New Orleans

ACORN launched an extensive campaign in 2004 which culminated in one set of negotiations after another with not only H&R Block, but also their competitors, Jackson & Hewitt and Liberty Tax Services, and their primary banker, HSBC, ACORN hammered on all of them for the end of Refund Anticipation Loans or RALs as they were called in the industry.  Much of this story is detailed in my first book, Citizen Wealth:  Winning the Campaign to Save Working Families. The first concessions involved disclosures, finally showing families that the effective rates of these “loans” were often as high as 235%!  We managed to eliminate some charges immediately.  By 2005 all three of the companies were under 3-year agreements on “best practices” including sharp reductions in RALs.  An additional breakthrough occurred in 2006-7 when HSBC, the prime financier of RALs agreed to exit the business, and notified preparers they would be terminating the contracts when complete.  Negotiations for a precedent setting, game changing program between H&R Block and ACORN for the 2^nd agreement commencing in 2008 evaporated with ownership and management changes, which kept a heart beat alive for RALs in H&R Block as they tried to replace bankers in recent years on the program.

The many contentious meetings we had with the IRS and our “relationship managers” on the IRS/ACORN partnership may have borne some fruit and have helped finally put the last stake in the heart on RALs, since the IRS was the primary “enabler” for the companies in this predatory scheme.  The IRS would advise the companies whether or not the e-filed return was likely to be paid in full, which essentially made the return and the RAL on which it was based, credit worthy enough for big banks like HSBC, Chase, and others to factor the funds.  Earlier this year the Office of the Controller of the Currency ordered HSBC to terminate the last of its funding for RALs after the IRS in late 2009 indicated that it would no longer provide the code the preparers needed to determine whether the refund would be made in full.

I also have to believe part of this is fruit, flower, and perhaps payback revenge as a farewell present from Mark Ernst, the Deputy Commissioner of the IRS before he left the government in late October 2010.  Ernst had been ousted as CEO of H&R Block due to losses in the subprime subsidiary, Option One, and the company coup and attack, which killed our deal.  Ernst had always assured us, including me personally, that RALs were a “temporary” business and one he wanted to abandon.   Once inside the IRS he was in a position to do some of the right things, speed up the return times for taxpayers obviating the need for RALs, and take the IRS out of an enable position.

Ding dong, this is one witch finally dead!

I note with some appreciation and no small amount of irony that Ernst has now ended up as Chief Operating Officer for Fiserv, a company based in Milwaukee which provides e-commerce systems for the financial services industry.  In a sweet bit of irony he is now working under Jeffrey Kabuki, the CEO of Fiserv.  Kabuki as the EVP at H&R Block led the negotiation team for the company in the ACORN/H&R Block negotiations while working for Ernst there.  Good luck, guys!  Here’s tipping one of Milwaukee’s finest to you, fellas, tonight!

RALs are dead, so one scourge for low income families and their citizen wealth has finally been put to rest, and as it turns out what goes around comes around!

New Orleans

In a significant concession HSBC, the main lender to the large preparers, announced that it was departing the business in what they described to me, and I reported in Citizen Wealth, as “reputational” concerns.  Despite the fact that they were making almost $200M per year from this business, there was no way to disguise its predatory nature.  JP Morgan-Chase was another big player in a session where they were conceding that they would lower rates, asked me sarcastically if we thought it would be “better if they got out of the business,” to which we answered “yes!”  Santa Barbara Trust was the last major lender still hanging in the business.  HSBC has assured us that they were on a step down, transitional contract, which would pull them completely out of the business with H&R Block by the end of 2009 while they dropped other companies immediately.

Given that background, I was both disappointed and delighted to read the news from H&R Block that they were scrambling to replace HSBC as their lender and credit source for RALs for the 2011 tax season.  This should not have been a surprise to them, but it was a surprise to me to see that HSBC had continued to stand behind the RALs in 2011, long after they had assured me that they would be out of the business completely.  Clearly in the last 2 ½ years since I left ACORN the organization had taken its eye off of the target and the consequences had not been good for lower income working families who are dependent on professional preparers.  That is disappointing.

