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The regulatory crackdown on refund-anticipation loans is poised to redistribute market share from one tax preparer and its bank partner to their rivals.
January 13 -
The Internal Revenue Service, as part of its plan to regulate tax preparers on the federal level, said it will examine refund-anticipation loans and other tax-time financial products, just as banking regulators crack down on some of the few financial institutions that still fund such loans.
January 11 -
Pacific Capital Bancorp Inc. plans to sell its tax division — its most profitable line — after regulators blocked the company from making new tax loans in the coming year.
December 28 -
Profits from tax refund anticipation loans, a controversial and once-lucrative product for underbanked consumers, are drying up.
July 31
Pacific Capital Bancorp Inc. has unloaded its tax division — but said the sale was "highly unlikely" to help its tax-preparation partners offer more refund anticipation loans this year.
The Santa Barbara, Calif., company entered talks to sell the unit last month, after regulators blocked it from making refund anticipation loans. Pacific Capital said late Thursday it had closed the deal with "Santa Barbara Tax Products Group, LLC, a new company formed by the existing management team of the Tax Division with financial backing from an investment firm."
Pacific Capital did not identify the firm, which is paying up to $10 million for the tax division. The banking company received $5 million up front and will collect the rest on March 15, as long as it honors a commitment to provide "transition support services" to the new company during the tax season.
Pacific Capital also could receive an additional $15 to $25 million from the sale if the new company funds a higher-than-expected number of refund anticipation loans this year. But according to a regulatory filing Thursday, "management believes it is highly unlikely that any further cash payments will be made … based on the number of refund anticipation loans currently expected to be processed."
That forecast will do little to help Jackson Hewitt Tax Service Inc., a partner that still needs funding for more than half of its refund anticipation loans this year. The nation's second-largest tax preparation company said Wednesday that it did not expect to have that RAL funding in place by today, the beginning of the tax season. In a regulatory filing Thursday, Jackson Hewitt noted the sale of Pacific Capital's tax division but did not revise its funding outlook.
George Leis, Pacific Capital's president and chief executive, said in a press release that the sale will allow the $7.9 billion-asset Pacific Capital to return to "our traditional community bank business model."
He also acknowledged the regulatory pressures that forced his company to sell its unit — and may restrict other companies from continuing to offer the controversial tax-time financial products.
"Recent changes in the regulatory and legislative environments have significantly altered the industry, including Pacific Capital Bancorp's ability to offer RALs this tax season, which thereby reduced the value of the business to both Pacific Capital Bancorp and potential buyers," he said.
Leis told American Banker last month that Pacific Capital's tax division generated virtually all of the company's revenue in the past year. (The division earned about $220 million from fees on the sale of the loans and a related product, refund anticipation checks, for the first nine months of 2009.) In a typical year the line of business accounts for roughly 40% of the company's income, he said then.
