FDIC Guidelines for payday lending
Guidelines for Payday Lending
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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.
Significant Risks
Borrowers who obtain payday loans generally have cash flow
difficulties, and few, if any, lower-cost borrowing alternatives. In
addition, some payday lenders perform minimal analysis of the
borrower's ability to repay either at the loan's inception or upon
refinancing; they may merely require a current pay stub or proof of a
regular income source and evidence that the customer has a checking
account. Other payday lenders use scoring models and consult
nationwide databases that track bounced checks and persons with
outstanding payday loans. However, payday lenders typically do not
obtain or analyze information regarding the borrower's total level of
indebtedness or information from the major national credit bureaus
(Equifax, Experian, TransUnion). In addition, payday lenders generally do
not conduct a substantive review of the borrower's credit history. The
combination of the borrower's limited financial capacity, the unsecured
nature of the credit, and the limited underwriting analysis of the
borrower's ability to repay pose substantial credit risk for insured
depository institutions.
Insured depository institutions may have payday lending programs that
they administer directly, using their own employees, or they may enter
into arrangements with third parties. In the latter arrangements, the
institution typically enters into an agreement in which the institution funds
payday loans originated through the third party. These arrangements
also may involve the sale to the third party of the loans or servicing rights
to the loans.4 Institutions also may rely on the third party to provide
additional services that the bank would normally provide, including
collections, advertising and soliciting applications. The existence of third
party arrangements may, when not properly managed, significantly
increase institutions' transaction, legal, and reputation risks.
Federal law authorizes federal and state-chartered insured depository
institutions making loans to out of state borrowers to "export" favorable
interest rates provided under the laws of the state where the bank is
located. That is, a state-chartered bank is allowed to charge interest on
loans to out of state borrowers at rates authorized by the state where
the bank is located, regardless of usury limitations imposed by the state
laws of the borrower's residence.5 Nevertheless, institutions face
increased reputation risks when they enter into certain arrangements
with payday lenders, including arrangements to originate loans on terms
that could not be offered directly by the payday lender.
Payday loans are a form of specialized lending not typically found in
state nonmember institutions, and are most frequently originated by
specialized nonbank firms subject to state regulation. Payday loans can
be subject to high levels of transaction risk given the large volume of
loans, the handling of documents, and the movement of loan funds
between the institution and any third party originators. Because payday
loans may be underwritten off-site, there also is the risk that agents or
employees may misrepresent information about the loans or increase
credit risk by failing to adhere to established underwriting guidelines.
Procedures
General
Examiners should apply this guidance to banks with payday lending
programs that the bank administers directly or that are administered by a
third party contractor. This guidance does not apply to situations where
a bank makes occasional low-denomination, short-term loans to its
customers.
As described in the 2001 Subprime Guidance, a program involves the
regular origination of loans, using tailored marketing, underwriting
standards and risk selection. The 2001 Subprime Guidance applies
specifically to institutions with programs where the aggregate credit
exposure is equal to or greater than 25% or more of tier 1 capital.
However, because of the significant credit, operational, legal, and
reputation risks inherent in payday lending, this guidance applies
regardless of whether a payday loan program meets that credit
exposure threshold.
All examiners should use the procedures outlined in the Subprime
Lending Examination Procedures, as well as those described here. While
focused on safety and soundness issues, segments of the Subprime
Lending Examination Procedures also are applicable to compliance
examinations. They will need to be supplemented with existing
procedures relating to specific consumer protection laws and
regulations.
Due to the heightened safety and soundness and compliance risks
posed by payday lending, concurrent risk management and consumer
protection examinations should be conducted absent overriding resource
or scheduling problems. In all cases, a review of each discipline's
examinations and workpapers should be part of the pre-examination
planning process. Relevant state examinations also should be reviewed.
Examiners may conduct targeted examinations of the third party where
appropriate. Authority to conduct examinations of third parties may be
established under several circumstances, including through the bank's
written agreement with the third party, section 7 of the Bank Service
Company Act, or through powers granted under section 10 of the
Federal Deposit Insurance Act. Third party examination activities would
typically include, but not be limited to, a review of compensation and
staffing practices; marketing and pricing policies; management
information systems; and compliance with bank policy, outstanding law,
and regulations. Third party reviews should also include testing of
individual loans for compliance with underwriting and loan administration
guidelines, appropriate treatment of loans under delinquency, and
re-aging and cure programs.
