Why it matters

Some bank vendors may cautiously smile when the FDIC makes a point that providing accounts and other services to payday lenders is fine, the Federal Deposit Insurance Corporation (FDIC) told banks by reissuing an earlier advisory with some tweaks. "Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws," the regulator wrote in FIL-52-2015. The FDIC's earlier guidance – which emphasized the risks and problems of servicing payday lenders—does not apply to services such as deposit accounts or extensions of credit, the FDIC explained. Whether or not banks are comforted by the new advisory remains to be seen.

Detailed discussion

In 2005, the Federal Deposit Insurance Corporation (FDIC) released FIL-14-2005, guidance on payday lending for banks making such loans directly or through third parties that established the regulator's expectations for prudent risk management practices, covering safety and soundness as well as consumer protection.

Payday lending remains a hot-button topic in both industry and government circles after lawmakers challenged the Department of Justice's (DOJ) Operation Choke Point, claiming it had unfairly targeted payday lending with the help of regulators such as the FDIC using the examination process to direct banks away from the industry. FIL-14-2005 has been cited as one of the examples of the regulator's efforts to discourage banks from working with payday lenders.

Although an internal investigation cleared the agency of any wrongdoing in relation to Operation Choke Point, the FDIC was named as one of several defendants (including the Office of the Comptroller of the Currency and the Federal Reserve Board) in a suit alleging the regulators improperly teamed up with the DOJ.

In an effort to remediate some of the perceived antagonism by the agency toward payday loans, the FDIC reissued FIL-14-2005 in FIL 52-2015, "to ensure that bankers and others are aware that it does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders," the regulator explained.

The changes to the earlier advisory are minor. As amended, the General Examination Procedures section of the guidance now reads: "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. This guidance also does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders."

In addition, a footnote in the section on Significant Risks reiterates that the "guidance applies only to banks making payday loans. It does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders."

The FDIC emphasized that its position on payday lending was neutral. "Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws," the regulator said. Banks are still advised to solicit the views of their examiner contacts before establishing any new payday lender relationships.

To read FIL-52-2015, click here.