The Consumer Financial Protection Bureau and the Navajo Nation announced Tuesday that they are taking action against companies and individuals who operated an illegal tax refund scheme.

The operation was based on tax preparation franchises steering low-income consumers, including many citizens of the Navajo Nation, toward high-cost tax refund anticipation loans. A proposed order, if approved by the court, would result in roughly $438,000 in total consumer redress and require the defendants to pay another $438,000 in civil penalties.

The complaint names Jeffrey Scott Thomas, stating that his company, J Thomas Development of NM Inc., owned four H&R Block tax preparation franchises in New Mexico. 

The CFPB and the Navajo Nation did not find that H&R Block participated in this scheme, and H&R Block terminated its relationship with those franchises, which then closed in September 2014. Before they closed, the tax franchises catered largely to low-income citizens of the Navajo Nation who qualified for and relied upon the Earned Income Tax Credit, a federal anti-poverty program. 

Thomas set up S/W Tax Loans Inc. to offer his clients refund-anticipation loans, which typically carried triple-digit annual percentage rates. Thomas decided that his franchises would not offer a line of credit to their tax customers. Instead, he established S/W Tax Loans to sell his tax clients refund-anticipation loans with APRs above 240%. Thomas named a friend, Dennis Gonzales, as the owner and president of S/W Tax Loans.

This scheme allegedly violated the law in several ways: 

  • Illegally steered vulnerable consumers to high-cost products: Thomas and his franchises illegally steered their tax-preparation clients to S/W Tax Loans without disclosing the financial interest he and his employees had in the loans. Thomas, as the financer, earned interest and fees on the loans, and he paid his tax preparers bonuses based on the number of refund-anticipation loans their clients took out. 
  • Illegally and grossly understated the loans’ APRs: S/W Tax Loans’ loan agreements told consumers that the IRS normally makes an electronic deposit in an average of about 12 days. Yet the company's 2013 loan agreements used an APR based on an estimate that the loan would be for 45 days. The inflated loan-term estimate resulted in the APRs being significantly understated, misleading consumers into believing the loans were far less costly than the reality.
  • Unfairly failed to disclose the availability of consumers’ tax refunds: The loan agreements authorized S/W Tax Loans to do several things, including to receive consumers’ state and federal tax refunds, and use their tax refunds to pay off the loan and fees for the tax-preparation services. The company did not disclose to more than 1,500 consumers that their tax refunds had been received from the IRS and already were being processed by the company. Instead, when these consumers inquired about the status of their refund, S/W Tax Loans persuaded the consumers to take out a second or third refund-anticipation loan. That resulted in many consumers paying a finance charge for an unnecessary high-interest loan.   

"Today’s joint action with the Navajo Nation to police illegal and abusive practices is a milestone [for the CFPB]. Through our coordination and cooperation, we are putting an end to this sorry chapter,” said CFPB Director Richard Cordray. "This scheme exploited vulnerable consumers by grossly understating loan rates and by deceiving them about the status of their tax refunds."Added Navajo Nation Assistant Attorney General Paul Spruhan, "Today’s action [withe the CFPB] is the first time the Navajo Nation has sued a border town tax lending service. This action puts lenders on notice that the Navajo Nation is prepared to enforce federal laws against predatory lenders to protect its citizens."
The proposed order, if approved by the court, would: 

  • Ban Thomas and Gonzales from the market: Thomas and Gonzales would be banned for five years from offering financial products associated with tax refunds and from investing, financing or working for any entity that offers such products.
  • Provide full refunds of interest and fees: The defendants would pay $254,267 in redress, which is enough to give full refunds of interest and fees to consumers who took out a second or third refund-anticipation loan because S/W Tax Loans did not tell them their tax refund soon would be available. This is in addition to the estimated $184,000 in refunds that S/W Tax Loans already has provided consumers harmed by the company's deceptive APR disclosures.
  • Require the defendants to pay $438,000 in civil penalties: For their conduct, the defendants would be required to pay $438,000 to the CFPB’s Civil Penalty Fund.


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