OCC Turns Off RAL Spigot at Pacific Capital

Mainstream tax prep customers will be less likely to use a refund anticipation loan this year, an outcome that reflects a new awareness by regulators at the Office of the Comptroller of the Currency. Perhaps it was meant to stay under the public radar, or maybe it was just a gift to the consumer advocates that have fought this battle, but PCBC announced the OCC’s instruction on Christmas Eve in a short 8-K.

This is very good news.  Pacific Capital, a Santa Barbara bank that operates Santa Barbara Bank & Trust, announced in a filing on December 24th that the OCC had asked it to cease its tax refund business. I get a kick out of how the people at Pacific Capital tried to spin this event:

• “It will help return Pacific Capital Bancorp to its roots of being a pure community bank….” George Leis, CEO
• “The tax refund loan business is a sort of niche business that falls outside of what would be considered core banking operations…” Tony Rossi, spokesman, PCBC

This spells big trouble for Jackson Hewitt, a national tax prep chain that was counting on Pacific Capital to fund at least part of its RAL activity in the upcoming tax season. Jackson Hewitt shares immediately fell by 25 percent. JTX has made some plans for alternative partnerships with Iowa’s MetaBank.  However, MetaBank is a small institution. It can fund RALs, and it will provide a loan product in tandem with any RALs that Jackson Hewitt offers, but it cannot replace Pacific Capital.

The OCC had meetings with advocates in December about the ongoing RAL program at PCBC.

Not all good news

This would be a great victory for consumers, except that it is not. Pacific Capital is going to sell its tax refund business. A few stories indicate that the new owner will be a private equity firm.  Pacific Capital released an announcement to that effect, promising that the sale would go through within one week.  This is incredibly problematic. Moving to a private equity framework will mean that there is even less supervision of this activity.  The OCC had an ability to put a stop to RALs at PCBC. No one except the private equity firm’s investors will have a say about what happens to the business if this sale goes through.