Metropolitan News-Enterprise


Friday, September 29, 2006


Page 1


C.A. Revives Suit Alleging Banks Misrepresented Tax Refund Loans




Federal law does not bar California consumers from suing banks for alleged misrepresentations in the marketing of tax refund appreciation loans, this district’s Court of Appeal ruled yesterday.

A divided panel in Div. Six reinstated a putative class action against a lender working with Jackson Hewitt, Inc., the nation’s second largest income tax return preparation service, to offer the loans, commonly marketed as “rapid refunds.”

The loans permit a taxpayer to borrow funds short-term in anticipation of a tax refund that will be large enough to cover the principal and interest. Interest rates are generally among the highest of any form of credit extended by federally regulated lenders, sometimes over 400 percent annually.

The borrower must sign a document authorizing the IRS to deposit the refund in a special bank account under control of the lender. If the refund is less than expected, or the IRS fails to deposit the refund as instructed, the borrower can be held liable for the resulting deficiency.

‘Cross-Collection’ Provision

Attorneys for the plaintiffs, Canieva Hood and the Congress of California Seniors, contend that Jackson Hewitt and its affiliated lenders target low-income borrowers; do not tell them that the product is actually a loan; and misrepresent the nature of the transaction by failing to call attention to oppressive provisions in the loan documents, particularly a “cross-collection” provision that permits the lender to apply the taxpayer’s refund to debts owed by the borrower to other lenders participating in the program.

Attorney General Bill Lockyer, who filed an amicus brief in support of the plaintiffs, sued Jackson Hewitt’s major competitor, H&R Block, earlier this year, making similar arguments.

Hood claims that she was evicted from her residence after Santa Barbara Savings and Loan Association seized her refund under the cross-collection provision in 2001, leaving her unable to pay her rent. Her complaint includes causes of action under the Unfair Competition Law, Consumers Legal Remedies Act, and Rosenthal Fair Debt Collection Practices Act, as well as California common law.

Santa Barbara filed a cross-complaint against the other lenders for indemnity.

No Preemption

Santa Barbara Superior Court Judge James Brown granted judgment on the pleadings in favor of the lenders, ruling that federal banking regulations preempt all of the state law claims.

But Justice Paul Coffee, writing for the Court of Appeal, said that where non-real estate lending is concerned, federal law permits state regulation of lending practices if the regulation “only incidentally affect[s] the exercise of [the banks’ lending] powers.”

The justice reasoned that the plaintiffs are not seeking to regulate the lenders’ ability to make and collect loans, but merely to insure that they do so in a manner consistent with the rights of consumers.

“Put another way, while the state cannot dictate to respondents how they can or cannot operate, it can insist that, however respondents choose to operate, they do so without violating debt collection laws and using deceptive business practices,” the justice wrote.

There is, he added, ample precedent for states to impose that type of regulation.

Justice Steven Perren concurred, but Justice Kenneth Yegan dissented.

Yegan argued:

“The effect of the majority’s decision is to permit a trial court in California to exercise regulatory control over the conditions under which national banks make Refund Anticipation Loans (RALs) and, acting pursuant to cross-collection agreements with other national banks, apply tax refunds deposited into special accounts to satisfy balances due on RALs made in prior tax years.  Regulations adopted by the Office of the Comptroller of the Currency (OCC) preempt state laws that purport to regulate the deposit-taking and non-real estate lending activities of national banks.  Here, appellants seek a state court injunction invalidating a federal banking practice approved by the OCC.  In my view, the majority should stay out of the federal banking business.”

The case is Hood v. Santa Barbara Bank and Trust, 06 S.O.S. 5193.


Copyright 2006, Metropolitan News Company