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MORE:
What the Changes
in the Welfare Law
Mean for People
with Disabilities
Fairer Housing for People
with Disabilities
Tax Refunds Drained by
Anticipation Loans
Legal Services Assured
for Immigrant Victims of
Domestic Violence
Immigration Relief Under
the 2005 Violence Against
Women Act
Portable Justice and
Global Workers
THE BIG SKIM:
How Tax Refund Anticipation Loans
Drain Over a Billion Dollars from
Workers’ Tax Refunds
By Chi Chi Wu
[Editor’s Note: This article is adapted from National Consumer Law Center annual reports
from 2002 to 2006 on the refund anticipation loan industry. See the footnotes for links to
these reports.]
Tax time in poor neighborhoods is not April. It is January. And “income tax”
isn’t what you pay; it’s what you receive. As soon as the W-2s arrive, working
folks eager for their checks from the [Internal Revenue Service] hurry to the
tax preparers, who have flourished and gouged impoverished laborers since
the welfare time limits enacted by Congress in 1996.1
R
efund anticipation loans are high-cost loan products that tax preparers and
financial institutions market and that allow taxpayers to borrow against their
anticipated tax refunds and receive an advance on their refund monies. These
loans are part of the fringe financial industry that includes payday loans, auto title
loans, pawnshops, and rent-to-own stores. Refund anticipation loans offer quick
credit to vulnerable consumers at steep prices and at the potential risk of ruined
credit ratings and debt collection harassment. Because these loans usually run from
seven to fourteen days (the difference between when the loan is made and when it is
repaid by deposit of the taxpayer’s refund), fees for them translate into triple-digit
annualized interest rates, draining billions from the pockets of consumers and the
U.S. Treasury. These loans target low- to moderate-income consumers with few
resources and great financial needs, especially those who receive the earned income
tax credit, a refundable credit provided through the tax system and intended to lift
low-wage workers out of poverty. Consumers often are misled into thinking of refund
anticipation loans as “quick refunds,” not understanding that they are loans.
Chi Chi Wu
Staff Attorney
National Consumer Law Center
77 Summer St., 10th Floor
Boston, MA 02110
617.542.8010
[email protected]
I. Background on Refund Anticipation Loans
Refund anticipation loans are a billion-dollar industry. In 2004 about twelve million taxpayers received these loans. Paying an estimated $1.24 billion in fees to get
quick cash for their refunds, these taxpayers essentially borrowed their own money at
extremely high interest rates. Some of them paid hundreds of millions more in fees
tacked onto the cost of the loans themselves. Thus tax preparers and the few lenders
offering these loans have enjoyed growing profits at the expense of their taxpayer
customers.
David Shipler, The Working Poor 13 (2004).
1
Clearinghouse REVIEW Journal of Poverty Law and Policy
n
January–February 2007
519
The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
A. How Refund Anticipation
Loans Work
Refund anticipation loans are high-cost,
short-term loans secured by taxpayers’
expected tax refunds. Instead of waiting
to receive tax refunds, customers borrow
against part or all of their expected tax
refunds. Consumers pay two, or sometimes three, fees to get one of these
loans: a fee for commercial tax preparation, which can average about $150; a
loan fee, ranging from about $30 to over
$100, to the lender; and, for some consumers, a fee, called an “application,”
“document preparation,” or “electronic
filing” fee, averaging about $30, to the
commercial tax preparer to process the
loan. Total fees can range from $180 to
over $250, or about 10 percent of the
consumer’s refund.
Refund anticipation loans speed up
receiving cash from tax refunds, but not
by much. The loan puts cash into the
consumer’s hand in one or two days,
accounting for its appeal as a quick and
“painless” way to get cash. What many
consumers wanting quick refunds do not
realize is that electronic filing of a tax
return with the Internal Revenue Service
(IRS) cuts the wait to eight to fifteen
days if the consumer has a bank account
into which the U.S. Treasury can directly
deposit the refund.2 Thus a refund anticipation loan is only one-to-two weeks
faster than an electronically delivered
refund.
Rather than the tax preparer, a separate
lender, usually a bank, typically makes
the loan. Commercial preparers, acting
as loan agents, facilitate the loans. In this
partnership the bank has the advantage
of avoiding state interest rate caps due to
federal preemption.3 When it makes the
loan, the bank prepares to collect on the
loan by opening a temporary “dummy”
bank account for the borrower to receive
electronic deposit of the refund. The
documents signed by the borrower
instruct the IRS to direct-deposit the
refund into that account. The contract
usually contains a right of setoff; the
lender is repaid when the refund appears
in the dummy account. The consumer is
liable for the full amount of the loan if
the refund is disallowed in whole or in
part. Thus, besides draining the wallets
of taxpayers, a refund anticipation loan
creates the risk of unmanageable debt if
the loan is not repaid when the refund
does not arrive. Consumers who owe
past-due refund anticipation loans are
also at risk from the particularly nasty
tactic of cross-lender debt collection, in
which current refunds are seized to repay
old refund anticipation loans when such
consumers try to get another loan, even
from a different tax preparer or lender.4
A related product that tax preparers and
lenders offer is the “refund anticipation
check.” This product uses the “dummy”
account described above to receive a
refund, but there is no loan. Instead, the
bank waits until the IRS direct-deposits
the tax refund, then issues the consumer
a paper check and closes the dummy
account. The consumer then picks up
the check from the tax preparer’s office.
These refund anticipation checks generally cost $25 to $28. While less expensive
and less risky than a loan, this product is
still pricey for a two-week bank account
in that a permanent savings account
probably costs about the same or less for
a full year of service. Since a paper check
is the ultimate payment form, some consumers may have to go to a check casher
to get cash in hand. The advantage of a
check is that it permits the tax-preparation fees to be deducted from the refund,
and thus the consumer does not need to
pay for those fees out of pocket. Refund
anticipation checks are often used as a
default product if a consumer is denied
or cannot qualify for a loan.
Internal Revenue Service, IRS E-File 2007 Refund Cycle Chart, Publication 2043 (2006), available at www.irs.gov/pub/irspdf/p2043.pdf.
2
3
For an explanation of this preemption, see Elizabeth Renuart et
Regulation, Preemption, and Industry Abuses 41–124 (3d ed. 2005).
al.,
National Consumer Law Center, The Cost
of
Credit:
See infra VIII. Litigation.
4
520
Clearinghouse REVIEW Journal of Poverty Law and Policy
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The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
Table 1.—Trends in Refund Anticipation Loan Volume and Fees
Filing Year
Number of Loans
Increase/Decrease
from Prior Year
Fees
2004
12.38 million
1.89%
$1,240,000,000
2003
12.15 million
-4%
$1,090,000,000
2002
12.7 million
5%
$1,140,000,000
2001
12.1 million
12%
$907,000,000
2000
10.8 million
–
$810,000,000
B. Refund Anticipation Loan
Volume and Fees
In 2004, the last year for which IRS
data were available as of this writing,
individual taxpayers filed 13.76 million returns associated with a refund
anticipation loan; in other words, 13.76
million taxpayers applied for a loan.5
The National Consumer Law Center and
Consumer Federation of America estimate that, of these, approximately 12.38
million resulted in an approved refund
anticipation loan.6 In other words, about
one in every ten taxpayers receives such
a loan.7
In 2004 taxpayers received an average refund of $2,154.8 Based on prices
charged to the customers of the nation’s
largest tax-preparation chain for that
year, the average taxpayer paid about
$100 in loan fees.9 Thus taxpayers paid
approximately $1.24 billion in loan fees
in 2004.
