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FDIC's Revised Examination Guidance on Payday Lending

March 14, 2005
Research

On March 1, 2005, the FDIC announced revisions to its guidelines to banks engaged in payday lending. The guidelines seek to "ensure that this high-cost, short-term credit product is not provided repeatedly to customers with longer-term credit needs." Thus, the FDIC has taken the important step of recognizing that payday lending can lead to a debt-trap.

The guidelines call on banks to develop procedures to ensure that they do not make payday loans to customers who have had payday loans outstanding from any lender for a total of more than three months in the previous 12 months. Assuming a typical payday loan of two weeks, the FDIC guidelines would permit six transactions, but then would require the bank to offer to or refer the borrower to a longer-term credit product.

The other provisions of the guidelines remain unchanged.

The Revised Examination Guidance is a positive step by the FDIC, however, the full impact of the Guidance is uncertain.