Metropolitan News-Enterprise


Tuesday, January 22, 2013


Page 1


C.A. Affirms Ruling Tax Service Violated Consumer Laws

Panel Upholds Judgment for $1.3 Million in Penalties, Restitution Over Refund Loans




The First District Court of Appeal yesterday affirmed a judgment requiring the nation’s third-largest tax preparation service to pay more than $1.3 million in penalties and restitution to customers.

Div. Two upheld San Francisco Superior Court Judge Curtis Karnow’s findings that Liberty Tax Service had blurred the line between tax refunds and high-interest loans in its marketing of products called “refund anticipation loans”—or RALs—and “electronic refund checks,” or ERCs.

Karnow said Liberty had violated several laws, including the federal Truth in Lending Act, the state and federal Fair Debt Collection Practices Acts, and California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. He ordered the company to pay $1.169 million in penalties plus $135,000 in restitution of hidden finance charges, and to implement corrective practices

A refund anticipation loan is made by a bank to a customer of the tax preparation service, although the actual marketing of the loan is done by the service, which signs up the customer and turns the paperwork over to the bank. The bank lends the customer the amount of his or her anticipated tax refund—less interest, bank fees, and usually tax preparation fees—and the customer signs over the anticipated refund as collateral.

If the actual refund is less than anticipated, the customer remains liable for the balance. Under what the trial and appellate courts described as illegal “cross-collection” practices, if the customer took out refund anticipation loans for multiple years, the refund for one year could be used to satisfy a debt from another.

The state Attorney General’s Office said the actual interest rates on the loans ran as high as 395 percent, and that approximately 70 percent of Liberty Tax Service’s refund anticipation loan customers in 2006 and 2007 were low-income persons who received the Earned Income Tax Credit.

An electronic refund check is a device by which the tax service agrees to prepare returns without advance payment, and the taxpayer agrees to allow the cooperating bank to open a special account to deposit the proceeds of the refund. The bank then takes out tax preparation fees and its own fees before remitting the balance of the refund to the taxpayer.

Karnow said Liberty’s cross-collection practices violated the FDCPA and the CLRA and were “fraudulent” and “unfair” within the meaning of the UCL. “By seizing control of taxpayers’ refunds before providing them any meaningful notice that they are believed to owe a debt, even a stale and possibly uncollectible debt, the collection scheme at issue is deceptive, unfair, and frustrates the fundamental purpose of the state and federal FDCPA,” the judge found.

He also said the company violated the TILA and the UCL by imposing bank “handling fees” for electronic refund checks that were really hidden finance charges, and that Liberty and its franchisees ran print and television ads that were likely to deceive consumers into signing up for financial products rather than simply waiting and receiving the full amount of their loans from the IRS.

Justice James Lambden, writing Thursday for the Court of Appeal, said Karnow’s ruling was “thoughtful and well-calibrated.”

He rejected Liberty’s argument that the ERC handling fees were exempt from regulation under TILA because the same fees were charged in “comparable cash transactions,” including those in which a few thousand customers used coupons that allowed them to obtain free preparation, as long as they paid the handling fees.

These were not comparable cash transactions, Lambden said, and were in fact not cash transactions at all, and “if anything” resembled credit transactions.

The justice agreed with Karnow that the defendant’s use of “authorizations” to collect past debts, including those that were “otherwise uncollectible,” was a fraudulent and unfair consumer practice.

Lambden went on to reject the defendant’s contention that the injunction against future violations, including specific requirements that the company educate its franchisees on the laws governing advertising and impose specific discipline on violators, including termination of a franchise for multiple offenders, imposed excessive burdens on Liberty.

He agreed with the trial judge that Liberty’s California franchisees, who owned a total of nearly 200 stores in 2005 and 2006—had committed serious and persistent violations of the False Advertising Law. He also concluded that “any reasonable concern about the court’s ‘heavy-handedness’” was alleviated by the trial judge’s retention of jurisdiction to modify or clarify the terms of the injunction.

The case is People v. JTH Tax, Inc., 13 S.O.S. 277.


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