Refund anticipation loan volume
increased significantly during the early
2000s but appears to have leveled off.
Table 1 shows the trends in loan volume
and fees since 2000. 10
The billion-dollar figures in Table 1
would be even higher if we could include
the fees paid for additional loan products called “Instant Money Loans” (H&R
Block) or “Money Now Loans” (Jackson
Hewitt). These are same-day loans, for
IRS Stakeholder Partnerships, Education and Communication Return Information Database for Tax Year 2003 (2005)
[hereinafter IRS Database] (in my files). Tax year 2003 returns were filed in calendar year 2004.
5
A 90 percent approval rate of the loans is associated with the 13.76 million tax returns filed in 2004, yielding a figure
of 12.38 million. See Santa Barbara Bank and Trust E-Filing Financial Services, Why You Should Choose SBBT! (2005),
available at www.taxwise.com/pdf/Why%20SBBT.pdf; Household International, Exploring the Refund Anticipation Loan
(RAL): Questions and Answers, available at http://policycouncil.nationaljournal.com/NR/rdonlyres/C8F9D329-AB22-45F4B6C4-171CCF015DC3/34883/HSBC_ExploreRAL_final1_06.pdf. Industry sources claim that the IRS data include nonloan
products such as refund anticipation checks. Even so, an analysis of lenders’ filings with the Securities and Exchange
Commission for 2003 reveals a total of 10.73 million, or less than a 15 percent difference. See Chi Chi Wu et al., National
Consumer Law Center & Consumer Federation of America, Another Year of Losses: High-Priced Refund Anticipation Loans Continue
to Take a Chunk out of Americans’ Tax Refunds 6–7 (2006) [hereinafter 2006 Report], available at www.consumerfed.org/
pdfs/2006_RAL_report.pdf.
6
For the 2003 tax year, 127 million returns were filed in the 2004 filing season. See IRS Database, supra note 5.
7
Internal Revenue Service, Tax Stats at a Glance, www.irs.gov/taxstats/article/0,,id=102886,00.html (last visited Nov. 21,
2006).
8
9
Chi Chi Wu & Jean Ann Fox, National Consumer Law Center & Consumer Federation of America, All Drain, No Gain: Refund
Anticipation Loans Continue to Sap the Hard-Earned Tax Dollars of Low-Income Americans 4 (2004) [hereinafter 2004 Report],
available at www.consumerfed.org/pdfs/RefundAnticipationLoanReport.pdf.
10
Table 1 is based on the 2006 Report, supra note 6, at 4; Chi Chi Wu & Jean Ann Fox, National Consumer Law Center &
Consumer Federation of America, Picking Taxpayers’ Pockets, Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing into
Low-Income Americans’ Hard-Earned Tax Refunds 4 (2005) [hereinafter 2005 Report], available at www.consumerlaw.org/
initiatives/refund_anticipation/content/2005RALreport.pdf; 2004 Report, supra note 9, at 4; Chi Chi Wu & Jean Ann Fox,
National Consumer Law Center & Consumer Federation of America, The High Cost of Quick Tax Money: Tax Preparation, “Instant
Refund” Loans, and Check Cashing Fees Target the Working Poor 1 (2003) [hereinafter 2003 Report], available at www.consumerlaw.org/initiatives/refund_anticipation/content/2003_RAL_report.pdf; Chi Chi Wu et al., Consumer Federation of America
& National Consumer Law Center, Tax Preparers Peddle High Priced Tax Refund Loans: Millions Skimmed from the Working Poor and
the U. S. Treasury 4 (2002) [hereinafter 2002 Report], available at www.illinoispirg.org/reports/taxpreparers.pdf.
Clearinghouse REVIEW Journal of Poverty Law and Policy
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The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
which consumers can receive all or part
of their loans immediately when they file
their taxes. Lenders charge $20 to $45 for
same-day loans, a fee that the consumer
pays on top of regular loan fees.11
lion tax returns, or about 70 percent
of all paid-preparer returns.16 Jackson
Hewitt franchisees and independent
brokers probably facilitate several million refund anticipation loans.
Tax preparers sometimes charge their
own separate fee, often termed “document preparation,” “e-filing,” or “application” fee, in addition to the loan fee.
However, all of the major tax-preparation chains have agreed to drop this
additional fee in part or whole. H&R
Block dropped this fee entirely as part
of an agreement with the Association of
Community Organizations for Reform
Now.12 Jackson Hewitt agreed to drop
this fee entirely in its company-owned
offices and to encourage its franchisees
to do the same.13 The elimination of this
fee is one of the positive developments
in recent years.
Given that the system administration fee
was not entirely dropped until 2006, an
estimate for the amounts paid in 2004
for these fees is instructive. Based on an
H&R Block estimate of an average of $32,
the fee added about $360 million to the
amount paid for loans in 2004.17
Thus only consumers who choose Jackson
Hewitt franchisees and independent tax
preparers might have to pay this fee.
This is still a substantial share of the
refund anticipation loan market since
over 4,800 of the approximately 5,500
Jackson Hewitt offices are franchisees.14
Major lenders reported partnerships
with several thousand independent preparers.15 For example, in 2003 independent preparers prepared over fifty mil-
C. Price of a Refund
Anticipation Loan
Refund anticipation loan fees translate
into triple-digit annualized percentage
rates for taxpayers. The annual percentage rate for these loans, based upon the
actual amount of time that the money is
lent, is extremely high. Since the federal government’s estimate of the time
to receive a refund through e-filing and
direct deposit is eight to fifteen days, we
calculate the rate based upon a ten-day
loan period.18 For 2006, the National
Consumer Law Center and Consumer
Federation of America estimated that the
annual percentage rates on these loans
range from about 40 percent (for a loan
of $9,999) to over 700 percent (for a loan
of $200).
See H&R Block, Sample Refund Anticipation Bank Loan (2006) (in my files); Santa Barbara Bank and Trust E-Filing Financial
Services, Program Newsletter (2006), available at www.taxwise.com/pdf/2006%20SBBT%20Newsletter.pdf.
11
Press Release, Association of Community Organizations for Reform Now & H&R Block, H&R Block and ACORN Partner
to Help Working Families Claim and Keep More of What They’ve Earned This Tax Season (Jan. 14, 2005), available at
http://acorn.org/index.php?id=8319&tx_ttnews[tt_news]=13278&tx_ttnews[backPid]=2793&cHash=d970af9d10.
12
Tax-Related Financial Products Can Be Costly: Hearing Before the Permanent Subcommittee on Investigations of the
Committee on Homeland Security and Governmental Affairs, 109th Cong. 24–27 (2005) (testimony of Gary P. Weinstein,
vice president, legal and government affairs, Jackson Hewitt Tax Service), available at www.access.gpo.gov/congress/senate/pdf/109hrg/21431.pdf.
13
Jackson Hewitt Tax Service, Annual Report (Form 10-K) 3 (2005), available at http://ccbn.10kwizard.com/download.
php?type=PDF&ipage=3595777.
14
Household Finance reports that H&R Block offices make up only 9,200 (or 53 percent) of the 17,300 outlets with which
Household does refund anticipation loan business. HSBC Finance Corporation, Annual Report (Form 10-K) 7 (2004).
