Home > Personal Finance > The End of the Road for Tax Prep Loans?

Comments 2 Comments

TaxRefundLoans_David_Goehring_Flickr[UPDATE: Some offers mentioned below have expired and/or are no longer available on our site. You can view the current offers from our partners in our credit card marketplace. DISCLOSURE: Cards from our partners are mentioned below.]

It’s rare to see an entire industry die. But according to a new study by consumers advocates, 2011 may be the last year that companies can offer for tax anticipation loans, which have been criticized by the IRS and consumer advocates for being expensive and unnecessary.

“We will be glad to see the last of these high-cost, high-risk loans,” Chi Chi Wu, staff attorney for the National Consumer Law Center (NCLC), said in a press release. “It’s not a moment too soon to stop multi-million dollar corporations from skimming off the tax refunds of hard-working families.”

In a press release quoted by a previous Credit.com story, Alan Bennett, CEO of H&R Block, one of the largest providers of tax loans, said that limiting the industry will hurt consumers. “Millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives,” Bennett said.

About 7.2 million taxpayers received tax anticipation loans in the 2009 tax filing season, according to the report, which was published by the NCLC and the Consumer Federation of America

A tax anticipation loan from Republic Bank costs $61.22 for a loan of $1,500, the report found. Since the average loan lasts only 7 to 14 days until the IRS refund arrives, that translates to an annual percentage rate of 149%.

[Article: IRS Introduces Refund Tracking App]

But a series of decisions in recent months by the federal government and the private sector have choked off financing for tax loans, which could drive the entire refund anticipation loan industry into extinction. Those include:

  • JP Morgan Chase, one of the largest funders of the refund anticipation loan market, voluntarily decided to stop providing money for such loans in April 2010.
  • The IRS announced in August 2010 that it will stop publishing its Debt Indicator, which helped tax loan companies determine whether to give a loan by telling them whether taxpayers owe money to the federal government.
  • In October 2010, the Office of Thrift Supervision (OTC) banned MetaBank from giving money to Jackson Hewitt for tax loans, which OTS said had engaged in “unfair or deceptive practices.” Three months later it banned HSBC bank from funding tax loans by H&R Block.
  • After these changes, only three state-chartered banks were left to fund the entire tax prep loan market. All three decided to pull out in February 2011 after the FDIC told them that operating without the IRS Debt Indicator was unsafe and unsound. One of those banks, Republic Bancorp of Louisville, sued the FDIC this week, saying the agency abused its regulatory authority by shutting down the bank’s tax loan business, according to a story by American Banker.

Consumer advocates believe the end of tax prep loans will help the working poor.

“We are pleased that the IRS and bank regulators may have effectively put an end to loans that siphon off hundreds of millions in taxpayers’ hard-earned money and federal benefits meant to lift hard-working Americans out of poverty,” Jean Ann Fox, director of financial services for the Consumer Federation of America, said in a press release.

[Identity Theft: Free Identity Risk Score and profile from Credit.com]

Image: David Goehring, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team