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