While some of the remaining 8,100 offices may be Jackson Hewitt franchisees, there apparently are still several thousand
independent preparers with which HSBC has a relationship.
15
16
2005 Report, supra note 10, at 15.
17
H & R Block, America’s Tax and Financial Partner (2004).
See Internal Revenue Service, supra note 2. The Treasury Inspector General for Tax Administration reports that the
average time is eleven days. Treasury Inspector General for Tax Administration, Department of the Treasury, Individual Income Tax
Return Information Was Accurately and Timely Posted to the Customer Account Data Engine (2005), available at www.ustreas.
gov/tigta/auditreports/2005reports/200540109fr.pdf. One would subtract the one or two days that it takes for the loan
to be made. Moreover, some free tax-preparation sites report that, during the height of tax season in early February,
refunds arrive in as quickly as a few days.
18
522
Clearinghouse REVIEW Journal of Poverty Law and Policy
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January–February 2007
The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
However, the refund anticipation loan
industry generally discloses lower rates.
The lenders justify their lower rate disclosure by “unbundling,” or subtracting, amounts from the finance charge
and denominating them as something
else in order to make the loans look
less expensive. For example, the lenders subtract a charge supposedly for the
“dummy” bank account; they claim that
it is comparable to the charge for the
non–loan refund anticipation check
product. However, this unbundling is
questionable. We include the charges for
the dummy account fee in our estimates
of the annual percentage rate to present a truer picture of the loan’s “cost of
credit.”
Based on the prices for these loans in
2006, a consumer paid about $100 in
order to get a loan for the average refund
of about $2,150 from a commercial taxpreparation chain (including the dummy
fee), and the effective annual percentage
rate on this loan would be 178 percent.
The fee for the loan plus the fee for
tax preparation, which averages about
$146, totals about $246.19 If the consumer chooses a tax preparer that charges
a “document preparation” or “application” fee of approximately $30 per loan,
the total would rise to $276.20
The price picture will be improving, at
least for customers of one major taxpreparation chain. H&R Block announced
that it would be cutting the price of a
refund anticipation loan in 2007 for certain of the loans, and thus the corresponding annual percentage rate would
decrease for these loans. For a loan of
$2,800, which is the average that H&R
Block processes, the fees will drop by
40 percent.21 H&R Block asserts that this
translates into an annual percentage rate
of 36 percent; however, this rate does not
include the “dummy account” fee.22 With
the latter fee, the rate is closer to 72 percent. While still high, this is an improvement from loan prices in the past.
II. Impact on Low-Income
Taxpayers and Earned Income
Tax Credit Recipients
There is no question that refund anticipation loans are targeted at low-income
taxpayers, especially the low-wage workers who receive the earned income tax
credit. As such, these loans represent a
billion-dollar drain from the wallets of
the taxpayers who need the money most.
Most refund anticipation loan borrowers
are low-and moderate-income taxpayers. According to IRS data, 78 percent
of loan applicants in 2004 had adjusted gross incomes of $35,000 or less.23
Statistics from the major tax-preparation chains and lenders show similar
figures. About 58 percent of H&R Block’s
customers make less than $30,000
annually, while 73 percent of Jackson
Hewitt’s customers earn less than that
amount.24 Refund lender HSBC states
that most of its refund anticipation loan
customers have an average household
income of $17,800.25 Median household
income in the United States was $44,400
in 2004.26
According to industry leader H &R Block, its average tax-preparation fee is $146. H&R Block, Annual Report (Form 10-K)
18 (2004), available at http://phx.corporate-ir.net/phoenix.zhtml?c=76888&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uM
TBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9Mjg3ODYzNCZhdHRhY2g9T04=.
19
See Tax-Related Financial Products Can Be Costly, supra note 13, at 7 (testimony of Nila Grant, former Jackson Hewitt
tax preparer); id. at 8 (testimony of Julie Burbach, H&R Block customer); id. at 175 (statement for the record of Maerine
Henderson, Jackson Hewitt customer).
20
Press Release, H&R Block, H&R Block Announces Plan to Open 1 Million Bank Accounts for Free and Significantly Cut the
Cost of Refund Lending (Sept. 7, 2006), available at www.prwebdirect.com/releases/2006/9/prweb434610.htm.
21
22
Id.
23
IRS Database, supra note 5.
See Peter Tufano & Daniel Schneider, H&R Block and “Everyday Financial Services” 7 (2d ed. 2005); Jackson Hewitt, Final
Prospectus 46 (2004), available at http://ccbn.10kwizard.com/download.php?type=PDF&ipage=2856162.
24
Jackson Hewitt Tax Service, supra note 14, at 7.
25
Carmen DeNavas-Walt et al., United States Census Bureau, Income, Poverty, and Health Insurance Coverage
2004, at 3 (2005), available at www.census.gov/prod/2005pubs/p60-229.pdf.
26
Clearinghouse REVIEW Journal of Poverty Law and Policy
n
January–February 2007
in the
United States:
523
The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
Table 2.—Cost of Accessing the Earned Income Tax Credit
Type of Fee
Cost to Taxpayer
Drain on Earned Income
Tax Credit Program
Loan fee (including dummy account fee)
$100
$700 million
Application/Administrative fee
$32
$204 million
Total
$132
$904 million
Tax-preparation fee
$146
$1 billion
Most of these borrowers also received
the earned income tax credit. This tax
credit is the nation’s largest antipoverty
program, providing over $38.7 billion to
twenty-two million families in 2004.27
According to IRS data, nearly 56 percent of refund anticipation loan consumers were earned income tax credit
recipients, or seven million families.28
Yet these tax credit recipients made up
only 17 percent of individual taxpayers
in 2004.29 Thus tax credit recipients are
vastly overrepresented among the ranks
of refund anticipation loan consumers.
IRS data show that more than one in
three tax credit recipients took out a
refund anticipation loan in 2004.30
Based on these IRS data, about $700
million was drained out of the earned
income tax credit program in 2004 by
loan fees.31 Administrative and application fees added another $204 million
to the drain. Nonloan fees also reduce
tax credit benefits. One criticism of the
earned income tax credit program has
been that no other antipoverty program requires its beneficiaries to pay
for the cost of accessing the benefit;
the cost includes both the drain created
by refund anticipation loans and taxpreparation fees. Including tax-prepa-
ration fees gives a fuller picture of how
tax credit benefits are chipped away: tax
credit recipients who got loans paid an
additional $1 billion in tax-preparation
fees. (See Table 2.)
Each of these fees undermines the effectiveness of the earned income tax credit
in supporting low-wage workers. These
fees transfer billions in wealth, paid out
of the U.S. Treasury, from poor families
to multimillion-dollar corporations.
III. Survey Data on Refund
Anticipation Loan Borrowers
One of the biggest problems with refund
anticipation loans is that many taxpayers
receiving them do not understand that
the product is a loan. One of the first surveys to analyze this problem was a 1996
study from the University of Georgia; the
study revealed that almost 50 percent
of taxpayers who had received a refund
anticipation loan did not realize they
were getting a loan.32 A small sampling
of consumers in 2003 in Virginia and
Arizona found that over 80 percent did
not know the product involved a loan.33
These results suggested the need for further research about consumer understanding of refund anticipation loans.
Internal Revenue Service, Tax Stats at a Glance, www.irs.gov/taxstats/article/0,,id=102886,00.html (last visited Nov. 21,
2006).
