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Smale, Pauline

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Payday Loans: Federal Regulatory Initiatives

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Federal Publications Key Workplace Documents 
April 2005 
Payday Loans: Federal Regulatory Initiatives 
Pauline Smale 
Congressional Research Service 
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Payday Loans: Federal Regulatory Initiatives 
Keywords 
Payday, loan, federal, lending, law, state, consumer, Congress, fee, borrower, credit, 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/key_workplace/187 
Congressional Research Service ˜ The Library of Congress
CRS Report for Congress
Received through the CRS Web
Order Code RS21728
Updated April 12, 2005
Payday Loans: 
Federal Regulatory Initiatives
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
A payday loan arrangement permits an individual to use a personal check to get a
small, short-term, cash advance.  The loans are typically for $100-$500.  The borrower
writes a postdated check for the loan amount and a fee.  The lender holds the check until
the borrower’s next payday, usually two weeks.  This source of short-term credit can be
expensive.  The fee charged on a 14-day payday loan is typically $15 to $17 per $100
advanced, amounts equivalent to an APR (annual percentage rate) of between 391% and
443%.  A loan can become even more expensive if it is rolled over or extended.
State laws have generally governed payday lending; some are silent while others
have prohibited or restricted payday lenders.  Payday loans are subject to the disclosure
provisions of the federal Truth-In-Lending Act.  When payday lenders attempted to
partner with banks and thrifts to circumvent restrictive state laws, however,  federal
regulators  issued supervisory guidance relating to payday loans.  Depository institutions
were cautioned that these arrangements introduced financial, compliance, and reputation
risks.  Consumer advocates are concerned that these guidelines may not provide
sufficient consumer protection.  They have called on Congress to examine the activities
of payday lenders to see if reforms are needed to protect consumers.  This report
provides information on the practice of payday lending and an overview of federal
regulation.  This report will be updated as events and legislation warrant.
Background
The payday loan industry became a popular source of funds for cash-strapped
borrowers in the 1990s.  Payday loans were originally offered through check cashing
outlets and pawnshops.  The market for this financial product soon produced stand-alone
payday loan businesses.  Today the industry includes large regional or national payday
loan businesses.  Some providers are multi-service, offering a range of financial services
(for example, money orders and check cashing) as well as payday loans. Nationwide,
payday loan offices increased from approximately 300 in 1992, 10,000 in 2000,  to almost
CRS-2
1
 "Fast Cash is Gaining Currency," The Dallas Morning News,  Jan. 4, 2005.
2
 No Cash ‘til Payday: The Payday Lending Industry, Federal Reserve Bank of Philadelphia-
Supervision, Regulation, and Credit, First Quarter 2002, p.2.
3
 The APR is a standard measurement of cost of credit to a borrower.  
4
 Show Me The Money: A Survey of Payday Lenders, State Public Interest Groups (PIRGs) and
the Consumer Federation of America, Feb. 2000, p.1.
22,000 in 2003.  The total dollar volume of payday loans in 2003 was approximately $40
billion.1  
In a payday loan transaction, the lender makes a small advance (typically $100-$500)
to its customer, agreeing to hold a personal check for the loan amount plus a fee until the
customer’s next payday.  Sometimes the advance is made in exchange for the
authorization to debit electronically the customer’s checking account for the loan amount
plus the fee.  The borrower receives cash immediately.  Fees charged can range from $15
to $30 on each $100 advanced,2 although the typical fee is at the lower end of that range.
The fee may seem modest when presented as a dollar amount, but when calculated as an
annual percentage rate (APR),3 the cost is relatively high.  A charge of $15 to borrow
$100 for 14 days amounts to an APR of 391%.  A survey by consumer advocates found
APRs on 14-day payday loans ranging from 390% to 871%.4 
A loan can become even more expensive for the borrower who does not have the
funds to repay the loan at the end of two weeks and obtains a rollover or loan extension.
An additional fee is attached each time the loan is extended through a rollover transaction.
