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Guidelines on Payday Lending

fdic.gov

Purpose

This guidance provides information about payday lending, a particular type of subprime lending, and supplements previously issued guidance about such programs.1 It describes safety and soundness and compliance considerations for examining and supervising state nonmember institutions that have payday lending programs.

This guidance is necessitated by the high risk nature of payday lending and the substantial growth of this product. It describes the FDIC's expectations for prudent risk-management practices for payday lending activities, particularly with regard to concentrations, capital, allowance for loan and lease losses, classifications, and protection of consumers. The guidelines also address recovery practices, income recognition, and managing risks associated with third-party relationships.

When examiners determine that management of safety and soundness or compliance risks is deficient, they should criticize management and initiate corrective action. Such actions may include formal or informal enforcement action. When serious deficiencies exist, enforcement actions may instruct institutions to discontinue payday lending.

Background

In recent years a number of lenders have extended their risk selection standards to attract subprime loans. Among the various types of subprime loans, "payday loans" are now offered by an increasing number of insured depository institutions.

Payday loans (also known as deferred deposit advances) are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment (such as a social security check). Payday loans are usually priced at a fixed dollar fee, which represents the finance charge to the borrower. Because these loans have such short terms to maturity, the cost of borrowing, expressed as an annual percentage rate (APR), is very high.2

In return for the loan, the borrower usually provides the lender with a check or debit authorization for the amount of the loan plus the fee. The check is either post-dated to the borrower's next payday or the lender agrees to defer presenting the check for payment until a future date, usually two weeks or less. When the loan is due, the lender expects to collect the loan by depositing the check or debiting the borrower's account or by having the borrower redeem the check with a cash payment. If the borrower informs the lender that he or she does not have the funds to repay the loan, the loan is often refinanced 3 through payment of an additional fee. If the borrower does not redeem the check in cash and the loan is not refinanced, the lender normally puts the check or debit authorization through the payment system. If the borrower's deposit account has insufficient funds, the borrower typically incurs a NSF charge on this account. If the check or the debit is returned to the lender unpaid, the lender also may impose a returned item fee plus collection charges on the loan.
www.fdic.gov/regulations/safety/payday/

• Payday Lending Risks
• Payday Lending Procedures

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• Payday Loan

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