The Final Frontier: RAL meets Payday

MetaBank has stepped in to fill the void that might be created if Pacific Capital (Santa Barbara Bank & Trust) is no longer able to fund refund anticipation loans (RALs).

This is a development with two main impacts.  First, it guarantees that financial problems at Pacific Capital will not prevent Jackson Hewitt from offering refund anticipation loans this year.  Second, it provides a line of credit to refund anticipation loans with high interest rates.  The rates, by MetaBank’s own calculation, are 150 percent APR.

In a brief reference on their latest 10-K, MetaBank makes reference to a pilot program that began this spring to fund RALs for “a major tax preparation firm.”

During fiscal 2009 the Bank participated in tax refund anticipation loans with a major tax preparation firm after participating in a test program with that firm in fiscal 2008.

The major tax preparer is Jackson Hewitt (JTX).  Jackson Hewitt, it turns out, was not going to be left holding the bag if PCBC couldn’t keep up its finances. Jackson Hewitt has set up a relationship that will allow that to deftly sidestep a change from Pacific Capital.  MetaBank will provide RAL funding this year.  How much remains to be seen.  MetaBank’s finances are sound.  On the other hand, MetaBank is a relatively small institution.  They might not be capable of funding the entirety of Jackson Hewitt’s RAL program.

Jackson Hewitt’s actions reflect the misfortune that plagues PCBC.  The FDIC has asked Pacific Capital to increase its regulatory capital.  The bank’s shares are selling for less than $1 and it has a considerable amount of debt tied up in California commercial real estate. Pacific Capital received TARP funding, but to further demonstrate its financial standing, it has been unable to make its TARP dividend payments.

How MetaBank Can Change the Tax Prep Market

MetaBank’s involvement could pose new complications for RAL advocacy.  Most significantly, MetaBank will  provide a new credit products to RAL users.  It will be connected to MetaBank’s  I-Advance line of credit:

The division also continued to exhibit product innovation as it filed new patent applications and maintained existing applications. The iAdvance� micro lending product, which is a program designed to provide a line of credit on prepaid cards, is experiencing increasing consumer acceptance and is being deployed by an increasing number of clients as a retention tool for their prepaid card programs

The i-advance is a new iteration of an old problem – the payday loan.  Granted, MetaBank refers to this product not as a payday product, but as a “micro-loan.” MetaBank charges customers a 12.5 percent advance fee on each micro-loan.  That amounts to an APR of 150 percent (MetaBank’s calculation). The advance lasts 35 days.  If you can’t repay in 35 days, MetaBank first tries to collect by tapping any funds remaining on the debit card.  If there is still money due, MetaBank reports to the credit bureau and shuts down the line of credit.

In theory, the I-advance does not “roll-over.” Rollovers are one of the worst features of payday lending.  Consumers are required to repay their advance each time.  According to MetaBank, if they continue to repay, they can continue to to use the product for 12 months.  They must sit out the 13th month.

I spoke with a customer service agent at MetaBank.  They will be putting the i-advance product on to the Jackson Hewitt refund anticipation pre-paid debit card. The i-advance product’s relationship to the JTX prepaid card existed last year, during the small rollout.  This year, its availability will be at scale.

The 150 percent APR is a low estimate.  If a consumer repays the loan in less than 35 days, then the APR would be that much higher.  For a customer that repays the loan in two weeks, for example, the APR would be325 percent.

More about MetaBank

MetaBank (CASH) is hardly a well-known institution.  They are headquartered in Storm Lake, Iowa. They have a branch presence in that community, as well as in two South Dakota metro areas. They have largely focused on payment system products. They provide debit cards, including the I-power debit card that Jackson Hewitt has used in the past.  The i-power card stands in as a destination for electronic transfers on tax refunds for customers without a bank card. It comes with a variety of fees that earn revenue for MetaBank and JTX.

MetaBank is regulated by the Office of Thrift Supervision.  The OTS has struggled to develop a response to RALs. The FDIC, however, issued a cease-and-desist order against Republic Bank in 2008 for its RAL business.  That order focused on the lack of safeguards against fraud among tax preparer partners of Republic.  The OTS has been slow to act on RALs, but they have recently made an effort to express the responsibility of member banks to make sure that they hold their tax prep partners accountable.  Jackson Hewitt is among the institutions that have been singled out for poor governance.  Here’s an example in Florida from in 2009.  What is more galling is that this is hardly an aberation.  In 2007, the IRS said that Jackson Hewitt was inflating tax deductions on returns in four cities – Atlanta, Chicago, Raleigh, and Detroit.  Specifically, tax prep agents were producing returns with excessive mileage deduction.  One return in Atlanta claimed that the tax filer had consumed 25,000 gallons of gas.  The IRS observed that this would have been possible if the individual was commuting 1370 miles per day.  The State of California, in a separate suit, won a settlement with Jackson Hewitt.  It is hard to believe that the corporation doesn’t have some culpability when one act of deceit is repeated across the country.

Impacts for Tax Prep

I had written earlier that the lack of an sound financial partner (Pacific Capital) to fund its RALs could mean that Jackson Hewitt would lose a big share of its tax prep business. Pacific Capital has been told to shore up its regulatory capital, and it has even received some scrutiny for unusual lending to insiders.  Given the set of relationships outstanding between retail tax prep firms and bank RAL funders, I suggested that this would shift business over to H&R Block.  That shift is less likely to happen. Granted, if MetaBank’s presence is relatively minor due to their financial reach, then some shift would occur nonetheless.

The evolution of refund anticipation lending to include a line of credit is not new.  The distinction here is the availability of such a product to consumers in a setting like Jackson Hewitt.  The product, available at least in the spring of this year, was only in some markets.  This year will not be a limited roll-out.  Pacific Capital’s involvement may not recede, either, depending upon their liquidity and the FDIC’s decision making.  If they have ample liquidity and if the FDIC does not step in, they could have the same participation as last year.  Those outcomes remain “ifs,” though. As well, MetaBank’s small size is itself a curb against their participation.  Could they provide funding for $2 billion in RALs.  Probably not.

Even so, a set of consumers will use the i-advance product in conjunction with a RAL. Those consumers will be on a slippery slope. They will have paid a fee to get their refund.  They will in turn utilize a fee-intensive product for short term access to cash.  These fees sap refunds.  The public’s own interest, as implemented through the Earned Income Tax Credit (EITC), is accordingly thwarted.