27
IRS data show that 7.77 million earned income tax credit returns were associated with a loan in 2004. IRS Database,
supra note 5. Based on the 90 percent approval rate, the number of approved loans is seven million. See Santa Barbara
Bank and Trust E-Filing Financial Services, supra note 6.
28
There were 21.4 million earned income tax credit returns in 2004 and 127 million individual tax returns in 2004. IRS
Database, supra note 5.
29
30
Id.
31
An average refund of $100 for a refund anticipation loan times 7 million yields $700 million.
Joan Koonce Lewis et al., Refund Anticipation Loan and the Consumer Interest: A Preliminary Investigation, 42 Consumer
Interests Annual 167 (1996).
32
33
524
2004 Report, supra note 9, at 12–13.
Clearinghouse REVIEW Journal of Poverty Law and Policy
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The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
Thus, in December 2004, the National
Consumer Law Center commissioned a
public opinion survey firm to conduct
a telephone poll on refund anticipation
loans. The survey firm questioned more
than 2,000 consumers about their experiences with these loans.34 Most of those
who indicated that they had gotten one
were unaware that the product was a
loan.
The survey found that 18 percent of consumers, or over one in six, had received
a refund anticipation loan at some point
in their lives. Of consumers who had
received a refund anticipation loan, a
startling 70 percent did not realize they
had received a loan. The results indicate
that, despite years of educational efforts
and supposed improvements in disclosures, consumers continue to be confused about these loans. Only 14 percent
of younger consumers, aged 18 to 24—
compared to the 40 percent of slightly
older consumers, aged 25 to 34—knew
they had received a loan.
The 2004 survey yielded information
about the demographics of borrowers.
Refund anticipation loan borrowers are
predominately parents. Over a quarter
(26 percent) of consumers with children
get these loans, while only 13 percent of
childless taxpayers get them. The survey
found racial disparities in loan usage.
Compared to 17 percent of white consumers, 28 percent of African-American
and 21 percent of Latino taxpayers got
loans.
A subsequent polling survey commissioned by the Consumer Federation of
America found that refund anticipation
loan borrowers were vulnerable to quick
cash loan offers. They are more likely
than non–refund anticipation loan borrowers to utilize other high-cost fringe
financial services, such as rent-to-own,
34
payday loans, and pawnshop loans.
These consumers are more likely to be
unbanked than non–refund anticipation
loan borrowers, and those who do have
bank accounts are more likely to have
overdrawn in the past year.
The relationship between refund anticipation loan use and use of other fringe
lending products may be more than a
shared customer base. There are indications that tax refunds, received either
directly from the IRS or through loans,
go in part to pay off other high-cost
lenders.
IV. Overview of Key Industry Players
The refund anticipation loan industry
consists of commercial tax-preparation companies and the banks that make
the loans. The industry is dominated
by three major commercial preparation
chains, H&R Block, Jackson Hewitt, and
Liberty Tax, and by three banks, HSBC,
Santa Barbara Bank and Trust, and Bank
One.
Accounting for 15.7 percent of all tax
returns by individuals in 2004, H&R
Block is the single largest tax preparer
in the nation.35 In 2005 H&R Block prepared sixteen million tax returns and
facilitated 4.2 million refund anticipation loans for about 26 percent of its
customers.36
H&R Block’s refund anticipation loan
partner is HSBC, which has about a 70
percent share in the refund anticipation
loan business. HSBC entered the business by acquiring Household Finance,
one of the larger subprime mortgage
and small-loan lenders in the nation. In
2004 HSBC reported that it had 8.2 million refund product customers.37 HSBC’s
income from refund anticipation loans
and checks was $261 million in 2005.38
For the full survey results, see 2005 Report, supra note 10, at 7–8.
H&R Block, Annual Report (Form 10-K) 3 (2005), available at http://phx.corporate-ir.net/phoenix.zhtml?c=76888&p=IROLsecToc&TOC=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvY29udGVudHMueG1sP2lwYWdlPTM1OTkxNTcmcmVwbz10ZW5r.
35
36
H&R Block, supra note 19, at 22.
37
HSBC Finance Corporation, Annual Report (Form 10-K) 10 (2004).
38
HSBC Finance Corporation, Quarterly Report (Form 10-Q) 3 (2005).
Clearinghouse REVIEW Journal of Poverty Law and Policy
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The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
Table 3.—HSBC 2006 Refund
Anticipation Loan Fee Schedule
for H&R Block
Amount of Loan
H&R Block
$200–$500
$29.95
$501–1,000
$39.95
$1,001–$2,000
$69.95
$2,001–$3,700
$99.95
$3,701–$9,999
$109.95
Table 4.—HSBC 2006 Refund
Anticipation Loan Fee Schedule
for Independent Preparers
Amount of Loan
General
$200–$500
$34.95
$501–1,000
$64.95
$1,001–$1,500
$79.95
$1,501–$2,000
$94.95
$2,001–$7,000
$119.95
Table 3 shows HSBC’s price structure
for refund anticipation loans in 2006
for H&R Block Table 4 for independent
preparers.39
Preparing 3.3 million returns in 2005,
or about 2 percent of all individual tax
returns, Jackson Hewitt is the second
largest tax-preparation chain in the
country.40 In 2005 Jackson Hewitt sold
3.1 million tax refund products, including 1.2 million refund anticipation
loans.41 Thus about 94 percent of Jackson
Hewitt clients were sold a financial prod-
uct. Jackson Hewitt derives a startling
percentage of its profits from financial
products. Nearly 40 percent, or $36 million of the company’s revenues, are from
financial products, and 28 percent of
the company’s revenues—a much higher
percentage than H&R Block—come from
refund anticipation loans alone.42
Santa Barbara Bank and Trust, a subsidiary of Pacific Capital Bancorp, is
Jackson Hewitt’s lending partner. Santa
Barbara made about 1.7 million refund
anticipation loans in 2005. Interestingly
the bank makes far more refund anticipation checks than loans, with a mix of
30 percent loans to 70 percent refund
anticipation checks. 43 However, loans
are far more profitable. Santa Barbara
earned $39.5 million in refund anticipation loan fees in 2004 and $21.1 million in refund anticipation check fees.44
About 30 percent of the bank’s pretax
earnings come from refund anticipation
loans and refund anticipation checks.45
See Table 5 for Santa Barbara’s price
structure in 2006.46
Table 5.—Santa Barbara Bank and
Trust’s 2006 Refund Anticipation
Loan Fee Schedule
Amount of Loan
Loan Fee
$300–$500
$29
$501–1,000
$44
$1,001–$1,500
$69
$1,501–$2,000
$84
$2,001–$5,000
$109
H&R Block, Sample Refund Anticipation Bank Loan (2006) (in my files); HSBC, Taxpayer Financial Services, www.hsbctaxpayerfinancialservices.com/htax/ERO/Ind?cmd_static=eroExpRefLoan (last visited Nov. 21, 2006). The fees include both
HSBC’s stated finance charge and the dummy account fee.
39
40
Jackson Hewitt, Annual Report (Form 10-K) 3 (2005).
41
Id. at 4.
42
Id. at 15.
Pacific Capital Bancorp, Quarterly Report (Form 10-Q) 57 (2005), available at www.snl.com/Cache/1895175.pdf?IID
=100652&FID=1895175&O=3&OSID=9. Santa Barbara’s overall volume of refund anticipation loans and checks was
approximately 5.6 million. Id.
