More Americans Turn to Tax Refund Loans to Pay Monthly Bills


March 5 (Bloomberg) -- When Amy Davis stepped into an H&R Block office in Greenwood, Mississippi, for an advance on her tax refund, it had been three weeks since her last paycheck.

Davis, 48, said she didn’t want to pay more than $300 in fees for a so-called refund anticipation loan of $5,380, but she had little choice. Her bills were mounting and the mother of two didn’t want to risk losing her utilities.

More Americans applied for tax refund loans in 2007, reversing two years of declines, according to a joint study released last week by the Washington-based Consumer Federation of America and the Boston-based National Consumer Law Center.

With the U.S. unemployment rate at 7.6 percent, the highest since 1992, consumer advocate groups say more jobless Americans may turn to high-interest, short-term loans to pay bills.

“You probably have increased demand because more people are struggling with debt,” said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington. “When people are desperate for cash, they’re desperate for cash.”

Loans secured by a borrower’s expected tax refund often leave borrowers with effective interest rates of as much as 500 percent for a $300 loan over a 10-day repayment period, according to the study from the Consumer Federation of America and the National Consumer Law Center. Lenders also use a pay stub or car title as collateral for similar short-term loans.

Deeper in Debt

“People who get these loans are probably people who need money pretty badly,” said Jim Campen, executive director of the Boston-based watchdog group Americans for Fairness in Lending. “In fact, they just got another short-term problem, which puts them deeper in debt.”

Refund loans that Davis used are issued by tax preparers such as Kansas City, Missouri-based H&R Block Inc. and Parsippany, New Jersey-based Jackson Hewitt Tax Service Inc. The loans can carry effective interest rates of 77 percent to 140 percent for the average refund loan of $3,000, according to consumer rights groups including the Consumer Federation of America and National Consumer Law Center.

Almost 9 million Americans, or 1 in every 15 taxpayers, paid about $901 million in fees during the 2007 tax filing year for refund loans, according to the joint study by the Consumer Federation and the Law Center.

The loans are expensive and unnecessary, said Chi Chi Wu, a staff attorney at the National Consumer Law Center. They promise taxpayers an advance on their refund in one to two days, while taxpayers can receive a refund at no cost within 15 days if they prepare their own returns and file electronically, Wu said.

Electronic Filing

H&R Block clients are encouraged to e-file, and 80 percent don’t take refund loans, said Nancy Mays, a spokeswoman for H&R Block, the nation’s largest tax preparer. Customers pay $58 in fees for a typical H&R refund loan of $2,700, the Consumer Federation and the Law Center found. H&R Block’s refund loan revenue was $190 million in 2008, according to a regulatory filing.

“The best way to get your refund is to e-file it and have the IRS make a direct deposit to a bank account,” said Mays. The company agreed in January to pay $4.85 million to settle California claims it engaged in deceptive marketing of the refund loans. H&R Block denied any wrongdoing.

One of Jackson Hewitt’s banking partners for its refund loan program is Santa Barbara Bank & Trust, whose parent, Pacific Capital Bancorp, was cited by consumer groups in January for allegedly using money from the Troubled Asset Relief Program to finance the loans.

TARP Funds

None of the $180 million Pacific Capital received from the TARP “was used to fund refund anticipation loans,” said Toni Rossi, a spokesman for the Santa Barbara, California-based company. Pricing refund loans in terms of their effective interest is misleading because doing so falsely assumes that the loan is outstanding for an entire year and that the consumer continues to accrue and pay interest, Rossi said. A Jackson Hewitt spokesman wasn’t available for comment.

In payday lending, a borrower gives a lender a personal check for the amount of the loan, typically about $300, plus interest in exchange for cash, said Jean Ann Fox, director of financial services at the Consumer Federation.

Interest can range from 400 percent to 800 percent, according to the Federation. The lender holds the check until the borrower’s next payday, when the loan can be repaid, or the borrower can pay the finance charges to roll it over to another pay period.

Overdraft More Likely

Those who take payday loans are at least 14 percent more likely to enter bankruptcy, according to a study published in October by researchers at the University of Pennsylvania and Vanderbilt University. Researchers at Harvard University found that consumers who use these loans are 11 percent to 16 percent more likely to overdraft and have their checking account closed.

With car-title loans, a borrower offers the title of the automobile in exchange for a median loan amount of $1,500, according to a study by the Woodstock Institute, a Chicago-based nonprofit that concentrates on economic development in low- income communities. Borrowers typically have a month to repay the loan. If they miss the payment, the lender can repossess the vehicle. Almost one in five car-title loans end in repossession, Woodstock Institute reported.

“These quickie credit products leave you worse off if you use them,” Fox said.

Davis, who is a student accounts coordinator at Mississippi Valley State University in Itta Bena, said she was lucky as she has friends who were available to help her in the end. She said she’ll “never, ever” take another refund loan.

“It was a fiasco,” she said.

To contact the reporter on this story: Jason M. Breslow in New York at jbreslow@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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