Firms Offering Tax Prep Services, Or Illegal Lending Rackets That Violate State, Federal Lending, Unfair Competition, Consumer Protection, False Advertising Laws; Do These Outfits Disguise Loans As 'Instant' Or '24-Hour' Refunds?'

A recent post on Rebecca Tushnet's 43(B)log describes a recent California appeals court ruling that affirmed a lower court's judgment in favor of the State of California against the seemingly ubiquitous tax return preparation service doing business as Liberty Tax Service.

In the ruling, Liberty was ordered to pay about $1.169 million in civil penalties, and roughly $135,000 in restitution, and permanently enjoining Liberty in several ways for violating state and federal lending, unfair competition, consumer protection, and false advertising laws for its business practices involving Liberty's tax preparation and related loan services (refund anticipation loans - "RALs" - and electronic refund checks - "ERCs").(1)

From the post:

• Liberty made a lot of money from RALs and ERCs, including in California; it got percentages or flat fees from the banks with which it worked, and RALs and ERCs also cross-subsidized its tax preparation services, which was important because many of its customers couldn’t afford to pay for them out of pocket.
  
  The trial court found that Liberty’s handling fee charged to ERC customers was an undisclosed finance charge in violation of TILA [Federal Truth in Lending Act] (since an ERC was a form of credit allowing delayed payment for tax preparation services), and that the failure to disclose this also violated the UCL [California's Unfair Competition Law] and FAL [California's False Advertising Law].
  
  Second, the trial court found that using “cross-collection” to collect tax refund loan debts from prior transactions, including non-Liberty transactions, was deceptive, unfair, and illegal. (This could occur when consumers’ prior RALs were larger than the refunds they ultimately received; because a RAL was a loan, they remained potentially liable on the debt.)
  
  Third, the trial court found that certain print and TV ads were likely to deceive within the meaning of the UCL and FAL; Liberty was liable for its own ads and those placed by California franchisees.
  
  Among other things, Liberty was enjoined from directly or indirectly representing a RAL as an actual refund, and from failing to state conspicuously that the product is a loan and including the name of the lending institution and the fee or interest it will charge.
  
  The court of appeals upheld the determination that Liberty’s cross-collection practices violated multiple state laws along with the federal Fair Debt Collection Practices Act (FDCPA). Liberty waived its arguments about the fraudulent and unfair prongs of the UCL and about the FAL, so the court didn’t need to reach other bases for liability.
  
  Liberty was responsible for bringing customers to the banks, soliciting loan applications and getting consumers to sign applications that authorized cross-collection. These authorizations covered any unpaid RAL debts, whether owed to Liberty or to anyone else, and whether the debt was stale or otherwise uncollectable.
  
  The trial court found that both unsophisticated and reasonable consumers were unlikely to recall the details of such debts, particularly those “incurred far in the past and perhaps in connection with a loan issued by a different lender and/or obtained through a different tax preparer.”
  
  Consumers had no meaningful notice of whether there was a claim against them before they authorized the cross-collection; they thus lost the right to dispute the debt, and thus the practice was deceptive, unfair, and in violation of the FDCPA. The cross-collection authorization “appeared on the second or third pages of lengthy and complex contracts that on their face had nothing to do with debt collection, making it unlikely that applicants would read and understand the significance of the information.”

For more, see Calculation of remedies and vicarious liability under California consumer protection law.

For the ruling, see People v. JTH Tax, Inc., -- Cal. Rptr. 3d --, 2013 WL 177140 (Cal. App. 1 Dist.) (Certified for Publication).

(1) The court pointed out, for example, that during a period relevant to the litigation, "[d]ozens of ads began appearing in Pennysaver that improperly promised such things as "Most Refunds in One Day," "Get $1200 in Minutes . . . And the Rest of Your Tax Refund in 24 Hours," "Most Refunds in 24 Hours" and "Got W-2? 24 Hour Refunds."