Despite the stigma attached to payday loans, the president of Goleta National Bank in California is anything but embarrassed about funding these short-term, high-rate loans.

Only six months after it got into the business, $340 million-asset Goleta estimates that these loans could account for 20% of its profits by next year.

"Major banks ought to take a much closer look at this product and start doing the same thing I'm doing," said Lew Stone, president and chief executive officer. "Banks need to get in there and start competing for the business."

Roughly a dozen banks are working with payday lenders, which generally advance money against a customer's forthcoming paycheck. But the business is controversial, criticized for charging excessive interest rates, piling up fees by repeatedly rolling over loans, and threatening criminal action for unpaid loans.

Payday lending is a fast-growing industry ripe for bank penetration. About 8,000 companies will make loans totaling $9.2 billion in the category this year - a volume the investment banking firm Stephens Inc. in Little Rock, Ark., said it expects will grow to $20 billion by 2004. Income from such loans will double, to $3 billion, in this period, Stephens predicted.

The industry's growth is "phenomenal," said Gerald Lewis, an Atlanta-based consumer finance analyst at Stephens. "A lot of banks are starting to test the waters."

Some banks involved in payday lending have tweaked them in an attempt to avoid criticism. For instance, Union Bank of California plans to convert some customers of Nix Check Cashing to bank account holders. It has taken a 40% equity position in Navicert Financial Inc., the privately held parent that operates 47 Nix Check Cashing offices in Southern California.

Wells Fargo & Co. account holders can get loans of $50 to $300 through Direct Deposit Advance. The banking company charges $5 for every $100 borrowed, far less than what most payday lenders charge.

Though large banks with deeper pockets can make payday loans independently, community banks interested in the business are creating partnerships with vendors. The advantage is twofold: numerous sites and extended hours, including nights and weekends. Without a storefront partner, "you need to be a larger bank with multiple branches to be effective," said Murray S. Gorson, president of Eagle National Bank in Upper Darby, Pa.

Eagle makes its payday loans through 250 of Dollar Financial Group's 765 sites and charges $15 to $20 for every $100 borrowed, depending on the state. It entered the business four years ago and now makes roughly $5 million a year in payday loans. They supply nearly half the bank's earnings, Mr. Gorson said.

Volume could be much higher, he said, but $52 million-asset Eagle refuses to do business with payday lenders that roll over loans too often. "These people have it in their business plan to roll over loans as many times as possible. That's something we won't go for," Mr. Gorson said. Eagle recently halved, to four, the number of times its payday loans may be rolled over.

Goleta National's partner is Ace Cash Express of Irving, Tex. In addition to 1,000 offices nationwide, the company has a "good corporate image," Mr. Stone said.

On a $100 loan, Goleta charges $15 - for an annual rate of 390%. But it insists on a number of conditions. For instance, loans may only be refinanced three times and only after a borrower repays 5% of the principal. Also, borrowers get 24 hours to rescind a loan and a five-day grace period on repayment deadlines.

Mr. Stone said payday loans are the best alternative for people temporarily strapped for cash. "Customers can never get in a position where they owe me a lot of money - that's what makes it a really good consumer product," he said.

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