A California Court affirmed a previous ruling against Liberty Tax Services yesterday, rejecting an appeal by the company that it did not violate numerous state and federal laws.
As a result of the decision (People vs. JTH Tax, Inc.), Liberty will pay approximately $1.169 million in civil penalties and another $135,000 in restitution.
The case concerned Liberty’s Electronic Refund Checks (“ERC”) provided in California from 2002 to 2005. During that time, the court said that Liberty sold 60,125 ERCs, generally for a price of between forty and fifty dollars.
One of the primary issues of dispute was whether or not a refund anticipation check is itself, in fact, a loan. The mechanics of a RAC are not in question: basically, the RAC serves as a payment vehicle, which could never be construed as a loan, but also as a means to defer paying for tax preparation out of pocket. The prosecutors argued that the latter constituted a loan.
The problem, according to the court, was that there were so many violations of laws in the pricing, advertising, and disclosures surrounding those loans. In 2007, the California Attorney General asserted that Liberty violated the state’s Unfair Competition Law (“UCL”) and its False Advertising Law (“FAL”), as well as the federal Truth In Lending Act (“TILA”) and Unfair Debt Collections Practices Act (“UDCPA”).
Some of the points:
Liberty collected outstanding debts on behalf of its bank partner, First Bank of Delaware, even though it had no claim on the obligations. Through an agreement with FBOD, Liberty received 65 percent of any of those collections made from California residents. Later, when Liberty’s bank partner became Santa Barbara Bank & Trust, it performed similar cross-collection services. Liberty did not tell people that they were going to perform a debt check (the application said that SBBT “may” check) prior to doing so. Moreover, the court found that it was even collecting debts that were no longer collectible. Liberty is to pay $118,000 in civil penalties for the 118 instances where this occurred and another $135,886 in restitution.
ERCs are loans, and thus Liberty’s lack of disclosures violated the Truth in Lending Act. The decision says that the handling fee for an ERC was a loan because it allowed a consumer to defer paying for their preparation services. Thus, it goes on, a handling fee of $24 to $30.95 is a finance charge. Liberty has to pay $240,500 in civil penalties. Going forward, they have to disclose the sale of the product as a loan and publish an APR-calculated interest rate. They have to make similar declarations in disclosures for refund anticipation loans, as well.
But perhaps the simplest and most incontrovertible violations were made by the court to redress Liberty’s advertising. There is no doubt about the minimum time it takes to get a refund from a Liberty refund anticipation loan – its at least 24 to 48 hours. Advertisements in the Pennysaver suggested that a person could get speedy cash right away. California found 100 ads where Liberty promised “most refunds in one day.” Liberty contested this, based on the fact that their franchisee manuals advised against advertising “instant cash” or “get $1,200 in minutes…and the rest of your tax refund in 24 hours” but the court still said that under agency, Liberty corporate was responsible: they did not stop the ads for two years, even after an email indicated that it knew that this was happening at approximately 100 franchises. Liberty is to pay $774,399 for violations of UCL and FAL.
So, Liberty sells 60,125 refund anticipation checks and another 46,222 refund anticipation loans during a time when they were violating scores of laws, and the penalty comes to just $1.3 million. Hmmm. That amounts to penalties and restitution of about $12.26 per customer.
Is that a slap down, or a slap on the wrist?
One hint: shares in Liberty Tax are up today, which could indicate that savvy investors thought the price was going to be higher.