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Jackson Hewitt Pays $5 Million to Settle California Charges

High-Cost Tax Refund Loans Marketed to Low-Income Customers

January 3, 2007
Jackson Hewitt, Inc. will pay $5 million, including $4 million in consumer restitution, to settle a lawsuit filed by California Attorney General Bill Lockyer.

The suit alleged that the nation's second-largest tax preparation firm violated state and federal laws in marketing high-cost refund anticipation loans (RALs) mainly to low-income customers.

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"Jackson Hewitt made a lot of money by pushing customers to take out expensive loans rather than encouraging them to wait a couple of weeks to get their refunds from the IRS for free," said Lockyer. "In the process they deceived consumers and took money from low-income families who can least afford it. They even charged people extra for being poor.

"This settlement benefits consumers by holding Jackson Hewitt accountable for its conduct, prohibiting the unfair practices we targeted in our lawsuit and requiring the firm to conduct itself in a manner that could set the industry standard," Lockyer said.

The complaint alleges Jackson Hewitt violated 13 state and federal laws or rules that regulate debt collection practices, and prohibit unfair business practices, false or deceptive advertising, and unauthorized use or sharing of individuals' tax return information.

The settlement requires Jackson Hewitt to pay $4 million in restitution to customers who purchased same-day "Money Now!" loans, "Accelerated Check Refunds (ACR)," and other RAL products that, according to Lockyer's lawsuit, Jackson Hewitt illegally promoted.

The $4 million will provide up to $30 per RAL purchased from 2001 to 2004, up to $15 for each additional financial product bought from Jackson Hewitt, and restitution to consumers victimized by the debt collection scheme.

In addition to the restitution, Jackson Hewitt will pay $500,000 in civil penalties and another $500,000 to reimburse the Attorney General's Office for its investigation costs.

As described in the complaint, RALs are loans provided to taxpayers, secured by their expected tax refund. Internal Revenue Service (IRS) rules prohibit Jackson Hewitt from providing loans itself, so the company contracted with banks for that purpose.

But Jackson Hewitt provided clients the loan applications, filled out the applications, sent the applications to the banks, and distributed the loan checks to customers. Jackson Hewitt's partner banks from 2001-04, the period covered by the lawsuit, were Santa Barbara Bank and Trust (now Pacific Capital Bank) and Household Finance (now HSBC).

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In a typical case, Jackson Hewitt's RAL program worked like this: After calculating a customer's taxes and determining their refund amount, a Jackson Hewitt tax preparer signed up the customer for a RAL. If the bank approved the application, Jackson Hewitt ultimately provided the customer a check – not for the full tax refund amount, but for the estimated refund, minus various fees Jackson Hewitt charged the customer. Depending on the amount of refund, those fees forced some consumers to pay the equivalent of annual interest exceeding 200 percent.

Additionally, Jackson Hewitt's marketing of RALs was deceptive in a number of ways, according to the complaint. Advertisements portrayed RALs as refunds or "Money Now," instead of loans, the complaint alleges, and omitted information that would have informed consumers the products actually were loans.

Jackson Hewitt also misled consumers by stating or implying RALs provided a faster way to get money at tax time than waiting to receive a refund from the IRS, according to the complaint. In fact, consumers who filed tax returns electronically could receive a direct deposit refund from the IRS just as quickly as they could get money from Jackson Hewitt through purchasing one of the firm's high-cost loan products.

From 2001 through 2004, California customers bought more than 200,000 RALs and other financial products from Jackson Hewitt, generating millions of dollars in income for the firm.

To indicate how Jackson Hewitt's RAL program targeted the working poor, the complaint notes most of the firm's customers are eligible for the Earned Income Tax Credit (EITC), established by the federal government to provide financial help to low-income families. EITC recipients, however, account for just 20 percent of all taxpayers.

Not only did Jackson Hewitt steer EITC recipients into expensive RAL products, the firm also charged them an additional fee ($10) to buy the products, the complaint alleges.

Jackson Hewitt also participated in a deceptive debt collection scheme under the banner of its RAL program, the complaint alleges.

RAL customers were liable for paying fees and paying back the borrowed money if their anticipated refund did not materialize, for whatever reason. If a customer allegedly owed that debt, Jackson Hewitt would give them a RAL application when they come to Jackson Hewitt in a subsequent year to get their taxes prepared.

What Jackson Hewitt did not adequately tell such customers is that when they signed the RAL application, they agreed to automatic collection on the purported debt, which they may not have even owed. The banks denied these RAL applications, and the customers' anticipated refund was used to pay off the alleged debt, plus a fee.

"Jackson Hewitt customers believed to owe debt from a prior year have been offered an application for a loan in the amount of their refund, but instead have found themselves in the midst of a debt collection process," the complaint alleges.

Additionally, according to the complaint, Jackson Hewitt violated state and federal law by using or sharing customers' tax-return information without their written consent. Jackson Hewitt engaged in these illegal practices to market RALs and collect on debts, the complaint alleges.

The Jackson Hewitt settlement is the second major development in Lockyer's enforcement crackdown on RALs. He filed suit against H&R Block in February 2006, and the case remains pending in San Francisco County Superior Court.

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