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FDIC Guidelines for Payday Lending

FDIC Guidelines for Payday Lending

The FDIC (Federal Deposit Insurance Corporation), has an article containing Guidelines for Payday Lending. It is a relatively complicated read, and its intended audience is not consumers of cash advance loans. Instead, it is for administrators and regulators of the payday loan companies.

Despite this, it still has interesting information for the layman. It starts with some background information, telling how payday loans are a type of subprime loan, and they are becoming more and more common. In addition, it describes how the fixed fee combined with the very short maturity results in a very high APR.

It goes on to talk about the significant risk to lenders for cash advance loans. People that need a payday loan using have significant money problems, so they may not be able to pay it back. It is even more of a risk because very little checking, such as a credit check, is done on borrowers, so they may get a cash advance even when their financial situation is extremely bad. On top of that the loans are generally not secured, with no collateral for the lender to take if the borrow defaults on the loan.

From the high risks outlined by the FDIC, we have a good idea why these companies have to charge relatively high finance fees. With the significant risk involved, higher charges are at least somewhat justified.

The article continues with relatively complicated details of procedures, safety and compliance issues. There didn't seem to be much interesting information in those sections for the typical consumer, but if you are really interested, or in the banking business, they may be worth reading.

Posted by Cash Advance Planet
May 7, 2006 3:07 pm

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