CFPB and Navajo Nation Sue Tax Franchise for Alleged Illegal Tax Refund Scheme

On April 14, the Consumer Financial Protection Bureau (“CFPB”) and the Navajo Nation filed a Complaint in the U.S. District Court for the District of New Mexico seeking monetary penalties against a tax-preparation franchise and its ownership for allegedly running an illegal tax refund scheme. The plaintiffs specifically claim that this franchise violated the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536(a)(1) (“CFPA”), and Regulation Z, 12 C.F.R. pt. 1026, by abusively steering its low-income customers, including many members of the Navajo nation, to costly tax refund anticipation loans (“RALs”).

The Complaint alleges an elaborate scheme. One defendant, Jeffrey Scott Thomas, operated several H&R Block franchises in New Mexico and in territory within the Navajo Nation. He separately set up and financed a loan company to offer his tax clients short-term loans secured by the clients’ anticipated tax refunds. These loans stated triple-digit annual percentage rates (“APR”) – generally, between 240% and 310% – even though H&R Block offered loans at the time with a maximum rate of 36%. The Complaint maintains that Thomas and his fellow defendants violated CFPA and Regulation Z by, among other things:

  • Paying his tax preparers bonuses based on the number of clients who obtained RALs from his “sister” loan company;
  • Concealing from those clients the financial interest he and his tax preparers had in each RAL they recommended; and
  • Failing to disclose that they had received their customers’ tax refunds and instead persuading the customers to take out additional RALs.

According to the Complaint, from 2011 to 2013, the defendants’ loan company provided RALs to about 7,000 customers annually and, overall, issued more than 39,000 RALs with a face value of more than $36 million. The CFPB and Navajo Nation are asking the court to compel the defendants to pay $438,000 in redress and $438,000 in civil penalties.