43
Pacific Capital Bancorp, Annual Report (Form 10-K) 63 (2004), available at www.snl.com/Cache/1754185.pdf?IID=100
652&FID=1754185&O=3&OSID=9.
44
45
Id. at 10.
Santa Barbara Bank and Trust E-Filing Financial Services, Program Newsletter (2005), available at www.taxwise.com/
pdf/05Update.pdf.
46
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With over 1,700 locations, Liberty Tax
is the third significant commercial
tax-preparation chain in the country.47
Liberty processed about one million
returns in 2004.48 Its president claimed
that only 16 percent of Liberty customers, or about 160,000, received a refund
anticipation loan.49
day lenders target earned income tax
credit and low-income taxpayers during
tax season. Check cashers often charge
exorbitant fees to cash tax refund or
refund anticipation loan checks.51 Payday
lenders have gotten into the business
of making refund anticipation loans as
well.52
Other industry players include a handful
of banks that make refund anticipation
loans. The largest of them is Bank One,
which merged in 2004 with J.P. Morgan
Chase and has about a 10 percent share
of the refund anticipation loan market. Smaller lenders in the industry are
Republic Bank and Trust, Republic First
Bancorp, and River City Bank. Based in
Kentucky, Republic Bank and Trust is
notorious for using its banks status to
partner with payday lenders in a rent-acharter arrangement, where it “rents” its
bank charter to payday lenders in order
to avoid state usury laws under federal
preemption. In 2004 the Federal Deposit
Insurance Corporation gave Republic a
poor Community Reinvestment Act rating of “needs to improve” based in part
on a “pattern or practice of substantive
violations of equal credit opportunity
laws in the Refund Anticipation Loan
product....”50
Tax time is also a boom time for used-car
dealers, who take advantage of “instant”
tax refunds for use as down payments
on vehicles during the slow winter season. Some dealers use service providers,
such as TaxMax, a division of CarBiz.
com, for back-office support. TaxMax
offers tax preparation and filing services and arranges for refund anticipation
loans through a bank.53 The dealer gets
the refund anticipation loan check to be
used as the down payment on the car.
V. A Cut of the Tax Refund
Pot of Gold
VI. The IRS Role in Refund
Anticipation Loans
Tax preparers and banks are not the only
businesses taking advantage of lowincome taxpayers’ refunds. Eager to cash
in on the availability of large lump sums
from tax refunds, check cashers and pay-
The IRS regulates refund anticipation
loans, but very lightly, with a set of rules
contained in IRS Publication 1345.55
Unfortunately, the IRS’s major role with
respect to these loans is actually to assist
A concern about fringe providers making refund anticipation loans—besides
their draining even more money from
the pockets of low-income taxpayers—is
that they are engaged in tax preparation.
The national taxpayer advocate noted
her concerns over the competency of tax
preparation by such fringe providers and
whether they are adequately respecting
IRS privacy regulations.54
Novelda Sommers, Head of Liberty Tax Services Takes On Competition One Block at a Time, Newport News Daily Press,
March 28, 2005, at B1.
47
48
Barbara Slavin, Rush of Donations from USA Is Immediate and Immense, USA Today, Dec. 30, 2004, at A1.
Mary Wisniewski, Bill Designed to Kill Off Tax Refund Loans, Chicago Sun-Times, April 6, 2005.
49
50
Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation, Public Disclosure: Community Reinvestment
Act Performance Evaluation: Republic Bank & Trust Company 2 (2004), available at http://www2.fdic.gov/crapes/2004/23627_
041004.pdf.
2003 Report, supra note 10, at 11–12.
51
2005 Report, supra note 10, at 16; 2004 Report, supra note 9, at 11; 2003 Report, supra note 10, at 9–11.
52
53
See Tax Deals 4 Wheels, www.taxmax.net/index.cfm (last visited Nov. 21, 2006).
National Taxpayer Advocate, Internal Revenue Service, 2003 Annual Report
gov/pub/irs-utl/nta_2003_annual_update_mcw_1-15-042.pdf.
54
to
Congress 271 (2003), available at www.irs.
Internal Revenue Service, Handbook for Authorized IRS E-File Providers of Individual Income Tax Returns (2004), available at www.
irs.gov/pub/irs-pdf/p1345.pdf.
55
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refund anticipation loan borrowings. This
is because the IRS is under a mandate
from Congress to achieve an 80 percent
electronic filing target by 2007, and these
loans boost electronic filing volume.
The major way that the IRS helps loan
providers is its “debt indicator,” which
screens electronically filed tax returns
and lets the preparer know if there are
any federal offset claims against a taxpayer’s refunds, such as for a delinquent
child support or student loan debt.56 The
debt indicator has proven to be a substantial benefit to the lending industry since it nearly doubles the number
of loans made and boosts loan profitability.57 With its debt indicator, the IRS
essentially is doing a free credit check
for refund anticipation lenders.
Another way the IRS is responsible for
refund anticipation loans is by permitting commercial tax preparers in the
Free File program to market the usurious loans as well as other paid products. Established by the IRS, the Free
File program is a partnership in which a
consortium of commercial preparers has
agreed to provide free online tax preparation and electronic filing of federal tax
returns to certain groups of taxpayers.58
Since taxpayers reach Free File preparers by going through the IRS website,
the IRS in effect permits the appearance
of an implicit government endorsement
of the marketing of refund anticipation
loans and other ancillary products, such
as audit “insurance,” or the preparation
of state tax returns.
VII.Legislation
Thus far ten states regulate refund anticipation loans:
n
California,59
n
Connecticut,60
n
Illinois,61
n
Minnesota,62
n
Nevada,63
n
North
Carolina,64
n
Oregon,65
n
Virginia,66
n
Washington,67
n
and
Wisconsin.68
A number of municipalities also regulate refund anticipation loans.69 With the
exception of Connecticut, all primarily
rely on disclosures to protect consumers
from lending abuses. However, disclosures are only partially effective in dealing with the problem of these loans.
56
See Chi Chi Wu, National Consumer Law Center, Corporate Welfare for the RAL Industry: The Debt Indicator, IRS Subsidy, and
Tax Fraud (2005), available at www.consumerlaw.org/action_agenda/refund_anticipation/content/Debt_Indicator_White_
Paper.pdf.
57
Id. at 3–7.
See Internal Revenue Service, Free File Home–Your Link to Free Online Filing, www.irs.gov/app/freeFile/welcome.jsp (last
visited Nov. 21, 2006).
58
59
Cal. Bus. & Prof. Code §§ 22251 et seq.
60
Conn. Gen. Stat. § 42-480(d)–(e).
61
815 Ill. Comp. Stat. 177/1 et seq.
62
Minn. Stat. § 270C.445.
63
Nev. Rev. Stat. §§ 604B et seq.
64
N.C. Gen. Stat. §§ 53-245 to 53-254.
65
Or. Rev. Stat. § 673.605.
66
Va. Code Ann. §§ 6.1-474 et seq.
67
Wash. Rev. Code §§ 19.265.010 et seq.
68
Wis. Stat. §§ 421.301, 422.310.
These include New York City (Section 20-739 of the Administrative Code) and Hempstead, New York. Seattle passed
a refund anticipation loan ordinance that required oral disclosures; however, Washington State subsequently preempted
that ordinance with its state refund anticipation loan law, supra note 67.
