The latest wrinkle in predatory lending: RALs, short for "refund anticipation loans." You get your tax refund when you file (but, if you file electronically, you'd get it in a few days anyway), and you only pay interest of, oh, 100 percent, or maybe as much as 700 percent.
This "product" is a big money-maker for tax preparation firms like H&R Block, Jackson Hewitt and Liberty Tax Services, who are the big three of refund loans, according to a new study by the Community Reinvestment Association of North Carolina (CRA-NC). It found that 11 percent of all tax filers in the state applied for a RAL in 2005, the latest data available, generating an estimated $44 million in fees for the tax-prep lenders. Two-thirds of the loan applicants received the federal EITC—earned income tax credit, for which low-income earners are eligible—and an estimated 86 percent of them were filing for low-income households.
The EITC is a key to the loan-refund business, according to CRA-NC executive director Peter Skillern. The reason is, it's a little complicated to get it, and it's worth a lot of money to low-wage earners—about $1,500 on average, which helps make their average refund top $2,100. So folks naturally go to an H&R Block, say, for help filling out their returns, and especially the EITC form. When they're done, however, they owe H&R Block $100 or $150, money they may not have. No problem: H&R Block will "advance" them their full refund of $2,000 instantly for an additional fee of—well, fees vary, but generally run from about $100 up to $130 or more.
Bottom line, they walk out with $1,800, not $2,000, and pay an extra fee for what amounts to a five- or 10-day loan, since the IRS now pays refunds within two weeks on returns filed electronically, three weeks for returns sent in the mail.
"On a 10-day loan, you're paying a phenomenal interest rate in the form of a $100 fee, on top of the fee you paid for the tax service itself," Skillern says.
CRA-NC, a foundation-supported nonprofit that represents consumers' rights in banking, thinks RALs should be illegal, Skillern says. Unfortunately, the office of the state Banking Commissioner, which last year helped to put predatory payday lenders out of business in North Carolina, has no jurisdiction over the tax-prep lenders, because although the loans are originated here, they're actually made by federally chartered banks located in other states.
(So were payday loans, but the difference, Skillern says, is that in-state payday lenders like Advance America, before North Carolina drove them out, were buying back most of the loans they originated and "servicing" them, which gave Banking Commissioner Joseph Smith and Attorney General Roy Cooper their opening.)
Last week, Skillern and fellow consumer advocates from New York and California met with the federal Comptroller of the Currency, which charters these banks, to ask for help. "He conceded the need for greater oversight," Skillern says. Meaning? "He's offering no relief—yet."
What's really needed, Skillern says, is federal legislation capping interest rates on all such short-term loans, including RALs and their new "holiday" cousins—loans made to you before Christmas based on your pay stub and an estimate of what your refund will be.
One good wrinkle in all this, Skillern says, is that the IRS will now split your refund, paying your tax preparer its fee and you the rest, which means no one should have to "borrow" the fee.
But tax preparers don't make that real clear, and meanwhile are selling their RALs hard, according to Tom Robinson, a Raleigh CPA who helps run one of 38 sites around the Triangle where low-income folks can get their taxes done for free.
These so-called VITA sites—short for Volunteer Income Tax Assistance—are part of a program started by the IRS itself, which is under a mandate from Congress to get more returns filed online and thus save money.
Robinson, a volunteer, works through the Ministry Incubator in downtown Raleigh and sees clients every Saturday morning during tax season at the Mayview public housing complex off Oberlin Road by appointment (856-0030).
"Our service is totally free," Robinson says, "and when we do your returns with you, we have a chance to say to you, you'll get your refund in a week or two anyway—isn't it better to have $2,000 in two weeks instead of $1,800 right now?"
But VITA is competing with word-of-mouth in low-income communities, where cash is king. Two of his recent appointments cancelled, Robinson says, because they'd gone to a paid tax preparer, doubtless so they could get their refunds quicker.
That's a common thing, the CRA-NC study found. Not only were low-income folks the big users of refund loans—no surprise there—but the loans were concentrated in specific areas where a company was marketing them hard and word got around: In the poorest ZIP codes, use of RALs was over 40 percent, the study found.
Information on statewide VITA sites is available on the state Commissioner of Banks' Web site, www.savetherefund.org. For more information on the report released earlier this month, see www.cra-nc.org.