periodic Reinvestigations and Some 
Employees Also File Annual Financial Disclosure Forms, but Information 
Collected Generally Would Not Identify Payday Lending: 

Officials with whom we spoke at DHS and FBI stated that the agencies 
periodically reinvestigate employees for both suitability and security 
clearances and some employees also may be required to file additional 
annual financial disclosures. For all federal employees, security 
clearance reinvestigations typically take place in 5-or 15-year 
intervals and follow the same criteria and methods as the initial 
investigations with the exception of reduced reporting time frames 
consistent with the date of the last reinvestigation. For instance, 
reinvestigations rely heavily on recent credit reports, which likely 
would not capture payday lending. For those employees whose positions 
require an active security clearance, agencies conduct 
reinvestigations at intervals corresponding with the employee's level 
of clearance. Reinvestigations occur every 5 years for top secret, 10 
for secret, and 15 for confidential clearances. Employees must update 
the SF-86 from their last investigation. One senior TSA security 
official stated that if they became aware of an employee using a 
payday loan, it would not be cause for a reinvestigation. They might 
pull a credit report to make sure there were no other financial 
issues, but use of a payday loan alone would not lead to 
reinvestigation. 

DHS components and FBI also can assess the financial well-being of 
some employees through the annual financial disclosure process. The 
Office of Government Ethics issues the Confidential Financial 
Disclosure Report (forms OGE-450 and OGE-278) that qualifying 
executive branch employees must fill out annually to disclose outside 
income, assets, and outstanding liabilities.[Footnote 28] Depending on 
position and pay grade, some employees must file the annual financial 
disclosure form that may capture additional financial information. 
[Footnote 29] For example, OGE requires filers to disclose all assets 
held for investment with a value exceeding $1,000 or any asset that 
produced more than $200 in income during the previous year. With 
certain exceptions, OGE-278 incumbent and termination filers are also 
required to report all transactions that occurred in the past year 
that exceeded $1,000. In contrast, the SF-86 requires the applicant to 
list only assets that are considered foreign financial interests, and 
does not require the filer to report any asset transactions. The 
purpose of the forms is to assist employees and their agencies in 
avoiding conflicts of interest between official duties and private 
financial interests or affiliations. Because this annual disclosure 
requires reporting debts of more than $10,000, it is unlikely that an 
employee would be required to report a payday loan because the average 
payday loan is lower than the reporting threshold. 

At their discretion, DHS components and FBI may choose to employ 
additional methods to ensure the integrity of their employees 
including polygraph examinations, more frequent reinvestigations, and 
access to other unspecified sources of information. Use of polygraph 
examinations varied at the components with which we spoke. FBI 
regularly uses them in investigations and reinvestigations, CBP uses 
them as a supporting investigative tool for certain positions, and ICE 
and TSA do not use them. All DHS components and FBI told us that they 
could reinvestigate employees at any time if financial issues became 
known or they were concerned about an employee's financial well-being. 

DHS and FBI Consider Payday Loan Use among Employees to Be a Minimal 
Security Issue Affecting Suitability and Clearances: 

We obtained CBP, ICE, TSA, and FBI perspectives about employee use of 
payday loans as it relates to suitability and national security 
clearance determinations. All of the officials with whom we spoke 
stated that they were not aware of significant payday loan use, nor 
were they concerned with it as a security issue. For instance, FBI 
officials said that while they have become aware during the 
suitability or security clearance processes of employee use of other 
high-interest loans, they could not recall any instances that 
discovered the use of payday loans. TSA and ICE officials said that 
they did not regard payday loans as a security issue. In our 
discussions with CBP, ICE, TSA, and FBI, officials pointed out that 
under current law, having a payday loan is not illegal, but knowledge 
that an employee had used such a loan might raise concerns that an 
employee was in trouble financially. 

Although payday lending is not being reported regularly to the major 
credit bureaus and does not show up on credit reports, DHS components 
and FBI felt confident that they captured an adequate amount of both 
applicants' and current employees' financial information to make sound 
determinations of suitability or grant security clearances. FBI 
officials explained that although the presence of a payday loan might 
indicate that the individual was overextended financially, they felt 
the existing background investigation process would capture 
information needed to assess the individual's overall financial 
situation. CBP officials explained that their investigations captured 
the majority of information on applicants, and they felt the current 
process was sufficient overall. CBP and ICE acknowledged that 
reinvestigations might miss instances of financial distress because of 
the time gaps between investigations. But CBP officials stated that 
while they did not completely capture such instances, current policies 
and procedures struck a reasonable balance between agency needs and 
available resources for investigations and adjudications. Furthermore, 
CBP, ICE, and TSA asserted that a suitability review followed by a 
security clearance review represented a multilayered approach--if 
derogatory financial information did not come to light in the 
suitability review, it could be identified when information was 
reviewed for the security clearance.[Footnote 30] DHS components and 
FBI consistently described the suitability and security clearance 
processes as tiered approaches (through administratively designed 
redundancies in investigative inquiries and methods) for uncovering 
financial and other information on their employees. For example, ICE 
described it as a "two-pronged approach" at determining whether an 
employee should be entrusted with a national security clearance or 
continued employment at ICE. 

DHS components and FBI officials emphasized that they would view the 
presence of a payday loan on an applicant's or employee's record in 
the context of the "whole person standard." That is, while certain 
types of information about an individual's financial situation might 
raise concerns, the fact that an applicant or employee had taken out a 
payday loan would not be an automatic disqualifier to employment or a 
clearance. In looking at an applicant or employee's financial history, 
agencies weighed an individual's explanation for debts or risky 
financial behavior against the extent, circumstances, and severity of 
the debts or risky financial behavior. DHS components and FBI 
officials further stressed that they were not as concerned with a 
single instance of debt or an individual using a payday loan one time 
as they were with recurring debts or risky financial behaviors, or how 
payday loans might contribute to such patterns. For instance, a 
habitual gambler or drug user might need cash on short notice and have 
to resort to taking out a payday loan. However, DHS components and FBI 
officials stressed that the existence of a payday loan, if it could be 
identified in the credit report or through other sources, is not 
currently considered a determining factor or a disqualifier. Payday 
loans are legal financial services when obtained online or at a 
storefront in a state where they are not prohibited. Any delinquent 
debt and the circumstances surrounding the delinquency would be more 
of a determining factor than a payday loan itself. 

Furthermore, all the agency officials with whom we spoke stated that 
they have resources available for employees who need help with a 
number of issues, including financial matters. Credit counseling and 
other services are available through EAPs.[Footnote 31] These programs 
provide confidential help to employees and work with them to address 
problems. Officials at CBP, ICE, TSA, and FBI with whom we spoke said 
that they may suggest or encourage employees to speak with EAP 
counselors if they experienced financial or other difficulties. For 
example, FBI investigators explained that contacting the agency's EAP 
for financial counseling generally was considered evidence of an 
employee's efforts to resolve financial issues. Since EAP counseling 
is confidential, officials were unable to tell us if employees 
specifically sought help for financial problems relating to payday 
loans but said that employees did seek help for a number of financial 
issues related to divorce, credit card debt, and over extension on 
mortgages. Officials from the FBI EAP said that it tracks reasons for 
employees seeking EAP services; however, the EAP does not collect and 
retain information at a level of detail that would allow them to 
identify individuals who use payday lending services. The FBI's EAP 
providers reported anecdotally about four or five cases annually of 
self-reported payday loan use, while case files showed that 443 
employees spoke with EAP counselors regarding financial issues in 
2009. DHS components were also able to provide general information on 
the number of employees who sought help for financial matters 
including credit card debt, mortgage issues, and medical expenses. For 
example, CBP reported that in fiscal year 2009, 29 employees or family 
members of employees contacted the EAP about financial concerns. TSA 
reported that payday lending was not an issue raised or documented 
during EAP counseling but there were hundreds of employees who spoke 
with counselors regarding other financial issues. EAP counselors we 
spoke with reiterated that few employees raised the use of payday 
loans as an issue during counseling; however, when the issue did come 
up, counselors said that employees tended to be in significant 
financial distress. Additionally, FBI officials stated that the agency 
has a Post-Adjudication Risk Management Program for persons who may 
pose a risk to the agency on account of financial considerations (as 
determined by FBI adjudicating officers). These employees are required 
to enter the program where they are monitored for improvements in 
negative patterns of behavior. 

Data Suggest Relatively Low Rates of Use of Payday Loans among 
Selected Federal Employees: 

While payday lending to federal employees does occur, data we obtained 
from the four agencies we reviewed on the salary levels of their 
employees suggest that these federal employees do not match the income 
profile of the average payday loan borrower. As described previously, 
one reported median household income of a payday loan borrower is 
estimated to be around $32,712. Salaries at DHS components and the FBI 
generally are higher than this. Employees at these components have 
salaries that range from approximately $42,000 to $155,000, with most 
making at least $60,000 and some law enforcement positions at ICE and 
FBI in particular making significantly more (see appendix II for more 
information). Furthermore, federal law enforcement employees receive 
additional Law Enforcement Availability Pay, which is a type of 
premium pay for federal law enforcement officers who are criminal 
investigators.[Footnote 32] The salary ranges listed above and in 
appendix II do not account for Law Enforcement Availability Pay. 
Additionally, federal employees receive benefits such as health 
insurance and disability insurance, which may provide an extra 
financial cushion in emergency situations. While this does not 
preclude these individuals from using payday loans, it suggests that 
they may not be the typical payday loan customer. Additionally, as 
discussed in the next section, federal employees may have other 
options available to them if they need financial assistance or short-
term, small-dollar loans. 

Similarly, data we obtained from the payday loan industry appear to 
support the DHS components' and FBI's low level of concern with regard 
to use of this product among employees (see appendix III). The five 
payday lenders that provided data to us all reported that they made 
loans to people who identified their employer as one of the four 
components we reviewed, but the employees using the loans constituted 
a small percentage of the agencies' total workforce (law enforcement 
and nonlaw enforcement). During the period we analyzed, individuals 
receiving payday loans represented from 0.15 to 1.57 percent of the 
employees at each of the four agencies. However, these data are not 
representative of all loans borrowed by employees at these agencies 
during this time period as they only include information from five 
lenders. 

