Is TARP supposed to support all Lending, or just helpful lending?

Think about what kind of implicit statement is made by a policy that provides taxpayer monies to create liquidity for a privately-held bank to provide funds so that income tax preparers can provide refund anticipation loans to consumers.  What are we doing if we borrow money so that a business can write loans to consumers to get their tax credit-driven refunds 10 days earlier? Why do we need to pay a private bank to speed up refunds of the Earned Income Tax Credit?  Is that efficient?

This is the process that is occuring when the US Treasury Department’s Troubled Asset Relief Program (TARP) invests $181 million in Pacific Capital Bancorp (PCBC), a Santa Barbara, California lender.  PCBC supplies money to Jackson Hewitt and other tax preparation services to fund refund anticipation loans (RALs).  The loans are short-term advances that bear a high interest rate.   A high percentage of RAL users get refunds through the Earned Income Tax Credit (EITC).

The EITC, created by Nixon, provides a refundable credit to workers.  It is designed to be a lean and direct means of supporting working families.

About Pacific Capital

PCBC is a small institution.  Yet their RAL business funded almost $6 billion in RALs in 2007 (10-k, pg. 101) .  In each of 2006 and 2007, it collected more than 20 percent of its interest income from its short-term positions on RALs.  They earned $118 million on RAL interest,$46 million on refund transfer fees, and another $41 million on the sale of RALs to outside investors, during 2007.   That is a big portion for a business.  Actually, the RAL segment out-earned the entire bank in 2007, where total income was just $100 million.  So, PCBC depends on RALs.  All the more, considering that RALs are a line of business that runs its course in just two months of the year.

All of these facts are given to support the conclusion that you cannot put dollars into a bank like Pacific Capital without touching RALs.  The bank is dependent upon RALs – without this business, they would have lost money in 2007.  It makes up over twenty percent of their interest income.  It is a small community bank with about $6.7 billion in assets, and they annually provide about $6 billion in RAL funds.

It is a business impacted by the credit freeze.  Writing the checks to give out all of these advances puts quite a strain on PCBC in January and February.  Normally, they seek outside debt to help keep their cash flows stable.  In 2007, PCBC securitized the sale of  $1.69 billion in RALs.  They retained another $4.15 billion on their balance sheets. This year, that outside debt is not as available.

Using TARP to fund RALs

With TARP, though, the money can keep flowing.

The sources of the money for the TARP program are entirely public, and that nature means that  the uses of the money should be held to different and higher standards than would private capital given to banks through shareholder investment. The source of the money is either from taxes paid to the federal government or from Treasury bonds sold by the government to investors.  In the end, taxpayers fund the process.

The goal of TARP is to jumpstart the economy by stimulating lending.  It implies that all lending is a “good.”  This makes some sense, but history nuances that belief.  Is all lending “good?”  What about predatory lending?

The logic of the Community Reinvestment Act is that banks and depository institutions should meet the credit needs of the communities where they are located.  Normally, those regulated banks are given credit by their regulators for finding ways to serve low-income borrowers, or borrowers in low-income neighborhoods.

“Given the generallyl higher income demographics in the Company’s market areas, the Company does not have many opportunities to make direct investments in low-income housing,” says the most recent 10-k filed by Pacific Capital. Ah, but PCBC does make loans to low-income borrowers through its RAL program.

RALs are distributed to borrowers across the country, and go to people who are largely low-income.

On Wednesday January 14th, a 5-member bipartisan panel will convene  Congressional hearings to provide oversight of TARP money.