WASHINGTON — The Consumer Financial Protection Bureau filed a lawsuit Tuesday against the owner of several tax-preparation outlets who allegedly steered low-income clients into expensive loans against their anticipated refunds.
The enforcement action against the New Mexico lender whose locations border the Navajo Nation was part of a coordinated effort with the Navajo Nation Attorney General and came a day before the April 15 deadline to file 2014 taxes.
"This action puts lenders on notice that the Navajo Nation is prepared to enforce federal laws against predatory lenders to protect its citizens," Navajo Nation assistant attorney general Paul Spruhan said in a statement.
The CFPB is seeking $438,000 in redress to customers and a matching amount in civil penalties.
The lawsuit claims that Jeffrey Scott Thomas owned four H&R Block tax-preparation businesses that catered to low-income clients that were part of the Navajo Nation and directed them to another company he set up separately called "Southwest" that offered high interest rate and often unnecessary loans.
Limited CU Offerings
Only a handful of credit unions offer tax refund anticipation loans, while many others use their websites and social media profiles to encourage members not to utilize those services, since they are often predatory lending products.
One credit union that does offer such loans is Huntington County FCU in Huntington, Ind. According to CEO Kathy Borskey, the credit union doesn't do many of the loans—only about a dozen this year—but still makes it available because members want the product.
Huntington County has offered the loans for more than a decade, and members must e-file their taxes and then bring in a confirmation that the loan has been accepted, along with the first two pages of their 1040 form.
"I'm surprised we still do it, because the tax refunds are turning around quicker and quicker" thanks to e-filing and direct deposit, Borskey told CU Journal. "We've had people file their taxes, get the acceptance, we did the loan, and within five days they had the money in their account from the refund. But no matter how quickly you get the money, you always want it quicker."
The loans, which carry at $15 processing fee and an 8% interest rate, are only advertised on HCFCU's website, and most of each year's loans are return business or members who heard about it through word of mouth.
"We charge a flat 8% interest rate, so you're only talking a few cents, a few dollars, based on the length of the loan," said Borskey. "Usually we set them up for 60 days, but within two or three weeks the money is usually paid back."
In spite of the low demand, HCFCU hasn't discussed eliminating the loans. "It's easy to do; if they want it, we'll do it," said Borskey.
Signature Loan By Another Name
Michigan State University FCU in East Lansing, Mich. Offers a 1040EZ loan similar to a tax refund anticipation loan, though CEO April Clobes said the credit union offers a different signature loan for each quarter, and the 1040EZ loan is the second quarter iteration of that product.
"It's a nice option for us to help members in a time of need," she said. "We do it more for an opportunity to have the member engage with us at that time if they have a need." She said that while the response rate is steady, it is not overwhelming and does not see the high response rates that the CU's holiday loan and summer signature loans do.
MSU FCU uses relationship-based pricing and tier pricing for its tax loans based on members' credit scores, and the loans carry an 18-month term.
"They're typically low dollar amounts—a few thousand dollars," said Clobes. "We have people take them not necessarily because they need a tax refund loan but because they need a signature loan at this time of year. Maybe I just want to go on a vacation and I'd like $2,500. For us it's a signature loan product that we market based upon a time-of-life need."
The credit union also offers the loan to members who owe money on their taxes, but Clobes said more members take it as a refund loan than as a loan to cover money they owe.
VITA Still Vital
While tax refund anticipation loans aren't widely available, many credit unions across the country continue to participate in the Volunteer Income Tax Assistance program that provides free tax prep services for low-income consumers.
One of the major VITA players is North Carolina's State Employees CU (SECU), which this year has prepared about 80,000 tax returns for free. According to Tenesha Carter, SVP of tax preparation services, that's about a 7.5% increase over last year, and the numbers continue to go up every year.
"The preparers who do the returns have to take annual certifications by the IRS, so even though it can be pretty foolproof if you use [online tax prep] software, a lot of people are still intimidated by doing their own tax returns and making sure it's right," said Carter. "They don't want to get a call from the IRS, so having the opportunity for a trained tax preparer to do it for you—and it's free—is what drives that growth."
The VITA program is free to members and non-members alike, and about 6% of each year's participants are non-members. All participants fill out a survey that includes questions about membership, and Carter said that about 30% of the non-members who come in for tax services end up joining the credit union.
According to Carter, one reason tax refund anticipation loans aren't as widely available as they used to be is because the IRS has instituted policies to curtail predatory lending practices around those products. She explained that the IRS used to give tax preparers a debt indicator when users e-filed, so potential lenders would know if the consumers applying for refund anticipation loans owed child support or back taxes that would result in a garnished refund.
"The IRS has tried to make it not attractive to offer these products, so there's not as much of a need for it," explained Carter, who added that SECU used to offer a refund anticipation loan. "It's more of a risky-type product not only for the predatory forks but for the credit unions as well, because you have no idea whether this person is going to get their refund, because the IRS won't tell you anymore. So you have to be very careful about it."
Carter added that along with eliminating the debt indicator, the IRS has also worked to speed up refunds issued to direct deposit accounts for tax payers who e-file, further reducing the need for loans to bridge the gap between filing and receiving a refund.
H&R Block Innocent
The CFPB and the Navajo Nation said H&R Block did not participate in the scheme and terminated its relationship with Thomas in September 2014. The CFPB also said that H&R Block typically offers more affordable lines of credit to customers, but that Thomas' franchises chose not to offer those products.
"Thomas set up S/W Tax Loans, Inc. ('Southwest') to offer his tax-preparation clients refund-anticipation loans, which were typically very expensive with triple-digit annual percentage rates," the CFPB said in a press release, and added that "by failing to disclose their financial interests in the loan products to which they were steering their customers, Thomas and his franchises were taking advantage of consumers and engaging in abusive practices."
CFPB Director Richard Cordray said on a conference call with reporters that the enforcement action is the first taken in conjunction with the tribal government since reaching a memorandum of understanding in 2013. On the same call, Spruhan said the coordination with the CFPB extends the tribal government's regulatory reach into border towns.
The CFPB lawsuit also named the owner and president of Southwest loans, Dennis Gonzales as a defendant and if the lawsuit is approved, Thomas and Gonzales will be banned from the tax refund-anticipation business for five years.