Review: TARP Money for RALs at Pacific Capital

Pacific Capital Bancorp (PCBC) got $181 million in TARP funds in November.  This California firm includes Santa Barbara Bank & Trust.  Santa Barbara Bank is one of the four banks in the United States (JP Morgan, HSBC, and River City are the others) that provides funds for Refund Anticipation Loans (RALs), through its subsidiary SBBT RAL Funding Corp.

RALs are something that you may never have heard about, unless you have a very high discount rate.  They are very expensive, but many people get them because they want to put their hands on cash as soon as possible during the tax season.  A typical RAL will expedite a return by nine days.  Filers get their refund back the next day, as opposed to two weeks from the date of their tax completion.  RALs go to people that get refunds.  And, among those refund getters, a great percentage of them are people getting the Earned Income Tax Credit.  The EITC, created during the Nixon administration and praised by Reagan (“the best anti-poverty, best pro-family…measure to come out of Congress)is a relatively cost-effective way of delivering relief to families.  It only goes to filers with earned income, and it phases out for people with incomes above approximately $42,000.  For single filers, it phases out after about $13,000.

RALs and Pacific Capital

Enter Pacific Capital.  This is a bank that hardly serves low-income folks.  In their 10-k, they acknowledge how much trouble they have meeting their CRA obligations:

Given the generally higher income demographics in the Company’s market areas, the Company does not have many opportunities to make the direct investments in low-income housing that are required for the Bank to comply with the provisions of the Community Reinvestment Act (“CRA”).

But, here’s a bank that is in a well-off area, but the catch is that with all of that money, it can’t find a way to produce a profit without bearing down on low-income folks in far-away places. The reason that is a valid statement is found in the company’s earnings report, when broken down by business segments.

Ral originations amounted to about 80 percent of assets (and about nine times equity!) in 2006 and 2007 (2008 10-k is not yet out).  PCBC has about $7.3 billion in assets in 2007. RAL originations were $5.8 billion. They make money on RALs and Refund Transfers (RTs) through several steps:

• first, interest income on RALs ($118 million in 07).
  
• Then there is non-interest fee income on refund transfers — about $45.9 million in 07).
  
• Then they make money securitizing a portion of their RALS –they securitized about one-fourth of RALs each year.  Net gain, after costs for the securitization itself, is another $41 million.
• Unfortunately, RALs are rife with fraud.  There are a lot of losses. Loan losses were very high – $116 million, and net after recoveries were still a lot — about $91 million.

Even after the losses, PCBC still makes more than $100 million each year on RALs.

TARP money for RALs

Here’s the real takeaway: without RALs, they lose money.  In spite of being a busy bank in a very rich part of the world, the non-RAL/RT portions of their business ran at a loss in both 07 and 06.

If you still aren’t familiar with the handiwork of PCBC in your community, then ask yourself if you’ve seen a Jackson Hewitt or an independent tax preparer offering rapid refunds.  PCBC’s RALs include the ones offered by Jackson Hewitt.  That’s the firm that pays Magic Johnson to speak on its behalf.  Its the firm where “9 out of 10” clients get a refund.  That works because most of their clients get the EITC.

As far as a going entity, you cannot separate Pacific Capital from RALs.  When our country invests TARP money in RALs, we are propping up a business that is wholly dependent upon this predatory loan product. And we are creating inefficiencies in our tax system.  We are putting money in the budget for low-income workers, then allowing those dollars to be siphoned off to a third-party in order to hasten the delivery of that service.