Small-Dollar Alternatives to Payday Loans Are Limited in Scope but 
Recent Actions May Encourage Broader Availability: 

Depository institutions, employers, and nonprofit organizations have 
developed various small-dollar loan models, including lending through 
the workplace and partnerships with nonprofits. Some institutions 
offer products that may serve as alternatives to payday loans--
mimicking some of the terms and conditions of these transactions but 
generally offering lower interest rates--while others use the small-
dollar loan products to establish long-term relationships with 
borrowers or meet a need for short-term credit in their community. 
Some small-dollar loan options we identified are available exclusively 
to federal employees or other specific populations, while other 
institutions offer their small-dollar loan products to the general 
public. Despite the variety of small-dollar loan products available, 
the number of institutions offering such products still is relatively 
small. Officials from a number of depository institutions with whom we 
spoke cited challenges to increasing the availability of small-dollar 
loans, including credit risk and concerns about the profitability of 
the product. However, recent actions such as changes in legislation 
and efforts to increase interest rates and ease some regulatory 
restrictions could prove useful in increasing the number of 
institutions offering small-dollar loan options to consumers. 

Workplace Lending Has Provided Some Employees with Small-Dollar Loan 
Options: 

Some Federal Employees Have Access to Small-Dollar Loan Options in 
Limited Situations: 

According to OPM and federal regulators, some federal employees who 
face financial difficulties have small-dollar loan options, but we 
found they are relatively limited in use and scope. The federal 
government offers employees an option for obtaining loans in certain 
situations. Through the Thrift Savings Plan (TSP), current federal 
employees (or members of the uniformed services) can obtain a general 
purpose loan (for any reason with no documentation required) if they 
have at least $1,000 of their own contributions and earnings in a plan 
account.[Footnote 33] The minimum TSP loan amount is $1,000 and the 
repayment term for the general purpose loan is from 1 to 5 years 
(repayment is through payroll deduction).[Footnote 34] There is a $50 
application fee and turnaround time varies from 3 to 8 business days 
to several weeks depending upon the application process (electronic or 
paper).[Footnote 35] Employee participation in the TSP is voluntary; 
thus, not all federal employees would have access to this option. 
Additionally, the minimum TSP loan amount ($1,000) may exceed 
employees' short-term credit needs as the typical payday loan 
transaction is $100-500. Further, turnaround time is important for 
borrowers who need short-term credit; therefore, this option may not 
be viable in situations when an employee needs funds immediately. 
According to the Federal Retirement Thrift Investment Board, TSP 
participants had more than 805,000 outstanding loans as of July 2010. 

Federal employees who are facing economic hardships due to an 
unexpected emergency (for example, death in the employee's immediate 
family, loss of income, or divorce) also may be eligible to apply for 
a loan or a grant (grants are infrequently made and only in the most 
extreme circumstances) through the Federal Employee Education and 
Assistance Fund, a nonprofit organization. This organization provides 
no-interest loans of up to $1,000 (applicants are required to provide 
verification of financial hardship). Loans generally are processed 
within one business day and there is no credit check. Payments are 
made directly to the creditor(s). Loans generally are repaid within 1 
year through payroll allotment administered by the employee's payroll 
service. According to the Federal Employee Education and Assistance 
Fund, due to current economic conditions, loan volume has nearly 
doubled in the last 2 years from 367 loans in 2009 totaling $250,801 
to 772 loans totaling $474,714 in 2010. Since the program's inception 
in 1987, the organization has made more than 5,900 loans totaling 
$3,587,987 as of December 2010. 

We also identified two federal agencies with in-house credit unions 
that offer small-dollar loans to employees. Representatives from the 
two federal credit unions reported that they identified employees' 
need for short-term credit upon reviewing members' automated clearing 
house activity.[Footnote 36] For example, one credit union recognized 
that some of its members were obtaining multiple payday loans during 
the same pay period through their account activity. In response, the 
credit union partnered with a nonprofit organization that had an 
existing small-dollar loan program to offer members an alternative to 
payday loans. Applicants must be credit union members (for at least 
120 days), have a job or retirement income, and have direct deposit. 
Loan amounts are $250 or $500, and the APR is approximately 18 
percent. The approval process generally takes about an hour. Members 
pay an annual fee to join the program and must qualify for the program 
annually.[Footnote 37] Members are permitted one outstanding loan at a 
time; however, they can take out subsequent loans up to their loan 
limit without additional fees or paperwork after the initial loan is 
paid in full. The ability to obtain subsequent loans may provide 
eligible employees with regular access to short-term credit. The 
program also includes a mandatory savings component that is set aside 
and held during the duration of the loan ($25 for a $250 loan and $50 
for a $500 loan). The representative reported that most members do not 
withdraw the money that is set aside for the savings component after 
the loan is paid in full because they intend to take out another loan 
soon thereafter. According to the representative, the credit union 
made 2,120 loans in 2009 and 1,090 in 2010 (as of June). 

Finally, some federal employees may be eligible for pay advances. OPM 
delegated authority to individual agencies to provide pay advances in 
limited situations (for example, for newly appointed employees no 
later than 60 days after their appointment, or during situations in 
which employees have received an order to evacuate, provided that 
advance pay is required to help employees defray immediate expenses 
incidental to the evacuation).[Footnote 38] However, these provisions 
do not provide employees with regular or easy access to financial 
assistance for routine expenses, a common reason consumers obtain 
payday loans. Further, according to OPM officials, agencies do not 
report use of pay advance authority to OPM. Agency officials at DHS 
confirmed that the agency does not have a formal policy for advancing 
pay and has not provided advance pay to its employees. 

Some Private-Sector and Other Governmental Employers Also Have Offered 
or Developed Workplace Lending Options: 

In addition to the small-dollar loan options for federal employees 
outlined above, we identified two workplace lending models that are in 
use or being developed--depository-employer partnerships and payroll 
deduction. That is, employees can obtain a loan indirectly through an 
employer that has a partnership with a depository institution or 
directly through an employer that offers a loan as an employee 
benefit. Officials from a few depository institutions with whom we 
spoke reported that they formed partnerships with employers to offer 
employees an alternative to payday loans. For example, a state 
employee assistance fund partnered with a state credit union to form a 
loan program in July 2009 after increases in emergency grant 
applications to the fund raised concerns about employees' financial 
stability. The loan is available to credit union members who are 
salaried state employees (employed at least 12 months and with no 
current disciplinary actions). Applicants must undergo a credit check 
and cannot have adverse credit history such as bankruptcy. Applicants 
also must complete an online financial education module and establish 
direct deposit with the credit union. Loan amounts range from $100 to 
$500 (in $100 increments) and the APR is 24.99 percent with a 6-month 
repayment term. 

The second workplace lending model--payroll deduction--allows 
employers to offer a small-dollar loan or line of credit that 
employees repay in installments through payroll. We identified at 
least two companies that have developed technology platforms that can 
interface with payroll systems to offer small-dollar loans. Companies 
that offer this product report that automation streamlines the 
underwriting process, which reduces loan origination fees. For 
example, a representative from one company reported that its 
technology platform allows employers to establish standard 
underwriting criteria such as employment history, income requirements, 
and loan options. The automated system verifies that an applicant 
meets the employer's loan eligibility criteria, which eliminates 
overall underwriting costs. Further, the payroll deduction model 
provides direct access to employee payroll, thereby reducing the risk 
of loan default. We discuss how concerns about profitability and 
credit risk may affect the availability of small-dollar alternatives 
to payday loans in more detail later in this report. 

Some Community and Regional Depository Institutions Offer a Range of 
Small-dollar, Short-term Loan Products but They Have Not Been Widely 
Available: 

Some community and regional depository institutions have developed a 
range of different products and mechanisms to offer consumers short- 
term credit; however, many of these products are not widely available 
or have eligibility restrictions. According to industry studies, small-
dollar loans generally range from $100 to $500. But representatives 
with whom we spoke from depository institutions that participated in 
FDIC's Small-Dollar Loan Pilot Program reported that their small-
dollar loans ranged from $50 to $3,000.[Footnote 39] Depository 
institution representatives reported that their loans, unlike payday 
loans, have no balloon payments and repayment terms range from 1 to 24 
months.[Footnote 40] Although small-dollar loan products that 
depository institutions offer vary with regard to conditions, terms, 
and availability, they generally offer more favorable terms than 
payday loans. However, all of the depository institution officials 
with whom we spoke said that as regional or community institutions, 
they provided limited geographical, and thus, consumer availability 
for small dollar loans. In addition, some depository institutions 
require that consumers meet eligibility criteria, including having an 
established relationship with the institution, minimum income level, 
credit history, ability to repay, and mandatory financial education or 
savings components. Limitations of some small-dollar loan programs 
(for example, eligibility criteria) may hinder their usage. For 
instance, one bank that participated in the FDIC pilot reported that 
it offered a small-dollar loan product as an alternative to payday 
loans at four of its branches on military installations; however, the 
bank did not issue any loans despite interest in the product as none 
of the applicants met loan eligibility requirements.[Footnote 41] 
Specifically, a representative reported that approximately 20 people 
inquired about the bank's small-dollar loan product during the 2 years 
it was offered but all of the applicants had a credit history which 
made them ineligible--applicants were required to have no previous 
credit history to qualify for a small-dollar loan. The representative 
reported that the bank did not continue to offer its small-dollar 
product after the FDIC pilot concluded, but was exploring ways to 
revise underwriting standards to make the product more appealing to 
borrowers. FDIC reported that several other banks that participated in 
the pilot were actively serving the military population. Finally, some 
depository institutions offer a small-dollar loan product for a very 
specific purpose. For example, one institution offered a small-dollar 
loan product exclusively to immigrants to cover the cost of 
citizenship application fees. 

Some Depository Institutions Offer Salary Advances as an Alternative 
to Payday Loans: 

Some depository institutions offer checking account holders with 
direct deposit the ability to access short-term, small-dollar loans or 
lines of credit for a fee. Customers are required to request the 
advance, which is repaid through direct deposit. For example, 
according to the president of one of the credit unions with whom we 
spoke, his institution has issued more than $5 million in salary 
advance loans over the past 10 years and they were the most profitable 
loan product in the institution's portfolio. Borrowers must be credit 
union members to qualify for the small-dollar loan product. Loan 
amounts range from $50 to $500, and the APR is 12 percent with a 12-
month repayment period. There is a forced savings component, which 
diverts 5 percent of the total loan into a savings account where it is 
held as long as the pay advance loan is active under the member's 
name. If a member obtains consecutive pay advance loans, the savings 
account slowly builds and collects interest. If a member's savings 
account hits the maximum pay advance amount of $500, the credit union 
then converts the pay advance loan to a secured loan and can offer the 
borrower a lower interest rate. 

