Dana Williams was in a bind last month. He was scheduled to go to Washington for a legislative conference, but he didn't have the money to make the trip.

The carpenter and single father knew, though, that he was due a significant tax refund. So he walked into an H&R Block office, got his taxes prepared and applied to get his $2,461 refund extra fast.

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What Williams got was a loan against his anticipated refund — a loan that about 12 million taxpayers a year take out to get their refund money in a day or two. But it's a loan that does not come cheap: Williams paid a finance charge of $75 for a loan that was to be repaid in less than two weeks.

The charges equate to an annual interest rate of 104 percent, his loan papers show.

Georgia law considers most consumer loans made at annual rates above 60 percent to be loan-sharking — a crime. And federal tax rules do not allow tax preparers to make refund loans to their customers.

In spite of those rules, tax preparation offices across the state openly offer customers loans against their tax refunds at rates that are almost always in the triple digits.

How do they do it?

H&R Block, Jackson Hewitt and other tax preparers partner with out-of-state, federally chartered banks to make the loans. That way, the preparer is not the actual lender.

Having a federal charter also allows the banks to skirt Georgia's lending laws and charge whatever interest rate they want.

Last year, payday lenders who were making similar high-interest, short-term loans were pushed out of business in Georgia after the General Assembly determined the loans were illegal and imposed severe heavy penalties. Yet Georgia lawmakers have done nothing to rein in tax refund lenders, even as other states have taken them on.

In fact, the General Assembly specifically exempted tax refund lenders from the penalties that illegal payday lenders now face.

Consumer advocates have long criticized the high cost of tax refund loans. They say the profile of the typical refund loan customer makes the costs especially troubling. About half of the tax filers who take out the loans are recipients of the Earned Income Tax Credit — one of the nation's largest anti-poverty programs, which pumps up tax refunds for low-income workers by as much as $4,300 per family.

Tax preparation and refund loan fees are generally subtracted from the benefits that families are due under the federal program.

"They are extremely expensive loans, they are for very short periods of time and it's an unnecessary expense that drains lots of money out of the pockets of the working poor," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Williams, who volunteers for a community organization that has opposed the tax refund loans, was well aware that he would be facing a hefty charge to get his money quickly. But he opted for the loan anyway, because he didn't want to miss the conference. "That's the bottom line," he said. "We needed the cash."

Tax preparers say that demand drives them to offer refund loans.

"People want these products," said Tom Linafelt, a spokesman for H&R Block. "While they are roundly criticized by consumer groups, they are loved by consumers."

They are also a big profit center for H&R Block and other tax preparation companies. Even though preparers aren't allowed to make the loans themselves, most have deals with the lenders to get a cut of the money. In H&R Block's case, the tax preparer gets nearly half the profits earned from every short-term loan made at one of its offices.

In the 2004 fiscal year, tax refund loans brought in $174.2 million to H&R Block — just over 4 percent of its companywide revenues, according to Securities and Exchange Commission filings.

For Jackson Hewitt, the nation's second-largest preparer, 29 percent of the company's net revenues came from its facilitation of tax refund loans, according to its SEC filings.

The demand cycle

The demand for the refund loans can also increase demand for a company's tax preparation services.

Williams, for example, did his own taxes for free last year, using an online program. He went to H&R Block this year because he was in a rush for the money. But to get the refund loan, he also had to pay H&R Block to prepare his return.

The total fees for the refund loan cost Williams $99.95. Preparing the tax return, which Williams said took about half an hour, cost him another $203.

For Williams, who made less than $20,000 last year and who raises his 7-year-old daughter De'Mai on his own, those charges were significant. Having an extra $300 "would have made a great difference for me," he said.

Once H&R Block prepares a tax return, customers can have the IRS deposit the refund in their bank account or send them a check, which costs nothing and usually takes three weeks or less.

Or they can get their money in a day or two through a loan from HSBC Bank USA, a subsidiary of the London-based global financial services company HSBC.

Even though tax preparers must disclose that customers are getting a loan, a recent poll commissioned by the National Consumer Law Center found that 70 percent of respondents who have taken out such a loan simply thought they were getting their tax refund quickly.

"A lot of people still don't understand that this is a bank loan that has to be repaid," Fox said. "This isn't just a fast refund from the IRS."

But Linafelt, the H&R Block spokesman, said the company's detailed disclosures should leave no doubt that the customer is getting a loan and how much it costs. "We are the industry leader when it comes to offering these products in a responsible manner," he said.

H&R Block gives each customer a five-point summary of tax refund loans. The document states first that the product is a bank loan. It also states that bank fees and H&R Block charges will mean a customer's loan check will be less than the full IRS tax refund the customer is due. The document also spells out other options.