If a payday loan of $100 for 14 days with a fee of $15 were rolled over three times, it
would cost the borrower $60 to borrow $100 for 56 days.  While this is still an APR of
391%, this example demonstrates how the loan fees can quickly mount and could
eventually become greater than the amount actually borrowed.  Consumers can also
become trapped in back-to-back transactions.  In these cases, the customer pays off the
first loan but immediately borrows again to meet financial needs.  If the borrower defaults
on the loan, serious financial consequences can occur.  The lender can deposit the
customer’s personal check which would result in additional fees (from the bank) for
insufficient funds if it did not clear the borrower’s checking account and could result in
the consumer being identified as a writer of bad checks.    
Payday lenders found a significant demand for these small loans from customers who
found themselves unable to meet their current living expenses.  These borrowers would
have personal checking accounts but no “cushion” of savings to meet unexpected
expenses or financial emergencies.  In addition, they might not have easy access to credit
elsewhere; for example they may not qualify for a low interest credit card or they may
have found that their bank does not offer loans for small amounts of credit.  Payday
lenders do not check a borrower’s credit history or look into his or her ability to repay the
loan.  They only require identification, proof of income, and ownership of a checking
account.
Critics of payday lenders consider payday loans to be abusive in their terms and in
relation to a borrower’s ability to pay.  Consumer advocates argue that the industry targets
vulnerable consumers, that the practice encourages chronic borrowing, and that frequent
CRS-3
5
 Information on state laws was found on the National Conference of State Legislatures website,
[http://www.ncsl.org].
6
 In this report the term thrift refers to savings banks and savings and loan associations .
7
 To view the Best Practices standards go to the CFSA website at [http://www.cfsa.net].
8
 12 C.F.R. Part 226.2(a)(14).
users can become trapped in a cycle of expensive debt.  Proponents state that payday loans
are meeting a need for short-term or emergency credit that is not being met by traditional
financial institutions.  They argue that payday loan fees can be less costly than bounced
checks or credit card late fees and interest charges.      
In general, state laws govern payday lending.  State laws are not uniform in their
treatment of payday lending. Currently, 15 states do not have specific payday lending
legislation or are unfavorable to the industry because of interest rate ceilings.  The
remaining 35 states and the District of Columbia have laws that address payday lending
most of which both limit finance charges and set a maximum loan amount.5  Some payday
lenders sought arrangements or partnerships with banks and  thrifts6 that might allow them
to circumvent state restrictions or prohibitions.  Consumer advocates spoke out against
this practice, calling it rent-a-bank payday lending.   
A trade association for the payday loan industry created a set of standards for its
membership.  The Community Financial Services Association of America (CFSA)
adopted a set of guidelines called Best Practices7 in 2000.  The standards apply only to
members and do not have the force of law. 
Federal Regulatory Response
By the late 1990’s, consumer advocates were asking federal regulators, state
legislators, and Congress to address what they viewed as inadequate consumer protections
for the rapidly expanding operations of payday lenders.  Some called for an outright ban
against payday loans while others argued for restrictions, increased disclosure, and
consumer education.  Contractual arrangements between depository financial institutions
and payday lenders raised additional concerns for the federal regulators of banks and
thrifts. 
On March 24, 2000, the Board of Governors of the Federal Reserve System
published a rule that added a section to the staff commentary on Regulation Z, the Truth
in Lending Act (TILA).  The TILA  requires creditors to disclose the cost of credit as a
dollar amount and in terms of the APR.  The commentary revision 8 clarified that payday
loans are within the definition of credit in the TILA and, therefore, payday lenders are
required to provide the standard disclosures.  Before the rule was issued some payday
lenders had stated that their cash advances to customers were not extensions of credit and,
therefore, should not be subject to the TILA.
Payday lenders drew the attention of the Office of the Comptroller of the Currency
(OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance
Corporation (FDIC) when they sought arrangements with banks and thrifts to expand
CRS-4
9
 For more information on federal preemption, see CRS Report RL32197, Preemption of State
Law for National Banks and Their Subsidiaries by the Office of the Comptroller of the Currency,
by M. Maureen Murphy.
