CASH 2018 Annual Report

70 Tax advance loans represent a significant credit risk, and if we are unable to collect a significant portion of the tax refund advances, it would materially negatively impact earnings. There is a credit risk associated with a tax refund advance because the funds are disbursed to the customer prior to the Company receiving the customer’s refund from the Internal Revenue Service (the “IRS”). Because there is no recourse to the customer if the tax refund advance is not paid in full with the proceeds of the customer’s tax refund, we may not collect all of our payments related to the tax refund advances from the IRS and state revenue departments. Losses will generally occur on tax refund advances when we do not receive payment from the IRS or state revenue department due to a number of reasons, such as IRS revenue protection strategies including audits of returns, errors in the tax return, tax return fraud, and tax debts not previously disclosed to us during our underwriting process. Although our underwriting takes these factors into consideration during the tax refund advance approval process, if the IRS significantly alters its revenue protection strategies for a given tax season, or we are incorrect in our underwriting assumptions, we could experience higher loan loss provisions above those projected. In addition, a consumer could exercise its rights and withdraw its ACH authorization provided in connection with a tax refund advance, meaning the Bank could no longer collect the payments related to the tax refund advances via a direct debit to the customer’s designated bank account, which could result in additional losses. For the tax season refund advance activity incurred in fiscal 2018, the Bank recorded $21.3 million in net charge-offs related to tax refund advances through September 30, 2018. Our network of tax preparation partners is extensive, but it may be difficult to manage and retain such marketing partners because of competitive market forces. As of the date of this filing, the Bank has a network of over 10,000 active EROs that utilize the Bank’s services, and it is expected that this number will increase for the 2018 tax season. Although each ERO undergoes an analysis of its operations prior to marketing the Bank’s products, it is possible that certain EROs will facilitate or engage in tax- related malfeasance or offer the Bank's products and services in a manner that does not comply with law or contractual representations, warranties, and covenants. In addition, it is possible that EROs may choose to offer the tax-related products of other companies that provide products and services similar to the Bank’s for pricing or other competitive reasons. Any of these events, were they to occur in the future, could result in material adverse consequences to us. Agency, technological, or human error could lead to tax refund processing delays, which could adversely affect our reputation and operating revenues. We and our tax preparation partners rely on the IRS, technology, and employees when processing and preparing tax refunds and tax-related products and services. Any delays during the processing or preparation period could result in reputational damage to us or to our tax preparation partners, which could reduce the use and acceptance of our cards and tax-related products and services, either of which could have a significant adverse impact on our operating revenues and future growth prospects. An IRS delay in processing tax returns in any given tax season could result in a smaller percentage of expected revenues flowing into our third fiscal quarter following such tax season. Changes in laws and regulations, or our failure to comply with existing laws and regulations, applicable to our tax refund- related services could have a material adverse effect on our business, prospects, results of operations and financial condition. We derive a significant portion of our total operating revenues and earnings from tax refund processing and settlement services. The tax preparation industry is highly regulated under a variety of statutes and regulations, all of which are subject to change, which may impose significant costs, limitations or prohibitions on the way we conduct or expand our tax refund processing and related services. Any new requirements or rules, changes in such requirements or rules, new interpretations of existing requirements or rules, failure to follow requirements or rules, or future lawsuits or rulings could increase our compliance and other costs of doing business, require significant systems redevelopment, render our products or services less profitable or obsolete or otherwise have a material adverse effect on our business, prospects, results of operations, and financial condition. In addition, changes in the U.S. tax laws as a result of pending tax legislation in the U.S. Congress or otherwise may adversely impact our tax refund processing and settlement business, and such damage could reduce customer demand for our strategic partner’s refund advance products, thereby reducing the volume of refund advance loans that we may offer.