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Bank Challenges New York Ban|on Tax-Refund Anticipation Loans

MANHATTAN (CN) - A California bank says it will lose millions of dollars this year because New York "hurriedly passed" regulations that effectively ban tax refund anticipation loans. Pacific Capital Bank dba Santa Barbara Bank & Trust sued New York Attorney General Andrew Cuomo, claiming that as a national bank it is governed by the Office of the Comptroller of the Currency, whose regulations preempt the state's.

The bank says taxpayers can get refund anticipation loans from banks within 24 hours of filing a tax return, though they are charged fees and. When the refund arrives from the IRS, the taxpayer must repay the loan, even if the refund is less than the loan.

Pacific says it issued tens of thousands of such refund loans in New York from January to April 2009.

It claims that New York's new tax laws threaten Pacific's ability to issue a similar amount this year and will cause the bank to lose millions of dollars this tax season.

Pacific objects that New York enacted its legislation "on the very eve of the 2009 tax season," banning the loans and burdening tax preparers with unfair regulations.

Before New York Tax Commissioner Robert Megna became director of the budget this year, he warned about shady tax refund anticipation loans, though Megna's warning concerned tax preparers rather than banks.

"While the promise of immediate cash is tempting, these short-term loans often carry an interest rate far in excess of loan rates offered by banks and credit unions," Megna said in a statement. "Coupled with associated fees, taxpayers may find much of their refund going to their tax preparer."

The danger arises from tax preparers who promise deductions for which the taxpayer is ineligible.

"Unsuspecting taxpayers are led to believe they are entitled to credits and deductions they do not qualify for and, in the end, they are left to pay the price long after the disreputable tax preparer has closed shop and moved on in search of their next victim," Megna said.

Because Pacific does not have branches in New York, it says it must use third-party tax preparers to issue refund anticipation loans in New York. But the new regulations "will necessarily chill tax preparers' willingness to facilitate" such loans, the bank says.

Similar legislation in Connecticut and New Jersey was overturned "because they significantly frustrated the banks' ability to make" tax refund loans, according to the complaint.

Pacific also sued Acting Taxation Commissioner Jamie Woodward, alleging that the new tax laws violate the Supremacy Clause of the Constitution. It seeks declaratory and injunctive relief. It is represented in Federal Court by Andrew Kratenstein with McDermott Will & Emery.

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