Third-Party Relationships and Agreements
The use of third parties in no way diminishes the responsibility of the
board of directors and management to ensure that the third-party activity
is conducted in a safe and sound manner and in compliance with policies
and applicable laws. Appropriate corrective actions, including
enforcement actions, may be pursued for deficiencies related to a
third-party relationship that pose concerns about either safety and
soundness or the adequacy of protection afforded to consumers.
The FDIC's principal concern relating to third parties is that effective risk
controls are implemented. Examiners should assess the institution's risk
management program for third-party payday lending relationships. An
assessment of third-party relationships should include an evaluation of
the bank's risk assessment and strategic planning, as well as the bank's
due diligence process for selecting a competent and qualified third party
provider. (Refer to the Subprime Lending Examination Procedures for
additional detail on strategic planning and due diligence.)
Examiners also should ensure that arrangements with third parties are
guided by written contract and approved by the institution's board. At a
minimum, the arrangement should:
Describe the duties and responsibilities of each party, including the
scope of the arrangement, performance measures or benchmarks, and
responsibilities for providing and receiving information;
Specify that the third party will comply with all applicable laws and
regulations;
Specify which party will provide consumer compliance related
disclosures;
Authorize the institution to monitor the third party and periodically review
and verify that the third party and its representatives are complying with
its agreement with the institution;
Authorize the institution and the appropriate banking agency to have
access to such records of the third party and conduct onsite transaction
testing and operational reviews at third party locations as necessary or
appropriate to evaluate such compliance;
Require the third party to indemnify the institution for potential liability
resulting from action of the third party with regard to the payday lending
program; and
Address customer complaints, including any responsibility for third-party
forwarding and responding to such complaints.
Examiners also should ensure that management sufficiently monitors the
third party with respect to its activities and performance. Management
should dedicate sufficient staff with the necessary expertise to oversee
the third party. The bank's oversight program should monitor the third
party's financial condition, its controls, and the quality of its service and
support, including its resolution of consumer complaints if handled by the
third party. Oversight programs should be documented sufficiently to
facilitate the monitoring and management of the risks associated with
third-party relationships.
Safety and Soundness Issues
Concentrations
Given the risks inherent in payday lending, concentrations of credit in this
line of business pose a significant safety and soundness concern. In the
context of these guidelines, a concentration would be defined as a
volume of payday loans totaling 25 percent or more of a bank's Tier 1
capital. Where concentrations of payday lending are noted, bank
management should be criticized for a failure to diversify risks.
Examiners will work with institutions on a case-by-case basis to
determine appropriate supervisory actions necessary to address
concentrations. Such action may include directing the institution to
reduce its loans to an appropriate level, raise additional capital, or submit
a plan to achieve compliance.
Capital Adequacy
The FDIC's minimum capital requirements generally apply to portfolios that
exhibit substantially lower risk profiles and that are subject to more
stringent underwriting procedures than exist in payday lending
programs. Therefore, minimum capital requirements are not sufficient to
offset the risks associated with payday lending.
As noted in the 2001 Subprime Guidance, examiners should reasonably
expect, as a starting point, that an institution would hold capital against
subprime portfolios in an amount that is one and a half to three times
greater than what is appropriate for non-subprime assets of a similar
type. However, payday lending is among the highest risk subsets of
subprime lending, and significantly higher levels of capital than the
starting point should be required.
The 2001 Subprime Guidance indicates that institutions that underwrite
higher risk subprime pools, such as payday loans, need significantly
higher levels of capital, perhaps as high as 100% of the loans
outstanding (dollar-for-dollar capital), depending on the level and volatility
of risk. Risks to consider when determining capital requirements include
the unsecured nature of the credit, the relative levels of risk of default,
loss in the event of default, and the level of classified assets. Examiners
should also consider the degree of legal or reputational risk associated
with the payday business line, especially as it relates to third-party
agreements.
