Jackson Hewitt will be able to get the money it needs to make refund anticipation loans during the upcoming tax season.  JTX, which has received some funding for its RALs from a small savings and loan in Kentucky, renewed its agreement with the likely intent of scaling up its relationship.  Republic Bank (Kentucky) has helped to fund a portion of JTX’s RALs since 2007.  Now it will grow, as JTX is no longer working with Pacific Capital Bancorp.  Both institutions made this announcement (see JTX 8-k) (see RBCAA 8-k) through 8-K filings on December 30th. The arrangement preserves Jackson Hewitt’s ability to offer refund anticipation loans during the 2010 tax season.  JTX had been under some pressure, after its main RAL partner was forced to shut down their RAL funding business.

The Office of the Comptroller of the Currency (the “OCC”) told Pacific Capital Bancorp to cease its tax refund solutions business last week.  Pacific Capital had been, and continues to be, under severe regulatory capital constraints.  Some of their regulatory ratios were far below minimums established by the FDIC. Pacific Capital has not been able to make dividend payments on their $187 million TARP investment. They have extensive exposure to California’s commercial real estate markets. In short, Pacific Capital was a wounded bank. Handing out RAL money, where fraud has been high and losses are steep, made no sense from a safety and soundness perspective.

Republic is an old hand at the refund anticipation loan business.  Republic is a small bank and would seem to be unable to provide the liquidity to disburse hundreds of thousands of refund anticipation loans in just a few weeks. To help with that endeavor, Republic relies on brokered deposits. During the 2008 tax season, Republic paid 5.09 percent interest to access more than $640 million in deposits.  Upon making the loans, Republic securitizes the debt. Republic securitized $1.1 billion in RALs in 2008. Republic could not securitize its RALs in 2009, owing to the unique market constraints.  That didn’t stop the business. Republic just (more…)

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.

In the next year, look for H&R Block (HRB)to pulverize its competition for retail tax prep.  Fundamental changes, going on this week, will impact the tax prep marketplace.  It will be one of those disruptive events that should make winners  out of Block, and losers out of Liberty Tax Service and Jackson Hewitt.

The unknown is how JP Morgan will respond.  They are already in the RAL business with a lot of the independents.  Even so, tax season is about two months off.  Can they come to terms with Jackson Hewitt and Liberty Tax?  Can they reach an agreement in time for this year’s tax season?

How RALs Drive Tax Prep Services

The tax prep chains draw in customers based on two things: the quality of their tax prep service, and the availability of advances on expected tax refunds.   In today’s market, tax prepares must provide loans, or really 9 day advances – on tax refunds.  For the kind of consumers that flock to strip-mall tax places, that refund is the payola of the year.  It can often be as much as $2,000 for a family making approximately $40,000 per year.

Refund anticipation loans are a sizeable chunk of income for tax prep chains.  The chains take about 10 percent of the (more…)