Tired of being buzzed into a storefront encased in bulletproof glass, Carl Martineau found a more dignified place to get a cash advance on his Social Security checks: a Berkeley branch of Wells Fargo Bank.

To California residents who just cannot make ends meet, the bank's polished decor looks so much more inviting than the gritty payday loan shops that offer bruising triple-digit interest rates in the state's poorest neighborhoods. However, mainstream financial institutions are increasingly peddling similar loans.

In California, payday lenders charge a 460 percent annual interest rate for a two-week cash advance on a borrower's pay or benefit check. The terms at major commercial banks are only slightly better -- an average of 365 percent for a 10-day cash advance.

"People who might know to stay away from payday lenders think that if a bank is offering it, it must be safe," said Lauren Saunders, managing attorney for the National Consumer Law Center. Yet "a bank payday loan has all the same problems a traditional payday loan has. You're getting sucked into the same debt trap."

Bank officials say low-income customers at times desperately need the cash advances. But they emphasize that they do not advise repeat borrowing because of the admittedly high cost of the product -- which banks say they do not heavily promote.

Yet Martineau, who lives in his Honda Civic and has relied on as many as five payday loans at a time from traditional shops, sees the bank as a new salvation. He has arranged his first Wells Fargo advance to begin in December.


"Payday places have a lot of stigma. You really feel like you're at the bottom of the barrel," said Martineau, 59, who has struggled with manic depression most of his life. "Going to the bank is a lot more dignified. You don't feel so ostracized."

Not subject to bans

Last month, the Bay Area News Group reported on California's proliferation of payday lenders and the powerful lobbying industry fueling their success. Although 17 states have driven the lenders out of business, mom-and-pop outfits and national chains have attracted hundreds of thousands of new California customers, while donating to politicians now pushing an industry-backed bill to expand lending.

Mainstream banks avoid the "payday loan" title, perhaps because of the stigma. They call their transactions "advances" on direct deposits and argue that they're not subject to the bans in a variety of states because national bank standards override state laws.

The banks also lend to U.S. troops, using a loophole in a 2006 federal law that bars payday lending to service members at rates higher than 36 percent. Congress passed the law after a Pentagon report described payday loans as "predatory" and a threat to national security for ravaging service members' assets.

Little publicly available data exists on the scope of bank payday-style lending, in contrast with lending by non-bank outlets, which reached $3.1 billion last year in California. However, federal regulators are starting to pay more attention.

In 2011, Regions Bank became the latest big bank to begin offering payday loans in recent years, joining Wells Fargo, U.S. Bank, Guaranty Bank and Fifth Third Bank: All offer payday-type loans in states that ban triple-digit lending in storefronts.

Georgia made payday lending a felony subject to racketeering charges for non-bank payday lenders, but Guaranty Bank offers a similar loan in that state. In Ohio, where voters enacted a payday loan interest rate cap of 28 percent, Fifth Third Bank's "Early Access Loan" has a 520 percent annual percentage rate for loans taken a week before payday.

Easier to borrow

Banks have also made payday advances a lot more convenient. They can be arranged online or by phone 24 hours a day, seven days a week.

Wells Fargo spokesman Ruben Pulido described his bank's Direct Deposit Advance program as "designed to help people that have an emergency situation, something that's short-term or unexpected, like a car repair." The high-cost loans are "not intended to solve long-term financial needs," he added.

Wells Fargo customers who have a checking account and a recurring direct deposit can borrow as much as half of their monthly earnings, or a maximum of $500. At most banks, fees average $10 per $100 borrowed. Wells Fargo charges $7.50 per $100. Non-bank payday lenders charge $15 per $100, but under California law they can only lend as much as $300 at a time.

Officials at the bank would not reveal how many loan clients it has, but said customers who use payday advances seem satisfied. "People say they have a sense of security that they're going to pay the full amount on their next deposit," Pulido said, "and they don't have to carry it on their credit card."

But there are signs of hidden distress. Under bank terms, loan amounts are automatically deducted from the customer's next direct deposit -- even if that results in overdraft fees.

"They get first cut of your income -- whether it's wages or public benefits -- before you pay for food, rent or medical expenses," attorney Saunders said.

Studies of borrowing patterns show the vast majority of customers are so broke that once they take out a first loan, it almost always leads to more loans. That piles fee upon fee until significant portions of the borrowers' already-low income goes to the lender, not to household bills.

Soaring interest

In an analysis of bank payday loan customers, the Center for Responsible Lending reported in July that the loans averaged 10 days.

Because the fees are a fixed percentage of the amount lent, the shorter the loan period, the higher the interest rate. While a monthlong loan carries an interest of 120 percent, for example, a 10-day loan has an interest of 365 percent.

According to the center's report, payday borrowers took out an average of 16 loans in a year; some borrowed more than 35 times. Social Security recipients were more than twice as likely to use the loans as other bank customers.

Consumer advocates warn that banks trap customers by downplaying annual percentage rates -- the yardstick that calculates fees and interest measured over a year. The APR is a central consumer protection of the 1968 Truth in Lending Act because it allows borrowers to weigh one loan against another.

When they approve payday advances, banks do not measure the borrower's ability to repay the loan, other than determining that the customer has direct deposit of a check.
Banks do acknowledge the hazards of repeat borrowing.

U.S. Bank spokeswoman Teri Charest said her bank provides account advances to only "a very small percentage" of customers. After three months, they're contacted "to see if there's a better alternative for their credit needs," she said. And after nine consecutive months, the bank imposes a three-month "cooling-off period."

Piece of the pie

Despite the warnings, more banks are being pushed by industry consultants to join the market as a way to offset lost revenue from new federal regulations that limit overdraft fees. Representatives of Fiserve, an industry software provider, pitch the small-dollar loan market to banks as "a very compelling revenue opportunity" -- and a way to "make some real money."

Jean Ann Fox, director of financial services for the Consumer Federation of America, noted the trend: "The banks said, 'Look at all that money the payday lenders are making off of our customers; why should we share with them? Let's get it ourselves.' "

The U.S. Office of the Comptroller of the Currency, which supervises 1,500 federally chartered commercial banks, now is drafting guidelines that will direct bank examiners to determine whether payday advances are resulting in consumer abuse.

Fox said so far federal overseers have failed to take meaningful action. That, she added, fuels the larger industry.

"To the extent that banks get away with this scot-free has become a lobbying point" for payday lending shops, she said. "It helps undermine state efforts to police and curb the high-cost, small-dollar loan market."