Because of the higher inherent risk levels and the increased impact that
payday lending portfolios may have on an institution's overall capital,
examiners should document and reference each institution's capital
evaluation in their comments and conclusions regarding capital
adequacy. (Refer to the 2001 Subprime Guidance for further information
on capital expectations.)
Allowance for Loan and Lease Losses (ALLL) Adequacy
As with other segments of an institution's loan portfolio, examiners
should ensure that institutions maintain an ALLL that is adequate to
absorb estimated credit losses within the payday loan portfolio.
Consistent with the Interagency Policy Statement on Allowance for Loan
and Lease Losses Methodologies and Documentation for Banks and
Savings Associations (Interagency Policy Statement on ALLL),6 the term
"estimated credit losses" means an estimate of the current amount of
loans that is not likely to be collected; that is, net charge-offs that are
likely to be realized in a segment of the loan portfolio given the facts and
circumstances as of the evaluation date. Although the contractual term
of each payday loan may be short, institutions' methodologies for
estimating credit losses on these loans should take into account the fact
that many payday loans remain continuously outstanding for longer
periods because of renewals and rollovers. In addition, institutions
should evaluate the collectibility of accrued fees and finance charges on
payday loans and employ appropriate methods to ensure that income is
accurately measured.
Examiners should ensure that institutions engaged in payday lending
have methodologies and analyses in place that demonstrate and
document that the level of the ALLL for payday loans is appropriate. The
application of historical loss rates to the payday loan portfolio, adjusted
for the current environmental factors, is one way to determine the ALLL
needed for these loans. Environmental factors include levels of and
trends in delinquencies and charge-offs, trends in loan volume, effects
of changes in risk selection and underwriting standards and in account
management practices, and current economic conditions. For institutions
that do not have loss experience of their own, it may be appropriate to
reference the payday loan loss experience of other institutions with
payday loan portfolios with similar attributes. Other methods, such as
loss estimation models, are acceptable if they estimate losses in
accordance with generally accepted accounting principles. Examiners
should review documentation to ensure that institutions loss estimates
and allowance methodologies are consistent with the Interagency Policy
Statement on ALLL.
Classification Guidelines
The Uniform Retail Credit Classification and Account Management Policy
(Retail Classification Policy)7 establishes general classification
thresholds for consumer loans based on delinquency, but also grants
examiners the discretion to classify individual retail loans that exhibit
signs of credit weakness regardless of delinquency status. An examiner
also may classify retail portfolios, or segments thereof, where
underwriting standards are weak and present unreasonable credit risk,
and may criticize account management practices that are deficient.
Most payday loans have well-defined weaknesses that jeopardize the
liquidation of the debt. Weaknesses include limited or no analysis of
repayment capacity and the unsecured nature of the credit. In addition,
payday loan portfolios are characterized by a marked proportion of
obligors whose paying capacity is questionable. As a result of these
weaknesses, payday loan portfolios should be classified Substandard.
Furthermore, payday loans that have been outstanding for extended
periods of time evidence a high risk of loss. While such loans may have
some recovery value, it is not practical or desirable to defer writing off
these essentially worthless assets. Payday loans that are outstanding
for greater than 60 days from origination generally meet the definition of
Loss. In certain circumstances, earlier charge off may be appropriate
(i.e., the bank does not renew beyond the first payday and the borrower
is unable to pay, the bank closes an account, etc.). The institution's
policies regarding consecutive advances also should be considered
when determining Loss classifications. Where the economic substance
of consecutive advances is substantially similar to "rollovers" - without
appropriate intervening "cooling off" or waiting periods - examiners
should treat these loans as continuous advances and classify
accordingly.
When classifying payday loans, examiners should reference the Retail
Classification Policy as the source document. Examiners would normally
not classify loans for which the institution has documented adequate
paying capacity of the obligors and/or sufficient collateral protection or
credit enhancement.
Renewals/Rewrites
The Retail Classification Policy establishes guidelines for extensions,
deferrals, renewals, or rewrites of closed-end accounts. Despite the
short-term nature of payday loans, borrowers that request an extension,
deferral, renewal, or rewrite should exhibit a renewed willingness and
ability to repay the loan. Examiners should ensure that institutions adopt
and adhere to the Retail Classification Policy standards that control the
use of extensions, deferrals, renewals, or rewrites of payday loans.