10
 The full text of the advisory letter and supervisory guidance can be found on the OCC website
at [http://www.occ.treas.gov/ftp/advisory/2000-10.txt] and the OTS website at
[http://www.ots.treas.gov/docs/77099.html].   
payday lending activities.  These arrangements could be structured to include marketing,
servicing, and financing activities.  The involvement of banks and thrifts might be sought
in an effort to avoid the state and local laws that would restrict the operations of payday
lenders.  Certain federal preemptions of state law are granted by regulators to banks and
savings associations,9 so a partnership could facilitate the payday lender’s  circumvention
of a state’s usury laws or other restrictions.  The terms of individual agreements vary.  In
an example situation, the payday lender would use a bank to initially fund  loans
originated through the lender and then the bank would sell the loans back to the payday
lender.  The payday lender would then service the loans and collect the payments.        
  
Federal regulators responded to payday lender efforts by issuing advisory letters and
guidelines regarding contractual arrangements with nonbank, third-party vendors (payday
lenders) to fund payday loans.  On November 27, 2000, the regulator for national banks
(the OCC) and the regulator for federal and state-chartered thrifts (the OTS) issued
advisory letters and supervisory guidelines relating to payday loans.10  The regulators
stated that payday loans were one example of a type of product being developed by non-
bank vendors that raised supervisory concerns because of the efforts by some vendors  to
engage national banks and thrifts as delivery vehicles.  
The joint statement by the regulators outlined several specific concerns.  Consumer
protection concerns were raised because of loan terms and borrower characteristics.  The
statement referred to non-bank vendors seeking to avoid individual state laws.  The
regulators were concerned that the bank or thrift would not be significantly involved in
the marketing of the product.  The institution might have an insignificant economic
interest in the business generated by the vendor and may not be able to properly oversee
the vendor’s operations.  Concern was expressed that many vendors of these products
engaged in practices that may be viewed as abusive to consumers.  
The regulators cautioned institutions about risks and safety and soundness threats.
Guidance issued by the OCC and the OTS highlighted the significant risks associated with
payday lending.  Five categories of risk were analyzed; credit, counterparty (contractual),
transaction (operational), reputation, and compliance and legal risks.
The two regulators stated that individual institution management should carefully
weigh the possible ramifications of payday lending and should consult with their legal
counsel and regulators before pursuing payday lending.  The regulators stated their intent
to scrutinize any such arrangements and to use their supervisory authority to examine the
operations of non-bank vendors.  
The regulators also acknowledged that payday loans were responding to a consumer
demand for short-term, low-balance credit.  They encouraged banks and thrifts to consider
CRS-5
11
 The full text of OCC Bulletin 2001-47 can be found on the OCC website
[http://www.occ.treas.gov/ftp/bulletin/2001-47.doc]. 
12
 The full text of the guidance can be found on the FDIC website at
[http://www.fdic.gov/news/news/press/2003/pr7003.html].
13
  Testimony of Jean Ann Fox, in U.S. Congress, House, Committee on Financial Institutions
Subcommittee on Financial Institutions and Consumer Credit, Financial Services Issues: A
Consumer’s Perspective, Sept. 15, 2004.
how this need could be served in a safe and sound manner, including the development of
alternative financial products.
On November 2, 2001, the OCC issued further guidance on the risks arising from
third-party relationships (including payday lenders) in an OCC bulletin.11  The OCC
warned that third-party activity should be conducted in a safe and sound manner and in
compliance with applicable laws.  The bulletin stated that the OCC would scrutinize any
arrangement.  The Comptroller of the Currency has also made public statements directing
banks to avoid involvement with payday lending.
Enforcement actions have been taken by both the OCC and the OTS to halt payday
lender relationships with institutions they supervise.  To date, the OTS has intervened
with two arrangements and the OCC with four.  Consumer advocates state that a clear
signal has been sent by these two regulators to the institutions they supervise to stay away
from partnerships with payday lenders.