Challenges to Increasing Availability of Small-Dollar Loans May 
Include Credit Risk and Unprofitability: 

A few representatives from the depository institutions and nonprofit 
organizations we contacted cited credit risk to depository 
institutions as a challenge in offering a small-dollar loan product. 
Generally, small-dollar loans, which are unsecured loans because 
borrowers are not required to provide collateral, are viewed as a 
higher credit risk than secured loans. Additionally, a majority of the 
depository institutions we reviewed have a streamlined underwriting 
process for their small-dollar loan products. That is, depository 
institution officials told us that small-dollar loan applicants 
generally had to provide less personal information for small-dollar 
loans than for traditional, secured loans, which may contribute to 
higher loan losses. 

Overall, we found that delinquency rates, which can serve as an 
indicator of credit risk, varied among the depository institutions, 
according to officials with whom we spoke.[Footnote 42] Specifically, 
delinquency rates for their small-dollar loan product ranged from 
under 3 percent to approximately 13 percent. In comparison, according 
to the Federal Reserve delinquency rates for all consumer loans 
(insured U.S.-chartered commercial banks) ranged from 4.61 to 4.82 
percent in 2009.[Footnote 43] Prior to the financial crisis in 2007, 
the Federal Reserve reported that delinquency rates for all consumer 
loans ranged from 2.77 to 2.97 percent. 

FDIC reported that the delinquency rates for small-dollar loans made 
during its small-dollar loan pilot were relatively stable at about 9 
percent for much of 2009, but climbed to 11 percent in the fourth 
quarter of 2009 which it largely attributed to adverse economic 
conditions. FDIC noted that although delinquency rates for small-
dollar loans made during the pilot were much higher than for other 
types of general unsecured loans to individuals, charge-off ratios 
(from 4.3 to 6.6 percent) generally were in line with industry 
averages for unsecured loans to individuals for 2009 (from 4.9 to 5.4 
percent).[Footnote 44] Overall, FDIC concluded that pilot loan 
performance statistics indicated that small-dollar loan borrowers 
might have had more difficulty paying loans on time but had a similar 
default risk to those in the general borrower population. Furthermore, 
a representative from a nonprofit with whom we spoke reported that the 
loan loss ratio, another indicator of credit risk, for the nonprofit's 
small-dollar loan program recently was 5-6 percent--1 percent lower 
than when the program first started. The program initially offered the 
loan to current members already using payday loans (the credit unions 
had recognized that current members were using payday loans by 
reviewing their ACH activity) and therefore were more of a credit 
risk.[Footnote 45] The program then expanded to all credit union 
members and the loan-loss ratio decreased. While not directly 
comparable, the loan loss reported by publicly traded payday loan 
companies was 20.4 percent of revenue in 2009 (compared to 23.2 
percent in 2008).[Footnote 46] 

Depository institutions commonly offer more expensive small-dollar 
loan options, such as overdraft loans or lines of credit that 
consumers often use as a source of short-term credit. For a fee, the 
depository institution will cover transactions that exceed the 
available balance of an account. The depository institution collects 
the funds, including all associated fees, from the customer's next 
deposit into the account. However, consumers must have an established 
account with the depository institution to qualify for this product, 
and the cost for this short-term credit can be relatively high. 

According to an FDIC study of bank overdraft programs, the median 
amounts of a point-of-sale (POS) debit card transaction, automated 
teller machine (ATM) withdrawal, and a check that resulted in a 
nonsufficient funds (NSF) transaction were $20, $60, and $66, 
respectively, and the median overdraft fee was $27 per 
transaction.[Footnote 47] As detailed in table 1, many of these 
overdraft fees tend to have higher APRs when compared with a payday 
loan and applying a 14-day repayment term.[Footnote 48] Quicker 
repayment of the overdraft amount would result in higher APRs, and 
slower repayment would result in lower APRs.[Footnote 49] 

Table 1: Comparison of Costs to Consumers of Obtaining a Payday Loan 
versus Bank Overdraft Fees, Based on a 14-Day Term as of November 2008: 

Product: Payday loan; 
Median transaction Size: $361; 
Median fee: $53; 
APR: 391%. 

Product: Point-of-sale and debit overdraft; 
Median transaction Size: $20; 
Median fee: $27; 
APR: 3,520%. 

Product: ATM overdraft; 
Median transaction Size: $60; 
Median fee: $27; 
APR: 1,173%. 

Product: NSF check; 
Median transaction Size: $66; 
Median fee: $27; 
APR: 1,067%. 

Sources: GAO analysis of FDIC data and data from the largest nonbank 
providers of payday cash advance services in the United States. 

[End of table] 

Unlike other small-dollar loan options discussed above, overdraft fees 
are a significant source of fee income for depository institutions. 
According to an FDIC survey of 462 FDIC-supervised banks, the banks 
earned an estimated $1.97 billion in NSF-related fees in 2006, 
representing 74 percent of the $2.66 billion in service charges on 
deposit accounts reported by these banks in their call reports. 
[Footnote 50] As such, there could be a disincentive for depository 
institutions to offer small-dollar loan products as they currently 
have other profitable means to provide customers short-term credit. 

Some Community and Regional Depository Institutions Said Their Small- 
Dollar Loan Products Were Not Profitable, but That They Offered Them 
to Build Relationships and Meet Community Needs: 

Some representatives from the depository institutions with whom we 
spoke reported that their small-dollar loan products were not 
profitable. These institutions reported that underwriting and other 
expenses equaled or exceeded any fees or interest income they 
collected. For example, a representative from one institution said its 
interest income on a $500 loan was $7.40. The representative stated 
that the cost of underwriting the loan exceeded this amount and that 
the institution viewed its small-dollar loan as a service to customers 
rather than a profit-making product. 

However, most of the institution officials with whom we spoke reported 
that profitability was not the focus of their small-dollar loan 
program; rather, the ability to establish long-term relationships and 
cross-sell other products was important to them. Relationship-based 
lending is a form of lending by which a depository institution seeks 
to establish a long-term relationship with borrowers--based upon the 
premise that as the relationship develops, the institution will have 
an opportunity to sell borrowers other products such as loans and 
checking and savings accounts. For example, representatives from a 
credit union membership association that provides technical, 
underwriting, and marketing support to more than 500 credit unions 
across one state reported that they marketed their small-dollar loan 
program as a gateway device to promote long-term credit union 
membership, which also convinced many credit unions to join. 
Representatives from the association reported that the program has 
grown in volume and continues to gain participants--82 credit unions 
with more than 200 branches have joined the program since it started 
in October 2006. 

Recent Actions May Encourage Wider Availability of Short-Term, Small- 
Dollar Loan Products: 

FDIC Conducted a Small Dollar Loan Pilot Program That Resulted in a 
Template for Small-Dollar Lending by Other Depository Institutions: 

As discussed earlier, FDIC conducted a 2-year Small-Dollar Loan Pilot 
Program as a case study to demonstrate how banks can profitably offer 
affordable small-dollar loans as an alternative to high-cost products 
such as payday loans and fee-based overdraft programs. The pilot began 
with 31 bank participants and concluded in the fourth quarter of 2009 
with 28 banks ranging in size from approximately $28 million to $10 
billion in assets.[Footnote 51] Participating banks made more than 
34,400 small-dollar loans with a principal balance of $40.2 million. 
The average loan amount for small-dollar loans (loan amounts up to 
$1,000) was approximately $700 with an average repayment term of 10-12 
months. The average loan amount for nearly small-dollar loans ($1,000- 
2,500) was approximately $1,700 with an average repayment term of 14-
16 months. All participating banks made loans within FDIC's targeted 
36 percent APR (inclusive of origination fees charged by approximately 
half of participating banks). According to FDIC, virtually all pilot 
participants could process loans within 24 hours and many within an 
hour if borrowers had the requisite documentation. 

FDIC identified best practices and lessons learned as a result of its 
pilot to develop a template for design and delivery elements for safe, 
affordable, and feasible small-dollar loans that may be replicated by 
other banks (see table 2 below). A majority of the pilot participants 
reported that they primarily used small-dollar loans to build or 
retain profitable, long-term relationships with consumers and also to 
create goodwill in the community. Although the pilot did not 
specifically track profitability, pilot participants generally 
indicated that origination and servicing fees for small-dollar loans 
were similar to those for other loans; and given the size of small-
dollar loans, interest and other fees generated were not always 
sufficient to achieve short-term profitability. According to FDIC, 
pilot participants reported that a longer loan term was critical to 
loan performance as it provided consumers a longer time to recover 
from a financial emergency than a single pay cycle or the immediate 
repayment often required for fee-based overdraft programs. 

Table 2: FDIC's Safe, Affordable, and Feasible Template for Small- 
Dollar Loans: 

Product element: Amount; 
Parameters: $2,500 or less. 

Product element: Term; 
Parameters: 90 days or more. 

Product element: APR; 
Parameters: 36 percent or less. 

Product element: Fees; 
Parameters: Low or none; origination and other upfront fees plus 
interest charged equate to APR of 36 percent or less. 

Product element: Underwriting; 
Parameters: Streamlined with proof of identity, address, and income, 
and a credit report to determine loan amount and repayment ability; 
loan decision within 24 hours. 

Product element: Optional features; 
Parameters: Mandatory savings and financial education. 

Source: FDIC. 

[End of table] 

Furthermore, FDIC officials noted that pilot participants and others 
said that a more flexible regulatory environment could encourage them 
to offer small-dollar loans. More specifically, FDIC reported that 
several pilot participants believed that small-dollar lending should 
receive more emphasis in Community Reinvestment Act of 1977 (CRA) 
examinations even if the programs were relatively small.[Footnote 52] 
However, FDIC noted that both its small-dollar loan guidelines and 
application process for the pilot program indicated that small-dollar 
loan programs already can receive favorable consideration for CRA 
purposes, although pilot participants reported that examiners were not 
always aware of this or were not consistent in applying the 
consideration. Federal regulators examine depository institutions for 
CRA compliance and assign ratings to individual institutions, which 
then are made publicly available. Regulators consider the CRA record 
of depository institutions in evaluating applications for charters or 
for approval of mergers, acquisitions, and branch openings. A number 
of pilot participants also said that favorable CRA consideration might 
provide an incentive for additional institutions to participate in 
small-dollar lending. They suggested that institutions should receive 
CRA consideration for offering a small-dollar loan product. For 
example, a representative from a nonprofit organization specializing 
in low-income consumer issues, with an emphasis on consumer credit, 
stated that offering banks CRA consideration would provide an 
incentive for depository institutions to offer small-dollar loans. But 
the representative also noted that as long as banks and credit unions 
could continue to collect overdraft fees from customers, they would 
have little incentive to offer small-dollar loans. 

