Credit Discrimination: Alleged Credit Discrimination in Fort Ord Area

Published by the Government Accountability Office on 1990-02-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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         Alleged Credit
          Discrimination in
          Fort Ord Area
                       United States
                       General Accounting Office
                       Washington, D.C. 20548

                       National Security and
                       International Affairs Division

                       B-2383 19

                       February 28,199O

                       The Honorable Leon E. Panetta
                       House of Representatives

                       The Honorable Beverly B. Byron
                       House of Representatives

                       As you requested, we conducted a review to determine whether finan-
                       cial institutions serving the Fort Ord, California, area were denying
                       credit to military personnel based solely on their military rank. You
                       were concerned that military personnel were being denied credit solely
                       on the basis of rank without considering the individual’s other financial
                       assets. This letter summarizes the results of our review and provides
                       information on credit discrimination complaints from military personnel
                       in the Fort Ord area. It also discusses the number of similar complaints
                       received by California and federal regulatory agencies.

                       Our work indicated that denying credit based on military rank is not a
Results in Brief       pervasive problem. Few military personnel have filed complaints about
                       adverse credit practices by financial institutions* at Fort Ord or in other
                       parts of the country. Specifically, we found the following:

                   l Four of the five financial institutions we contacted in the Fort Ord area
                     granted credit to military personnel regardless of rank. Although one (a
                     finance company) did not take credit applications from military person-
                     nel in the lower ranks, a company headquarters’ official said that this
                     local practice contradicted its company guidance, and, subsequently,
                     headquarters directed the branch to stop this practice.
                   . Military organizations at Fort Ord that would likely receive credit dis-
                     crimination complaints had received no complaints in recent years con-
                     cerning credit practices based on military status or rank.
                   . Of the 10 military personnel we interviewed at Fort Ord to discuss
                     credit, credit was denied primarily because the applicants had a poor
                     credit history. In those cases where credit was granted, applicants did
                     not have to make additional financial commitments.

                       ‘Financial institutions considered in this report were banks, thrifts, credit unions, finance companies,
                       and acceptance corporations.

                       Page 1                                                  GAO/NSIAD-90.96BR       Credit   Discrimination
                               . Federal and California regulators” indicated they received relatively few
                                 complaints from military personnel about credit practices by financial

                      --   -
                                 We contacted five major financial institutions-a   bank, a credit union,
Cr’dit   Practices   in the      and three finance companies -serving the Fort Ord area. The bank and
Fort Ord Area                    the credit union are located on the base. The finance companies have
                                 branch offices that serve military personnel in the Fort Ord area.

                                 According to headquarters officials of the three finance companies, their
                                 local offices should accept and evaluate all credit applications on an
                                 individual basis. Moreover, these officials said that credit practices
                                 adversely affecting military personnel are not only unacceptable, but
                                 could mean lost business opportunities.

                                 However, a branch office of one of the finance companies we contacted
                                 did not offer credit to military personnel below a certain rank. Specifi-
                                 cally, the company’s branch office near Fort Ord did not accept credit
                                 applications from military personnel in ranks El through E4. According
                                 to a branch official, this practice had been in effect for several years
                                 and was the result of the branch’s poor experience with these individu-
                                 als who generally did not meet credit qualifications, often left the area,
                                 and did not repay their debts.

                                 An official from the company’s headquarters office stated that this local
                                 practice contradicted company guidelines, which are unwritten, requir-
                                 ing the evaluation of each application on its own merit, taking into con-
                                 sideration not only income but other factors as well. Consequently, after
                                 our inquiry, the branch was directed to change its practice to comply
                                 with company guidelines.

                                 During the last 2 to 3 years, military organizations that would normally
                                 receive complaints had not received any complaints from military per-
                                 sonnel alleging inequitable credit treatment. Such organizations, which
                                 included the Armed Forces Disciplinary Control Board, Equal Opportu-
                                 nity Office, Army Emergency Relief, and Inspector General, are respon-
                                 sible for correcting conditions that adversely affect the welfare and

                                 ‘We contacted the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the
                                 Comptroller of the Currency regarding the banks. We contacted the Office of Thrift Supervision
                                 regarding the thrifts, and the National Credit IJnion Administration regarding the credit unions. We
                                 also contacted the Federal Trade Commission and the California Department of Corporations regard-
                                 ing finance companies and acceptance corporations.

                                 Page 2                                                GAO/NSLAD-OO-96BR Credit Discrimination
      I                      B-238319

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                             morale of Fort Ord military personnel. Thus, officials at Fort Ord
                             believed that credit was not a major issue facing the military and cited
                             the lack of complaints as support for their view.

                             Military status or rank was not the reason for denying loans to person-
                             nel we contacted at Fort Ord. We interviewed six soldiers who were pri-
                             vates or specialists in the ranks E2 through E4 and four noncom-
                             missioned officers in the ranks E7 and E8. Two E4s and three noncom-
                             missioned officers stated that they had been rejected by the on-post
                             credit union or bank for loans.

