Refund-Anticipation Loans Under Fire

Widely advertised and promoted by U.S. tax preparation companies, refund-anticipation loans are a $1.6 billion market in this country. Jackson Hewitt has seen their latest quarter, ended January 31, beat their quarter revenue estimates. The Asbury Park Press reports that their Money Now loan program has helped the price of its shares swell by more 8.8 percent in a year. Not all news is good news for these loans though.


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John Hewitt, the founder of the firm, says these loans are unwise. The refund-anticipation loans calculate the amount of the loan based on year-end pay stubs. The Asbury Park Press reports that regulator scrutiny may be attracted by the loans, according to industry analysts.

“We will be wary of scrutiny from regulators and advocacy groups. This is probably the single largest risk factor facing Jackson Hewitt,” Scott Schneeberger, a Lehman Brothers Holdings analyst told Bloomberg. Schneeberger went on to say that tax preparer lending is already under scrutiny from regulators. Jennifer Pinnick, a Morgan Stanley analyst, said, “There has been some controversy regarding this loan and its high implied interest rates. It may attract increased regulatory scrutiny.”

The Asbury Park Press reports that a Jackson Hewitt franchisee located in New York tries to guide clients away from these loans, as the initiation fees and interest can reach 69 percent. State usury laws do not apply to federally chartered companies that provide these loans to company clients, according to Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston. Interest rates are usually capped at 36 percent by state usury laws.

For examples, the Philadelphia Daily News reports that Elizabeth Saunders took out a refund-anticipation loan from Jackson Hewitt last year. Her income didn’t come quite to $20,000, yet she was charged $419 in tax preparation fees amounting, to 15.9 percent of the Earned Income Tax Credit to which she was due. Judith Ghebremichael got a refund-anticipation loan from H&R Block last year and paid $381.95 in return preparation fees on $18,000 to $20,000 in income. Her fees took up 10.8 percent of the amount of her Earned Income Tax Credit entitlement.

Thomas Dresslar told Bloomberg, “Our investigation and our discussions with Jackson Hewitt involve all its practices, all of its products along these lines.” Dresslar is a spokesman for California Attorney General Bill Lockler, who has been investigating Jackson Hewitt’s tax-refund lending practices for about three years.

Attorney General Lockler’s main reason for investigating these loans has been proper consumer disclosure. Bloomberg reports that Lockler has called for Californians to avoid refund-anticipation loans due to the vulnerability of the poor to sales pitches promising “quick cash.”

Other tax preparation companies have been scrutinized and sued, according to Bloomberg. A suit was filed against H&R Block on February 15 of this year by California Attorney General Bill Lockler, who charged that the company violated California and U.S. laws in illegally withholding tax refunds and deceiving mainly low-income customers who received refund-anticipation loans.

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