Borrowers Beware

A phalanx of banking reform activists met with Pacific Bancorp CEO George Leis to discuss a type of short-term loan that the group characterized as predatory upon the poor: the tax-refund anticipation loan (RAL). Headquartered in Santa Barbara, Pacific Bancorp is the parent company to Santa Barbara Bank and Trust (SBB&T), which is one of the nation’s three main RAL lenders, the other two being JP Morgan and HSBC. The San Francisco-based California Reinvestment Coalition (CRC) spearheaded the delegation, which included representatives from like-minded organizations from the Midwest and the East Coast. They met with Leis and other top management for two hours on Friday morning, October 19.

Leis and Debbie Whitely, Pacific Bancorp’s executive vice-president and director of investor relations, said in a joint interview with the Independent that refund anticipation products made up 56 percent of SBB&T’s 2006 after-tax income; that figure was 36 percent the year before, and is expected to fall somewhere in between for 2007. “These are very, very, very popular products,” said Whitely.

In April, shortly after Leis took over leadership of Pacific Bancorp, the SBB&T stopped making so-called holiday loans, at least partly due to pressure from the CRC. These had been available starting in November of each year, based on estimated tax refunds as calculated by the borrowers’ pay stubs. By contrast, the RALs that SBB&T still offers are based on the borrowers’ W2 forms. In discontinuing the holiday loans, SBB&T followed the lead of JP Morgan and HSBC, who are still the nation’s top two RAL lenders.

During the Friday meeting, the activists asked the bank to discontinue the RALs altogether, or, failing that, to stop selling them to people who qualify for state tax relief known as earned income credit, which is available only to the very poorest taxpayers. About half of those who receive the credit also use RALs, according to the CRC’s executive director, Alan Fisher. He characterized the RALs as siphoning off a government benefit intended for the poor.

“The only reason people need RALs, or think they do, is because they have no bank account,” said Fisher. In order to issue the RALs, the bank opens a temporary account for the borrower, into which the tax return is deposited, allowing the bank to recover the amount of the loan as well as fees. The loans are not generally made directly by SBB&T, but via tax preparation companies including H&R Block and Jackson Hewitt. The customer is charged approximately 10 percent of the anticipated refund, including a $100 fee for tax preparation, a $35 loan application fee, and a varying loan fee-or interest-of about $70 based on a $2,000 refund, said Fisher. For an 11-day loan-the typical amount of time that it takes the IRS to send the borrower’s e-filed refund to the temporary account-that varying loan fee amounts to an annual percentage rate of 140 percent, Fisher added. Leis framed it a little differently: On an average $3,000 refund anticipation loan, he said, the bank makes a profit of about $14.

SBB&T also offers refund transfers, which are not loans but a less expensive service in which the bank establishes temporary accounts to receive the direct deposit of customers’ tax refunds. Leis said that of the 7 million people who use SBB&T’s refund anticipation products, two-thirds use the transfers and one-third use the loans. He added that 70 percent are return customers.

Instead of setting up these temporary “dummy accounts,” said Fisher, the group urged the bank to help would-be borrowers establish permanent bank accounts, enabling them to receive their entire refund, deposited directly within two weeks of e-filing their returns. The delegation specifically asked the bank to donate more support to Volunteer Income Tax Assistance (VITA), which assists its customers in opening permanent accounts and is free to those who receive earned income credit. In addition, delegates asked the bank to translate its loan documents into Spanish and Asian languages since many RAL customers don’t read English.

The CRC board and staff were joined by representatives from the Community Reinvestment Coalition of North Carolina, the Woodstock Institute of Chicago, and the Neighborhood Economic Development Assistance Program of New York. Peter Skillern, of North Carolina, was particularly harsh in his evaluation of SBB&T’s practices. “Santa Barbara Bank and Trust needs to stay in California,” he said. “Stay home. We don’t need them making these high interest loans in our poor neighborhoods.”

“We had a great meeting with CRC, I thought,” said Leis. “They brought some concerns to our attention and actually gave us some good ideas.” One of those was to offer the loan application in Spanish as well as English. He said that he was “pretty certain” that the bank will implement that change.

Leis said that he tried to impress upon the CRC delegation the bank’s conviction that if offers an important product that meets a need for millions of people.

Responding to the CRC’s suggestion that the bank should simply set up permanent accounts for would-be refund anticipation customers, Leis said one reason the bank does not is that Pacific Capital only has branches in California. “This service operates in all 50 states,” said Leis. “If a customer is in New York it would do them little good to open a checking account in Santa Barbara.” (Pacific Capital Bank, N.A.‘s 50 branches operate in eight California counties under five brand names, including SBB&T, First National Bank of California, South Valley National Bank of California, San Benito Bank, and First Bank of San Luis Obispo.)

It is also true that from a bank’s point of view, the accounts of most low-income customers can hardly compete with the profit from the RAL industry. The American Riviera Bank’s Chief Financial Officer, Michelle Martinez, who worked in SBB&T’s finance department for many years, commented on the feasibility of opening millions of permanent accounts instead of temporary “dummy” accounts during tax season. It is no small task to set up accounts, she explained, especially now with the anti-terrorism security checks required by Homeland Security. If the account maintains a small balance it brings the bank little benefit, and if it becomes dormant the bank has the burden of reporting it to the federal government, which then takes possession of its assets.

The SBB&T is just now starting to offer a lower-cost RAL to tax preparers, said Leis, with stricter qualifying criteria and risk controls. Leis invited the CRC to come back following the tax season for a debriefing on the success of this foray. The bank will also offer some RALs directly, bypassing contracted tax preparers, for the first time this year.

The bank agreed to look into increasing its support for VITA sties. However, Whitely noted that VITA struggles to serve its customer base, whereas the bank’s refund anticipation programs have grown substantially since 1992. “There is clearly a need,” she said, “and we are pleased with the product and the service.” The CRC’s Charisse Ma Lebron complained that the bank was frustratingly vague about its intentions for supporting VITA. The bank did not name a dollar amount or define other measurable goals.

“We like the business and we think we can be leaders in the business,” Leis said. “We appreciate CRC’s passion and compassion around this product, and we think we can continue to make the product better and better. We are happy to work with the CRC and its partners to drive costs down and make the components more transparent.”

American Riviera Bank president Michael Salsbury speculated that one reason most banks are not in the RAL business is because its seems risky “to have such a large percentage of revenues concentrated in something that the IRS could do away with at the stroke of a pen.” It is not even an option for American Riviera, said the bank’s chief financial officer, Michelle Martinez; it has become a huge business that would require more capital than American Riviera has at its disposal. Making instant loans to complete strangers also requires a daunting investment in technology, said Martinez.

As Pacific Capital’s new president, Leis said, “One of the things I’m going to do is to grow our core banking products and lessen our reliance on the RAL. Our core is retail and commercial loans, and wealth management.”