WASHINGTON—California Attorney General Edmund Brown Jr. accused H&R Block, Inc. of unlawful predatory lending practices and recently asked the San Francisco Superior Court to issue an injunction against the tax-preparation agency.
"Today's request for an injunction is part of an ongoing lawsuit against H&R Block, filed in 2006, alleging that the company engaged in false or deceptive advertising in its marketing of high-cost loans to low-income families," said a California Department of Justice press release.
IRS rules make it illegal for tax preparers to offer direct loans. California state law prohibits H&R Block from advising its clients that a taxpayer could get a tax refund within 2 days—without disclosing that it was a refund anticipation loan (RAL) that could cost the taxpayer 80 percent or more on annual fees and interest rates.
RALs are short-term loans given on the spot, guaranteed by taxpayers' tax refunds and carry no risk to the lender, as the refund comes from the Internal Revenue Service (IRS).
Yet, many low-income families, earning between $10,000 and $35,000 per year, are so cash-strapped that they can't wait for their tax refund check and take out RALs.
Under RALs, uninformed consumers essentially receive their tax refunds early, at interest rates ranging from 40 percent to over 700 percent, according to the Center for Responsible Lending, a Web-based consumer advocacy group.
"Tax preparers, both independent operations and major chains, charge interest rates that can run on an annualized basis well into triple figures, all for the privilege of getting money a few days earlier," according to an article by Bankrate, Inc., a financial research firm.
To many, RALs are considered unnecessary as tax refunds from the IRS are normally received within two weeks for anyone filing taxes electronically and within 28 days when filing taxes by mail, without additional cost.
Predatory Lending Practices?
IRS statistics indicate that close to 80 percent of all RAL borrowers are those with less than $35,000 in annual income. Tax agencies H&R Block and Jackson Hewitt disclosed similar statistics.
Besides the working poor, taxpayers eligible for the Earned Income Tax Credit (a federal anti-poverty program) and Native Americans are also victims of the RAL hype, according to a recent report titled "Borrowing Trouble: Predatory Lending in Native American Communities" by the Annie E. Casey Foundation.
More than two-thirds of Native Americans reported to the surveyors that RALs and similar predatory lending vehicles were of great concern among tribes. According to the report, Native Americans are vulnerable as many live on reservations and have limited education concerning financial matters.
Recent spot checks of tax preparation firms in Durham and Philadelphia showed that close to 90 percent of accounting firms still peddled RALs to low-income families, without disclosing the true nature of such loans. This is happening despite IRS laws against non-disclosure of RAL information.
"RALs do indeed exploit low-income taxpayers, promote tax fraud and expose confidential tax returns to prying eyes. RALs carry high costs and risks and drain hundreds of millions from the Earned Income Tax Credit (EITC), a special tax benefit to working poor families," said the researchers.
Latest statistics show that American taxpayers lost a total of $900 million in refund money to unscrupulous lenders, not including an additional $90 million in associated fees.
Fighting Back
Beginning this year, the IRS called for comments to be submitted no later than Apr. 7 on placing restrictions on RALs and other financial vehicles that are peddled to low-income taxpayers.
H&R Block and JP Morgan Chase Co. have decreased their fees and interest rates considerably. Others—such as Santa Barbara Bank & Trust Co. (up to 194 percent), Jackson Hewitt (about 150 percent and more) and Republic Bank & Trust Co. (about 161 percent and more)—are still demanding predatory rates for their RAL products, according to a recent press release by the National Consumer Law Center.
To protect active duty military service members, the Military Lending Act was enacted by Congress in 2006 and came into effect in October 2007. The Act bans RALs with annualized interest rates higher than 36 percent, which includes both fees and interest rates.
The Department of Justice also stepped up its prosecution of tax preparers that promote RALs. Over the past months, the U.S. Department of Justice fined a number of tax preparers.
Jackson Hewitt paid $4 million in restitution and $1 million in fines to California consumers for violating state and federal laws because of promoting RALs to low-income customers last year.
In 2007, the New Jersey Office of the Attorney General filed suit against the Malqui Corporation for peddling RALs that carried predatory-type interest rates.
The State of New York Division of Human Rights also filed a lawsuit against Hewitt and Liberty Tax Services for marketing RALs to the underprivileged.
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