Under the Retail Classification Policy, institutions' standards should:
Limit the number and frequency of extensions, deferrals, renewals, and
rewrites;
Prohibit additional advances to finance unpaid interest and fees and
simultaneous loans to the same customer; and
Ensure that comprehensive and effective risk management, reporting,
and internal controls are established and maintained.
In addition to the above items, institutions should also:
Establish appropriate "cooling off" or waiting periods between the time a
payday loan is repaid and another application is made;
Establish the maximum number of loans per customer that are allowed
within one calendar year or other designated time period; and
Provide that no more than one payday loan is outstanding with the bank
at a time to any one borrower.
Accrued Fees and Finance Charges8
Examiners should ensure that institutions evaluate the collectibility of
accrued fees and finance charges on payday loans because a portion
of accrued interest and fees is generally not collectible. Although
regulatory reporting instructions do not require payday loans to be
placed on nonaccrual based on delinquency status, institutions should
employ appropriate methods to ensure that income is accurately
measured. Such methods may include providing loss allowances for
uncollectible fees and finance charges or placing delinquent and impaired
receivables on nonaccrual status. After a loan is placed on nonaccrual
status, subsequent fees and finance charges imposed on the borrower
would not be recognized in income and accrued, but unpaid fees and
finance charges normally would be reversed from income.
Recovery Practices
After a loan is charged off, institutions must properly report any
subsequent collections on the loan.9 Typically, some or all of such
collections are reported as recoveries to the ALLL. In some instances,
the total amount credited to the ALLL as recoveries on an individual loan
(which may have included principal, finance charges, and fees) may
exceed the amount previously charged off against the ALLL on that loan
(which may have been limited to principal). Such a practice understates
an institution's net charge-off experience, which is an important indicator
of the credit quality and performance of an institution's portfolio.
Consistent with regulatory reporting instructions and prevalent industry
practice, recoveries represent collections on amounts that were
previously charged off against the ALLL. Accordingly, institutions must
ensure that the total amount credited to the ALLL as recoveries on a loan
(which may include amounts representing principal, finance charges,
and fees) is limited to the amount previously charged off against the
ALLL on that loan. Any amounts collected in excess of this limit should
be recognized as income.
Compliance Issues
Payday lending raises many consumer protection issues and attracts a
great deal of attention from consumer advocates and other regulatory
organizations, increasing the potential for litigation. Regardless of
whether state law characterizes these transactions as loans, they are
considered extensions of credit for purposes of federal consumer
protection law. Laws and regulations to be closely scrutinized when
reviewing payday lending during consumer compliance examinations
include:
Community Reinvestment Act (CRA)/ Part 345
Under interagency CRA regulations and interpretive guidance, a payday
lending program may adversely affect CRA performance. For example,
evidence of discriminatory or other illegal credit practices are
inconsistent with helping to meet community credit needs and adversely
affect an evaluation of a financial institution's performance. Examples of
illegal credit practices include, but are not limited to violations of: the
Equal Credit Opportunity Act, concerning discouraging or discriminating
against consumers on a prohibited basis; the Truth in Lending Act,
regarding disclosures and certain loan restrictions; and the Federal
Trade Commission Act, concerning unfair and deceptive acts or
practices. Under longstanding interagency regulatory guidance, only
illegal credit practices adversely affect CRA performance and may result
in a lower CRA rating. As in all other aspects of the CRA evaluation, FDIC
examiners will continue to follow the CRA regulations and guidance
issued jointly by the federal banking agencies (FDIC, Federal Reserve,
OTS and OCC) and in effect at the time of an examination.
However, other questionable payday lending practices, while not
specifically prohibited by law, may be inconsistent with helping to meet
the convenience and needs of the community. For example, payday
loans to individuals who do not have the ability to repay, or that may
result in repeated renewals or extensions and fee payments over a
relatively short span of weeks, do not help to meet credit needs in a
responsive manner. A full description of the payday lending program and
such practices should be included in the section of the CRA Public
Performance Evaluation that describes the institution. This section
provides a description of the institution's profile, business strategy, and
product offerings inside and outside the assessment area(s). As with
any public comment, public comments regarding payday lending
practices should be discussed appropriately in a financial institution's
CRA Public Performance Evaluation, and included in the institution's CRA
Public File.
