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When you hear the expression payday loan, you may think of one of those strip mall storefronts, you know, over by the pawn shop. They charge people high fees to borrow small amounts of cash until the next paycheck, sometimes ridiculous interest rates. But it turns out it's not only the little storefronts operating this way. Here's Robert Benincasa of NPR's investigations unit.

ROBERT BENINCASA, BYLINE: They're low-dollar short-term loans and they carry the equivalent of triple-digit annual interest rates. They're like traditional payday loans, but instead of a forlorn-looking storefront with a garish neon sign, it's your familiar neighborhood bank doing the lending.

A small but growing number of banks, including some major players, have been offering the loans, calling them deposit advances. That's at least until bank regulators stepped in November 21 and put new restrictions on the loans, limiting their frequency and requiring closer scrutiny of customers' ability to pay them back.

DAVID SILBERMAN: Many of these loans are taken on a nearly continuous basis.

BENINCASA: That's the Consumer Financial Protection Bureau's David Silberman testifying at a Senate hearing this summer. He and other regulators worry that deposit advances can lead consumers into a cycle of debt. Terms vary by bank, but basically here's how it works: You borrow the money, and in return you give the bank the right to go into your account and pay itself back, plus a fee, as soon as your next direct deposit comes in.

SILBERMAN: For far too many consumers, payday and deposit advance loans are traps. Returning every two weeks to re-borrow the same dollar amounts at a high cost becomes a drag on the financial well-being of consumers already facing income shortfalls.

BENINCASA: Some states have fought storefront payday lenders, in some cases banning them from doing business. Take Arkansas, for example. Hank Klein, a retired credit union president there, recalls that in 2008 the state had nearly 300 payday lenders.

HANK KLEIN: And since July of 2009, we don't have any storefront payday lenders in Arkansas.

BENINCASA: Klein, who became an anti-payday loan activist, says it's all because a court ruling allowed the attorney general in Arkansas to enforce a state interest rate cap.

KLEIN: They've been run out of the state by the attorney general. Well, now the banks come in and doing the same thing. They operate under federal law, so the attorney general can't do anything.

BENINCASA: Banks are not only regulated differently from storefront lenders, they're supposed to be different. Banks trade on reputations of stability and fairness. That's what led one California woman to bypass the storefront lenders and visit her banker.

ANNETTE SMITH: I'm 70 years old - going to be 70 years old in January. I am a widow and a disabled senior.

BENINCASA: That's Annette Smith. About five years ago she needed money to fix her truck and asked her local Wells Fargo banker for a loan.

SMITH: And he said we don't loan money any less than $5,000. But we do have a service that's called a direct deposit advance. And you can go home and access that on your computer and you can borrow up to $500.

BENINCASA: So she did, and $500 appeared in her account. She qualified for the loan not because she had good credit - she didn't - but because she had recurring direct deposits. In her case, Social Security benefits of about $1,100 a month. It turned out to be a very costly arrangement. Smith ended up taking out repeated advances, 63 of them over five years, and paying almost $3,000 in fees.

She knows now that the fees amounted to an annual interest rate of 180 percent.

SMITH: If I knew that it was 180 percent interest, it probably would have caught my attention, instead of $50.

BENINCASA: Why didn't Smith know her interest rate at the time? Well, in part because the law doesn't require banks to calculate it. The loan is based on a fee, which might be 10 percent. The annual interest rate varies based on how long the loan is outstanding. So banks typically talk about fees and not interest and they don't like to call deposit advances loans.

Listen to this exchange between Senator Joe Donnelly, a Democrat from Indiana and bank lobbyist Richard Hunt at that Senate hearing last summer. Hunt represents four of the six banks that make deposit advances.

SENATOR JOE DONNELLY: Do you think that it's appropriate for some of the most respected banking names to be making 200 percent-plus off of their customers?

RICHARD HUNT: First off, I do not accept that it's 200 percent, because it's a line of credit. It's not a loan. If we were charging 200 percent for a home mortgage, I'm with you. That's too much. This is not a loan. This a line of credit.

DONNELLY: You know that's not what we're talking about.

BENINCASA: Hunt says deposit advances to help consumers when they run short of cash, and that their fee disclosures are clear. Still, taking action were two big bank regulators, the Comptroller of the Currency and Federal Deposit Insurance Corporation. Immediately affected are four of the six banks known to be offering deposit advances: Wells Fargo, Guaranty Bank, U.S. Bank and Bank of Oklahoma.

Two others, Fifth Third and Regions Bank, are regulated by the Federal Reserve, which did not issue similar restrictions. But the Consumer Financial Protection Bureau has indicated it will take some action as well. As for Smith, the California grandmother, she has become an outspoken critic of deposit advances since her experience, even testifying before Congress.

NPR contacted Wells Fargo about her loan and bank spokeswoman Richele Messick declined to discuss the particulars of Smith's case. But she said Smith could have qualified for a payment plan free of charge. Nonetheless, in Smith's eyes, her bank violated her trust.

SMITH: The bank is where you go and you wouldn't be taken advantage of, you would be helped. And because they called it a service, and they called it a fee, I trusted them.

BENINCASA: After Smith got the attention of a local advocacy group, Wells Fargo agreed to forgive her last advance, if she agreed never to take another one. But she's still out the $3,000 she paid to borrow the money. Robert Benincasa, NPR News.

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