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Thanks to Gridlock, Tax Prep Loans Live to Fight Another Day

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A political standoff in Washington is creating a loophole for lenders looking for new ways to continue offering loans that many consumer advocates say are predatory. After years of work by federal regulators to prevent companies like H&R Block from selling costly tax anticipation loans, at least one company appears to have figured out a new way to offer such loans by exploiting Washington gridlock.

Liberty Tax operates a chain of tax preparation stores around the country. Often located in struggling neighborhoods, the stores offer to do consumers’ taxes quickly, and give them cash immediately, based on their anticipated tax refund.

Instant cash comes at a high price. Interest rates for such loans vary between 50% and 500%, according to the Center for Responsible Lending.

Federal regulators don’t like the idea of so much tax money going to lenders instead of to the intended recipient: Taxpayers. So various federal agencies have cracked down on tax prep lenders, as well as the banks that often fund them. The Office of Thrift Supervision banned MetaBank from giving money to Jackson Hewitt in 2010, as we covered here, and later invoked a similar ban against HSBC Bank, which was funding tax prep loans by H&R Block, as we reported.

But what happens when tax lenders get their money from companies that aren’t banks? Thanks to Washington gridlock, there’s nothing regulators can do to stop that. In a filing with the Securities and Exchange Commission, JTH Holding, Inc., which operates Liberty Tax, announced it has a new partner to fund things like tax prep loans.

The prospectus doesn’t name this new partner. But it does make one detail clear: The company is not a bank. Why is that important? Because for the foreseeable future, the Consumer Financial Protection Bureau has no power to regulate financial products offered by non-banks.

“This is a great example of … why you need to get a director in there,” says Kathleen Day, spokeswoman for the Center for Responsible Lending. “What this does is it creates an un-level playing field, which is what caused the current financial crisis.”

The bureau was created last summer by the Dodd-Frank financial reform act. It has broad powers, consolidated from seven other agencies, to regulate large banks. But Dodd-Frank is clear that the bureau has no authority to regulate non-banks until it has a permanent director in place.

President Obama nominated Richard Cordray, the former Ohio attorney general and now the bureau’s enforcement chief, to become the agency’s first director. But Republicans successfully blocked the nomination, and pledged to block any nominee, until the administration agrees to reduce the bureau’s power and budget.

“If you ask me, the American people should be getting more transparency out of this administration not less,” Sen. Mitch McConnell (R – KY) said Tuesday in a prepared statement. “We don’t need any more unelected, unaccountable czars in Washington.”

Over 200 consumer groups signed a letter opposing the Republicans’ efforts to block Cordray, partly to bring non-banks under closer regulatory scrutiny.

“There is tremendous public support for holding Wall Street accountable, and for ending tricks and traps in the consumer financial marketplace,” John Carey, spokesman for Americans for Financial Reform, said in a statement.

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  • http://www.federaldirecttax.com JoeR

    What has happened with the FDIC dropping its Cease & Desist order against Republic Bank Corp (the bank behind the refund anticipation loans offered at Jackson Hewitt and Liberty Tax) is create a monopoly where the independent tax preparer cannot compete. It is utterly absurd that they remove all banks providing these products to independent tax preparers and then let Republic stay in business to service the national franchise chains! I am not sure if I am aware of a more blatantly obvious example of favoritism being shown to large players in an industry hoping to crush the mom & pop shops.

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  • Eric

    JoeR, Republic has agreed to settle with the FDIC, pay $900,000 and end operations of its Refund Loan division effective end of this tax season. RALs in it’s current form are effectively dead as of the end of this upcomming tax season. The reason it was harder for providers to give RALS to independents as it’s much more difficult to provide oversight with independents then a large entity with systems and checks and balances, for better or worse. Anyhow, it’s hard for the banks not to favor large players when they are easy to mange, agree to transfer part of the risk to the large players and have a guranteed contract. JTH transfered a good portion of the liability for the RAL business from the bank to JTH. I assume the same was done at Jackson Hewitt. This personal type gurantee was important for the deal to happen. It’s also very difficult for a mom and pop to coordinate the same type of liability transfer. Anyhow, no matter after this tax season.

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