Banks may expand their short-term lending at interest rates of 120% or more as they try to replace more than $15 billion in revenue lost to regulations limiting overdraft fees.

"The smarter banks are trying to resell overdraft protection to consumers as a different product," said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Maynard, Mass.

Banks, including Cincinnati-based Fifth Third Bancorp; San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank; and U.S. Bancorp, based in Minneapolis, are already making such loans, usually from $100 to $500, at annual rates of 120% if repaid in 30 days. They are known as "checking advance products." This puts them in competition with so-called payday loan stores, which lend at similar terms to customers who generally lack credit cards to bridge the gap until the paycheck comes, according to Rowe, whose firm advises banks.

The banks do not call the advances payday loans because it is a "very tarnished, negative brand," said Rowe, who estimated that banks may lose from $15 billion to $20 billion in revenue when Federal Reserve rules take effect July 1. The rules will bar banks from charging overdraft fees at automated teller machines or on debit cards unless a customer has agreed to pay for protection against exceeding account balances.

For consumers, getting a short-term, high-interest loan from a bank might be worse than going to a payday store, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. A bank has direct access to consumer accounts, meaning its loans will be paid off ahead of food, housing or utility bills, she said.

"They're looking for ways of replacing their overdraft income," Saunders said. "Instead of pricing their products openly and up-front, they seem addicted to back-end ways of making profits." The center has represented plaintiffs in lawsuits against banks but has not sued over the loan programs, she said.

Banks caution customers that the loans are an expensive form of credit. Alternatives "may be more suitable to your long-term needs," says Fifth Third on its Web site.

At U.S. Bancorp customers using "Checking Account Advance" may borrow from $20 up to a preset limit. The fee is $10 for each $100 borrowed. Loans are repaid from the account's next direct deposit. Wells Fargo's "Direct Deposit Advance Service" works the same way and allows a line of credit up to $500. It has been offering the loans since 1994.

The advance is less expensive than a payday loan, said Wells Fargo spokeswoman Richele Messick, and the bank's policies ensure that customers do not use it as a long-term solution.

"Wells Fargo encourages all our customers to properly manage their accounts," Messick said. "Emergencies do arise, and our Direct Deposit Advance Service can help customers when they're in a financial bind."

Fifth Third, Ohio's largest lender, began offering "Early Access" loans in September 2008, before the current debate on overdraft fees and the Fed's announcement of an opt-in rule, bank spokeswoman Stephanie Honan said. The bank offers the advances only to existing customers with checking accounts in good standing. "Our product fully complies with all applicable state and federal banking regulations," said Honan.

U.S. Bancorp spokeswoman Teri Charest declined to comment.

National banks making payday-type loans unfairly compete with payday loan stores because they are exempt from state laws limiting interest rates, said Steven Schlein, a spokesman for the Community Financial Services Association of America, an Alexandria, Va.-based trade association representing payday lenders. "What the banks are doing are payday loans," Schlein said. "Let's have everybody operate under the same system."

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