69
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Connecticut’s law regulates refund
anticipation loans by capping rates at a
60 percent annual interest rate.70 The
Connecticut law prohibits those who
broker or process these loans from facilitating a loan at a rate over 60 percent
and imposes a fine of $500 per violation.
After the Connecticut cap was passed,
Santa Barbara Bank and Trust promptly
sued the state in federal district court
and obtained a ruling that the National
Bank Act preempted the law.71 The case is
currently on appeal.
On the federal level, Sen. Daniel Akaka
(D-Haw.) and Rep. Jan Schakowsky (DIll.) introduced the strongest effort to
regulate these loans: the Taxpayer Abuse
Prevention Act would ban loans made
against the earned income tax credit.72
Senator Akaka also introduced several
measures to defund the debt indicator.
Other legislators introduced bills that
would require registration of refund
anticipation loan providers, better disclosures, and funding for free tax-preparation programs and bank account pilots
to receive refunds.73
For states interested in regulating
refund anticipation loans, the National
Consumer Law Center drafted a model
state law that would regulate refund
anticipation loans. This model law primarily focuses on the tax preparers facilitating the loans.74
70
VIII. Litigation
During the past fifteen years a number of
consumer class action lawsuits were filed
against tax preparers and their lending partners over alleged refund anticipation loan abuses. These class actions
alleged that the companies violated a
range of laws, including the federal Truth
in Lending Act, the federal Racketeering
Influenced and Corrupt Organizations
Act, and state laws governing unfair and
deceptive acts and practices.75 Some of
the class actions focused specifically on
whether tax preparers breached a fiduciary relationship to their customers
when they failed to disclose the kickbacks they received from lenders for
each loan.76
Some of these class actions have had tortured histories or resulted in extremely
controversial settlements. In 2000 a
notorious $25 million global settlement
threatened to eliminate all of these lawsuits and pay pennies on the dollar to a
large class of borrowers.77 There were allegations that H&R Block and Household
colluded with some “friendly” plaintiffs’
attorneys on the settlement.78 The Court
of Appeals for the Seventh Circuit overturned the approval of the settlement
and sent the case back to a different
judge, who rejected the settlement and
fired the attorneys for the class.79
Conn. Gen. Stat. § 42-480(d)–(e).
Pacific Capital Bank National Association v. Connecticut, No. 3:06-CV-28 (PCD), 2006 WL 2331075, slip op. (D. Conn.
Aug. 10, 2006).
71
Taxpayer Abuse Prevention Act, S. 324, 109th Cong. (2005), available at http://thomas.loc.gov/cgi-bin/query/D?c109:2:./
temp/~mdbsfbG80a::.
72
See Taxpayer Protection and Assistance Act of 2005, S. 832, 109th Cong. (2005), available at http://thomas.loc.gov/cgibin/query/D?c109:2:./temp/~mdbsNgCTlR::.
73
National Consumer Law Center, Model Refund Anticipation Loan Act, www.consumerlaw.org/action_agenda/refund_
anticipation/ral_commentary.shtml (last visited Nov. 21. 2006).
74
See Peterson v. H&R Block Tax Services Incorporated, 22 F. Supp. 2d 795 (N.D. Ill. 1998); Basile v. H&R Block Incorporated,
777 A.2d 95 (Pa. Super. Ct. 2001); H&R Block Incorporated v. Haese, 976 S.W.2d 237 (Tex. Ct. App. 1998); Green v. H&R
Block Incorporated, 735 A.2d 1039 (Md. 1999); Cades v. H&R Block, 43 F.3d 869 (4th Cir. 1994); Affafato v. Beneficial,
No. 96 CV 5376 (NG), 1998 U.S. Dist. LEXIS 12447 (E.D.N.Y. Aug. 7, 1998).
75
76
See Basile, 777 A.2d 95; Mitchell, 783 So. 2d 812; Haese, 976 S.W.2d 237; Green, 735 A.2d 1039.
Zawikowski v. Beneficial National Bank, No. 98 C 2178, No. 98 C 2550, 2000 U.S. Dist. LEXIS 11535 (N.D. Ill. July 21,
2000).
77
David Cay Johnston, New Questions About Block’s Lucrative Tax Loans, New York Times, July 2, 2000, at A3.
78
Reynolds v. Beneficial National Bank, 288 F.3d 277 (7th Cir. 2002), rev’d and remanded, 260 F. Supp. 2d 680 (N.D. Ill.
2003). These decisions are discussed in the 2003 Report, supra note 10, at 15 (Seventh Circuit decision), and 2004 Report,
supra note 9, at 17 (on remand).
79
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The court appointed the attorneys who
objected to the first settlement as class
counsel.80 In an ironic twist of fate, these
attorneys subsequently engineered a second settlement that would have snuffed
out a number of strong class actions
brought in state court in West Virginia
and Ohio and would have involved giving
coupons for discounts on tax-preparation services to claimants as part of the
settlement. The federal district court
rejected this settlement and noted its
many problems.81 A third settlement was
approved in 2006: it paid $39 million to
a much smaller class, did not eliminate
other class actions, and did not involve
coupons.82
Meanwhile, the West Virginia and Ohio
cases against H&R Block were settled
in December 2005.83 The $62.5 million
settlement, including attorney fees, for
the class covered consumers in twentysix states.84 No coupons were involved in
this settlement.
In Texas H&R Block and plaintiffs’ counsel proposed a much-criticized settlement in which class members received
only discount coupons for tax preparation but the attorneys for the class
80
received $49 million in attorney fees.85
The intervention of objectors resulted in
a modification of the settlement so that
class counsel agreed to pay out $26 million of their $49 million in fees to class
members in addition to the coupons.86
Government consumer protection agencies attempted to curb refund anticipation loan abuses. As early as the mid1970s, the Federal Trade Commission
issued an order forbidding Beneficial
from advertising its refund anticipation
loan product as an “instant tax refund.”87
During the 1990s several state consumer protection agencies and attorneys general instituted proceedings
against H&R Block for failing to distinguish clearly between its loan and “Rapid
Refund” products.88 The New York City
Department of Consumer Affairs brought
enforcement actions against tax preparers’ lending activities for violations of
the city’s consumer protection law.89 The
California Attorney General’s Office sued
H&R Block over its lending activities.90
Several state attorneys general and banking commissioners issued advisories cautioning consumers in their states to avoid
refund anticipation loans.91 The banking
Carnegie v. Household International, 220 F.R.D. 542 (N.D. Ill. 2004).
Carnegie v. Household International, 371 F. Supp. 2d 954 (N.D. Ill. 2005). This decision is discussed in the 2004 Report,
supra note 9, at 24–25.
81
82
Carnegie v. Household International, 445 F. Supp. 2d 1032 (N.D. Ill. 2006).
Lawrence Messina, “Rapid Refund” Lawsuits Resolved: H&R Block Agrees to Pay $62.5 Million, Associated Press, Dec.
27, 2005.
83
See Cummins v. H&R Block, No. 03-C-134 (W. Va. Cir. Ct. Kanawha County Dec. 23, 2005) (agreement of settlement).
84
85
This ruling and settlement are discussed in the 2003 Report, supra note 10, at 15–16.
H&R Block to Pay $26 Million over Claims that Company Failed to Disclose Loan Fees, BNA Banking Report, June 30,
2003, at 1052.
