Tax refund loans are fast, but cost is high


Published: Sunday, February 1, 2004 at 6:01 a.m.
Last Modified: Saturday, January 31, 2004 at 10:08 p.m.

Amy and Edwardo Damaso of Los Angeles needed cash in a hurry to pay bills. So when their tax preparer offered them a way to get the money due from their income tax refund days ahead of time, they jumped at the chance - even though they had to pay a steep fee.

``I am aware of the cost, but I was desperate for money,'' said Amy Damaso, 44. ``It solved my problems because I got the money right away. But it hurts because it costs a couple of hundred dollars.''

The Damasos are among millions of Americans who have taken out refund anticipation loans through their tax preparers. The loans are similar to the payday loans aimed at people who can't make ends meet between paychecks - and, according to critics, are just as exploitative of the working poor.

For a $1,500 return, for example, the loan fees would amount to about $100. And because a refund loan gets borrowers their money only about a week or two faster than the Internal Revenue Service would have (for returns filed electronically), the interest rate, on an annualized basis, exceeds 150 percent.

``Why should we be charged interest rates in the hundreds or even thousands of percent range to be loaned the money we are owed?'' said Maude Hurd, president of the Association of Community Organizations for Reform Now, a consumer group better known as ACORN. ``We are warning our members to stay away from refund anticipation loans, and making sure they know they can get their refunds fast without a loan and often without paying for tax preparation at all.''

This month, ACORN launched protests at H&R Block Inc. offices in 30 cities, claiming that millions of dollars in tax breaks meant for the working poor are being siphoned off by tax preparers like H&R Block.

H&R Block is certainly not the only tax preparation company offering the loans, but it was targeted by ACORN because it accounts for about half of all refund loans made in the United States, said Lisa Donner, director of ACORN's financial justice center in Brooklyn, N.Y.

ACORN wants H&R Block to curtail its marketing of the refund loans while clarifying to the firm's customers that there are more attractive low-cost options.

``It's one of the few times that you can say that if you change the practices of one company, you've changed the whole market,'' Donner said.

H&R Block spokeswoman Denise Sposato said nearly 6 million people - about 30 percent of H&R Block's 21 million customers - took out one of two ``rapid refund'' products last year alone. Sposato said customers clamored for the loans, even though the Kansas City-based company disclosed lower-cost alternatives.

``We try to take every opportunity to tell people that there are other options that will get more of the money into their own pocket,'' Sposato said. ``But we cannot make the decision for the client. They are the only ones who know their immediate needs.''

To a degree, the Damasos support the arguments on both sides. The couple have received refund loans four times in the past, said Amy Damaso, who worked in health care before becoming disabled nearly two years ago.

She and her husband, a security guard, are ACORN supporters who agreed to talk to the press as part of the H&R Block protest. Yet Amy Damaso says she has mixed feelings about the loans.

``It is a lot (of) money'' to pay in fees, she said. ``But then again, if you are in crisis . . .''

The cost of rapid refunds varies based on the size of the refund, state laws and the type of refund check involved.

ACORN is protesting two H&R Block products: refund anticipation loans, or RALs, and refund anticipation checks, or RACs.

Refund anticipation loans get cash in the consumer's hands within two days of filing. That's about a week or two faster than the consumer could expect a refund check from the government, even in the best of circumstances. When a taxpayer files a tax return electronically and opts for direct deposit of his or her refund check into a bank account, the IRS usually delivers refunds in one to two weeks. When returns are filed by mail, refunds take longer - usually four to six weeks.

The cost of a refund loan is broken into several pieces: a system administration fee that averages $32 but is not charged in some states; a $24.95 bank fee; and interest charges that vary between $5 and $75, depending on the loan amount, Sposato said.

Sposato disagrees with calculating the costs of the loans on an annual basis, noting that some of the costs are fees, not interest charges. ACORN argues that there's no other way to do it, because the loans cannot be secured without paying the fees.

Refund anticipation checks are not loans at all. They're designed for consumers who don't have bank accounts or who otherwise couldn't pay their tax preparation fees, Sposato said.

Under this plan, a customer pays about $57 in fees. A temporary account is established for the taxpayer, which allows him or her to get the refund check deposited to an account that's in H&R Block's control. H&R Block provides a check to the taxpayer as soon as the refund hits the account.

That saves check-mailing time, getting the refund to the taxpayer in about two weeks rather than four to six weeks. H&R Block also allows these customers to pay the tax preparation fees out of the refund.

Sposato maintains that H&R Block preparers are all instructed to explain other options before selling a refund loan. ``But the filing decision rests with the client,'' she said.

ACORN officials counter that H&R Block's marketing of the loans is so aggressive that it sometimes obscures the other options.

``We hear the same argument from predatory mortgage lenders, that they disclosed everything at closing. But it often turns out that the disclosures didn't happen in a reasonable way,'' Donner said. ``The experience of our members is that refund anticipation loans are the first, most aggressive and, sometimes, the only option offered.''

Donner said that assertion was supported by H&R Block's acknowledgment that about 30 percent of its customers took the loans.

``There are times when people need money now. That's an unhappy fact,'' Donner said. "But it is not 30 percent of the people - and that percentage would be a lot higher if you were just looking at the low-income people that we serve."

Los Angeles Times staff writer Kathy M. Kristof welcomes comments and suggestions but cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, Calif. 90012, or e-mail kathy.kristof@ latimes.com.

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