Santa Barbara Bank and Trust's once-thriving business in tax refund anticipation loans has been put on hold.
The California community bank, one of the few independent banks in the country in the niche, is rethinking its options after the Internal Revenue Service decided to make huge changes in the way it refunds the earned income-tax credit.
"They changed the system in midstream," said David Spainhour, chief executive of Santa Barbara Bank. "We're going to have to rethink the program for next season."
The $1 billion-asset bank had for years been building up its business of lending to tax filers in anticipation of a return. The practice gained momentum nationally in recent years, largely a result of the marketing efforts of tax preparation firms such as H&R Block.
Santa Barbara bank, for a fee, would lend the amount of the anticipated return directly to the taxpayer. The IRS, until this year at least, would send the tax refund directly to the bank. Mr. Spainhour said the business was safe, profitable, and a way of serving a large block of low-income customers, who are the biggest users of the product.
Mr. Spainhour said the bank earned $1 million in pretax income on the service last year.
But fraud-related problems with the earned income tax credit, which gives direct tax credit to low-income filers, have thrown a monkey wrench into the business.
The IRS in February decided to review all returns within the program, delaying refunds up to 12 weeks. Before, the earned income credit portion of the refund was sent within 10 working days.
In addition, the IRS decided to stop sending the payments directly to lenders.
Beneficial Corp., a major participant, filed suit against the IRS over the new policy, but was unable to put a halt to the new practice.
An IRS spokesman said the policy stopping direct deposits of refunds to lenders will not change. As part of its push to eliminate filing fraud, the agency delayed a total of $23 billion in refund claims.