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Fast Money at Tax Time is Bad Business
By The Changeling | April 3, 2008
A couple of weeks ago I became a volunteer in Habitat for Humanity’s Loan Rangers Public Awareness Campaign. This campaign came about after Habitat for Humanity NYC noticed that several of the families that they’d helped to become homeowners were being targeted by predatory tax preparers. They were being offered quick refunds (within 3 days) when they filed their taxes, but they what they didn’t realize was that these rapid refunds came with a high interest rate and a long list of fees. In short, they were being robbed of their tax refunds. When it was brought to the attention of Habitat for Humanity, they began a campaign to raise the awareness of people who are most likely to be victims of usury masquerading as a rapid refund. Here’s some additional information on these high interest rapid refunds, known as Refund Anticipatory Loans or RALs:
WHAT IS A REFUND ANTICIPATION LOAN (RAL)?
You may have seen the advertising signs that come out every tax season: Rapid Refund! Instant Money! Get Cash Fast! These slogans advertise “Refund Anticipation Loans,” also known as rapid tax refunds. Refund Anticipation Loans (or RALs) are short-term, extremely high-interest loans, based on a taxpayer’s expected income-tax refund. At first glance, RALs may seem very attractive—especially to cash-strapped taxpayers—because they promise to deliver the anticipated tax refund immediately. But what many consumers don’t realize is that RALs carry hidden costs, including high fees and interest rates.
In fact, RALs:
• Are loans made by banks, which must be repaid, not cash advances on the expected return;
• Carry deceptively high interest rates—often 67% to 774% annually;
• Usually charge for unnecessary services that can add up to hundreds of dollars.
Is the fast turnaround worth the cost?
Taxpayers typically receive their RAL loan within one to three days. By comparison, people who file their taxes electronically can receive their refunds directly from the IRS in approximately eight to 15 days (or sooner) if they have a bank account or credit union account into which their money can be wired.
RALS TARGET LOW-INCOME TAXPAYERS
RAL providers target low-income taxpayers and communities for these under-regulated loans— seeking out people most likely to have limited savings and most in need immediate cash. At the top of the target list are families and individuals who claim federal Earned Income Tax Credit (EITC). The EITC is designed to supplement the earning of low-wage workers to help them maintain jobs and pay for necessities. This tax credit makes tempting prey for predatory RAL providers.
• Almost 60% of all New Yorkers who apply for RALs each year also claim EITCs;
• Nearly one in four New Yorkers who claim the EITC also receives a RAL loan each year.
These statistics confirm that a substantial portion of the EITC benefit for hardworking families ends up in the pockets of banks and unscrupulous tax preparers.
HOW DO RALS WORK?
Taxpayers are charged service fees that typically add up to about $300 to take out a RAL, including tax preparation and filing fees. The refund arrives in one to three days, but is deposited directly to a dummy account. Using this money as collateral, a partner bank gives the taxpayer a short-term loan. Most RAL borrowers believe the money they receive is simply an advance on their refund—or the actual refund itself. Too often, they are unaware that they’ve taken out a bank loan, despite laws that require full disclosure to people seeking RALs. If the refund arrives promptly and if it is for the amount expected, these loans can be paid off promptly. In this case, the RAL recipient has lost only the expense of the fees and the short-term loan interest. However, if a problem arises with the taxpayer’s anticipated return—the results can be devastating. If your tax refund is denied, smaller than anticipated or paid to other creditors (such as the IRS for past taxes or to your ex-spouse for child support), you will still owe the bank the loan, your credit rating will be hurt and the bank may send a debt collector to harass you. And any delay in repayment adds up quickly at APRs of 67% to 774%. The taxpayer—not the deceptive tax preparer—is left holding the bag.
(The above was taken from the Habitat from Humanity NYC website.)
To address this issue, Habitat for Humanity has trained people to become Loan Rangers. To become a Loan Ranger, I attended a brief training session during which I learned more about the RALs and my good friend Beth and I were assigned to post the flyers in the Flatbush/Farragut/Rugby area. We spent Good Friday posting them in various places throughout the neighborhood. We mostly posted them on busy corners, but also posted them in a few stores and we left flyers in Yvette Clarke’s office.
About a week ago I visited the Jackson Hewitt tax office on Bedford (pictured above) to see if I could get a rapid refund. I’d already filed my taxes and gotten my refund, but I wanted to pose as a person interested in getting a quick refund just to see how deceptive tax preparers really were. I went in the middle of the day during the week, and met briefly with a young woman who was sitting alone in the office. I asked her if I could get my tax money fast and she said that I could. When I asked how much it would cost, she said that she didn’t know. She said that she could only find out how much this rapid refund would cost me AFTER she filed my taxes. I told her that I didn’t want to pay too much, and that I wanted to keep as much of my refund as possible, and that’s when she said something that might’ve convinced an unsuspecting person to get the RAL. She said, “It probably will be around $30 or so. The refund is your money, you’re just getting it faster.” At that point I thanked her and told her that I had to think about it. No wonder so many people get duped into giving up their hard-earned refund–the information is not made clear to them.
I received permission from Habitat’s Directory of Advocacy to distribute this flyer through the blog. If you’re interested in getting the word out about predatory lending/RALs, please post these flyers wherever you think people will see them. Even if it deters a few people from getting RALs, then it’ll be worth it.
Refund Anticipation Loan Flyer
For more information on predatory lending and the loan rangers program click here.
For more information on other Habitat for Humanity programs in NYC visit the Habitat for Humanity website by clicking here.
April 3rd, 2008 at 7:30 pm
Wow . What a bunch of scumbags . Good job Petra !
April 3rd, 2008 at 7:37 pm
Go Petra!!!
April 4th, 2008 at 7:49 am
Hey thanks! I think that when the credit union opens on Myrtle Avenue they will have programs that are geared toward improving financial literacy among Bed-Stuy residents.
Also, I realize that I wasn’t clear about my experience at the tax office. The woman initially told me that she wasn’t sure how much the fee for a rapid refund would cost me. THEN she told me it would “Probably be around $30 or so.” Our brief exchange was pretty confusing, but I guess it was meant to be.