Blog of the Day: Tax-Preparation Lending Lives On, as Does Regulatory Arbitrage

Here’s another example of tightening bank regulation pushing business into the shadow financial system, for better or for worse.

JTH Holding Inc., which runs the Liberty Tax chain, is preparing to go public, and the eagle eye of BankTalk.org spotted this morsel in the prospectus: The tax-preparation franchisor has landed a partner to offer a product similar to refund anticipation loans. A nonbank partner.

This is significant because the federal banking regulators have been nudging their charges out of the RAL business. Republic Bancorp Inc. of Louisville, Ky., for example, recently settled a dispute with the FDIC by agreeing to end its RAL program after the coming tax season. In fact, Republic was Liberty’s sole remaining bank provider for RAL funding.

But Liberty disclosed in the prospectus that it plans to expand the new type of loan, known as the instant cash advance, in the coming season. This product is funded by the nonbank (whose identity Liberty did not reveal) and was quietly introduced on a test basis this past tax season.

“These plans mean that the fight against tax refund loans may not go away,” says Bank Talk (which is published by the Community Reinvestment Association of North Carolina – no relation to BankThink). “Instead, the battle will become the domain of the CFPB and the states.”

Consumer advocates like CRA-N.C. don’t like this because they consider loans like these to be predatory, no matter what they are called. We bet banks won’t be happy either that a company not subject to federal supervision is filling a void that they, as regulated institutions, were forced to leave.

If it’s any consolation to bankers, Liberty says the instant cash advance probably won’t be as big a business as RALs were. The ICA will cost more than a RAL, because without the benefit of federal preemption a lender is subject to the laws of each state where the product is offered.  ICAs will also carry greater risk to the mysterious nonbank (and to Liberty, which will share in the credit risk), because the IRS is no longer providing lenders with information about tax liens or other claims against the borrower’s refund.

If this type of lending is going to go on, is it better that it happens within the banking system or outside it? Post a comment below.