CONSUMER FORUM

Refund anticipation loans are risky business

Posted Sept. 18, 2011, at 6:34 p.m.

The largest tax preparation service in the country has received the message about refund anticipation loans. Consumers don’t want their high costs, and consumer advocates are hoping others in the business follow the lead.

H&R Block announced late last year that it was discontinuing its RAL program. The move came after regulators told Block’s third-party lender to stop putting money into the program. Consumer watchdogs have long decried the practice, which can rack up serious interest payments for the short-term loans.

A tax preparer makes an anticipation loan based on the refund a client expects to receive. Rather than waiting for the refund, the client agrees to accept a loan minus a fee and the preparer’s cost of doing the tax return.

Anticipation loans can hit low-income people really hard. Pressed for cash most of the time, the poor have been unwilling and unable in the past to wait the roughly eight weeks it used to take the Internal Revenue Service to crank out their refunds. By signing an agreement to pay a hefty fee up front, low-income taxpayers could get a portion of their expected refund several weeks ahead of people who waited for a check from the IRS.

The Consumer Federation of America estimates that RALs took $600 million out of 7.2 million taxpayers’ pockets in 2009. Bill Cobb, Block’s chief executive officer, said the company’s revenues were strong last year without income from the RALs, and its analysts concluded it didn’t need to make such loans again in 2012.

JP Morgan Chase drew cheers from the consumer community in the spring of 2010, when it announced the end of its RAL program. Chase cited “increased regulator scrutiny” when it announced that RALs were no longer “a strategic fit” in its business plan.

There’s less incentive to take out a RAL these days. The IRS anticipates that next year, average taxpayers who file electronically can expect refunds within two weeks. That makes the expensive anticipation loans less attractive, although that quicker cash is still attractive to many consumers.

Meanwhile, Block isn’t out of the quick cash business entirely. The firm offers what are called refund anticipation checks, which pay the cost of the tax preparation in advance of the IRS refund. A RAC is a temporary bank account, set up at a cost of about $30, only to receive an IRS refund check. Consumers get their money by way of a check or prepaid card, which could carry a fee, too. When the money is gone, the account closes automatically.

While RACs are generally cheaper than RALs, they don’t make much sense financially. Consumers would be better served by opening a regular checking account, which would enable direct deposits, and therefore faster refunds (see Consumer Forum, Dec. 10, 2010).

We agree with critics who, while recognizing the need for such financial arrangements, cringe at charging consumers high rates to borrow their own money.

Other tax preparers know that the big guns are out of the market, and they’re expected to jump in to fill the vacuum. Three national consumer watchdog groups last week called for an end to such loans, calling them “high cost and risky.”

Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s membership-funded, nonprofit consumer organization. Individual and business memberships are available at modest rates. For assistance with consumer-related issues, including consumer fraud and identity theft, or for more information, write: Consumer Forum, P.O. Box 486, Brewer 04412, go to http://necontact.wordpress.com, or email contacexdir@live.com.

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