The FDIC is the primary supervisor for state-chartered banks that are not members
of the Federal Reserve System.  On July 2, 2003, the FDIC responded to concerns raised
by banks becoming involved with payday lending by issuing examination guidance for
FDIC supervised institutions that participate in payday loans.12   The guidance warned of
safety and soundness issues.  The guidance discussed the high risk nature of payday
lending and referred to the five categories of risk addressed by the OCC and OTS.  The
FDIC’s guidance may allow banks to participate in payday lending if strict requirements
and standards are met.  The guidance instructs examiners to consider a comprehensive
range of regulatory factors when inspecting banks that do opt to be involved in these
arrangements.  Factors include concentrations of credit, capital adequacy, loan loss
provisioning, and policies towards rollovers.  The guidelines are to be applied during the
regular bank examination schedule.  To date, the FDIC has not taken any action based on
this guidance.
In September 2004, consumer advocates testified13 that the FDIC guidelines are not
sufficiently stringent and that their enforcement may not provide needed consumer
protections.  Ten state-chartered FDIC supervised banks were listed that had partnered
with payday lenders.  Congress was urged to prohibit the use of checks drawn on banks
and thrifts as the basis for loans.  In the 108th Congress, legislation (H.R. 2407) that would
have restricted the operations of payday lenders, regulated the involvement of banks and
thrifts, and set minimum national standards for state payday loan laws was introduced but
no further action was taken.  
CRS-6
14
 The full text of Financial Institution Letter FIL-14-2005 can be found on the FDIC website
[http://www.fdic.gov/news/news/financial/2005/fil1405.pdf].
On March 1, 2005, the FDIC issued revised examination guidance on payday lending
programs.  The FDIC expressed concerns about the manner in which payday lending was
being conducted.  The revised guidance states that institutions should ensure that payday
loans are not provided to customers who have had payday loans outstanding from any  
lender for a total of three months in the previous 12-month period.14  Customers turned
down for payday loans should be provided with information on alternative credit products.
In addition, FDIC-supervised banks active in payday lending were instructed to submit
their plans addressing the revised guidance. 
             
        
      
 


UNT Digital Library

Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS21728Updated May 23, 2005Payday Loans: Federal Regulatory InitiativesPauline SmaleEconomic AnalystGovernment and Finance DivisionSummaryA payday loan arrangement permits an individual to use a personal check to get asmall, short-term, cash advance.  The loans are typically for $100-$500.  The borrowerwrites a postdated check for the loan amount and a fee.  The lender holds the check untilthe borrower’s next payday, usually two weeks.  This source of short-term credit can beexpensive.  The fee charged on a 14-day payday loan is typically $15 to $17 per $100advanced, amounts equivalent to an APR (annual percentage rate) of between 391% and443%.  A loan can become even more expensive if it is rolled over or extended.State laws have generally governed payday lending; some are silent while othershave prohibited or restricted payday lenders.  Payday loans are subject to the disclosureprovisions of the federal Truth-In-Lending Act.  When payday lenders attempted topartner with banks and thrifts to circumvent restrictive state laws, however,  federalregulators  issued supervisory guidance relating to payday loans.  Depository institutionswere cautioned that these arrangements introduced financial, compliance, and reputationrisks.  Consumer advocates are concerned that these guidelines may not providesufficient consumer protection.  They have called on Congress to examine the activitiesof payday lenders to see if reforms are needed to protect consumers.  Legislation, H.R.1643 and H.R. 1660, that would regulate the payday lending has been introduced.    Thisreport provides information on the practice of payday lending and an overview of federalregulation and legislation.  This report will be updated as events and legislation warrant.BackgroundThe payday loan industry became a popular source of funds for cash-strappedborrowers in the 1990s.  Payday loans were originally offered through check cashingoutlets and pawnshops.  The market for this financial product soon produced stand-alonepayday loan businesses.  Today the industry includes large regional or national paydayloan businesses.  