Bank open to using TARP money for Refund Anticipation Loans

Pacific Capital Bancorp (PCBC) indicates that its $181 million TARP allocation will give it more liquidity, and provide alternatives for the bank to keep funding to its refund anticipation loan (RAL) business.

Check out this transcription of PCBC’s last earnings call, on Nov. 21st, with investors:

Julianna Balicka — Keefe, Bruyette & Woods

I have two quick questions on RAL and I’ll step back. The $4.5 to $5 billion funding that you could potentially do on balance if all other methods fail, does that include your TARP capital or does your TARP capital funding change the game that you can now do more on balance sheet?

Stephen Masterson, CFO, PCBC

The TARP program obviously helps us in a lot of regards. We want to use that TARP money for the purposes that it was intended and that is to continue lending in our marketplace, to continue the economic viability in our marketplace to strengthen our banking infrastructure. We didn’t take the TARP money to increase our RAL program or to build our RAL program, but it certainly helps our capital ratios.

RALs are short-term advances made to people filing their tax returns.  Instead of waiting for their refund, a RAL allows a local tax preparer to give the consumer their money by the next day.  If a consumer uses electronic filing, wait times for refunds average about 11 days.

PCBC does not provide tax preparation.  Instead, they act as the funder to the independent tax preparers.  Those tax prep businesses submit the documentation to PCBC.  Pacific Capital contacts the IRS to make sure that the filer has no outstanding tax liens, and then distributes cash to the tax prep business.  The IRS essentially provides free underwriting for this business.  PCBC takes 3.5 percent of the refund amount for its business. On a typical return with a refund, that is a fee of 40 to 60 dollars.  There are other fees borne by consumers, though, including fees for depositing the refund or for creating a check.

PCBC takes some of the loans and sells them to third party investors through a securitization process.  This provides liquidity for a business that runs hot and cold, with lots of volume from mid-January until March 1st, and then a trickle for the remainder of tax season.  The credit crisis has curbed the demand for these securities, so had Treasury not stepped in to fund this market, then there might have been less supply of RALs.

PCBC uses a lot of insider lobbying to keep their RAL business alive.  Recently, PCBC got Business Wire to write a glowing puff piece about its business.  In their latest 10-k, they also tell analysts that “they (Obama campaign) understand the program much better today than they did yesterday through the education that we’ve done.”  That is consistent with past years, when PCBC has hired Ernst and Young to lobby Republicans and McDermott Will & Emery for Democrats in working to keep the debt indicator.

“We have two of the probably best lobbyists and analysts in Washington as our advisors,” said CEO George Leis, “the Promontory Group with Gene Ludwig and [Ian Wise].”

The presence of  Eugene Ludwig, former Comptroller of the Currency and President of the Promontory Group (“can help troubled institutions deal with regulators”), could undermine genuine efforts by consumers groups to represent the needs of working Americans.

This is a curious use of tax payer money.  Whereas the IRS debt indicator has played a part in RAL underwriting for some time, direct funding by the government is a new low.  Senator Daniel Akaka (D-HI) has been a constant opponent of the debt indicator.   His Taxpayer Abuse Prevention Act, currently tabled in Finance, would elminate the debt indicator.  Barney Frank (D-Ma) intends to hold hearings on the sustainability of lending created by TARP.  This seems like an egregious example of TARP money used detrimentally.