Although the FDIC pilot has ended, several of the pilot participants 
with whom we spoke reported that they continue to offer their small- 
dollar loan products. A representative from FDIC reported that agency 
officials are planning to travel to a number of different cities to 
meet with community banks to discuss the pilot and attempt to get more 
banks involved in making small-dollar loans. More broadly, FDIC 
continues to work with depository institutions, consumer groups, 
nonprofit organizations, other government agencies, and others to 
research and pursue strategies that could prove useful in increasing 
the supply of small-dollar loan options available to consumers. 

Recent Amendments to Regulation E May Affect Overdraft Practices: 

Recent amendments to Federal Reserve Regulation E, which implements 
the Electronic Fund Transfer Act, may encourage some depository 
institutions to offer small-dollar alternatives.[Footnote 53] These 
recent changes require depository institutions to provide notice and a 
reasonable opportunity for customers to opt in to the payment of 
overdraft fees for ATM and one-time debit card transactions. That is, 
customers must consent to the payment of overdraft fees for ATM and 
one-time debit card transactions, which could affect overdraft 
practices and increase consumer awareness of the costs for this short- 
term credit.[Footnote 54] FDIC and consumer advocates noted that prior 
to the recent amendments, participation in some overdraft loan 
programs was based on automatic enrollment and customers may not have 
fully understood the risks and potential costs involved. Additionally, 
consumer advocates assert that overdraft programs are a high-cost form 
of lending that traps low-and moderate-income consumers into paying 
high fees. Further, consumer advocates argue that by honoring 
overdrafts, depository institutions encourage consumer reliance on 
these programs and therefore, consumers incur greater costs in the 
long run than they would if the transactions were denied at the 
outset. If customers opt out of overdraft protection, and depository 
institutions collect less income from these fees, the institutions may 
have more incentives to offer small-dollar alternatives to them. 

Recent Financial Reform Legislation Established a Loan Loss Reserve 
Fund to Offset Credit Risk to Depository Institutions That Offer Small-
Dollar Loans: 

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes 
a provision to establish a grant program within the Community 
Development Financial Institutions Fund (CDFI).[Footnote 55] The new 
program would help designated CDFI's to defray the costs of operating 
small-dollar loan programs, by providing financial assistance to these 
institutions to establish their own loan loss reserve fund to mitigate 
some of the losses from such programs. 

Several depository institution officials with whom we spoke reported 
that access to a loan loss reserve fund to offset credit risk could 
help to increase depository participation in small-dollar lending. For 
example, a state credit union association partnered with the state's 
treasury department to develop a loan loss reimbursement fund because 
some of the credit unions were hesitant to participate in the 
association's small-dollar loan program without this assurance. The 
representatives reported that the loan loss reimbursement fund was an 
important factor in increasing participation in the small-dollar loan 
program. 

New Credit Union Regulation Raised the Interest Rate Cap for Small- 
Dollar Loans: 

Effective October 25, 2010, the National Credit Union Administration 
(NCUA) adopted a rule to offer short-term, small-dollar loans at a 
maximum APR of 1000 basis points above the general interest rate 
permissible for federal credit unions.[Footnote 56] Currently, the 
Federal Credit Union Act imposes a ceiling on the interest rate a 
federal credit union may charge for credit at 15 percent, but allows 
the NCUA Board to set a higher interest rate if certain criteria are 
met. Currently, the Board set rate is 18 percent. According to an NCUA 
official, this new rate would provide greater flexibility to federal 
credit unions to offer their members alternatives to payday loans. 
Generally, credit union representatives with whom we spoke stated that 
they believed these changes could increase participation in small- 
dollar lending. However, a representative from one of the federal 
credit unions was concerned that the rule limited the number of short- 
term, small dollar loans a borrower could obtain during a specified 
time period (credit unions cannot make more than three short-term, 
small-dollar loans in any rolling 6-month period to any one borrower). 
The representative reported that this would change how the credit 
union currently operated its small-dollar loan program and could cause 
some borrowers who use the product to return to payday lenders. 

Concluding Observations: 

Recent statutory and regulatory changes and FDIC initiatives may 
encourage more institutions to offer small-dollar loan alternatives to 
payday loans or expand their availability, but many consumers may 
still choose to use payday loans for their wide availability and 
relative lack of eligibility restrictions. Concerns about such high-
interest lending have not abated as more Americans encounter financial 
difficulties due to the recent economic downturn. In conducting our 
work we found limited data available on the payday loan industry that 
made it difficult to assess the size of the industry, the prevalence 
of various product offerings, and the ultimate effect of industry 
practices on federal law enforcement employees or other consumers. 
While a small number of payday loan companies are publicly traded and 
information is available on where they operate, the size of their 
operations, and the types of products they offer, in our discussions 
with industry representatives, they estimate that thousands of private 
companies--about which very little is known--offer pay advance 
products. Some of these companies may operate in states where payday 
lending is legally restricted, but according to state officials and 
FTC staff, tracking and monitoring lenders--particularly those that 
operate online--can prove very difficult, as a number of them are 
small "mom and pop" shops or may be located overseas. However, the 
creation of the new Consumer Financial Protection Bureau provides an 
opportunity for the federal government to centrally collect more data 
on the industry and, within the scope of its authorities, lay a 
foundation for broader awareness of these alternative financial 
services providers. Furthermore, although the federal agencies we 
studied believe they have sufficient information to assess an 
employee's financial situation and identify those employees in 
financial distress--and our data analysis suggests relatively low 
rates of payday loan use by select federal law enforcement employees--
any isolated problems could be significant for the individuals 
involved because the data also suggest some individuals repeatedly use 
payday loans. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DHS components (CBP, ICE, TSA, 
and the Office of the Chief Human Capital Officer), FBI, FDIC, the 
Federal Reserve, FTC, HHS, OPM, NCUA, and Treasury for their review 
and comment. CBP and the DHS Office of the Chief Human Capital 
Officer, FBI, the Federal Reserve, FDIC, and FTC provided us with 
technical comments that we incorporated as appropriate. Additionally, 
FDIC commented that they agreed with the findings of the report. HHS, 
OPM, and Treasury did not provide comments on our draft report. 

NCUA provided us with written comments, which are reprinted in 
appendix IV. NCUA believed the report was well written and thoroughly 
researched and offered some technical comments that we have 
incorporated as appropriate. 

We are sending copies of this report to interested congressional 
committees and the Secretaries of the Departments of Health and Human 
Services, Homeland Security, and the Treasury; the Directors of FBI 
and OPM; and the Chairmen of the FDIC, Federal Reserve, FTC, and NCUA. 
In addition, the report will be available at no charge on the GAO Web 
site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at cackleya@gao.gov or (202) 512-8678. Contact points for 
our Office of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix V. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

In this report, we examine (1) how select federal law enforcement 
agencies become aware of employees who are potential security risks 
due to financial problems, including payday lending, and (2) various 
alternatives to payday lending that provide consumers with access to 
small-dollar loans and more favorable interest rates. 

To determine how select federal law enforcement agencies become aware 
of employees who are potential security risks due to financial 
problems we focused on four major federal law enforcement agencies--
Customs and Border Protection (CBP), Immigration and Customs 
Enforcement (ICE), Transportation Security Administration (TSA), and 
the Federal Bureau of Investigation (FBI). To determine what financial 
information agencies collect on applicants and employees, we met with 
officials at the Office of Personnel Management (OPM) and the four 
selected agencies. We obtained information and documentation on the 
policies and processes these agencies follow when conducting 
suitability or security clearance investigations of applicants or 
employees. We specifically considered financial information that is 
collected and analyzed and spoke with investigators and adjudicators 
about how this information is used when determining whether someone is 
suitable for employment or whether to grant a security clearance. When 
available, we collected data on the number of suitability or security 
clearances that were denied for financial reasons. When applicable, we 
also reviewed agency codes of conduct and other personnel standards 
that apply to the financial status of federal employees.[Footnote 57] 
To determine whether employees at the four law enforcement agencies we 
reviewed sought help for financial matters, we spoke with officials 
who have knowledge of the agencies' employee assistance programs. When 
available, we also obtained data on the number of employees from these 
agencies who seek help on financially related matters. FBI and CBP 
provided summary data on employees who sought help on financial-
related matters. We believe that the data obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

To determine the types of data payday lenders collect and report about 
their customers, and thus what information would be publicly available 
to employers when they run a credit check, we spoke with members of 
the payday loan industry, representatives from two of the three major 
credit bureaus (Experian, Equifax, and TransUnion), and with a company 
that provides credit-related data that extends beyond information 
offered by the major credit bureaus. Since some payday lenders pull 
data from and report to other companies that aggregate data on the 
"near-prime" market, we collected information on these companies and 
interviewed one company to see if it collected information from payday 
lenders that we could use to determine prevalence of payday loan use 
at the agencies we reviewed. The data they collected on employment was 
not reliable for our purposes. We also conducted interviews with and 
collected information from trade organizations that work with payday 
lenders such as the Consumer Financial Services Association, the 
Financial Service Centers of America, and the Online Lenders Alliance. 

To determine if law enforcement employees at the four federal agencies 
we examined have salaries that typically fall within the range of the 
average payday loan borrower, we compared midpoints of salary ranges 
of law enforcement employees at these agencies with the median salary 
of a payday loan borrower. We collected data from the human resources 
departments at CBP, ICE, TSA, and FBI on the number of full-time 
equivalent (FTE) employees in different law enforcement job series and 
pay grades.[Footnote 58] We then calculated the midpoint pay for each 
pay grade that corresponded to employees in one of the Law Enforcement 
Officer General Schedule (LEO-GS) pay series--from GS-5 through GS-15--
using the 2010 LEO General Schedule for the Washington, D.C. locality. 
We averaged the pay at step 5 and step 6 of these salary ranges. 
[Footnote 59] We charted this information to show the number of FTE 
employees at each agency for each average LEO-GS salary level. We 
compared these salary ranges with the median household income of a 
payday loan borrower as identified by the Center for American Progress 
using data from the Board of Governors of the Federal Reserve System's 
(Federal Reserve) Survey of Consumer Finances for 2007.[Footnote 60] 
The study estimates the median household income to be $30,892, which 
we adjusted for inflation to be $32,712 in 2010.[Footnote 61] 
According to the Federal Reserve, 2.4 percent of families surveyed 
reported using a payday loan, and payday loan use was essentially 
limited to the bottom three income quintiles with medians of $12,300; 
$28,800; and $47,300. The median household income estimate derived 
from the 2007 Federal Reserve survey data is consistent with estimates 
from other studies we reviewed, including those focused at the 
federal, state, and local levels. For example, a study conducted by 
the California Department of Corporations in 2007 found that 48.3 
percent of payday loan borrowers in the state reported their income as 
below $40,000. Another study conducted in 2001 by the Credit Research 
Center at Georgetown University indicated that more than half of 
payday loan borrowers from a nationally representative sample of 
payday loan customers had incomes between $25,000 and $49,999. Since 
the Federal Reserve survey covered a more recent national sample, we 
concluded that it was the most relevant for our purposes. The other 
studies were consistent with the Federal Reserve's survey findings. 
Our analysis in appendix II shows that all of the federal law 
enforcement employees at the four agencies we reviewed have salaries 
that are higher than that of the median household income of a payday 
loan borrower. We believe that the data obtained provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
For the results of our salary range analysis, see appendix II. 