Some providers are multi-service, offering a range of financial services(for example, money orders and check cashing) as well as payday loans. Nationwide,payday loan offices increased from approximately 300 in 1992, 10,000 in 2000,  to almostCRS-21 "Fast Cash is Gaining Currency," The Dallas Morning News,  Jan. 4, 2005.2 No Cash ‘til Payday: The Payday Lending Industry, Federal Reserve Bank of Philadelphia-Supervision, Regulation, and Credit, First Quarter 2002, p.2.3 The APR is a standard measurement of cost of credit to a borrower.  4 Show Me The Money: A Survey of Payday Lenders, State Public Interest Groups (PIRGs) andthe Consumer Federation of America, Feb. 2000, p.1.22,000 in 2003.  The total dollar volume of payday loans in 2003 was approximately $40billion.1  In a payday loan transaction, the lender makes a small advance (typically $100-$500)to its customer, agreeing to hold a personal check for the loan amount plus a fee until thecustomer’s next payday.  Sometimes the advance is made in exchange for theauthorization to debit electronically the customer’s checking account for the loan amountplus the fee.  The borrower receives cash immediately.  Fees charged can range from $15to $30 on each $100 advanced,2 although the typical fee is at the lower end of that range.The fee may seem modest when presented as a dollar amount, but when calculated as anannual percentage rate (APR),3 the cost is relatively high.  A charge of $15 to borrow$100 for 14 days amounts to an APR of 391%.  A survey by consumer advocates foundAPRs on 14-day payday loans ranging from 390% to 871%.4 A loan can become even more expensive for the borrower who does not have thefunds to repay the loan at the end of two weeks and obtains a rollover or loan extension.An additional fee is attached each time the loan is extended through a rollover transaction.If a payday loan of $100 for 14 days with a fee of $15 were rolled over three times, itwould cost the borrower $60 to borrow $100 for 56 days.  While this is still an APR of391%, this example demonstrates how the loan fees can quickly mount and couldeventually become greater than the amount actually borrowed.  Consumers can alsobecome trapped in back-to-back transactions.  In these cases, the customer pays off thefirst loan but immediately borrows again to meet financial needs.  If the borrower defaultson the loan, serious financial consequences can occur.  The lender can deposit thecustomer’s personal check which would result in additional fees (from the bank) forinsufficient funds if it did not clear the borrower’s checking account and could result inthe consumer being identified as a writer of bad checks.    Payday lenders found a significant demand for these small loans from customers whofound themselves unable to meet their current living expenses.  These borrowers wouldhave personal checking accounts but no “cushion” of savings to meet unexpectedexpenses or financial emergencies.  In addition, they might not have easy access to creditelsewhere; for example they may not qualify for a low interest credit card or they mayhave found that their bank does not offer loans for small amounts of credit.  Paydaylenders do not check a borrower’s credit history or look into his or her ability to repay theloan.  They only require identification, proof of income, and ownership of a checkingaccount.Critics of payday lenders consider payday loans to be abusive in their terms and inrelation to a borrower’s ability to pay.  Consumer advocates argue that the industry targetsvulnerable consumers, that the practice encourages chronic borrowing, and that frequentCRS-35 Information on state laws was found on the National Conference of State Legislatures website,[http://www.ncsl.org].6 In this report the term thrift refers to savings banks and savings and loan associations .7 To view the Best Practices standards go to the CFSA website at [http://www.cfsa.net].8 12 C.F.R. Part 226.2(a)(14).users can become trapped in a cycle of expensive debt.  Proponents state that payday loansare meeting a need for short-term or emergency credit that is not being met by traditionalfinancial institutions.  They argue that payday loan fees can be less costly than bouncedchecks or credit card late fees and interest charges.      In general, state laws govern payday lending.  State laws are not uniform in theirtreatment of payday lending. Currently, 15 states do not have specific payday lendinglegislation or are unfavorable to the industry because of interest rate ceilings.  Theremaining 35 states and the District of Columbia have laws that address payday lendingmost of which both limit finance charges and set a maximum loan amount.5  Some paydaylenders sought arrangements or partnerships with banks and  thrifts6 that might allow themto circumvent state restrictions or prohibitions.  Consumer advocates spoke out againstthis practice, calling it rent-a-bank payday lending.   A trade association for the payday loan industry created a set of standards for itsmembership.  