Thursday, Apr 19, 2018
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Refund loans to taxpayers may be headed for extinction

Want your tax refund faster?

Rather than wait for a refund check to come in the mail or be direct-deposited into a bank account, some taxpayers opt to get it immediately. For a price.

They use what's called a refund anticipation loan. Consumer groups derogatorily refer to them as tax refund "quickies."

Long offered by some of the nation's biggest tax preparation companies, the short-term loans are backed by the "anticipated" tax return. The borrower gets the money quickly, usually within one to two days, but with hefty fees deducted.

Typically marketed to low-income or moderate-income individuals, such loans are touted as a "financial lifeline" to help pay bills or unexpected expenses.

But they are under scrutiny by consumer groups and others and may be heading toward extinction.

In recent months, a number of big-name tax preparers, including H&R Block, have stopped offering the loans because federal regulators have forced their banking partners to back out.

About 7.2 million U.S. taxpayers used refund anticipation loans in 2009, paying about $606 million in fees plus $58 million in add-on charges, according to a recent study issued jointly by the National Consumer Law Center and the Consumer Federation of America.

"These are conservative numbers," said Chi Chi Wu, a lawyer at the center. "We will be glad to see the last of these high-cost, high-risk loans." Some, the lawyer said, have a 149 percent annual percentage rate.

Consumer advocates consider most of the loans predatory, saying they take advantage of low-income people who don't have bank accounts but need cash quickly.

Deborah Wakeman, owner of a Liberty Tax office in Sacramento, said such loans are "for instant gratification. They're for the person who wants that refund in one to two days."

But this year, a combination of smaller loan amounts, more stringent requirements by banks, and increasing caution on consumers' part, has resulted in fewer of the loans being issued, she said.

"People are more cost-conscious and they're looking at the fees," she noted. Liberty's tax guide clearly states that its anticipation loans carry an effective annual percentage rate of 124 percent. Last year by this time, her office had done 58 such loans; this tax season, only 9.

In many cases, taxpayers are deciding to wait 8 to 15 days for their refunds.

Liberty and Jackson Hewitt, both national chains, are among the few tax-preparation providers that still make anticipation loans.

Jackson Hewitt, for instance, advertises refund anticipation loans on pink flyers and on the company's Web site: "Need Money Now? ... Get $1,500 in as Little as 1 Day!"

Both Liberty and Jackson Hewitt offer tax refund loans -- issued through Kentucky-based Republic Bank -- that are limited to $1,500, based on a total refund of $2,000. (In previous years, such loans were issued in amounts up to $7,500.) Taxpayers pay $61.22 in loan fees, an effective APR of 124 percent, based on a 12-day loan.

If the refund is larger than $1,500, the balance is paid to the taxpayer by direct deposit or a check or is loaded onto a prepaid debit card. Some options require an additional $30 administrative fee, charged by the bank. There are often fees attached to the issuance of paper checks and debit cards.

The IRS has played a role in the fading popularity of anticipation loans. For years, it supplied tax-prep companies and financial institutions with a "debt indicator," which showed if a tax refund was going to be reduced to pay delinquent student loans, child support, or other debts.

That information helped financial institutions backing the tax refund loans determine how much they could lend.

Although the IRS has no authority to ban the loans, its decision to stop providing debt information to tax preparers and lenders has effectively cut off the oxygen. It's given federal regulators impetus to forbid or discourage banks from backing the loans, in part because they are now considered riskier.

To some extent, advance loans for an IRS refund may be less necessary than in years past.

On e-filed tax returns, refunds usually arrive in 10 to 14 days, depending on whether they're direct-deposited to a bank account or sent by mail.

Filers who submit paper tax returns usually must wait four to six weeks to receive a mailed refund check. Those who have payroll cards through their employers can have IRS tax refunds deposited onto the cards.

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