In addition to average customer income information, we attempted to 
understand the composition of the payday lending industry by obtaining 
information from payday lenders and reviewing information from 
industry experts on the state of the payday loan industry, including 
market share, growth projections, current legislative issues, and 
regulatory issues. We also conducted an analysis from five lending 
companies of borrowing by employees at the four agencies we reviewed. 
We contacted several representatives of the payday loan industry and 
received cooperation from five companies, including from two of the 
largest payday lending companies, to gain an understanding of (1) what 
data the industry collects from its borrowers and (2) how many federal 
employees at the four agencies we reviewed use payday loans. We 
requested that the companies search their databases on the field 
"employer" to identify borrowers obtaining loans from January 1, 2010, 
to July 31, 2010, who indicated as their employer one of the four 
agencies we reviewed.[Footnote 62] We asked the companies to search on 
the full name of the agency as well as the acronym and any common 
misspellings. Based on these searches, each of the five companies that 
responded to our request provided us with data on the number of 
borrowers who listed their employer as one of the four law enforcement 
agencies in the scope of our work. The companies also provided us data 
on the total number of transactions, in the aggregate, conducted by 
the same group of borrowers. Based on the data reported, it is not 
apparent if a borrower used one or multiple payday loans during the 
time period we requested. Furthermore, it is possible that a customer 
from one lending company that provided us data also could have been a 
customer at another lender that provided us data from this same time 
period. Therefore, the number of customers cannot be added to provide 
a total number of borrowers from the agencies we reviewed. Since we 
did not audit the information systems from which the data were pulled, 
we cannot assure the accuracy of the data, but believe this 
information provides a limited snapshot of the population borrowing 
from these lenders. However, we did discuss with these companies the 
data reliability measures and controls they have in place for the 
systems from which they pulled data. We believe these data provide a 
point-in-time estimate of payday loans these five companies provided 
to employees at the four agencies we reviewed and are reliable for our 
purposes. We also believe that the data obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 
This information cannot be used to project the prevalence of payday 
lending among federal employees or employees at the agencies within 
our scope. See appendix III for our lending analysis. 

To identify the alternatives to payday lending that are available for 
consumers needing small-dollar loans, we spoke with a number of banks 
and credit unions, including some federal and state employee credit 
unions, offering small-dollar loan products. Many of these banks were 
participants in the Federal Deposit Insurance Corporation's Small- 
Dollar Loan Pilot Program, which concluded in June 2010. During semi- 
structured interviews we asked representatives of these institutions 
to describe how their programs operate, who is eligible, the fees they 
charge, and how many loans they have made. We also asked these 
representatives to identify what could be done to encourage more 
financial institutions to offer small-dollar loans. Through a 
literature search, interviews, and online searches, we identified 
other models for small-dollar loans such as relationship lending, 
overdraft lines of credit, partnership programs, and salary advances. 
We also interviewed consumer groups and trade organizations that 
conduct research on unbanked and underbanked populations to identify 
alternative models to payday lending that are being employed or 
developed. We identified other models for small-dollar loans offered 
by alternative financial services providers such as prepaid cards, car 
title, pawn, and installment loans. 

To understand regulatory oversight of the payday loan industry, we 
conducted interviews with officials at the Federal Deposit Insurance 
Corporation, the Board of Governors of the Federal Reserve System, 
Federal Trade Commission, and the National Credit Union 
Administration. We collected information from these agencies about 
their regulation of financial institutions that make payday loans and 
depository institutions that provide small-dollar loans. We also held 
a discussion with the Attorney General of West Virginia to understand 
how oversight and criminal misconduct of online payday lenders is 
handled at the state level. We selected West Virginia as an example of 
a state that since 2006 has taken legal action to enforce state 
prohibition of payday lending. 

We conducted this performance audit from June 2009 through January 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Federal Law Enforcement Salaries Compared With Median 
Household Income Of Average Payday Loan Borrower: 

The figure below shows the distribution of the salary ranges and 
number of law enforcement personnel at the Department of Homeland 
Security (DHS) in Customs and Border Protection (CBP), Immigration and 
Customs Enforcement (ICE), Transportation Security Administration 
(TSA), and at the Federal Bureau of Investigation (FBI). This analysis 
shows that federal law enforcement employees at FBI and the three DHS 
components we reviewed have salaries that typically are higher than 
that of the median household income of a payday loan borrower 
($32,712).[Footnote 63] The distribution of salaries for law 
enforcement employees at these agencies ranged from the Law 
Enforcement Officer General Schedule (LEO-GS) 5 level to the LEO-GS-15 
level.[Footnote 64] The number of employees peaked at different salary 
ranges for each of the components but all of the peaks were above the 
household income of $32,712. For example, 48.2 percent of law 
enforcement employees at CBP have salaries at the LEO-GS-11 level, 
which corresponds to a salary of $62,467-81,204. More than half of law 
enforcement employees at ICE fell into two salary ranges--25.7 percent 
had salaries at the LEO-GS-9 level ($53,350-68,834) and 30.1 percent 
had salaries at the LEO-GS-13 level ($89,033-115,742). At TSA, law 
enforcement salaries tended to be a little lower with the majority of 
employees (53 percent) having a salary at the LEO-GS-9 level ($53,350-
68,834). Lastly, FBI employees in law enforcement positions tended to 
cluster around the LEO-GS-13 salary level (41.7 percent) which 
corresponds to a salary range of $89,033-115,742.[Footnote 65] 
Furthermore, federal law enforcement employees receive additional Law 
Enforcement Availability Pay, which is a type of premium pay for law 
enforcement officers who are criminal investigators. This additional 
pay, along with other benefits federal employees receive such as 
health and disability insurance, may provide an additional financial 
cushion to federal law enforcement employees. We believe that the data 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

Figure 4: Federal Law Enforcement Salaries at Four Agencies Compared 
with the Median Household Income of the Average Payday Loan Borrower 
Based on Fiscal Year 2009 Personnel Data: 

[Refer to PDF for image: vertical bar graph] 

One reported median household income for a payday borrower is $32,712, 
which is $9,310 lower than the lowest paid Law Enforcement Officer 
(LEO) at the agencies (GS-05, Step 1). 

FTEs: 

GS-5: Salary range for General Schedule pay scale: $42,022-$52,241; 
TSA: 0; 
ICE: 289; 
FBI: 0; 
CBP: 2,005. 

GS-6: Salary range for General Schedule pay scale: $44,312-$55,704; 
TSA: 0; 
ICE: 0; 
FBI: 0; 
CBP: 0. 

GS-7: Salary range for General Schedule pay scale: $47,838-$60,505; 
TSA: 631; 
ICE: 689; 
FBI: 0; 
CBP: 5,167. 

GS-8: Salary range for General Schedule pay scale: $49,861-$63,880; 
TSA: 1,914; 
ICE: 0; 
FBI: 0; 
CBP: 0. 

GS-9: Salary range for General Schedule pay scale: $53,350-$68,834; 
TSA: 4,372; 
ICE: 3,311; 
FBI: 0; 
CBP: 5,886. 

GS-10: Salary range for General Schedule pay scale: $58,752-$75,813; 
TSA: 862; 
ICE: 0; 
FBI: 0; 
CBP: 0. 

GS-11: Salary range for General Schedule pay scale: $62,467-$81,204; 
TSA: 382; 
ICE: 780; 
FBI: 714; 
CBP: 21,476. 

GS-12: Salary range for General Schedule pay scale: $74,872-$97,333; 
TSA: 21; 
ICE: 1,913; 
FBI: 949; 
CBP: 5,654. 

GS-13: Salary range for General Schedule pay scale: $89,033-$115,742; 
ICE: 3,873; 
FBI: 7,235; 
CBP: 3,142. 

GS-14: Salary range for General Schedule pay scale: $105,211-$136,771; 
ICE: 1,558; 
FBI: 2,305; 
CBP: 1,052. 

GS-15: Salary range for General Schedule pay scale: $123,758-$155,500. 
ICE: 456; 
FBI: 634; 
CBP: 171. 

Note: We analyzed fiscal year 2009 data from DHS, FBI, and the Office 
of Personnel Management's 2010 General Schedule for law enforcement in 
the Washington D.C. locality. The median household income estimate is 
from a Center for American Progress study of the Federal Reserve's 
2007 Survey of Consumer Finances adjusted for inflation to 2010 
dollars. FTEs included in this figure do not include leap or other 
premium pay. 