The Community Financial Services Association of America (CFSA)adopted a set of guidelines called Best Practices7 in 2000.  The standards apply only tomembers and do not have the force of law. Federal Regulatory ResponseBy the late 1990’s, consumer advocates were asking federal regulators, statelegislators, and Congress to address what they viewed as inadequate consumer protectionsfor the rapidly expanding operations of payday lenders.  Some called for an outright banagainst payday loans while others argued for restrictions, increased disclosure, andconsumer education.  Contractual arrangements between depository financial institutionsand payday lenders raised additional concerns for the federal regulators of banks andthrifts. On March 24, 2000, the Board of Governors of the Federal Reserve Systempublished a rule that added a section to the staff commentary on Regulation Z, the Truthin Lending Act (TILA).  The TILA  requires creditors to disclose the cost of credit as adollar amount and in terms of the APR.  The commentary revision 8 clarified that paydayloans are within the definition of credit in the TILA and, therefore, payday lenders arerequired to provide the standard disclosures.  Before the rule was issued some paydaylenders had stated that their cash advances to customers were not extensions of credit and,therefore, should not be subject to the TILA.Payday lenders drew the attention of the Office of the Comptroller of the Currency(OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit InsuranceCorporation (FDIC) when they sought arrangements with banks and thrifts to expandCRS-49 For more information on federal preemption, see CRS Report RL32197, Preemption of StateLaw for National Banks and Their Subsidiaries by the Office of the Comptroller of the Currency,by M. Maureen Murphy.10 The full text of the advisory letter and supervisory guidance can be found on the OCC websiteat [http://www.occ.treas.gov/ftp/advisory/2000-10.txt] and the OTS website at[http://www.ots.treas.gov/docs/7/77099.html].   payday lending activities.  These arrangements could be structured to include marketing,servicing, and financing activities.  The involvement of banks and thrifts might be soughtin an effort to avoid the state and local laws that would restrict the operations of paydaylenders.  Certain federal preemptions of state law are granted by regulators to banks andsavings associations,9 so a partnership could facilitate the payday lender’s  circumventionof a state’s usury laws or other restrictions.  The terms of individual agreements vary.  Inan example situation, the payday lender would use a bank to initially fund  loansoriginated through the lender and then the bank would sell the loans back to the paydaylender.  The payday lender would then service the loans and collect the payments.          Federal regulators responded to payday lender efforts by issuing advisory letters andguidelines regarding contractual arrangements with nonbank, third-party vendors (paydaylenders) to fund payday loans.  On November 27, 2000, the regulator for national banks(the OCC) and the regulator for federal and state-chartered thrifts (the OTS) issuedadvisory letters and supervisory guidelines relating to payday loans.10  The regulatorsstated that payday loans were one example of a type of product being developed by non-bank vendors that raised supervisory concerns because of the efforts by some vendors  toengage national banks and thrifts as delivery vehicles.  The joint statement by the regulators outlined several specific concerns.  Consumerprotection concerns were raised because of loan terms and borrower characteristics.  Thestatement referred to non-bank vendors seeking to avoid individual state laws.  Theregulators were concerned that the bank or thrift would not be significantly involved inthe marketing of the product.  The institution might have an insignificant economicinterest in the business generated by the vendor and may not be able to properly overseethe vendor’s operations.  Concern was expressed that many vendors of these productsengaged in practices that may be viewed as abusive to consumers.  The regulators cautioned institutions about risks and safety and soundness threats.Guidance issued by the OCC and the OTS highlighted the significant risks associated withpayday lending.  Five categories of risk were analyzed; credit, counterparty (contractual),transaction (operational), reputation, and compliance and legal risks.The two regulators stated that individual institution management should carefullyweigh the possible ramifications of payday lending and should consult with their legalcounsel and regulators before pursuing payday lending.  The regulators stated their intentto scrutinize any such arrangements and to use their supervisory authority to examine theoperations of non-bank vendors.  