Truth in Lending Act/ Regulation Z
TILA and Regulation Z10 require banks engaged in consumer lending to
ensure that accurate disclosures are provided to customers. A bank that
fails to disclose finance charges and APRs accurately for payday loans
- considering the small dollar tolerance for inaccuracies - risks having to
pay restitution to consumers, which in some instances could be
substantial. This risk remains even if the bank provides loans through a
third-party agreement.
TILA and Regulation Z also require banks to advertise their loan products
in accordance with their provisions. For example, advertisements that
state specific credit terms may state only those terms that actually are or
will be arranged or offered by the creditor. If an advertisement states a
rate of finance charge, it must state the rate as an APR, using that term.
If the APR may be increased after the initial origination date, the
advertisement must so state. Additional disclosures also may be required
in the advertisements.
Equal Credit Opportunity Act/ Regulation B
Illegal discrimination may occur when a bank has both payday and other
short-term lending programs that feature substantially different interest
rate or pricing structures. Examiners should determine to whom the
products are marketed, and how the rates or fees for each program are
set, and whether there is evidence of potential discrimination. Payday
lending, like other forms of lending, is also susceptible to discriminatory
practices such as discouraging applications, requesting information or
evaluating applications on a prohibited basis. If the lender requires that a
borrower have income from a job, and does not consider income from
other sources such as social security or veterans benefits, then it is
illegally discriminating against applicants whose income derives from
public assistance.
ECOA and Regulation B limit the type of information that may be
requested of applicants during an application for credit. A creditor may
not refuse to grant an individual account to a creditworthy applicant on
the basis of sex, marital status or any other prohibited basis. A state
nonmember bank must ensure that its payday lending program complies
with these limitations.
ECOA and Regulation B require creditors to notify applicants of adverse
actions taken in connection with an application for credit. Notices of
adverse action taken must be provided within specified time frames and
in specified forms. State nonmember banks involved in payday lending
must ensure that such notices are given in an accurate and timely
manner.
Fair Credit Reporting Act
A bank engaged directly or indirectly in payday lending is responsible for
complying with requirements to provide notice to a consumer when it
declines an application for credit or takes other adverse action based on
certain information. If adverse action is taken based on information
received from a consumer reporting agency, the consumer must be
notified and provided the name and address of the consumer reporting
agency. It is important to note that information in "bad check lists" or
databases that track outstanding payday loans are considered to be
consumer reports, and therefore the companies that provide such a
tracking service (such as Teletrack) are consumer reporting agencies. If
adverse action is taken based on information received from a third party
that is not a consumer reporting agency, the adverse action notice must
direct the consumer to the bank, and not any third party, for details
regarding the character of the information (even where the payday loan
applications are received by the bank through a third party such as a
payday lender).
Electronic Fund Transfer Act (EFTA)/ Regulation E and Truth in Savings
Act (TISA)
Payday lending arrangements that involve the opening of a deposit
account or the establishment of "electronic fund transfers" must meet the
disclosure and other requirements of both the EFTA and TISA. Examples
include providing a device to access funds from a deposit account, or
depositing a payday loan directly in a borrower's account and debiting
the subsequent payment.
Fair Debt Collection Practices Act (FDCPA)
If a bank engages in payday lending through an arrangement with a third
party, and the third party collects defaulted debts on behalf of the bank,
the third party may become subject to the provisions of the FDCPA.
Although the bank itself may not be subject to the FDCPA, it may face
reputational risk if the third party violates the FDCPA in collecting the
bank's loans. A compliance program should provide for monitoring of
collection activities, including collection calls, of any third party on behalf
of the bank.
Federal Trade Commission Act (FTC Act)
The Federal Trade Commission Act (FTC Act) declares that unfair or
deceptive trade practices are illegal. (See 15 USC § 45(a)). State
nonmember banks and their institution-affiliated parties will be cited for
violations of section 5 of the FTC Act and the FDIC will take appropriate
action pursuant to its authority under section 8 of the Federal Deposit
Insurance Act when unfair or deceptive trade practices are discovered.
