Four of the nation’s largest banks — Wells Fargo, Fifth Third Bank, U.S. Bank and Regions Bank — are involved in high-interest, short-term loans that may not always be called “payday” loans but might as well be. Thus, a group of five U.S. senators have asked regulators to put a stop to the practice altogether.

Last week, Senator Richard Blumenthal of Connecticut sent a letter — also signed by Sen. Richard Durbin of Illinois, Sen. Chuck Schumer from New York, Sen. Sherrod Brown of Ohio and Sen. Tom Udall from New Mexico — to Federal Reserve Chairman Ben Bernanke, FDIC Chairman Martin Gruenberg and Comptroller of the Currency Thomas Curry, calling on them to use their authority to end the payday lending by federally regulated banks, which is already illegal in 14 states and can not be offered to active-duty U.S. servicemembers.

“These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt,” reads the letter.

To highlight the growing trend of banks offering these don’t-call-them-payday loans, Senator Blumenthal uses an example similar to the Wells Fargo Direct Deposit Advance loans we recently wrote about, in which borrowers with accounts at the bank — and who have direct deposit of wages and/or benefits already set up with their account — will take out a short-term loan that is deposited straight into their account.

Up front, the borrower pays a fee — ranging from $7.50 to $10 per $100 borrowed. The next time the borrower receives a direct-deposited payment, the amount of the loan is taken out by the bank. But if the deposited funds aren’t sufficient, the bank takes the money anyway, which can trigger overdraft fees and additional interest on overdrafted funds.

While banks and payday lenders market these loans as a short-term solution, meant to tide the borrower over until their next payday (hence the name), studies show that the average payday borrower ends up in a cycle of debt that lasts for around six months. Blumenthal points out that the typical bank payday borrower will take out 16 payday loans over the course of a year.

In the letter, the senators urge the Federal Reserve, FDIC and Comptroller of the Currency to stop federally regulated banks from engaging in payday lending and to prevent further expansion of payday lending before this predatory practice spreads.

From the letter:

“Bank payday loans increase the ranks of the unbanked by making checking accounts unsafe for vulnerable consumers, a result clearly inconsistent with a safe and sound banking system. And payday lending poses serious reputational risks to any financial institution engaging in it… As the agencies responsible for the safety and soundness of the financial institutions you supervise, you are compelled to stop them from making payday loans and to prevent additional banks from beginning to do so. We urge you to take meaningful regulatory action that ensures that no bank, regardless of its prudential regulator, structures loans in a way that traps its customers in a cycle of high cost debt. Our states’ residents, and consumers everywhere, deserve better from our nation’s financial institutions.”

The Center for Responsible Lending recently wrote to the Office of the Comptroller of the Currency asking it to lower Wells Fargo’s Community Reinvestment Act rating in light of the bank’s continued offering of these loans. In response to the Senators’ letter, the Center writes, “We commend the five senators for taking a stand against pernicious lending that preys on vulnerable consumers without considering their ability to repay.”

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