Payday Loans: Federal Regulatory Initiatives


Publication Date: June 2006

Publisher: Library of Congress. Congressional Research Service


Research Area: Banking and finance



A payday loan arrangement permits an individual to use a personal check to get a small, short-term, cash advance. The loans are typically for $100-$500. The borrower writes a postdated check for the loan amount and a fee. The lender holds the check until the borrower's next payday, usually two weeks. This source of short-term credit can be expensive. The fee charged on a 14-day payday loan is typically $15 to $17 per $100 advanced, amounts equivalent to an APR (annual percentage rate) of between 391% and 443%. A loan can become even more expensive if it is rolled over or extended.

State laws have generally governed payday lending; some are silent while others have prohibited or restricted payday lenders. Payday loans are subject to the disclosure provisions of the federal Truth-In-Lending Act. When payday lenders attempted to partner with banks and thrifts to circumvent restrictive state laws, however, federal regulators issued supervisory guidance relating to payday loans. Depository institutions were cautioned that these arrangements introduced financial, compliance, and reputation risks. Consumer advocates are concerned that these guidelines may not provide sufficient consumer protection. They have called on Congress to examine the activities of payday lenders to see if reforms are needed to protect consumers. In the 109th Congress, several bills (S. 1878, H.R. 1643, H.R. 1660, H.R. 4866, and H.R. 5350) have been introduced with provisions addressing the regulation of payday lending. This report provides information on the practice of payday lending and an overview of federal regulation and legislation. This report will be updated as events and legislation warrant.