High fees, high risk? FDIC issues examination guidance for controversial area of bank involvement in payday lending.
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The FDIC recently issued examination guidance for FDIC-supervised institutions that offer payday loans. The guidance will make it easier for banks engaged in payday lending to determine whether they can meet federal standards.
Payday loans are small-dollar, unsecured, short-term advances offered to consumers in exchange for flat fees. In recent years, more and more banks around the country have gotten involved in the practice because of the potential for added fee revenue. The service is typically offered through a third-party vendor.
The service has been controversial because payday fees, when calculated as an annual percentage rate, appear high--although they are lower than those charged in connection with bounce-protection programs. The latter services have proved popular with consumers.
Despite the appeal of added fee income, some financial institutions have hesitated about getting involved in payday lending because of possible negative reaction from the FDIC.
The FDIC guidance was issued, in part, because of this bank uncertainty. "This guidance raises the bar for banks involved in payday lending, and appropriate so, given our experience with this activity," said Michael Zamorski, director...
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