CA Federal Court Dismisses Complaint Alleging That Tax Refund Loan Violated Military Lending Act

The U.S. District Court for the Southern District of California has dismissed a complaint alleging that the short-term tax refund advance loan offered by a tax preparation software company and various financial institutions violated the Military Lending Act (MLA).

According to the complaint, the plaintiff obtained a short-term advance loan on his anticipated federal tax refund in connection with filing his tax return in 2024.  Additionally, the plaintiff was allegedly required to obtain a checking account through one of the defendant banks, into which the advanced funds would be deposited, and establish a temporary deposit account with another defendant bank, into which the tax refund would later be deposited.

The plaintiff claimed that the short-term tax refund advance loan violated the MLA because: (1) defendants had unlawful access to his bank account to “intercept” his tax refund to repay the advance loan; (2) the advance loan provides for an APR in excess of the MLA’s statutory limit; and (3) the relevant agreements require him to arbitrate any legal dispute and waive the right to bring a class action in violation of the MLA’s prohibition on such provisions.  The defendants moved to dismiss on a number of grounds.

The court dismissed the complaint with leave to amend.  First, the court determined that the complaint improperly “lumped” the defendants together and, thus, failed to give each defendant notice of the conduct with which it was charged.  Second, the court held that it did not have personal jurisdiction over one of the defendant banks because the bank’s establishment and maintenance of a checking account to hold the advanced funds did not constitute the requisite purposeful direction at the forum state (California).  Third, the court held that all the defendants — except the bank making the advance loan — were not “creditors” subject to the MLA because they were not engaged in the business of extending consumer credit or assignees of such person with respect to consumer credit.

The dismissal was, however, without prejudice, so the plaintiff can refile the complaint.