Tax-Refund Loans Take Advantage of the Desperate
4/12/2009
Source: By Jason M. Breslow • Bloomberg News

When Amy Davis stepped into an H&R Block office in Greenwood, Miss., for an advance on her tax refund, it had been three weeks since her last paycheck.

Davis, 48, said she didn't want to pay more than $300 in fees for a so-called refund anticipation loan worth $5,380, but she had little choice. Her bills were mounting and the mother of two didn't want to risk losing her utilities.

More Americans applied for tax-refund loans in 2007, reversing two years of declines, according to a joint study by the Washington-based Consumer Federation of America and the Boston-based National Consumer Law Center.

With the U.S. unemployment rate at 7.6 percent, the highest since 1992, consumer groups say more jobless Americans may be turning to high-interest, short-term loans to pay bills.

"You probably have increased demand because more people are struggling with debt," said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington.

Loans secured by a borrower's expected tax refund often leave borrowers with effective interest rates of as much as 500 percent for a $300 loan over a 10-day repayment period, according to the study from the Consumer Federation of America and the National Consumer Law Center. Lenders also use a pay stub or car title as collateral for similar short-term loans.

"People who get these loans are probably people who need money pretty badly," said Jim Campen, executive director of the Boston-based watchdog group Americans for Fairness in Lending. "In fact, they just got another short-term problem, which puts them deeper in debt."

Refund loans that Davis used are issued by tax preparers such as H&R Block Inc. and Jackson Hewitt Tax Service Inc. The loans can carry effective interest rates of 77 percent to 140 percent for the average refund loan of $3,000, according to consumer-rights groups, including the Consumer Federation of America and National Consumer Law Center.

Almost 9 million Americans, or 1 in every 15 taxpayers, paid about $901 million in fees during the 2007 tax-filing year for refund loans, according to the joint study.

The loans are expensive and unnecessary, said Chi Chi Wu, a staff attorney at the National Consumer Law Center. They promise taxpayers an advance on their refund in one to two days, while taxpayers can receive a refund at no cost within 15 days if they prepare their own returns and file electronically, Wu said.

H&R Block clients are encouraged to e-file, and 80 percent don't take refund loans, said Nancy Mays, of H&R Block, the nation's largest tax preparer. Customers pay $58 in fees for a typical H&R refund loan of $2,700, the Consumer Federation and the Law Center found. H&R Block's refund loan revenue was $190 million in 2008, according to a regulatory filing.

The company agreed in January to pay $4.85 million to settle California claims it engaged in deceptive marketing of the refund loans. H&R Block denied any wrongdoing.

Davis, who is a student accounts coordinator at Mississippi Valley State University in Itta Bena, said she was lucky because she has friends who were available to help her in the end. She said she'll "never, ever" take another refund loan.

"It was a fiasco," she said.