January 6, 2009
Consumer groups say Santa Barbara Bank & Trust's refund anticipation loan (RAL) program is a predatory lending practice. To make matters worse, the groups claim the bank is using taxpayer money, from the U.S. Treasury's Troubled Assets Relief Program (TARP), to help make the high-priced loans.
On November 21, 2008, Treasury approved Santa Barbara as a recipient of $180 million from the TARP program.
"Santa Barbara is feeding off of taxpayer money twice in making RALs this upcoming tax season," said Peter Skillern, Executive Director of the Community Reinvestment Association of North Carolina. "First, Santa Barbara is skimming off hundreds of millions in refund dollars in making RALs to working families. Second, it is funding its RAL loans using tax dollars from the bailout."
Santa Barbara is one in the handful of banks that makes RALs and partners with tax preparer Jackson Hewitt. RALs are loans secured by a taxpayer's federal refund, lasting only one to two weeks. They cost between $32 to $130 in loan fees, plus the ancillary fees, and can translate into high Annual Percentage Rates (APRs) of 50 percent to 500 percent. Nearly 9 million taxpayers received RALs in 2006, costing them nearly $1 billion in loan fees.
RALs target low-income taxpayers, especially recipients of the Earned Income Tax Credit (EITC), a special tax benefit for working families. Nearly two thirds of RAL borrowers are EITC recipients, yet they make up only about 17 percent of taxpayers.
Santa Barbara made 1.83 million RALs in 2007, earning $118 million in fees. It is one of the higher-priced RAL lenders, charging about 40 percent more than some of its competitors. The bank relies heavily on revenue from RALs and a related product, refund anticipation checks, and these products at one point constituted 56 percent of its after-tax income.
"Californians are disappointed to see a supposed community bank in wealthy Santa Barbara take federal money while continuing to offer predatory tax refund loans to Earned Income Tax Credit recipients and other Californians in financial need," said Alan Fisher, Executive Director of the California Reinvestment Coalition.
In order to make these RALs, Santa Barbara must have adequate sources of funding while they maintain certain capital levels required by banking regulators. According to Santa Barbara's own statements, TARP funds will help the bank maintain capital levels while it makes triple digit APR loans to working poor families.
