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WASHINGTON-The Federal Deposit Insurance Corporation recently issued examination guidance for financial institutions that offer payday loans due to the high-risk and nature of the product and increasing demand and product offerings. “This guidance raises the bar for banks involved in payday lending, and appropriately so, given our experience with this activity,” FDIC Director of Supervision and Consumer Protection Michael Zamorski said. “Payday lenders will be subject to special examination procedures to verify and monitor their performance. Failure to meet the standards will result in enforcement actions, which could include instructions to exit the business.” The Consumer Federation of America praised the FDIC’s action. “The payday loan industry is in for a shock,” CFA Director of Consumer Protection Jean Ann Fox stated. “While the FDIC does not categorically prohibit banks from partnering with payday lenders, the guidelines require up to dollar for dollar capitalization of loans, call any loan unpaid in 60 days a default, and brand serial loans as an unsafe banking practice.” According to the FDIC, the guidance would hold a bank’s board and management responsible for ensuring that payday lending operations, including those through third-party vendors, are operated in a safe and sound manner and comply with consumer protection laws and regulations. “Such arrangements can expose banks to heightened risk of litigation and harm to their reputation, especially where loans are originated on terms that could not be offered by the third party,” FDIC said in a statement. The guidance also focuses on concentrations of credit, capital adequacy, the allowance for loan and lease losses, and policies towards rollovers or renewals of credit, including requiring banks to write off a payday loan debt more than 60-days overdue.

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