The Savvy Consumer: Tax refund loans may have gotten riskier

By Teresa McUsic

tmcusic@savvyconsumer.net

The good news this tax season is that this will be the last time banks will be able to offer refund anticipation loans (RALs), the high-cost service that allows you to get your tax refund a little earlier. Regulators have shut down the practice, and the few remaining banks that still offer them have said they will stop after this tax season.

However, payday lenders and other short-term lenders in Texas are already registered to fill the void, consumer advocates say.

"Now that bank regulators have closed the back door for banks to help tax preparers make short-term, high-cost loans, those same companies are turning to nonbank lenders," said Ann Baddour, senior policy analyst with Texas Appleseed, an Austin-based public interest law center.

In 2011, there were 3,842 RAL facilitators registered with the Office of the Consumer Credit Commissioner in Texas, including more than 150 in Tarrant County.

Among them is Liberty Tax Service, which is planning an initial public stock offering. Its prospectus disclosed that the tax-preparation chain plans to partner with an unnamed nonbank lender to make RALs, said Jean Ann Fox, director of financial services with the Consumer Federation of America.

Liberty's website shows that it has partnered to make RALs in Texas and six other states with SGS Credit Services in Arlington and other SGS subsidiaries, which Fox says appear to be tied to other payday lenders based on officer names listed in state filings. Calls to Liberty and SGS Credit were not returned.

Also listed among the registered RAL providers is Fort Worth-based Cash America, a pawnshop chain and payday lender that offers short-term loans in 23 states and online.

According to its website, Cash America will help customers fill out tax forms through an online tax service, then offer a refund anticipation check (RAC) for an undisclosed fee.

A RAC is given to the tax filer after the IRS sends a refund check to the institution through a direct deposit, Fox said. It allows the consumer to pay for the tax preparation fees out of the refund and provides a quicker direct deposit for someone who doesn't have a bank account.

Calls to Cash America were not returned.

While the refund loan lenders must pay $50 to register with the credit commissioner's office, there are few other state requirements.

"At this time, the agency registers those lenders and we do have the capability and are welcome to receive any consumer concerns about the lender's practices," said Sue Jevning, spokeswoman for the office. However, "we don't license them or conduct any regular examination schedules."

Baddour said there is much to be learned about how nonbank lenders help consumers take out a refund anticipation loan.

"With banks making RALs, the IRS sends a refund to a temporary bank account. The bank takes out their fee and the fee for the preparer, and the rest is for the filer," she said. "With nonbanks, there is a risk factor. If your tax refund is being directly deposited into somebody's bank account, you have to trust that they will take out their fees and that they are going to give you what's left over."

Another issue is the cost. A refund anticipation check costs around $30, while a refund anticipation loan typically costs $100 to $120, said Chi Chi Wu, staff attorney with the National Consumer Law Center. That makes for quite a high annual percentage rate, given that the loan is only for a couple of weeks. Because there are no caps on interest rates for many payday lenders in Texas, the cost of a refund anticipation loan can be set on their own terms, Baddour said.

"Consumers have even more reason to avoid RALs made by payday lenders," Fox said. "These RALs are likely to be more expensive and riskier."

One reason consumers use refund anticipation loans is to pay for their tax preparation, Baddour said.

To address this problem, Catholic Charities and AARP have established free face-to-face tax preparation programs for filers locally.

Bill Gunn, program director for Catholic Charities' VITA community tax service, said getting a refund quickly is another reason consumers choose RALs.

"But if you have a checking account, you can directly deposit that refund in around 10 days," he said. "Most of the clients we serve have a checking account."

Gunn said another concern of taking out an RAL with a payday lender is the possibility that the IRS finds an error on the return and the refund is less than the loan amount. "Or what if you end up owing the IRS?" he said. "Then you would owe the lender and the IRS money."

Gunn says filers should also be wary of commercial entities offering free tax preparation services that sometimes go with high-cost products like RALs.

Teresa McUsic's column appears Saturdays. TMcUsic@SavvyConsumer.net

Looking for comments?