[End of figure] 

Appendix III: Summary of Payday Loans by Employees at Four Federal Law 
Enforcement Agencies: 

To help identify the scope of payday loan usage among employees at the 
Department of Homeland Security (DHS) in Customs and Border Protection 
(CBP), Immigration and Customs Enforcement (ICE), Transportation 
Security Administration (TSA), and at the Federal Bureau of 
Investigation (FBI), we compared the number of full-time equivalents 
(FTE) at each agency with customer data received from the payday loan 
industry. Data on payday loans made during a 7-month period in 2010 
from five payday lending companies indicate that customers reporting 
employment with one of the four identified federal agencies represent 
about 0.7 percent of the total FTE population at these four agencies 
in 2009 (see table 4).[Footnote 66] The lowest usage of 0.15 and 0.18 
percent of the agencies' total FTE population was reported for ICE and 
FBI. The highest usage of 1.57 percent was reported for TSA. While 
this does not indicate a widespread problem, usage among employees at 
TSA was almost ten times the usage among employees at ICE and more 
than five times the usage among employees at CBP. The five payday loan 
companies that provided us data on their customers represent 
approximately one-fifth of the 2009 industry total of cash advances 
originated and operated approximately one quarter of all payday 
lending storefronts in 2009.[Footnote 67] Each of the five payday 
lending companies submitting customer data reported that employees of 
CBP, ICE, TSA, or FBI accounted for less than 1 percent of each 
company's total customer base. For example, company 1 reported a total 
customer base of 996,157 for the 7-month reporting period; of this 
total, no more than 0.06 percent of customers reported employment with 
CBP, ICE, TSA, or FBI. While each company reported a small number of 
federal law enforcement employees as having taken a payday loan, these 
data are limited and cannot be used to project the prevalence of 
payday lending among federal employees or among these specific federal 
employee populations. We believe that the data obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Table 3: Number of Payday Loan Customers at Five Payday Loan Companies 
from January 1, 2010, to July 31, 2010, Who Identified Their Employer 
as One of Four Federal Law Enforcement Agencies: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted)[A]: 55,457; 
Distinct Customers: Company 1[B]: 115; 
Distinct Customers: Company 2: 23; 
Distinct Customers: Company 3: 6; 
Distinct Customers: Company 4: 3; 
Distinct Customers: Company 5: 11; 
Total distinct customers from five companies: 158; 
Total distinct customers as percentage of FTE counts: 0.28%. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted)[A]: 51,618; 
Distinct Customers: Company 1[B]: 463; 
Distinct Customers: Company 2: 144; 
Distinct Customers: Company 3: 98; 
Distinct Customers: Company 4: 37; 
Distinct Customers: Company 5: 68; 
Total distinct customers from five companies: 810; 
Total distinct customers as percentage of FTE counts: 1.57%. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted)[A]: 20,130; 
Distinct Customers: Company 1[B]: 15; 
Distinct Customers: Company 2: 8; 
Distinct Customers: Company 3: 1; 
Distinct Customers: Company 4: 1; 
Distinct Customers: Company 5: 6; 
Total distinct customers from five companies: 31; 
Total distinct customers as percentage of FTE counts: 0.15%. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted)[A]: 33,695; 
Distinct Customers: Company 1[B]: 32; 
Distinct Customers: Company 2: 15; 
Distinct Customers: Company 3: 4; 
Distinct Customers: Company 4: 0; 
Distinct Customers: Company 5: 9; 
Total distinct customers from five companies: 60; 
Total distinct customers as percentage of FTE counts: 0.18%. 

Government Agency: Total all agencies; 
FTEs fiscal year 2009 (enacted)[A]: 160,900; 
Distinct Customers: Company 1[B]: 625; 
Distinct Customers: Company 2: 190; 
Distinct Customers: Company 3: 109; 
Distinct Customers: Company 4: 41; 
Distinct Customers: Company 5: 94; 
Total distinct customers from five companies: 1,059; 
Total distinct customers as percentage of FTE counts: 0.66%. 

Government Agency: Percent of total customer base; 
FTEs fiscal year 2009 (enacted)[A]: n/a; 
Distinct Customers: Company 1[B]: 0.0600%; 
Distinct Customers: Company 2: 0.0471%; 
Distinct Customers: Company 3: 0.0421%; 
Distinct Customers: Company 4: 0.0005%; 
Distinct Customers: Company 5: 0.0180%; 
Total distinct customers from five companies: n/a; 
Total distinct customers as percentage of FTE counts: n/a. 

Source: GAO analysis of industry data. 

[A] Enacted refers to the actual number of FTEs funded in fiscal year 
2009. 

[B] Data from this company covers the period January 1-July 26, 2010. 

[End of table] 

Table 5 shows the number of distinct payday loan transactions made by 
employees of CBP, ICE, TSA, or FBI with one of five identified lending 
companies during the same 7-month period. While company totals reflect 
an average of 2.56-6.06 transactions per customer within the specified 
population, company data do not distinguish between multiple-and 
single-use borrowers. For example, company 1 reported an average of 
5.94 transactions for the 115 CBP-employed borrowers but did not break 
these data down to actual transactions per individual borrower. Hence, 
one borrower may have engaged in 10 or more transactions, while 
another accepted only one loan during the same period. Additionally, 
company data do not distinguish between original loans and rollover 
loans or loans that are extended beyond the maturation date for an 
additional fee (as might be the case when a borrower is unable to 
repay the loan at the time it is due). For instance, data provided by 
company 2 indicate that each customer reporting employment with TSA 
engaged in an average of six transactions during this 7-month period. 
While one customer may have accepted 6 or more loans, another customer 
may have rolled over the same loan multiple times; in the latter 
instance, the loan is recorded as a distinct transaction each time it 
is rolled over. Without more detailed information, it is difficult to 
know the level of concern--if any--payday loan use should elicit among 
security officials at these agencies. An individual who borrowed only 
once may not be in serious financial distress while an individual who 
rolled over a loan several times or took out more than one loan may be 
in significant financial distress and of more concern to agency 
officials. 

Table 4: Number of Payday Loan Transactions Conducted from January 1, 
2010, to July 31, 2010, at Five Payday Loan Companies by Individuals 
Who Identified Their Employer as One of Four Federal Agencies: 

Company 1: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted): 55,457; 
Distinct customers: 115; 
Total number of transactions: 683; 
Average number of transactions per customer: 5.94. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted): 51,618; 
Distinct customers: 463; 
Total number of transactions: 2,742; 
Average number of transactions per customer: 5.92. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted): 20,130; 
Distinct customers: 15; 
Total number of transactions: 79; 
Average number of transactions per customer: 5.27. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted): 33,695; 
Distinct customers: 32; 
Total number of transactions: 72; 
Average number of transactions per customer: 2.25. 

Company 1: Total[A]; 
FTEs fiscal year 2009 (enacted): 160,900; 
Distinct customers: 625; 
Total number of transactions: 3,576; 
Average number of transactions per customer: 5.72. 

Company 2: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted): 55,457; 
Distinct customers: 23; 
Total number of transactions: 132; 
Average number of transactions per customer: 5.74. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted): 51,618; 
Distinct customers: 144; 
Total number of transactions: 804; 
Average number of transactions per customer: 5.58. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted): 20,130; 
Distinct customers: 8; 
Total number of transactions: 29; 
Average number of transactions per customer: 3.63. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted): 33,695; 
Distinct customers: 15; 
Total number of transactions: 99; 
Average number of transactions per customer: 6.6. 

Company 2: Total; 
FTEs fiscal year 2009 (enacted): 160,900; 
Distinct customers: 190; 
Total number of transactions: 1,064; 
Average number of transactions per customer: 5.6. 

Company 3: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted): 55,457; 
Distinct customers: 6; 
Total number of transactions: 30; 
Average number of transactions per customer: 5. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted): 51,618; 
Distinct customers: 98; 
Total number of transactions: 603; 
Average number of transactions per customer: 6.15. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted): 20,130; 
Distinct customers: 1; 
Total number of transactions: 6; 
Average number of transactions per customer: 6. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted): 33,695; 
Distinct customers: 4; 
Total number of transactions: 21; 
Average number of transactions per customer: 5.25. 

Company 3: Total; 
FTEs fiscal year 2009 (enacted): 160,900; 
Distinct customers: 109; 
Total number of transactions: 660; 
Average number of transactions per customer: 6.06. 

Company 4: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted): 55,457; 
Distinct customers: 3; 
Total number of transactions: 8; 
Average number of transactions per customer: 2.67. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted): 51,618; 
Distinct customers: 37; 
Total number of transactions: 141; 
Average number of transactions per customer: 3.81. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted): 20,130; 
Distinct customers: 1; 
Total number of transactions: 1; 
Average number of transactions per customer: 1. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted): 33,695; 
Distinct customers: 0; 
Total number of transactions: 0; 
Average number of transactions per customer: 0. 

Company 4: Total; 
FTEs fiscal year 2009 (enacted): 160,900; 
Distinct customers: 41; 
Total number of transactions: 150; 
Average number of transactions per customer: 3.66. 

Company 5: 

Government Agency: CBP; 
FTEs fiscal year 2009 (enacted): 55,457; 
Distinct customers: 11; 
Total number of transactions: 31; 
Average number of transactions per customer: 2.82. 

Government Agency: TSA; 
FTEs fiscal year 2009 (enacted): 51,618; 
Distinct customers: 68; 
Total number of transactions: 177; 
Average number of transactions per customer: 2.60. 

Government Agency: ICE; 
FTEs fiscal year 2009 (enacted): 20,130; 
Distinct customers: 6; 
Total number of transactions: 23; 
Average number of transactions per customer: 3.83. 

Government Agency: FBI; 
FTEs fiscal year 2009 (enacted): 33,695; 
Distinct customers: 9; 
Total number of transactions: 13; 
Average number of transactions per customer: 1.44. 

Company 5: Total; 
FTEs fiscal year 2009 (enacted): 160,900; 
Distinct customers: 94; 
Total number of transactions: 244; 
Average number of transactions per customer: 2.56. 

Source: GAO analysis of industry data. 

[A] Data from Company 1 covers the period January 1, 2010-July 26, 
2010. 

[End of table] 

Appendix IV: Comments From the National Credit Union Administration: 

National Credit Union Administration: 
Office of the Chairman: 
1775 Duke Street: 
Alexandria, VA 22314-3428: 
703-518-6300: 
703-518-6319--Fax: 

January 18, 2011: 

Ms. Alicia Puente Cackley: 
Director: 
Financial Markets and Community Investment: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Re: Payday Lending: Federal Law Enforcement Uses a Multilayered 
Approach to Identify Employees in Financial Distress, GAO-11-147: 

Dear Ms. Cackley: 

NCUA appreciates the opportunity to comment on GAO's payday lending 
study examining the use of payday loans by federal employees in law 
enforcement and national security positions. As the independent 
federal agency that charters and supervises federal credit unions, 
NCUA has spent considerable time and effort developing the means for 
federal credit unions to become a viable alternative to traditional 
payday lenders. As noted in the report, NCUA recently promulgated a 
rule that allows federal credit unions to offer short-term, small 
dollar loans under certain limits and with appropriate consumer 
protections. NCUA's hope is that this rule will aide federal credit 
unions in fulfilling their mission of providing affordable credit to 
members, particularly those members of modest means. 

NCUA understands the dangers that predatory payday loans pose to 
individual borrowers and the nation as a whole and supports the 
efforts of GAO to investigate any possible threat payday loans may 
pose to our national security. While we believe the report is well 
written and thoroughly researched, we do have the following comments 
that we believe will make the report more accurate: 

1. On page 4, in the first full paragraph, the report states that GAO 
spoke with representatives of a number of banks and credit unions that 
offer small-dollar loans and that many of these institutions 
participated in the FDIC's Small-Dollar Loan Pilot Program. As 
written, these statements seem to imply that some credit unions 
participated in the FDIC's Pilot Program, which is not accurate. We 
suggest modifying this paragraph so that it is clear that only banks 
participated in the pilot program. We note that a similar statement 
appears on page 45. 