Examiners should focus attention on marketing programs for payday
loans, and also be alert for potentially abusive collection practices. Of
particular concern is the practice of threatening, and in some cases
pursuing, criminal bad check charges, despite the payment of offsetting
fees by the consumer and the lender's knowledge at the time the check
was accepted that there were insufficient funds to pay it. If evidence of
unfair or deceptive trade practices is found, examiners should consult
with the regional office and the region should consult with Washington.
Where entities other than banks engage in unfair or deceptive trade
practices, the FDIC will coordinate its response with the Federal Trade
Commission. (Refer to FIL-57-2002, dated May 30, 2002, for further
information.)
Privacy of Consumer Financial Information/Part 332
Payday lending arrangements are subject to the same information
sharing restrictions and requirements as any other type of financial
service or product provided by FDIC-supervised institutions to
consumers. The bank should ensure consumers are appropriately
provided with a copy of the bank's initial, revised, and annual notices, as
applicable. In addition, the bank should ensure that a consumer's
nonpublic personal information is used and disclosed only as permitted
and described in the privacy notice.
Safeguarding Customer Information
The Interagency Guidelines Establishing Standards for Safeguarding
Customer Information, Appendix B to Part 364, require banks to implement
a written information security program to protect the security,
confidentiality, and integrity of customer information. The guidelines
require banks to assess reasonably foreseeable internal and external
threats that could result in unauthorized uses or destruction of customer
information systems, and to design a security program to control those
risks. A bank's board of directors should approve the written program
and oversee its implementation.
Examiners should ensure the bank has appropriately addressed the
security risks in payday lending arrangements to safeguard customer
information, whether in paper, electronic, or other form, maintained by or
on behalf of the bank.
FOOTNOTES:
1 See January 31, 2001, interagency Expanded Guidance for Subprime
Lending Programs (FIL 9-2001) (2001 Subprime Guidance); January 24,
2000, Subprime Lending Examination Procedures (RD Memo No. 00-004);
March 4, 1999, Interagency Guidelines on Subprime Lending (FIL-20-99);
and May 2, 1997, Risks Associated with Subprime Lending (FIL-44-97).
2 The typical charge is $15 to $20 per $100 advanced for a two-week
period, resulting in an APR of nearly 400%.
3 Payday lenders generally use the term "rollover." Other terms used
may include extension, deferral, renewal or rewrite.
4 Insured depository institutions also may fund payday lenders through a
lending relationship. This guidance does not address such situations.
5 See section 27 of the Federal Deposit Insurance Act, 12 U.S.C. §
1831d (enacted as section 521 of the Depository Institutions Deregulation
and Monetary Control Act of 1980 [the "DIDMCA"]). The authority of
national banks to export favorable interest rates on loans to borrowers
residing in other states was recognized by the U.S. Supreme Court in
Marquette National Bank of Minneapolis v. First Omaha Service Corp.,
439 U.S. 299 (1978), in the context of section 85 of the National Bank
Act. That authority was subsequently extended to credit unions, savings
associations, state nonmember banks and insured foreign branches in
the DIDMCA to provide competitive lending equality with national banks.
6 See July 25, 2001, Interagency Policy Statement on Allowance for
Loan and Lease Losses (ALLL) Methodologies and Documentation for
Banks and Savings Associations (FIL 63-2001).
7 See June 29, 2000, Uniform Retail Credit Classification and Account
Management Policy (FIL -40-2000).
8 AICPA Statement of Position 01-6 Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, provides guidance for accounting for delinquency
fees.
9 AICPA Statement of Position 01-6 provides recognition guidance for
recoveries of previously charged-off loans.
10 Federal Reserve Board staff considered payday loans in the context
of Regulation Z, and found that they are a form of credit under the Truth
in Lending Act. 12 CFR Part 226, Supplement I, Subpart A, Section
226.2(a)(14), note 2. If the fees are finance charges, as they usually will
be, see 12 CFR Part 226.4, they must be disclosed as an APR,
regardless of how the fee is characterized under state law.