Dictatorial Insinuations

Lately bank assessments have released a number of institutions that are involved in payday lending and have failed to properly assess and control the risks associated with payday lending. Therefore the federal banking agencies have taken hasty action to address the recognized problems.

Here’s an example: during September of 2002, the FDIC entered into an official infliction action with one of its own state nonmember institutions that were involved with payday lending. The FDIC required them to, in part, strengthen their risk management practices that are associated with the payday lending they do. Also to considerably expand the capital to cover the greater risks associated with the payday lending activities. The Office of Comptroller of the Currency (sounds really strange, I know, but they pretty much just regulate the nation’s banking systems) also has recently entered into official agreements with several of the national banks. In some cases it is requiring the institutions to leave the payday lending market as a result of their failure to suitably manage the attendant risks. I think this was a wise decision on the OCC’s part because not only is it costing more money to have these high risks involved in the banks and then the risk becoming a statistic, but it is also causing the business to lose some of their customers resulting in a loss of production and commerce.

These depository institutions that are involved in the payday lending should clearly implement some sort of risk management programs into their systems. It should be a program that appropriately identifies, measures, monitors and controls the risks that are related with payday lending. The FDIC has recently created draft guidelines for payday lending that would apply to every institution that offers payday programs that are also under the FDIC’s supervision. These guidelines pretty much explain the FDIC’s expectations for prudent risk management practices for every payday lending activity, with special focus on capital, allowance for loan and lease losses and loan classifications. The draft the FDIC has created also addresses other guidelines regarding recovery practices, income recognition and other managing risks associated with third-party relationships. This also includes compliance with consumer protection laws.