Delightful was seeing that the IRS finally did the right thing after having been an enabler to this thievery for so many years and eliminated a code this last summer that allowed tax preparers to know whether or not the likelihood was good that the filer would receive their entire refund sufficiently to cover the charges and fees being larded on by the preparers.  The IRS was effectively doing a low grade “credit check” for the preparers.  Disgusting!  Once they did that the Office of the Controller of the Currency (OCC), one of the many federal bank regulators, issued a determination barring HSBC and the like from such lending by classifying it now as too risky, despite a last minute contract extension that Block (after filing suit against HSBC for reneging on the contract) had negotiated with HSBC for the 2011 season where Block would cover all HSBC losses.  Finally the federales did the right thing!

Though this may be the death knell for RALs, which are a loan with interest, against the sums, some of the other predatory schemes will still survive.  Block announced that it would continue to fund refund anticipation checks, which are more like advances, through its own bank, the H&R Block Bank.

These predatory operations have been crack cocaine for the big-time preparers for years, so it will take some time and effort to cut the heads off of theses snakes, but at least more of the tails are now going.

Thanks to Eileen A.J. Connelly and David Pitt, AP personal finance writers for a great story on these developments!

Quepos           

            Partially, it was simply the “one that got away.”  It’s footprint was smaller with a base in Santa Barbara that was too far away from our groups and members to do much damage.  They had gotten into this predatory business and done very well, but were impervious to the impacts.  What did it matter to their normal customer base  in Santa Barbara after all?

            Direct discussions with Jackson & Hewitt, when I was with ACORN, when round-and-round, with J&H always claiming they would not “unilaterally disarm,” but would do so as H&R Block did so and others like Liberty Tax Services.  H&R Block was going to move from HSBC to its own bank.  I’m not sure if that happened or not.  Liberty was also a big customer for Santa Barbara. 

            The actions of OCC and other banking regulators are key here, because the withdrawal of Santa Barbara from this line of lending could finally push RALs out of the market, which would be huge.

            This was the Christmas present report from Bloomberg News:

Regulators ordered Santa Barbara Bank & Trust to stop providing the loan money, which covered about 75 percent of Jackson Hewitt’s financial products program, according to a regulatory filing by Jackson Hewitt.

Shares of the company, the No. 2 tax preparer behind H&R Block, dropped $1.34 to $4.50 on Thursday.

The Office of the Comptroller of the Currency told Santa Barbara Bank & Trust on Dec. 18 that the lender would not receive regulatory approval to originate the refund anticipation loans in 2010, according to a statement from the bank’s parent, the Pacific Capital Bancorp.

A bank spokesman, Tony Rossi, said that “the tax refund loan business is a sort of niche business that falls outside of what would be considered core banking operations.”

The bank signed a nonbinding letter of intent with a private equity firm to sell the tax business, the statement said.

Tax preparers are locked in a battle for customers, with Jackson Hewitt vowing this month to regain market share from H&R Block. Firms can attract clients with refund anticipation loans, in which customers who need cash immediately can get a short-term loan, typically lasting a few weeks, that is based on the expected amount of their tax refund.

Jackson Hewitt, with 6,600 outlets and almost three million clients, has been losing customers to H&R Block and Intuit, which makes TurboTax software. It suspended its dividend in March and has hired Goldman Sachs to explore “strategic alternatives,” language that typically means a company may be sold.

            The next target for economic justice reformers and citizen wealth advocates will need to be the unknown “private equity” company that will be tarnishing its reputation and brand – if such a concept is possible in private equity – by buying the Santa Barbara RALs business.  The other target may end up being whomever buys Jackson & Hewitt if Goldman Sachs is able to do the offload.

            You sow what you reap.