The regulators also acknowledged that payday loans were responding to a consumerdemand for short-term, low-balance credit.  They encouraged banks and thrifts to considerCRS-511 The full text of OCC Bulletin 2001-47 can be found on the OCC website[http://www.occ.treas.gov/ftp/bulletin/2001-47.doc]. 12 The full text of the guidance can be found on the FDIC website at[http://www.fdic.gov/news/news/press/2003/pr7003.html].13  Testimony of Jean Ann Fox, in U.S. Congress, House, Committee on Financial InstitutionsSubcommittee on Financial Institutions and Consumer Credit, Financial Services Issues: AConsumer’s Perspective, Sept. 15, 2004.how this need could be served in a safe and sound manner, including the development ofalternative financial products.On November 2, 2001, the OCC issued further guidance on the risks arising fromthird-party relationships (including payday lenders) in an OCC bulletin.11  The OCCwarned that third-party activity should be conducted in a safe and sound manner and incompliance with applicable laws.  The bulletin stated that the OCC would scrutinize anyarrangement.  The Comptroller of the Currency has also made public statements directingbanks to avoid involvement with payday lending.Enforcement actions have been taken by both the OCC and the OTS to halt paydaylender relationships with institutions they supervise.  To date, the OTS has intervenedwith two arrangements and the OCC with four.  Consumer advocates state that a clearsignal has been sent by these two regulators to the institutions they supervise to stay awayfrom partnerships with payday lenders.The FDIC is the primary supervisor for state-chartered banks that are not membersof the Federal Reserve System.  On July 2, 2003, the FDIC responded to concerns raisedby banks becoming involved with payday lending by issuing examination guidance forFDIC supervised institutions that participate in payday loans.12   The guidance warned ofsafety and soundness issues.  The guidance discussed the high risk nature of paydaylending and referred to the five categories of risk addressed by the OCC and OTS.  TheFDIC’s guidance may allow banks to participate in payday lending if strict requirementsand standards are met.  The guidance instructs examiners to consider a comprehensiverange of regulatory factors when inspecting banks that do opt to be involved in thesearrangements.  Factors include concentrations of credit, capital adequacy, loan lossprovisioning, and policies towards rollovers.  The guidelines are to be applied during theregular bank examination schedule. In September 2004, consumer advocates testified13 that the FDIC guidelines are notsufficiently stringent and that their enforcement may not provide needed consumerprotections.  Ten state-chartered FDIC supervised banks were listed that had partneredwith payday lenders.  Congress was urged to prohibit the use of checks drawn on banksand thrifts as the basis for loans. On March 1, 2005, the FDIC issued revised examination guidance on payday lendingprograms.  The FDIC expressed concerns about the manner in which payday lending wasbeing conducted.  The revised guidance states that institutions should ensure that paydayloans are not provided to customers who have had payday loans outstanding from any  CRS-614 The full text of Financial Institution Letter FIL-14-2005 can be found on the FDIC website[http://www.fdic.gov/news/news/financial/2005/fil1405.pdf].lender for a total of three months in the previous 12-month period.14  Customers turneddown for payday loans should be provided with information on alternative credit products.In addition, FDIC-supervised banks active in payday lending were instructed to submittheir plans addressing the revised guidance.On March 11, 2005, the FDIC issued a cease and desist order against a state-chartered bank that affiliates with payday lenders.  The regulator ordered the bank to makeseveral improvements related to its payday lending activities.               LegislationThe operation of the payday loan industry and the criticism of this financial producthas raised congressional concerns.  In the 109th Congress, two bills (H.R. 1643 and H.R.1660) addressing payday lending have been introduced. H.R. 1660 would restrict theoperations of payday lenders, regulate the involvement of banks and thrifts, and setminimum national standards for state payday loan laws.  H.R. 1643 amends a variety ofbanking laws to protect borrowers from loans that in their terms and relation to aborrower’s ability to pay may be abusive.  Section 6 of H.R. 1643 amends the TILA.  Thenew provisions would limit rollovers or loan extensions and provide consumers withadditional disclosure concerning the hazards of payday lending.  Both bills wereintroduced on April 14, 2005, and no further action has been taken on either.  

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