Finance charges and fees for the loans range from $29.95 to $109.95, depending on the size of the loan. The annualized finance charges are almost always in the triple digits. The annual percentage rates are disclosed to customer in truth-in-lending statements included with loan documents.

Merited by risk

James Pieper, an HSBC spokesman, said the interest charges are warranted because of the risk taken on by the bank. He declined to reveal the default rate on the loans, but acknowledged it was "relatively small."

A high interest rate isn't justified because the risk for the bank is extremely minimal, said Chi Chi Wu, staff attorney at the National Consumer Law Center, a Boston-based nonprofit organization.

"This is a product that is basically secured by the taxpayer's refund," she said. "If the preparer is doing their job right, there should be almost no risk."

If the refund doesn't come through, for any reason, the customer is on the hook for the loan.

Georgia lawmakers viewed high-interest, short-term payday loans as so harmful to consumers — especially military personnel — that they authorized a massive crackdown on the industry last year. But tax refund loans are made at similar triple-digit interest rates, and apparently they pass legal muster.

Payday lenders argued before the General Assembly and in court cases that they could charge whatever they wanted because they were just brokering loans for federally chartered, out-of-state lenders. State and federal officials argued, however, that federally chartered banks involved in payday lending were "rent-a-banks" that were involved in name only — the local payday shops were really making the loans.

In contrast to payday lenders, most experts agree that the federally chartered banks that specialize in tax refund loans are real lenders, which take on the risk when making the loans. Yet the tax preparers who arrange the refund loans play a large role in the transactions, from handling the paperwork to getting a cut of the profits.

49.9 percent stake

H&R Block, for example, funds 49.9 percent of the refund anticipation loans made by HSBC at its company-owned offices. While HSBC is the official lender, H&R Block gets the profits and the risks associated with its share of the loans.

That 49.9 percent stake allows H&R Block to comply with IRS rules that say a tax preparer can't be related to the bank making the loan. IRS rules consider companies to be related if there is a 50 percent or greater ownership interest.

While they may be on more solid legal footing, the tax refund loans don't differ much from payday loans, said former state Sen. Don Cheeks, who led the fight against the payday loan industry.

"It's another way of taking advantage of poor people," Cheeks said.

The federal regulations allowing out-of-state banks to ignore state usury limits make it difficult for states to take on the high-cost loans, said former Gov. Roy Barnes, who filed seven class-action lawsuits last August against payday lenders in four Georgia counties.

Barnes, who has not taken on tax refund loans, called them "the biggest rip-off in the country."

While Georgia has not challenged tax refund loans, other states have tried.

Massachusetts argued in 2003 that tax preparers were brokering loans and tried to subject them to licensing, but most preparers stopped charging upfront fees that would have subjected them to such a license.

The Mississippi banking commissioner has taken on the issue, advising tax preparers they may need to obtain a state license to broker the loans. This is the first year that the state has started inspecting tax preparers for compliance with the law, which limits a loan broker's charges to 3 percent of the loan amount.

Taking action

The state of Connecticut and the Seattle City Council adopted measures in 2004 requiring more disclosure for tax refund loans. Other jurisdictions that passed laws related to tax refund loans in previous years include Illinois, Minnesota, North Carolina, Wisconsin and New York City.

States may find it difficult to take on federally chartered banks, but consumer advocates say states can regulate the role that tax preparers play in the transactions.

"We think states ought to push the envelope on it," said Fox, of the Consumer Federation of America. She noted that a model law drafted by the National Consumer Law Center suggests that states adopt rules governing tax preparers, including registration requirements and limits on refund loan fees.

Some federal lawmakers also have become interested in the issue, in part because they believe that their gigantic anti-poverty program is being weakened by tax refund loans.

Sen. Daniel K. Akaka (D-Hawaii) has sponsored a bill that would prohibit tax refund loans that are tied to benefits of the Earned Income Tax Credit, a program that added $36 billion last year to the tax refunds of 21 million low-income families. Recipients of the tax credit paid $740 million in fees for tax refund loans, and another $830 million for tax preparation charges, according to a joint study by the Consumer Federation of America and the National Consumer Law Center.

'Lining the coffers'

"The EITC is supposed to be this tax benefit to help boost working families out of poverty, and instead it is lining the coffers of multimillion-dollar corporations," said Wu, of the National Consumer Law Center.

Williams, the Atlanta carpenter, is among those who lost some of his federal benefits to the cost of the refund loan and tax preparation.

Because he's a parent and earns a relatively low income building booths for Atlanta trade shows, he qualified for the EITC. For him, the benefit was worth more than $2,000. Without the program, he would have received no refund.

Williams hopes the government will take on the tax preparers. "To me, it's like they are getting rich on us," he said.

However, Williams said he would not want the government to prohibit the tax refund loans, because having some means to get the money quickly can often be a real help.

"I would want them to still be able to do it," Williams said, "but at a lesser rate."