2. On page 4, in the first paragraph under the Background section, we 
suggest adding credit unions to the end of the first sentence. With 
the suggested change, this sentence would read: "Payday lenders are 
one of many providers of alternative financial services — products or 
services that operate outside of federally insured banks, credit 
unions, and thrifts." This addition would ensure credit unions are 
considered along with banks and thrifts. 

3. On page 6, the Art Explosion shows that a payday loan customer has 
an "appointment for repayment." In our research we typically see this 
date being referred to as the repayment date. We are concerned that 
the use of the phrase "appointment for repayment" may be misleading as 
to the actual protocol with payday lending. 

4. On page 8, in the second full paragraph, the report states that the 
APR that payday lenders can charge to members of the military is 36%, 
but does not reference fees. We suggest modifying this sentence to 
include a reference that the APR includes all fees and charges 
connected with the making of the loan and is different than the APR 
calculation in Regulation Z. 

5. On page 39, we suggest revising the section on NCUA's Short-term, 
Small dollar loan program, up to the sentence that begins with 
"According to an NCUA official," to read as follows: 

New Credit Union Regulation Raised Interest Rate Cap for Small-Dollar 
Loans: 

Effective October 25, 2010, the National Credit Union Administration 
(NCUA) adopted a rule to allow federal credit unions to offer short-
term, small-dollar loans at an APR that is 1000 basis points above the 
interest rate ceiling as set by the NCUA Board. The Federal Credit 
Union Act imposes an interest rate ceiling of 15%, but allows the NCUA 
Board to set a higher interest rate if certain criteria are met. 
Currently, the Board set rate is 18%. This new rule does not prohibit 
federal credit unions from continuing or participating in any other 
payday lending program that is legal under NCUA's regulations, but 
does offer federal credit unions a viable alternative structure. In 
order to take advantage of the higher rate, federal credit unions must 
make loans in accordance with the requirements of the rule, which 
include charging only an application fee that does not exceed $20, 
limiting the number and amount of loans a borrower may receive, not 
offering roll-overs, and other provisions designed to protect the 
borrower and the safety and soundness of the institution. 

Again, we thank you for the opportunity to comment on this report and 
will be happy to assist GAO in the future on this or any other issue. 

Sincerely, 

Signed by: 

Debbie Matz: 
Chairman: 

[End of section] 

Appendix V: GAO Contacts And Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Debra Johnson, Assistant 
Director; Beth Garcia; Daniel Kaneshiro; David Maurer; Marc Molino; 
Linda Rego; Barbara Roesmann; Rachel Siegel; Andrew Stavisky; and 
Andrea Yohe made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Center for Responsible Lending, A 36% APR Cap on High-cost Loans 
Promotes Financial Recovery (January 2009). 

[2] DOD, Report on Predatory Lending Practices Directed at Members of 
the Armed Forces and Their Dependents (August 2009). GAO, Military 
Personnel: DOD's Predatory Lending Report Addressed Mandated Issues, 
but Support Is Limited for Some Findings and Recommendations, 
[hyperlink, http://www.gao.gov/products/GAO-07-1148R] (Washington, 
D.C.: Aug. 31, 2007). 

[3] One lender provided us data for January 1, 2010-July 27, 2010. 

[4] For example, check-cashing outlets, money transmitters, car title 
lenders, payday loan stores, pawnshops, and rent-to-own stores all are 
considered providers of alternative financial services. 

[5] For example, Kansas allows a borrower to take up to two loans at 
once from the same lender, while Alabama has a restriction on the 
number of times that a payday loan may be rolled over. See Kan. Stat. 
Ann. § 16a-2-404(3); Ala. Code § 5-18A-12(b). 

[6] Our report used an estimate of $30,892 in 2007 dollars from a 
study conducted by the Center for American Progress. Center for 
American Progress, Who Borrows From Payday Lenders: An Analysis of 
Newly Available Data (March 2009). We adjusted this number for 
inflation in 2010 to $32,712. The original survey results can be found 
at Federal Reserve Board, Changes in U.S. Family Finances from 2004 to 
2007: Evidence from the Survey of Consumer Finances (February 2009). 

[7] One payday lender with whom we spoke reported seeing an increase 
in customers with higher incomes, some up to $70,000. 

[8] Who Borrows From Payday Lenders and Congressional Research 
Service, Payday Loans: Federal Regulatory Initiatives (Washington, 
D.C., June 7, 2006). 

[9] National People's Action and Public Accountability Initiative, The 
Predators' Creditors: How the Biggest Banks Are Bankrolling the Payday 
Loan Industry (2010). 

[10] According to the National Conference of State Legislatures, 
Georgia and the District of Columbia prohibit payday lending, while 
another eight states either do not have specific payday lending laws 
or require lenders to comply with interest rate caps on consumer 
loans. According to the industry officials, these conditions 
effectively prohibit payday lending. 

[11] 10 U.S.C. § 987(b). 

[12] 15 U.S.C. §1601-1667f. 

[13] 12 C.F.R. part 226. 

[14] 15 U.S.C. §§ 41-58. 

[15] FTC v. LoanPointe, LLC, No. 2:10 cv-00225 DAK (D. Utah Aug. 26, 
2010) (Stipulated Final Order for Permanent Injunction and Settlement 
of Claims as to Defendant Mark Lofgren) (defendant did not admit any 
of the allegations set out in the complaint by agreeing to the 
settlement). 

[16] The Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203, title X, 124 Stat. 1376, 1987 (2010) established 
the bureau to oversee payday lenders (among other covered entities) to 
assure that financial products and services are fair, transparent, and 
competitive. 

[17] Suitability determinations assess elements of a person's 
character or conduct that may impact the integrity or efficiency of 
the service rendered in employment in a covered federal government 
position. 5 C.F.R. § 731.101. Suitability is distinguished from a 
person's ability to fulfill the qualifications for a position, as 
measured by experience, education, knowledge, and skills. Applicants 
for covered positions are assessed by criteria OPM developed under 5 
C.F.R. § 731.202(b) that constitute specific grounds for determining a 
person unsuitable for federal employment: "(1) misconduct or 
negligence in employment; (2) criminal or dishonest conduct; (3) 
material, intentional false statement, or deception or fraud in 
examination or appointment; (4) refusal to furnish testimony as 
required by law in regard to matters inquired of under the civil 
service laws, rules, regulations, and records pertinent to these 
matters; (5) alcohol abuse, without evidence of substantial 
rehabilitation, of a nature and duration that suggests that the 
applicant or appointee would be prevented from performing the duties 
of the position in question, or would constitute a direct threat to 
the property or safety of the applicant or appointee or others; (6) 
illegal use of narcotics, drugs, or other controlled substances 
without evidence of substantial rehabilitation; (7) knowing and 
willful engagement in acts or activities designed to overthrow the 
U.S. government by force; and (8) any statutory or regulatory bar 
which prevents the lawful employment of the person involved in the 
position in question." Although OPM developed these criteria as 
grounds for determining applicants unsuitable for employment, agencies 
exercise discretion in making such determinations and consider 
additional factors that include the nature of the federal position, 
the nature and seriousness of the conduct, its recency, the age of the 
person when the conduct occurred, and efforts toward rehabilitation. 
See 5 C.F.R. § 731.202(c). 

[18] For example, applicants for certain positions such as those that 
are intermittent, seasonal, or temporary do not require a formal 
background investigation. Rather, the employing agency checks into the 
applicant's character or conduct as appropriate to ensure the person's 
suitability. 5 C.F.R. § 731.104. 

[19] Exec. Order No. 12958, 60 Fed. Reg. 19825 (Apr. 17, 1995), as 
amended; 5 C.F.R. § 1312.23. 

[20] Classification levels (confidential, secret, or top secret) 
correspond to the sensitivity of information that may cause serious or 
exceptionally grave danger to U.S. national security interests. 5 
C.F.R. § 1312.4. 

[21] Additionally, OPM has delegated the authority to some agencies, 
including FBI, CBP, ICE, and TSA, to use in-house investigators rather 
than OPM personnel. Adjudicators determine the suitability based on 
these investigative results. 

[22] OPM officials with whom we spoke explained that OPM does not 
regard delinquent debt as evidence of dishonest conduct. 

[23] The Bank Secrecy Act (BSA), codified as 12 U.S.C. §§ 1829b, 1951- 
1959, 31 U.S.C. §§ 5311 et seq., requires financial institutions to 
report any suspicious transaction related to a possible violation of 
law or regulation. The Financial Crimes Enforcement Network (FinCEN) 
administers BSA and its implementing regulations, which direct 
depository institutions to file suspicious activity reports (SAR). 
Suspicious activity reporting is one component of broader anti-money 
laundering programs that depository (banks, thrifts, and credit 
unions) and other financial institutions implement to comply with the 
BSA. An institution's decision to file a SAR may be subjective and is 
based on its knowledge of the customer and the customer's usual 
banking activity. For more information, see GAO, Bank Secrecy Act: 
Suspicious Activity Report Use Is Increasing, but FinCEN Needs to 
Further Develop and Document Its Form Revision Process, GAO-09-226 
(Washington, D.C.: Feb. 27, 2009). 

[24] The SF-86 is also known as the Questionnaire for National 
Security Positions. 

[25] This debt threshold is established under Executive Order No. 
12968, 60 Fed. Reg. 40245 (Aug. 2, 1995). 

[26] GAO, DOD Personnel Clearances: Comprehensive Timeliness 
Reporting, Complete Clearance Documentation, and Quality Measures Are 
Needed to Further Improve the Clearance Process, [hyperlink, 
http://www.gao.gov/products/GAO-09-400] (Washington, D.C.: May 19, 
2009). 

[27] There are 13 sets of guidelines for adjudicators to consider in 
processing security clearances: Guideline A--allegiance to the United 
States; Guideline B--foreign influence; Guideline C--foreign 
preference; Guideline D--sexual behavior; Guideline E--personal 
conduct; Guideline F--financial considerations; Guideline G--alcohol 
consumption; Guideline H--drug involvement; Guideline I--emotional, 
mental, and personality disorders; Guideline J--criminal conduct; 
Guideline K--security violations; Guideline L--outside activities; and 
Guideline M--misuse of information technology systems. 32 C.F.R. part 
147. 

[28] All executive branch employees that are currently employed in 
agency-designated positions are required to file the OGE-450. 
Executive branch employees who occupy those positions above GS-15 are 
required to file the OGE-278. 

