DEL.ICIO.USATLANTA
Sour economy boosts demand for tax refund loans
People who need fast cash must pay high interest rates; IRS doesn’t endorse practice
The Atlanta Journal-Constitution
Tuesday, January 06, 2009
Signs of the tough economic times aren’t hard to find these days, from foreclosure notices plastering neighborhoods to long lines at unemployment offices.
Add to the list: local tax preparation offices.
MIKKI K. HARRIS / mkharris@ajc.com
Karen Ervin (red shirt) sits down to apply for a line of credit after waiting four and a half hours Monday at a Jackson Hewitt office in downtown Atlanta.
A huge crowd packed a Jackson Hewitt office in downtown Atlanta late Monday afternoon, with some people waiting in line more than four hours to borrow money.
Why? The offices have become a source of high-cost, fast money by offering loans backed by taxpayers’ anticipated refunds.
Tax refund loans are generally scorned by consumer advocates, who say it doesn’t make sense to pay high interest rates and fees for money taxpayers are entitled to receive at no additional charge.
But some people say they can’t wait the weeks or months it can take to get their W-2 form, file their tax return and receive a refund.
Pat Cameron walked out of a Jackson Hewitt office on Tuesday with a $234 loan, paying $66 for the money — or about a 350 percent annual interest rate, assuming the loan is paid back in about a month.
Cameron, a graphic artist who lives in Atlanta, said he needed extra cash to pay utility bills and buy medicine for his 78-year-old father, who had a heart attack last month. Cameron, 58, heard ads on radio and TV from Jackson Hewitt promoting the company’s “Money Now” lending program.
“I know they charge so much, but this will get me through the first of the month,” he said.
To obtain the loan, Cameron had to show his end-of-the-year pay stub, proof of employment and an ID.
A spokesperson for Jackson Hewitt did not several return phone calls to discuss the product.
The Internal Revenue Service doesn’t take an official stand on tax refund loans, but it doesn’t endorse the practice, said Mark Green, an IRS spokesman in Atlanta.
Green said the IRS offers a program that enables low- and middle-income taxpayers to file electronically for free and have their refund deposited directly in their checking or savings accounts in about 10 business days.
And people who may need the money in a more timely manner can receive expedited refunds through the IRS’ “hardship” program, Green added.
The Georgia Legislature in 2004 changed state law to outlaw payday loans, another high-interest lending product viewed by many as predatory. But the law specifically exempted tax refund loans.
Tax preparation companies such as Jackson Hewitt and H&R Block have for years offered high-interest loans in exchange for a quick cash advance on tax refunds, partnering with out-of-state, federally chartered banks to make the loans. Phones calls to H&R Block were not returned.
The downtown crowd suggests the recession may be driving up demand for these loans as people struggle to pay bills, stave off foreclosure and make rent payments. Green, the IRS spokesman, said he saw refund lending sites pop up recently at local laundromats and car dealerships.
Before the current economic crisis, refund anticipation loans were slowly declining in popularity, said Jean Ann Fox, director of financial services for the Consumer Federation of America, a nonprofit association of consumer advocacy groups.
“But it stands to reason that as families are pinched, the lure of quick cash is going to be very strong,” she said.
However, she said, people should think twice about paying such a high cost to get their tax refunds a few weeks early.
“I understand the crisis some people are in, but you’re talking about triple-digit interest.”
State Rep. Rob Teilhet (D-Smyrna) filed a bill last legislative session to protect consumers by requiring lenders to tell borrowers that they were taking out a loan and not getting a tax refund. The bill didn’t get a hearing, Teilhet said.
“Refund anticipation loans, like payday loans, are sort of the financial equivalent of crack,” he said.
Advocates have said the fact that people are using the service is proof of its legitimacy. But Teilhet, for one, isn’t buying it.
“That would also apply to drugs, it would apply to prostitution, it would apply to all sorts of things that are damaging,” he said. “You don’t legitimize it because there’s a market for it.”
Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta, said people need to think carefully before they plunk down money for a tax refund-backed loan.
“Generally, we don’t think it’s a good idea to pay such an exorbitant rate to get what would be due to you anyway in a couple of weeks,” she said.
However, she said she understands that some people may feel they have no choice but to pay the price to get cash in hand now, such as people under pressure to make mortgage payments.
“I don’t think any of us can stand in judgment of people in that situation until we know whether two weeks would really make a difference to them on a foreclosure,” she said.
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