Today’s news that the OTS is going to prevent MetaBank (CASH) from offering refund anticipation loans puts a hurt on its profitability, it might present a bigger crisis for one of its partner companies.

No RALs from MetaBank  threatens the viability of the entire business model at Jackson Hewitt.

The SEC published news of the OTS’s Supervisory Directive overnight.

Many of Jackson Hewitt’s customers apply for a “financial product.”  Financial product fees constituted 22 percent of revenue in 2010.  About 9 in 10 JTX customers used either a RAL or a RAC in 2010. The share was (more…)

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…)

Jackson Hewitt’s expanded partnership with MetaBank, a small thrift in Storm Lake, Iowa, adds one name to the short list of banks that provide liquidity to national tax prep chains for their refund anticipation loans. But, what or who is MetaBank?

• MetaBank has $652 million in deposits, with 13 branches, in two states (Iowa and South Dakota)
• MetaBank has faced two enforcement orders since 2001 from its primary regulator, the Office of Thrift Supervision. The most recent, in June of 2009, involved an employee who absconded with $4 million in deposits.
• MetaBank received a satisfactory for its last Community Reinvestment Act exam in 2007.
• MetaBank has less than $1 billion in assets. As an intermediate small institution, it will not have another exam until 2011.
• MetaBank made two mortgage loans to low-income borrowers in 2007, and only 5 to moderate income borrowers.
• The bank made three loans to borrowers in low-income census tracts in 2007. In the period from 2005 to 2007, MetaBank made a total of 5 mortgage loans to borrowers in low-income census tracts.
• Low-and-moderate income census tracts make up 25.2 percent of census tracts (with 20.8 percent of housing units) in the four MSAs where the OTS examines MetaBank. Only 7.5 percent of mortgage loans made by MetaBank went to borrowers in low-and-moderate income census tracts. Median family incomes for census tracts in those MSAs are such that a moderate income is less than $54,160.
• MetaBank made two qualified Community Development investments, both in bonds to Urbandale, Iowa for economic development. Each bond was for $95,000.  The bank made about $31,000 in donations to local community organizations.
• The bank claimed that a fair amount of small business lending should qualify as a community development loan – with 87 small business loans and 330 small farm loans in low and moderate income census tracts. The bank did not report any community development activity in three of its four assessment areas.  The OTS said that it had a “good record,” of community development lending, but “poor responsiveness” to community development needs.  Odd.

This information is relevant for groups that want to work with MetaBank.  The institution is going to be (more…)

Edmund Andrew’s story about his own  foreclosure and subsequent bankruptcy is illuminating.

Andrews is the economic reporter for the New York Times.  He has covered the rise and fall of mortage markets in our country since the beginning of the decade.  He gave some warnings to readers about the situation.  He should have known better.

Andrews mentions that he was earning $120,000 per year.  His new wife also was making a second, albeit much more pedestrian, salary.  She was probably making less than $30,000 in retail at a clothing store.  Nonetheless, they had a pretty good income.  Andrews’ only thorn was a $4,700 per month alimony payment.

As he recounts, he qualified for a $500,000 mortgage with American Home Mortgage.  They didn’t check out his cash flow.  They didn’t want to know that he was giving away about half of his after-tax take home pay to his wife.  They did notice that he had a second mortgage out, on his former home with his first wife, but that just meant that he would get a slightly higher interest rate.  He got a high-cost stated-income loan with almost 100 percent loan-to-value.  And, it carried an adjustable rate...doomed to reset in five years.

Well, it caught up with Andrews in a few years.  He had to refinance, but into a much higher interest rate loan.

What was really unbelievable was the incentives that faced him when it came time to deal with a loan in default.  As JP Morgan Chase, his loan servicer, explained it was not possible to modify his loan while he was current on his payments.  If he fell behind 90 days, then his loan would go to a different department.  Then it would be up for a mod, but it would probably be modified with no change in the principle due.  Monthly payments would probably increase.

These incentives are unfortunately all too normal. A professor at Valparaiso determined that while there were many modifications taking place, that as many as half resulted in a higher monthly payment for borrowers.  The logic of that is impossible to understand. It would seem that all of the efforts, which are difficult and require the participation of many institutions, are only leading to more situations that will end up in foreclosure.

Sheila Bair has some good ideas, but she is being countered by the big banks and some of the other regulatory institutions. For example, a study jointly authored by the OTS and the OCC points out that many loan modifications aren’t working.  They indicate that many are occuring.  Their lead comment is somewhat naive:

“Consistent with last quarter’s findings, the report also showed that re-default rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest re-default rates. For example, the percentage of modified loans that were seriously delinquent (60 or more days past due) after eight months was 41 percent for loans modified in the first quarter and 46 percent for loans modified in the second quarter.”

Then they note that one possible reason could be that most mortgages are getting these higher monthly payments.  Gee…what an interesting finding!

The FDIC has issued a cease and desist letter against Republic Bank of Kentucky (RBCAA).  The issues concerns the funding of refund anticipation loans (RALs) by RBCAA.  The FDIC is asserting that Republic does not have adequate safeguards in place to thwart fraud among the tax preparers that submit their refund applications to RBCAA.

RBCAA also got its Community Reinvestment Act Evaluation today.  The company did well on services and investments, earning a high satisfactory rating.  However, on the lending test, RBCAA got a “needs to improve.  A “needs to improve” is a very bad score.  In recent years, less than 3 percent of all ratings have been as low as this.

RBCAA would be stung if they were unable to continue with their RAL lending.  Although the bank has regular branches in Louisville, they draw a substantial portion of their business from their tax refund services (TRS) segment.  In 2007, TRS consisted of 11 percent of net income.  Its steady income, too, so going forward it might be a hard thing to give up.

Losses on what would appear to be a relatively risk-less business, given that the Federal government provides underwriting to cue Republic if a filer has an outstanding tax lien, were actually 1.14 percent of TRS revenue in 2007.

The RALs are troubled by the lack of a healthy securitization market, more broadly.  It is not yet evident (more…)