While the prepaid industry has been rocked by the OTS’sapparent action against MetaBank restricting new program activity,it may be easy to overlook the consumer credit effects this leadingprepaid issuer’s iAdvance product may have generated by thisaction.iAdvance, a short term loan capability (a.k.a. cash advance)that can be added as a source of load to a general purposereloadable prepaid card, was apparently called out specifically for”unfair or deceptive acts or practices” (Meta Financial Group8-K Report 10/12/10).iAdvance was one ofthe first significant hybrid credit/prepaid cards we reviewed backin 2009.
The high pricing of these products, which can also belinked to a DDA account as a source of short term funding,certainly can raise eyebrows.In the case of iAdvance, the basicpricing was $2.50 per $20 advanced, with expected payoff with thenext paycheck deposit.The National Consumer Law Center pegs thisAPR at 120 – 650 percent, depending on the actual length of theloan.By comparison, the FDIC set 36 percent as the guideline APRcap under its 2008 small dollar loan initiative.
As unappealing as these credit costs may be, these arehigh risk loans for the issuers.Responsible products can setsafeguards against chronic usage, excessive balances, and otherconsumer abuses of the products.And, in today’s economicenvironment, the potential user base has expanded with moreconsumers experiencing damaged personal credit histories,unemployment, and closed revolving credit card accounts.Few oneither the pro or con side of these products would deny the needfor short term credit that can accommodate the broadest possibleconsumer profile.
But, as of this writing, there are few details availableregarding the specifics of the OTS concerns.But rather, the lack ofdetails casts a pall over the near term outlook for shortterm/small dollar loan products.We can only hope for a swift anddefinitive resolution.The most needy consumer borrowers do deserveprotection, but they are also needy.