86
Beneficial Corporation v. Federal Trade Commission, 542 F.2d 611 (3d Cir. 1976) (upholding part of FTC order, but
overturning in part).
87
See, e.g., National Association of Attorneys General, Texas–H&R Block, Inc., H&R Block of South Texas, Inc., 150 Percent
Interest Charges, NAAG Consumer Protection Report, Sept. 1993, at 28; JTH Tax v. H&R Block Eastern Tax Services, 128 F.
Supp. 2d 926, 938 (citing several state enforcement actions).
88
89
See Dykstra v. H&R Block, No. 401201/02 (N.Y. Sup. Ct. Dec. 20, 2002) (stipulation of settlement).
Complaint, People of California v. H&R Block Inc. (Cal. Super. Ct. Feb. 15, 2006), available at http://ag.ca.gov/newsalerts/cms06/06-013_0a.pdf.
90
Press Release, Office of the California Attorney General, Attorney General Lockyer Urges Consumers to Avoid Expensive
Loans Disguised as “Instant” Tax Refunds (Jan. 26, 2005), available at http://ag.ca.gov/newsalerts/release.php?id=440&ye
ar=2005&PHPSESSID=403425df1a6a943e8f474c5a3e5c3b7e; Iowa Attorney General Tom Miller, Rapid Tax-Refund Loans:
Costly Way to Gain Few Days on Tax Refund, Daily Nonpareil, Jan. 26, 2005; Bruce Mohl, State Urges Low-Income Taxpayers
To Avoid Refund Loans, Boston Globe, Feb. 5, 2004; Press Release, Office of the Illinois Attorney General, Attorney General
Madigan Warns Consumers, Taxpayers About Instant Tax Refund Schemes, (Feb. 13, 2003), available at www.illinoisattorneygeneral.gov/pressroom/2003_02/021303.html; AG Warns of Scams Regarding Tax Refunds, Tulsa World, Feb. 8, 2003,
at A19.
91
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commissioners for Massachusetts and
Missouri issued warning letters to tax
preparers that they would be required
to obtain broker’s licenses if they were
offering loans.92
Several lawsuits have been filed against
refund anticipation lenders and tax preparers over the practice of cross-lender
debt collection.93 This is a particularly
abusive practice that lenders use to collect prior refund anticipation loan debts.
All of the lenders include a provision in
their loan agreements allowing them to
take a consumer’s tax refund and use it
to pay back any prior refund anticipation loan debts for any lender. Thus, if
a taxpayer owes money to one lender
from a prior year and applies for a loan
from a different lender, her loan will
be denied and her refund will be gone.
The second lender will take her refund
and use it to repay the prior loan debt to
the first lender. The National Consumer
Law Center is cocounsel for the putative
class in the latter case, which survived a
preemption challenge on appeal.
IX. Where Next for the Refund
Anticipation Loan Industry?
For years, we have heard that the IRS will
be able to reduce the time it takes to issue
a refund—down to only a few days with
e-filing and direct deposit. Since faster
refunds means that refund anticipation
loans will no longer have the advantage
of speed, this increase in refund issuance will reduce the demand for loans.
The major industry players appear to be
responding to the eventuality of faster
refunds in different ways.
Jackson Hewitt and both of its lending
partners have developed a new product,
called a “pay-stub refund anticipation
loan”; the taxpayer gets a loanlike product even before she receives her W-2.94
Since a taxpayer cannot file a return
without a W-2, this loan is made prefiling and before the tax season officially
starts by estimating taxes from year-todate information on the taxpayer’s pay
stub. The taxpayer must then return to
Jackson Hewitt when her W-2 does arrive
in order to repay the pay-stub loan.
The price for a pay-stub loan includes
several fees. One news report cited fees
of $50 to Jackson Hewitt and a finance
charge of as much as $95 for loans up
to $1,900.95 Taxpayers must pay a second
finance charge for a loan representing
the balance of their refund.96 Thus taxpayers might pay up to twice as much as a
traditional loan to get part of their refund
monies before tax season begins.
Jackson Hewitt appears to be responding to the potential of faster IRS refunds
by introducing a loan product that can
get the “jump” on tax season, but at a
much greater cost. This product concerns us for several reasons, including
the added expense, this product enabling
the refund anticipation loan industry to
keep draining tax refunds and earned
income tax credit benefits despite IRS
efforts to speed refunds, and the additional risk posed by a loan based on a
refund where the taxpayer has not even
received her W-2, let alone had her taxes
calculated. Furthermore, the pay-stub
loan forces the taxpayer in advance of the
tax season to return to Jackson Hewitt to
have her taxes prepared.
Memorandum from John S. Allison, Commissioner, Department of Banking and Consumer Finance, Mississippi, to All Tax
Preparers that Issue Refund Anticipation Loans (Aug. 19, 2003) (“Department Warns Mississippi Tax Preparers They May Have
to Obtain a License to Provide Refund Anticipation Loans”), available at www.dbcf.state.ms.us/documents/cons_finance/taxpreparers-1st-memo.pdf; Letter from Thomas J. Curry, Massachusetts Commissioner of Banks (March 5, 2003) (“Division of
Banks Warns Tax Preparers that They Must Be Licensed to Provide Refund Anticipation Loan”), available at www.mass.gov/
?pageID=ocaterminal&L=6&L0=Home&L1=Government&L2=Our+Agencies+and+Divisions&L3=Division+of+Banks&L4=Arc
hive+of+News+%26+Updates&L5=2003+News+%26+Updates&sid=Eoca&b=terminalcontent&f=dob_taxprep&csid=Eoca.
92
See, e.g., Carbajal v. H&R Block Tax Services, 372 F.3d 903 (7th. Cir. 2004); Hood v. Santa Barbara Bank and Trust, 143
Cal. App. 4th 526, (Cal. Dist. Ct. App. 2006).
93
Jackson Hewitt advertises: “Don’t Wait For Your W-2. Get up to $1900 with a Money Now Loan in Minutes. Then Come
Back With Your W-2 To File Your Return” (advertisement in my files). See also Jackson Hewitt, Products and Services:
Money Now Loan, www.jacksonhewitt.com/products_moneynow.asp (last visited Nov 21, 2006).
94
95
Melissa Burke, Consumers Can’t Wait for Tax Refunds, York Daily Record, Jan. 8, 2006.
96
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So far, industry giant H&R Block appears
not to have developed a comparable product and has criticized Jackson Hewitt for
making pay-stub loans.97 However, H&R
Block also stated that it might develop a
similar product if Jackson Hewitt continues.98 Meanwhile, H&R Block is positioning itself to be a major provider of
“everyday financial services,” especially
for low- and moderate-income consumers.99 H&R Block’s share of the low- and
moderate-income “market” is enormous. For instance, H&R Block serves
approximately 27 percent of unbanked
households in the United States.100
With a bank charter, H&R Block will have
the potential ability to get many of these
unbanked clients into bank accounts.
H&R Block announced several new products, including low-cost electronic bank
accounts based on debit card access. H&R
Block set an ambitious goal of getting
one million of its customers into bank
accounts.101
H&R Block’s business strategy is not
without risks for consumers. While the
fees for its bank accounts appear to be
reasonable for now, the devil is always
in the details and in the fine print. H&R
Block might pitch products that are not as
affordable as refund anticipation loans.
For instance, H&R Block owns one of
the top ten subprime mortgage lenders,
Option One. H&R Block tax preparers can
heavily steer their low-income homeowners into Option One subprime loans.
