- The Washington Times - Monday, March 23, 2009

NEW YORK | The credit crunch is rearing its head in an unexpected place — the short-term loans that appeal mostly to working-class taxpayers who want their federal tax refunds fast.

Disappointed applicants from coast to coast say they’ve been turned down for refund anticipation loans, known as RALs, where they’ve routinely received them in past years.

It’s an interesting development because RALs are a major revenue generator for tax preparers. In 2007, nearly 9 million taxpayers paid more than $900 million in fees for such loans according to a report by the Consumer Federation of American and the National Consumer Law Center.

RALs, which average about $3,000, are cash advances backed by tax refunds and are typically repaid within 14 days. Consumer advocates have long criticized them for their hefty fees and interest rates that can exceed 100 percent on an annual basis.

But information technology worker Mike Armstrong was in a bind. He needed emergency dental surgery and his car was in the shop when he went to an H&R; Block tax preparation office in Laguna Nigel, Calif. Even though the Marine Corps veteran knows RALs are expensive, he needed his $1,900 refund fast, so he agreed to pay a little more than $200 in fees and finance charges.

Mr. Armstrong, 30, was told that his credit score would be checked if he applied for an instant refund loan, which advances money the same day. Knowing that he has a spotty credit history from his days in the Marines, he instead chose the chain’s “Classic RAL,” which offers the money in one to two days.

“That’s the one I always get,” he said. “I’ve never been denied for it, even in my worst credit days.”

This time, he was turned down.

Indeed, one hurdle that many are having a tough time getting over is that HSBC, the bank that issues RALs to H&R; Block customers, conducts credit checks and risk assessments to judge the likelihood that loans will be repaid. And HSBC spokeswoman Cindy Savio confirmed that the bank has tightened its credit criteria this year but would not elaborate on specifics.

Still many applicants say they were unaware that there was a chance they could be rejected for what is essentially a guaranteed loan — especially one they’ve had no problem getting before.

H&R; Block spokeswoman Nancy Mays said an explanatory flier labeled “Facts About Refund Anticipation Loans” is given to every RAL applicant. The sheet, which was provided to Associated Press, clearly spells out that an RAL is a loan and details the fees and surcharges that might apply. But while the flier states, “Approval for an Instant RAL is more limited than for a Classic RAL,” and elsewhere mentions that applicants can be denied, it does not specifically state whether either loan is subject to a credit check. Ms. Mays said customers are required to sign a consent for a credit check.

Having received RALs several times before, Tareva Aldrich, 22, signed the paperwork put in front of her after her return was prepared at an H&R; Block near her home in Fayetteville, N.C. But she did not read it carefully, because she considered the details a matter of routine. And Ms. Aldrich said she was never verbally informed that a credit check was required for the $5,500 same-day RAL. H&R; Block declined to comment on her case.

“I’ve never known for it to be something you’ve got to be approved for,” she said. “If my credit was going to be an issue, then why didn’t [they] tell me that before I filed my taxes?” Instead of getting her money the same day, Ms. Aldrich waited more than three weeks before her refund arrived.

Although consumers may be expected to know that loans typically require a credit check, the people who seek RALs often have little contact with financial institutions.

“The folks who find RALS attractive are not the most sophisticated financially in the country,” said Robert Kerr of the National Association of Enrolled Agents, a trade organization for people who represent taxpayers before the IRS.

Moreover, many people who seek RALs have weak credit histories. “More than half couldn’t get a loan under normal circumstances,” said John Hewitt, chief executive of Liberty Tax Service, a tax prep chain based in Virginia Beach. “If the bank wasn’t fairly certain that they would get the money from the IRS, they wouldn’t get a loan.”

RAL programs have been the target of numerous lawsuits in the past decade, including several that accused the tax preparation companies of inadequate or misleading disclosures in loan applications. In January, H&R; Block reached a $4.85 million settlement with California Attorney General Jerry Brown that prohibits the company from marketing RALs as early tax refunds rather than loans. In its 2008 annual report, H&R; Block detailed $113.7 million in costs related to other RAL litigation since 2003. Jackson Hewitt Tax Service Inc., the nation’s second largest chain, reached a similar $5 million agreement with the California attorney general in 2007.

This year, RAL rejections are the subject of a mounting number of complaints with state attorneys general, the Better Business Bureau and on Web sites like ConsumerAffairs.com. Many state they would have been unwilling to pay the tax-preparation fees, which average about $180, if they knew they wouldn’t get the loans. On the Web, frustrated consumers rarely distinguish between the tax-preparation companies and the banks that supply the loans, and often detail multiple phone calls to both in their attempts to find out what happened to their money.

Jessica Ahmed, a 35-year-old from Houston who works at a furniture company, said she was behind on her bills after a hectic holiday season. Ms. Ahmed said she’s gotten an RAL through Jackson Hewitt every time she’s applied in the past. But she was rejected this year for a $6,200 RAL.

“I’ve had poor credit for a really long time, and I’ve always gotten the RAL,” she said.

Jackson Hewitt’s RALs are issued by Santa Barbara Bank & Trust, a division of Pacific Capital Bancorp. Pacific Capital spokesman Tony Rossi said the bank uses credit checks for its instant loans but not for its other RALs. The bank has not changed or tightened its criteria this year, he maintained.

Difficulty getting these loans is not likely to become an issue for advocacy groups, who discourage people from using them because of their costs.

“I would hope that consumers who need every penny they’ve got would not spend money to borrow against their own tax refund money,” said Jean Ann Fox of the Consumer Federation of America.

Liberty Tax’s Mr. Hewitt defended the costs by noting that there are many instances in the marketplace when people are willing to pay extra for speed.

“We know it’s a bad deal, but if the customer wants it, if you don’t have it, you’re going to be at a competitive disadvantage,” he said.

Similarly, Mr. Kerr of the National Association of Enrolled Agents said many of his members offer RALs because of competitive pressures.

“The market has clearly demonstrated that there’s a demand for the product,” he said. “They exist because the IRS is not fast enough in processing refunds.”

But the reality is that using electronic filing and direct deposit, the IRS now gets most refunds out in eight to 15 days, while paper returns and mailed checks can take three to four weeks. Still for people in emergency situations, the promise of getting their refund fast can outweigh the costs.

“It’s not always worth it, but sometimes I go to get the money right away,” said Mr. Armstrong, who needed dental surgery in February. “It hasn’t always been as quick to get the refund from the IRS as it is now.”

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