A customer applies for a payday loan in Sacramento. (The Sacramento Bee/ZUMA Press)

Increasingly, mainstream banks are offering products similar to payday loans — short-term, high-interest loans secured by a pending paycheck — according to a consumer group that called on the Office of the Comptroller of the Currency to stop the practice.

Banks including Wells Fargo and U.S. Bank are giving customers advances on their paychecks, typically for a fee of $10 per $100 borrowed, which translates to an annual percentage rate of 120 percent or higher, if repaid in under one month, according to a report by the Center for Responsible Lending.

[Economy1] “These products ensure that many borrowers will end up trapped in cycles of debt,” the report stated. “Unless the OCC and other bank regulators take action with regard to bank payday loans, these products will likely proliferate throughout the banking industry as financial institutions look for new sources of fee income.”

In recent years, several states have cracked down on payday lending, which typically operates out of simple storefronts. Fifteen states and the District of Columbia prohibit triple-digit interest rates on loans to consumers, according to the Center. But national banks are subject to regulation by the OCC, a part of the U.S. Treasury Department, and thus evade the limits. Consumer advocates are particularly concerned about Wells Fargo extending the reach of the products through its recent acquisition of Wachovia Bank.

Wells Fargo defended its loan product as a service to existing customers caught in an emergency, whose high cost is fully disclosed and complies with state and federal law.

“Wells Fargo does not consider our Direct Deposit Advance Service ‘exploitative’ nor is it a ‘payday loan,’” spokeswoman Richele Messick said in an email response to questions. “We reach out to customers at all stages of their usage of the service, reminding them of the expense of this product and encouraging them to seek less expensive alternatives.”

A U.S. Bank spokeswoman didn’t respond to requests for comment.

In 2000, the OCC stopped national banks from partnering with payday lenders, the Center said, calling on the agency to crack down on banks that are now directly making these kinds of loans. The OCC should also gather information on bank customers’ usage of these products and the impact on minority communities, which are disproportionately affected by payday lending, the report said.

The OCC doesn’t have a problem with national banks offering this type of loan, spokesman Dean DeBuck said.

“It’s not a payday loan. It’s available through banks and bank branches. It’s something you don’t get at a storefront,” DeBuck said. “This is a product that is offered to customers and they don’t have to use it. If it works for them, fine. If it’s not suitable for them, they can find something else.”

Here’s how the Wells Fargo and U.S. Bank products work, according to the Center. A banking customer who is signed up for direct deposit of at least $100 every 35 days may take an advance of $500 or half of the monthly direct deposit income, whichever is less. The funds are automatically repaid from the incoming direct deposit funds or existing balance.

A key problem is that the bank doesn’t evaluate the customer’s ability to repay the loan, as it would with a mortgage or consumer loan, Center spokeswoman Kathleen Day said.

“It’s not a good idea to lend money to someone that they can’t afford to repay,” Day said. From the customer’s perspective, “it would be better to take a $100 cash advance and pay it back over the year because you’d only be paying a double-digit APR.”

The OCC is primarily concerned with the safety and soundness of national banks, which actually improves when the banks make more money off their customers, noted David Min, associate director for financial markets policy at the Center for American Progress, a progressive think tank.

“The prudential regulators don’t necessary care as much if the consumers are being misled,” Min said. “They’re not always going to be a good consumer protection regulator.”

In a separate report, the Center said overdraft programs at national banks are among the worst in the industry and called on the OCC to curb abuses.

“Most national banks have adopted automated overdraft systems through which the bank routinely lends accountholders the money to cover any transaction — including those conducted with debit cards that customers often would prefer not to be covered,” the report said. “Banks charge a fixed fee averaging about $34 per incident and engage in a number of abusive practices that help to maximize overdraft fee revenue.”

The Center’s review of the 13 largest national banks, which hold about 80 percent of the $4 trillion deposits at U.S. national banks, found that the banks automatically enroll customers in the highest-cost overdraft program available, despite having lower-cost alternatives, and allow multiple overdraft fees to be charged in a single day.

In response to concerns about overdrafts on debit card use, the Federal Reserve approved new rules that take effect in July, requiring banks to opt in customers to any overdraft fees charged on ATM withdrawals or one-time debit card transactions. Bank of America earlier this month announced it will block any debit card transactions that would overdraw a customer’s account, to avoid charging an overdraft fee.

Katherine Reynolds Lewis is a Washington-area writer specializing in finance, work and family issues, whose work appears in the Fiscal Times, MSN.com, Washington Post Magazine and Parade.

After examining records for the more than 80 percent of payday borrowers who take out multiple loans each year, the Center Responsible Lending, a consumer advocacy group, found that half took out new loans either immediately or, depending on the state, at the first opportunity the law allows. Within one week, 78 percent of multi-loan borrowers had returned for another round. Within 30 days, the figure jumped to 94 percent.

The fees associated with the repeat loans, CRL found, amount to $3.5 billion each year.

“Rather than serving as a bridge to get a borrower past a financial emergency to their next payday,” Leslie Parrish, senior CRL researcher and co-author of the report, said in a statement, “the data clearly shows payday loans work more like a shovel into deeper debt.”

The issue is on Congress’ radar, with at least two proposals to rein in the industry floating around Capitol Hill. One of those, as we pointed out a few months back, is a loophole-riddled bill that would effectively endorse payday lending as a legitimate business practice, while capping the annual interest rates for payday loans at the equivalent of 391 percent. The other aims to kill the industry altogether.

But whether Congress takes up either this year is still very much in question.

Payday loans — advances that are to be repaid on payday — are so burdensome and so pernicious that in 2006 Congress effectively banned them for military families. Given all the problems workers face right now, Congress should extend this protection to everybody.

In the House, Democrat Luis Gutierrez (Ill.) is pushing legislation to cap rates on payday loans at the equivalent of 391 percent per year. In the Senate, Democrat Richard Durbin (Ill.) would cap the rate at 36 percent — in effect killing the industry, which says it can’t sustain profits at such interest levels.

The question now becomes: Will Democratic leaders stick their necks out to take on the powerful payday lenders for the sake of consumers, or will it bow to the $50-billion-a- year industry under the guise of preserving borrowers’ option to pay 391 percent? Congress plans to take up several finance reform packages shortly. We could know the answer soon.