X. Resources on Anti–Refund
Anticipation Loans
For more information on refund anticipation loans and the industry, refer
to the National Consumer Law Center
and Consumer Federation of America’s
annual reports on the refund anticipation loan industry.102
Many other national, state, and local
groups have engaged in efforts against
these loans. A partial list includes the
n
Association
of Community Organizations for Reform Now;103
n
Children’s
n
National
Defense Fund;104
Community Tax Coalition;
n
Neighborhood Economic Development
Advocacy Project in New York City;105
n
California
Reinvestment Coalition;
n
Connecticut
Association for Human
Services (which spearheaded the successful effort to pass the Connecticut
loan interest rate cap);
n
Policy
Matters Ohio;106
97
David Twiddy, Block Calls on Rivals to Halt Use of Tax Loans, Associated Press, June 12, 2006.
98
Id.
99
See Tufano & Schneider, supra note 24.
Id. at 9.
100
Press Release, H&R Block Announces Plan to Open 1 Million Bank Accounts for Free and Significantly Cut the Cost of
Refund Lending (Sept. 7, 2006), available atwww.prwebdirect.com/releases/2006/9/prweb434610.htm.
101
These reports are available, along with a host of other resources, at www.consumerlaw.org/action_agenda/refund_
anticipation/index.shtml.
102
ACORN Financial Justice Center, Increasing Incomes & Reducing the Rapid Refund Rip-Off (2004), available atwww.acorn.
org/fileadmin/ACORN_Reports/National_EITC_Report_-_Final_version_01.pdf.
103
Children’s Defense Fund, Keeping What They’ve Earned: Working Americans and Tax Credits (2005) (versions for Mississippi,
New York, Ohio, South Carolina, Tennessee, Texas, and District of Columbia), available at www.thehatchergroup.com/
doc/briefing_book05.pdf; Children’s Defense Fund Minnesota, Keeping What They’ve Earned: Working Minnesotans and Tax Credits
(2005), available at www.cdf-mn.org/PDF/2005_RAL_report.pdf.
104
New Yorkers for Responsible Lending, NYS Tax Refund Anticipation Loan (RAL) Fact Sheet: RALs Made in 2004, available
at www.nedap.org/pdfs/NYS_Rals_Fact_Sheet.pdf.
105
David Rothstein, Policy Matters Ohio, Credit Where It’s Due: The Earned Income Tax Credit
policymattersohio.org/pdf/credit_where_its_due.pdf.
106
532
in
Ohio (2006), available at www.
Clearinghouse REVIEW Journal of Poverty Law and Policy
n
January–February 2007
The Big Skim: How Tax Refund Anticipation Loans Drain Over a Billion Dollars from Workers’ Tax Refunds
n
Community
Reinvestment Association
of North Carolina; and
n
Woodstock
Institute.107
Many of these groups, as well as the
Brookings Institution, have also published
reports on refund anticipation loans.108
Several free tax-preparation programs
and credit unions have alternative loans
that are much cheaper than those in
the commercial industry. For example, Alternatives Federal Credit Union
offered a refund anticipation loan based
upon its usual line of credit. Alternatives
charged a $20 fee and an 11.5 percent
annualized interest rate for this lowcost loan.109 For a ten-day loan based on
the average refund of about $2,000, that
works out to an annual percentage rate
of 47.5 percent, about one-third of the
rate for a comparable loan from HSBC
or Santa Barbara. In Minneapolis, U.S.
Federal Credit Union and AccountAbility
Minnesota offer free loans to clients who
have outstanding loans in order to move
them away from the loans.110
Last, but certainly not least, the national
taxpayer advocate has frequently discussed the problems with refund anticipation loans. The national taxpayer
advocate is the head of an independent
office within the IRS; the office assists
individual taxpayers and advocates the
reform of systemic problems for taxpayers in the tax system. The national
taxpayer advocate issues two statutorily
required reports to Congress every year.
In several of her reports, she has been
critical of the IRS’s role with respect to
refund anticipation loans.111
■
■
■
Refund anticipation loans skim hundreds
of millions of dollars from the earned
income tax credit and the tax refunds of
low-income taxpayers. Since these loans
represent a major source of revenue, tax
preparers and banks will continue to sell
them and develop even worse products
unless Congress or the IRS acts to restrain
the industry. A number of measures can
stem the drain caused by these loans—
from banning the usurious loans outright
to getting more low-income taxpayers into
bank accounts.112 The IRS has a major role
and can prevent the loans by speeding up
refunds or eliminating the debt indicator.
State legislatures and agencies can rein
in loans by regulating the tax preparers
that facilitate the loans. In the meantime,
free tax-preparation and asset-building
programs are available as an alternative
to commercial tax preparation and the
lure of loans. Ultimately the most effective reform should come from Congress,
which has the power to ban or cap the
rates for these usurious loans.
Tom Feltner, Woodstock Institute, Refund Anticipation Loans Usage Rates Negatively Impact the Asset Building Potential of
the Earned Income Tax Credit, Reinvestment Alert, Feb. 2006, available at www.woodstockinst.org/document/alert29.pdf.
107
108
Alan Berube & Tracy Kornblatt, Brookings Institution, Step in the Right Direction: Recent Declines in Refund Loan Usage Among LowIncome Taxpayers (2005), available at www.brookings.edu/metro/pubs/20050412_eitcdecline.pdf; Alan Berube et al., Brookings
Institution, The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the Benefits of the EITC (2002), available at
www.brookings.edu/es/urban/publications/berubekimeitc.pdf.
109
Amy Audetat & Alexis Heath, Alternatives Federal Credit Union, Alternatives Federal Credit Union’s Refund Express Loan: A Responsible
First Step in Reducing Dependency on Predatory Refund Anticipation Loans, available at www.tax-coalition.org/Resource%20Library/
Refund_Express_Loan_%20Package.pdf.
See AccountAbility Minnesota, Express Refund Loans, www.accountabilitymn.org/index.php?id=RefundLoans_information (last visited Nov. 21, 2006).
110
111
2 Internal Revenue Service, National Taxpayer Advocate’s 2007 Objectives Report to Congress: The Role of the IRS in the Refund
Anticipation Loan Industry (2006); id., 1 National Taxpayer Advocate 2005 Annual Report to Congress 162–79 (2005); id., The
National Taxpayer Advocate’s Report to Congress: Fiscal Year 2004 Objectives 17–18 (2003); id., National Taxpayer Advocate 2003
Annual Report to Congress 270–71 (2003); id., National Taxpayer Advocate FY 2001 Annual Report to Congress 63 (2001). These
reports are available at www.irs.gov/advocate/article/0,,id=97404,00.html. The U.S. General Accounting Office also noted
the many problems with refund anticipation loans and paid tax preparers. See U.S. General Accounting Office, GAO-04-70,
Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax Preparers, but Oversight for IRS Is a Challenge 10 (2003), available at www.gao.gov/cgi-bin/getrpt?GAO-04-70.
For more information on reform measures, the National Consumer Law Center, Consumer Federation of America, and
a number of other nonprofit organizations developed a National Refund Anticipation Loan Platform, available at www.
consumerlaw.org/action_agenda/refund_anticipation/content/RALplatform.pdf.
112
Clearinghouse REVIEW Journal of Poverty Law and Policy
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January–February 2007
533
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