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Borrower Beware

Cash Program Takes Aim at Commercial Tax Preparers' "Rapid Refund" Loan Practices

By Ericka Blount Danois | Posted 1/29/2003

Ever since her children's father landed in jail, Mysia Hamilton has had to make every dollar count. She raised her three sons on her own and managed to find the time to go to medical school for a year, while working full-time at the University of Maryland. Her schedule was stressful, and money was often tight, but because she felt her boys had to see that their mother was "strong," the only time she let herself cry was in her room alone at night. Finally, when she landed a job as a medical assistant in 2001, she began earning enough to keep the family afloat.

Though she earns more money now, she still qualifies for the Earned Income Tax Credit (EITC), which she has received every year since 2000. The EITC is a refundable tax credit that offsets income taxes owed by low-income workers like Hamilton. For many, the EITC can mean the difference between no refund and getting back a few thousand dollars. A single parent raising two or more children and earning between $10,350 and $13,520 in 2002, for example, was eligible for the maximum EITC of $4,140.

Hamilton, like many others in similar situations, relies on her refund check to catch up on unpaid bills and other debts. Signs posted by tax preparers, such as Jackson Hewitt and H&R Block, that promised she could get money now from her tax return always caught her eye. For the past three years she has used Jackson Hewitt to get refund-anticipation loans--loans based on the refund a taxpayer expects to get from the IRS.

Refund-anticipation loans are a common practice for independent tax accountants, big-chain preparers such as H&R Block, and even local check-cashing stores that hire accountants during tax season. The catch, which many consumers don't know about, is that most refund-anticipation loan fees translate into exorbitant interest rates. According to a report prepared in January 2002 by the Consumer Federation of America and the National Consumer Law Center, those interest rates often reach the triple digits. Commonly, the report noted, they range from 67 percent to as high as 700 percent for a 10-day loan.

Hamilton received a refund loan of $3,700 from Jackson Hewitt in 2000 but ended up spending $300 of it on the loan's processing fees. Such fees include a sliding-scale fee based on the amount of refund a taxpayer will receive from the IRS. For example, in 2000, the fee for a refund-anticipation loan of $1,900 was $74.95, according to a report released by the Consumer Federation of America in 2002; when calculated into an annual percentage rate, the Consumer Federation says, the interest on such a loan would be about 149 percent.

"I just hit myself so many times when I think about that," Hamilton says now. "The mentality is, if I don't have the money now, I am not going to miss it anyway. It is not money that you have in hand. People have bills and things to catch up on, and the temptation is that you can get it right now."

According to Baltimore CASH Campaign coordinator Alison Beck Yonas, tax preparers who offer these loans often take advantage of low-income taxpayers' frequent need for quick cash. The CASH Campaign--the acronym stands for Creating Assets, Savings, and Hope--is a coalition of community organizations, nonprofits, and work-force development agencies that publicizes to city residents the Earned Income Tax Credit and free tax-preparation services that don't offer loans on-the-spot but can usually get a filer's IRS refund in seven to 10 days.

"A lot of the marketing is geared toward people who can least afford to spend money on fees," Beck Yonas says. "For example, the Jackson Hewitt on York Road has a sign that says we loan on eic. We want to educate consumers that they have alternatives."

Byron Burnett, manager of Jackson Hewitt's 3334 Greenmount Ave. office, disputes the notion that commercial tax preparers target low-income filers--rather, he says, they seek out Jackson Hewitt's tax preparers because of the services they offer. "It has been my experience that a lot of people who receive the Earned Income Tax Credit don't qualify for a loan," Burnett says. "Customers have to have good credit, no tax liens, bank accounts, and we give preference to prior-year customers."

According to a report compiled in 2002 by Valerie Coffin, national researcher for the Baltimore chapter of the Association of Community Organizations for Reform Now (ACORN), commercial tax preparers who charge high interest rates for these rapid-refund loans may be violating the law. The report alarmed state Del. Elizabeth Bobo (D-Howard County)--who was already working with ACORN on mortgage and payday-lending scams--and she passed it on to Mary Louise Preis, Maryland's commissioner of Financial Regulation .

"If it is tantamount to a usury loan--charging fees that exceed the usury limit--then they are breaking the law," Bobo says. The finance charge permitted in Maryland is capped at about 33 percent for loans under $500.

In a letter to Bobo dated June 18, 2002, Preis wrote, "[B]ased upon preliminary findings we have sufficient reason to expand it to an investigation." Preis would not comment on the investigation, because it is still pending, in a Jan. 14 letter to Bobo she questioned whether these loans may carry a higher finance charge than is permitted under the state's Consumer Loan Law.

Mike Melen, manager of H&R Block's district office on Security Boulevard, says his company provides a service many people want and need. "We do recommend that customers get free electronic filing without a loan," Melen says. "We offer them [refund-anticipation loans] because of demand from our clients. If we didn't offer them, they would go somewhere else. We don't look at it as a moneymaker. We just look at it as getting our clients in the door."

According to the ACORN study, in 2001, H&R Block took in $133.7 million in refund-anticipation loan fees nationwide, an increase in revenue from the $43.9 million in fees it received for this service in 2000.

As far as she's concerned, Hamilton says she won't be going back to Jackson Hewitt with her taxes this year. She knows how much money she's lost over the years through refund-anticipation loans and instead plans to take her W2s to a free tax-preparation service at Bon Secours Family Support Center in West Baltimore. And she says she will put the money she saves this year to good use. "I plan to use the money I get back this year to pay bills," she says, "and also to put toward moving into a new house."

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