Wells Fargo: Financier to the RAL Business

While BankTalk goes to great length to excoriate (big word!!!) the immediate providers of refund anticipation loan dollars, there are other financial institutions that make RALs possible.

Wells Fargo, for instance, is providing the credit lifeline that keeps Jackson Hewitt in business.  On April 30th of this year, Wells entered into a new definitive material agreement to restructure $200 million of debt to Jackson Hewitt. A key fact, in my mind, is that the loan specifies that Wells’ willingness to finance JTX is dependent upon the RAL business.

A source from a New York investment firm tipped me off on this.  He said that Wells has a clause in its credit agreement with JTX that it can exercise in the event that there is a change in Jackson Hewitt’s ability to find RAL funding. The stipulation does not just allow Wells to back out if JTX loses its RAL funder. It can even be invoked by Wells if there is some deleterious change in how JTX accesses their RALs.  If JTX had to pay a higher price, or if they had to give up their marketing fees for originating RALs, or if they were forced to scale down the fees that they generate (extort) from customers, then Wells can step in.

But, it is better to verify, rather than merely take the word of a “source.” Here is the language in their SEC filing:

The Amendment adds a number of events of default to the Credit Agreement, including with respect to the continuation and funding of the Company’s refund anticipation loan program; the presentation of Borrowers’ business plan to the Lenders; and a termination of the Company’s kiosk license agreement with Wal-Mart.

This means that if Wells does step in, they can be quite forceful. If Wells, as administrative agent, identifies an “event of default,” they can accelerate all debt payments and require JTX to return the entire outstanding debt. This would effectively be the end of JTX. Jackson Hewitt has some assets, but more than one-third of their balance sheet consists of goodwill.  At the end of their last quarter, they had $7.04 million in cash and $78 million in receivables.  Even more problematic, and perhaps representative of their status as an ongoing concern, is their shareholder equity. Shareholder equity is – (minus) $74 million.

Perhaps the best defense for JTX is that there is not much to carve out of their balance sheet.  I’m not even sure if Wells would be first in line, since this refinance is so new.

Jackson Hewitt, and the entire RAL industry, exists in an endangered state. The next move is really in the hands of the IRS.  Mark Ernst made it clear, at last month’s CERCA meeting, that he is not satisfied with RAL pricing. What might be possible?  I think the IRS could do a few things:

shift to a system of RACs. Ideally, the IRS would create a standard for RACs that protect consumer interests. That would probably mean a RAC without add-on fees.  Perhaps there would be a stipulation against marketing kickbacks to tax prep firms, too. That creates an incentive on the part of the tax preparer to push these products.

• Create another split refund that allows the consumer to satisfy the cost of tax preparation through an immediate claim to the preparer on a portion of proceeds from their refund.
• speed up IRS returns. I have heard some chatter that the IRS is moving toward getting refunds back in 72 hours, or at least in 4 days. That would mitigate some of the demand for a RAL, as many consumers with high enough discount rates to pay for expediting their refund by 9 days are suddenly provoked to re-evaluate the value of a waiting only two extra days.
• establish a portal for simple returns to be filed over the internet, through a secured form. This might work for simple returns.

The ongoing problem is how to settle tax prep costs.  As long as our tax code remains so complicated, people are going to continue to seek out tax help.

The upshot is that Wells is betting on RALs, and on the likelihood that there will be no IRS intervention in the next year. It is a bet that won’t be tested until next spring. Jackson Hewitt sheds money from April until December, and then makes the bulk of its annual cash flow over the first twelve weeks of the year. If their business doesn’t come back, then there will be a reckoning. Wells is now a participant in that risk – and should be perceived as a hidden agent with an interest in the ongoing use of refund loans.