                             Based on our review of the loan files and our discussions with the five
                             unsuccessful applicants, we found that these individuals were unable to
                             obtain loans because they could not meet the standard financial criteria.
                             In all but one case, their debt to income ratio was too high, or their
                             credit report indicated too many unpaid debts or delinquent payments.
                             In the remaining case, the individual lacked an adequate number of
                             credit references. Of the successful applicants, we found that they did
                             not have to make other financial commitments, such as payroll

                             Both the credit union and bank accepted loan applications from and
                             made loans to military personnel in all ranks. A credit union official
                             stated that the vast majority of credit union loans were to military per-
                             sonnel and more than half were to E4s and below. Similarly, a bank offi-
                             cial stated that the bank makes almost all of its loans to military
                             personnel and that E4s and below generally qualify for its loan program
                             for low-income applicants.

                             We also noted that the credit union and bank have similar qualification
                             and evidence requirements for military and civilian personnel. When
                             evaluating any applicant, they consider several factors, including debt
                             to income ratio, length of employment, and gross income.

                             The California and federal agencies responsible for overseeing the finan-
Extent of Credit             cial institutions indicated that military personnel have filed few com-
Discrimination               plaints in recent years alleging adverse credit practices by financial
Complaints                   institutions. For example, nationwide statistics maintained by the Office
                             of the Comptroller of the Currency on complaints against national banks
Nationwide I)                showed that military personnel filed 70 credit complaints between 1987
                             and 1989, which was only .2 percent of the 43,000 complaints received.
                             Available data from other regulators indicated that 1 percent or less of

                             Page 3                                 GAO/NSLAD-90.96BR   Credit Discrimination

    all complaints received during the last 2 to 3 years were credit com-
    plaints from military personnel.

    According to regulators, most credit complaints from military personnel
    concerned financial institutions denying or cancelling credit cards for
    individuals who live or move overseas. In 1988, the Army & Air Force
    Exchange Service began a credit card program which provided credit
    cards to all military personnel, including those overseas, who qualified.

    We conducted this review between September 1989 and *January 1990 in
    accordance with generally accepted government auditing standards. Our
    objective, scope, and methodology is contained in appendix I.

    Unless you publicly announce its contents earlier, we plan no further
    distribution of this report until 10 days from its issue date. At that time,
    we will send copies to interested parties and make copies available to
    others upon request.

    Please contact me at 275-3990 if you or your staff have any questions
    concerning this briefing report. Other major contributors are listed in
    appendix II.

    Paul L. Jones
    Director, Manpower Issues

    Page 4                                   GAO/NSLADW-96BR   Credit Discrimination

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                                                                     Page 6   GAO/NSIAD-90-96BR   Credit Discrimination
Adpendix I

C)bjective, Scope, and Methodology

                   Our objective was to determine whether financial institutions serving
                   the Fort Ord, California, area were denying credit to military personnel
                   solely on the basis of rank. The requesters were concerned that military
                   personnel were being denied credit without considering the individual’s
                   other financial assets. We conducted most of our work at Fort Ord, Cali-
                   fornia, where a complaint by an enlisted person alleged that a finance
                   company did not accept credit applications from military personnel
                   below the rank of E5. This individual had not been denied credit, but
                   believed that the company applied credit practices which discriminated
                   against lower ranked military personnel.

                   To accomplish our objective, we used a multi-faceted approach. We con-
                   tacted the individual who had initially made the allegation. We talked
                   with officials from five financial institutions serving the Fort Ord area,
                   state of California officials responsible for overseeing the finance com-
                   panies, and the responsible national regulatory agencies. In these discus-
                   sions, we discussed established policies and procedures for granting
                   credit to military personnel, the frequency and nature of complaints
                   from military personnel, and, in particular, whether the complaints from
                   military personnel alleged credit discrimination. We also obtained copies
                   of applicable policy and procedure statements, and reviewed and ana-
                   lyzed complaint files. In addition, we met with the military organizations
                   serving the Fort Ord community which would likely be aware of
                   instances of alleged credit discrimination.

                   To determine whether financial institutions were discriminating against
                   military personnel, we looked for the following types of evidence:

               ldenying credit to military personnel below a certain rank,
               laccepting credit applications only from military personnel above a cer-
                tain rank,
              . using different criteria for granting credit to military personnel versus
                civilians, and
              . requiring payroll allotments from military personnel when credit was

                   In addition, we assumed that, if credit discrimination against military
                   personnel was occurring, there would be complaints in the state, federal,
                   or local files. As an additional check, we interviewed 10 military person-
                   nel at Fort Ord and reviewed their application folders on file at the
                   financial institutions to determine whether they were approved or
                   denied credit based on rank.

                   Page 6                                  GAO/NSIAD-90-95BR   Credit Discrimination
.r ..-._
               Appendix I
               Objective, Scope, and Methodology

               After completing our analysis, we briefed the congressional staff, and
               we agreed that no additional work was warranted.


               Page 7                                 GAO/NSIAD-9OBSBR   Credit Discrimination

                                     to This Report
                                                                                                       . ,

                            George E. Breen Jr., Assistant Director
    National Security and
    Ikernational Affairs
    Washington, D.C;
                            Kane Wong, Regional Management Representative
    San Francisco           Ann Lee, Evaluator-in-Charge
    Regional Office


                            Page 8                                    GAO/NSIAD-90-95BR   Credit Diicrhination
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