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Bank Notes: Metabank, ITT Tech

Adam Rust's picture

Posted May 27, 2015

The Federal Reserve releases MetaBank: Yesterday, the Federal Reserve announced that it had ended the 2011 consent order placed upon the bank by the Office of Thrift Supervision. The order penalized MetaBank for activities related to its prepaid cards and in particular to its i-advance loan product. The i-advance was a short-term line of credit available to some account holders of prepaid cards that were issued by the Storm Lake, Iowa bank. In the period after the order, program managers reduced or in some cases ended their relationships with the issuer. The consent order came down just days before the initial public offering of NetSpend common stock. NetSpend decided to put off the IPO. Subsequently, it embarked upon an issuer diversification strategy aimed at finding multiple bank partners for its branded prepaid cards. MetaBank's shares have rallied in the last few months, possibly due to perceptions by investors that this moment was coming. 

But Things are Brutal at ITT Tech: The for-profit school faces a lawsuit from the Securities and Exchange Commission. The SEC says that the company concealed the performance of the loans it backed. What is truly surprising is the method that ITT apparently employed. The company chose to make payments on delinquent accounts.  The advantage was one of book-keeping: if enough of the loans defaulted, then ITT had to compensate the loan issuers. Because the performance was so poor, ITT became obligated for tens of millions of dollars in guaranteed payments.

The loan programs were known as PEAKS and CUSO. Those accounts were kept off of ITT's balance sheet. While ITT was not holding the loans directly, it still was obligated to guarantee some of the losses on those pools. 

According to the SEC, many private student lenders backed away from the for-profit sector. As a result, ITT developed a "temporary credit" product that was designed to balloon at the end of the academic year. But extending that much credit began to crimp ITT's cash flows. The company developed two partners (PEAKS and CUSO) which allowed the for-profit school to take those temporary loans off their balance sheet. 

The CUSO program consisted of private student loans originated to ITT students by a group of credit unions. The program began in 2009 with participation from seven credit unions. CUSO offered adjustable-rate loans at prime plus 10.5 percent. The credit unions also garnered origination fees of ten percent, according to the Credit Union Times.

In 2010, ITT created PEAKS. PEAKS established a trust subsidiary that made loans to students from cash accessed by a bank through the sale of $300 million in notes. PEAKS charged 11.5 percent plus prime. Since 2010, the prime rate has been 3.25 percent.

ITT guaranteed the performance of those loans. 

The SEC is suing because of what these obfuscations meant for ITT's shareholders. According to the SEC, ITT reported $70.9 million in income for the nine months ending in the 3rd quarter of 2013, when it should have said that it lost $59.95 million.