Refund loans subject to tighter requirements

NEW YORK – The credit crunch is rearing its head in an unexpected place: the short-term loans that appeal to mostly 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 America 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.

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 loans will be repaid. And HSBC spokeswoman Cindy Savio confirmed that the bank has tightened its credit criteria this year.

Still many applicants say they were unaware 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 the Associated Press, clearly spells out that an RAL is a loan, and details the fees and surcharges that might apply. But the flier does not specifically state if its two kinds of loans are subject to a credit check.

While 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 preparation chain based in Virginia Beach, Va. 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.