[29] According to 5 C.F.R. § 2634.904, filers generally include: (1) 
each officer or employee in the executive branch whose position is 
classified at GS-15 or below of the General Schedule; and each officer 
or employee in any other position determined by the designated agency 
ethics official to be of equal classification if: (i) the agency 
concludes that the duties and responsibilities of the employee's 
position require that employee to participate personally and 
substantially through decision or the exercise of significant 
judgment, and without substantial supervision and review, in taking a 
government action regarding (A) contracting or procurement; (B) 
administering or monitoring grants, subsidies, licenses, or other 
federally conferred financial or operational benefits; (C) regulating 
or auditing any nonfederal entity; or (D) other activities in which 
the final decision or action will have a direct and substantial 
economic effect on the interests of any nonfederal entity; or (ii) the 
agency concludes that the duties and responsibilities of the 
employee's position require the employee to file such a report to 
avoid involvement in a real or apparent conflict of interest, and to 
carry out the purposes behind any statute, Executive Order, rule, or 
regulation applicable to or administered by the employee. Positions 
which may be subject to a reporting requirement under this 
subparagraph include those with duties which involve investigating or 
prosecuting violations of criminal or civil law. 

[30] As authorized by title III of the Intelligence Reform and 
Terrorism Prevention Act of 2004, the President's security clearance 
oversight working group has been considering the security clearance 
and reinvestigation process. 50 U.S.C. § 435b. 

[31] All federal agencies provide EAPs. Basic EAP services include 
free, voluntary, short-term counseling and referrals for various 
issues affecting employees' well-being, such as alcohol and other 
substance abuse, stress, grief, family problems, and psychological 
disorders. EAP counselors also work with managers and supervisors to 
help address employee and organizational challenges and needs. 

[32] Due to the nature of their work, criminal investigators are 
required to work, or be available to work, substantial amounts of 
"unscheduled duty." Availability pay is generally an entitlement that 
an agency must provide if the required conditions are met. By law, 
availability pay is generally fixed at 25 percent of a criminal 
investigator's rate of basic pay. 5 U.S.C. § 5545a(h); 5 CFR § 550.185 

[33] TSP is a retirement savings and investment plan for federal 
employees and uniformed services, which is administered by the Federal 
Retirement Thrift Investment Board. TSP resembles private-sector 
401(k) pension plans in that both allow employees to contribute a 
portion of their current compensation through payroll salary 
deductions and invest their account balances among a menu of 
investment options selected by the employer. 

[34] In addition to the TSP general purpose loan, current federal 
employees (including employees in a nonpay status) may be eligible to 
apply for a TSP financial hardship in-service withdrawal (employees 
are limited to only one financial hardship withdrawal in a 6-month 
period). The financial hardship in-service withdrawal is only 
available if financial need results from at least one of the four 
following conditions: recurring negative monthly cash flow; medical 
expenses (including household improvements needed for medical care) 
that have not yet been paid and that are not covered by insurance; 
personal casualty loss(es) that have not yet been paid and that are 
not covered by insurance; or legal expenses (such as attorneys' fees 
and court costs that have not yet been paid for separation or 
divorce). Employees may withdraw only their own contributions and any 
earnings those contributions have accrued (minimum withdrawal is 
$1,000). 

[35] The interest rate for the general purpose loan is the G Fund rate 
at the time the loan application is processed--2.375 percent as of 
December 24, 2010. This rate is fixed for the life of the loan. 
Although TSP loan interest is not tax-deductible, all of the interest 
goes back into the employee's TSP account. 

[36] The automatic clearing house (ACH) is an electronic batch 
processing system by which payment orders are exchanged among banks. 
Representatives from two of the credit unions with which we spoke 
reported that they can identify the names of major payday lenders on 
members' ACH transactions. 

[37] The nonprofit uses the annual fees that credit unions 
participating in this program collect to fund a loan loss reserve that 
reimburses credit unions for 50 percent of any loan losses. 

[38] 5 U.S.C. § 5522, 5524a; 5 C.F.R. §§ 550.203, 505.403. OPM 
officials reported that DOD also has agency-specific regulations for 
advancing pay to military employees that relocate in certain 
situations. Financial Management Regulation 7000.14-R, Volume 7A, 
Chapter 32. 

[39] In February 2008, FDIC began a 2-year pilot project to review 
affordable and responsible small-dollar loan programs in financial 
institutions. The pilot was designed to illustrate how banks 
profitably could offer affordable small-dollar loans as an alternative 
to high-cost credit products, such as payday loans and fee-based 
overdraft protection. The pilot tracked two types of loans--small-
dollar loans of $1,000 or less and nearly small-dollar loans from 
$1,000 to $2,500--however, one pilot participant reported making loans 
up to $3,000. We discuss the pilot in more detail later in this report. 

[40] A balloon payment is the final installment of a loan to be paid 
in an amount that is disproportionately larger than the regular 
installment. 

[41] The small-dollar loan product was available exclusively to active 
members of the military. Loans amount ranged from $500 to $1,000, and 
there was a $50 application fee. The APR varied between 18-22 percent, 
and the repayment term was 6-12 months. 

[42] Delinquent loans and leases are those past due 30 days or more 
and still accruing interest as well as those in nonaccrual status. 

[43] FDIC reported that analysis it conducted found delinquency rates 
for general unsecured loans to individuals were relatively stable at 
2.5 percent for 2009. 

[44] Charge-offs are the value of loans and leases removed from the 
accounting books and charged against loss reserves. Charge-off rates 
are calculated on an annualized basis and net of recoveries. 

[45] The loan loss ratio (generally, pretax income and loan loss 
provisions divided by net charge-offs) is calculated to determine the 
rate of loan losses for a specific period. It provides an indication 
of the volume of loan losses in a period relative to the average 
portfolio outstanding. 

[46] Stephens Inc., Payday Loan Industry: Entering Early Stage of a 
Recovery; Expect Above Normal Growth (April 2010). 

[47] In 2006 FDIC began a two-part study to gather empirical data on 
the types, characteristics, and use of overdraft programs operated by 
FDIC-supervised banks. Data and information for FDIC's study were 
gathered through a survey of a sample of institutions representing 
1,171 FDIC-supervised banks, and a separate data request of customer 
account and transaction-level data from a smaller set of 39 
institutions. FDIC issued the formal results of its study in November 
2008. See FDIC, Study of Bank Overdraft Programs (Washington, D.C., 
November 2008). 

[48] Truth in Lending Act (TILA) and its implementing regulation, 
Regulation Z, require certain product information to be included in 
disclosures to borrowers for many types of credit products, including 
payday loans. (TILA is codified at 15 U.S.C. § 1601-1667f and 
Regulation Z can be found at 12 C.F.R. part 226). The payday lending 
industry has debated whether the APR is the appropriate way to 
calculate payday loan fees. The industry argues that a payday loan is 
a short-term loan (generally repaid within 2 weeks); therefore, 
calculating the fees as an annual rate of interest (the APR) is not an 
accurate reflection of costs. 

[49] Study of Bank Overdraft Programs. 

[50] Study of Bank Overdraft Programs. 

[51] FDIC noted that several banks entered and exited as the pilot 
progressed. 

[52] CRA was enacted to prevent redlining, which is the practice of 
denying or increasing the cost of banking services to areas that have 
large minority populations, and instead encourage banks and thrifts to 
help meet the credit needs of all segments of their communities, 
including low-and moderate-income neighborhoods. 12 U.S.C. §§ 2901- 
2908. 

[53] The Electronic Fund Transfer Act established the rights, 
liabilities, and responsibilities of parties in electronic funds 
transfers and protects consumers when they use such systems. 15 U.S.C. 
§ 1693 et seq.; Regulation E, 12 C.F.R. part 205. 

[54] 12 C.F.R. § 205.17(b). 

[55] Pub. L. No. 111-203, title XII, § 1206, 124 Stat 1376, 2131 
(2010), to be codified at 12 U.S.C. § 4719. A CDFI offers financial 
products and services in economically distressed target markets, such 
as mortgage financing for low-income and first-time homebuyers and not-
for-profit developers; flexible underwriting and risk capital for 
community facilities; and technical assistance and commercial loans 
and investments to small start-up or expanding businesses in low-
income areas. The CDFI Fund confers CDFI certification, which is 
required to access financial and technical award assistance from the 
Fund through the CDFI Program. 12 U.S.C. §§ 4701-4718. 

[56] 75 Fed. Reg. 58285 (Sept. 24, 2010). 

[57] These agencies have codes of conduct or personnel standards for 
employees requiring them to stay current on any debt. 

[58] FBI provided data on all FTE employees (law enforcement and 
nonlaw enforcement) because all FBI employees are required to hold a 
security clearance. 

[59] For example, for employees in the LEO-GS-9 pay grade for 
Washington D.C. locality, we calculated the midpoint salary as 
$61,092, which is the average of LEO-GS-9, step 5 ($60,232) and LEO-GS-
9, step 6 ($61,952). 

[60] Center for American Progress, Who Borrows from Payday Lenders: An 
Analysis of Newly Available Data (March 2009). 

[61] According to the Federal Reserve, the data from the 2007 Survey 
of Consumer Finances is the most recent, and the first to collect data 
specific to payday loans. 

[62] One lender provided us data from January 1-July 26, 2010. 

[63] This estimate comes from the Center for American Progress using 
data from the Board of Governors of the Federal Reserve's Survey of 
Consumer Finances for 2007. The study estimates the median household 
income to be $30,892 and the mean to be $32,614. For figure 3, we used 
the median household income estimate as a better middle estimate of 
income distribution which we adjusted for inflation to be $32,712 in 
2010. This estimate is consistent with estimates from other studies we 
reviewed, including those focused at the federal, state, and local 
levels. 

[64] For comparative purposes, the following full-time equivalent 
positions were not included in the table: an additional 1,906 law 
enforcement positions at the FBI that were categorized in non-graded 
positions; 25 CBP law enforcement positions that were reported at 
grades LEO-GS-1; an additional 24 TSA law enforcement positions that 
were reported at grades LEO-GS-1 and LEO-GS-2; and additional 34 ICE 
law enforcement positions that were reported at the Senior Executive 
Schedule pay scale which differs from the General Schedule and has 
salaries above the GS-15 level. 

[65] We reported salary ranges from the LEO-GS schedule, the 2010 
Federal Law Enforcement General Schedule for Washington, D.C. locality. 

[66] The FTE data includes employees classified in both law 
enforcement and nonlaw enforcement positions. 

[67] According to an industry official, more than 2,300 distinct 
payday lending companies currently are in operation; while some 
companies operate a single storefront, others manage multiple 
locations. 

[End of section] 

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