Each depositor insured to at least $250,000 per insured bank

Payday loans are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment. Payday loans are usually priced at a fixed-dollar fee. Because these loans have such short terms to maturity, the cost of borrowing, expressed as an annual percentage rate, can range from 300 percent to 1,000 percent, or more.

Federal law authorizes federal and state-chartered insured depository institutions making loans to out of state borrower's 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 the usury limitations imposed by the state laws of the borrower's residence. Interest rate exportation has allowed credit card issuers to provide a uniform, nationwide rate to their cardholders.

A handful of banking institutions have formed business relationships with payday lenders. The partnerships between payday lenders and banks rely on interest rate exportation. A bank forming such a business relationship is accused by some consumer advocates of "renting" the bank's charter to the payday lender to avoid usury and other state consumer protection laws.

Even though legal for state nonmember banks, institutions face increased reputation risk when they enter into certain arrangements with payday lenders, including arrangements to originate loans on terms that are less favorable to the borrower than would be permitted under state law. Therefore, the FDIC's position has been that institutions should implement risk management practices to identify, measure, monitor and control these risks. FDIC guidelines address appropriate actions for managing risks associated with third parties who offer payday loans.

The FDIC guidelines include strict requirements for managing third party relationships and agreements; maintenance of higher capital levels—perhaps up to dollar-for-dollar capital—and sufficient loan loss allowances for payday lending portfolios, depending on the level and volatility of risk; limits on the total amount of payday loans an FDIC-insured institution may extend as a percentage of its capital; restrictions on "rollovers" including an appropriate cooling-off period; limits on the number of loans per customer allowed within a designated time period; requiring banks to charge off certain loans; and CRA downgrades for discriminatory or illegal credit practices.

The OCC and the Federal Reserve have largely informally banned payday lending by their banks. While this difference from FDIC policy has led to congressional inquiries, legislation to either restrict or expand the federal role in regulating the payday industry is not expected in the near future.