For Tax Loans, 2011 is a Whole New Ballgame

Alternatives out, too

Meanwhile, the company’s competitors will find it more difficult to offer refund-based loans this year because of a decision by the IRS in August 2010 that it would no longer provide tax preparers with a digital “debt indictor.” Previously, tax prep companies received an electronic notification from the IRS about whether a taxpayer’s refund would be offset by the need to pay delinquent taxes or other debts. The companies would use this information to help them decide whether to loan money based on the refund, and how much to give.

Concerned that tax refund loans charge low-income predatory fees to access their own money, the IRS will stop giving out the indicator.

“Refund Anticipation Loans are often targeted at lower-income taxpayers,” RS Commissioner Doug Shulman said in a press release. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

Even with these new restrictions, H&R Block’s competitors are scrambling to win new customers now that the industry’s largest player is out of the game. But Jackson Hewitt, the #2 provider of refund advance loans and Liberty Tax Service, the third-largest player, have had recent troubles of their own. A year before H&R Block’s funding was cut off, the Office of the Comptroller of the Currency made a similar decision against Santa Barbara Bank & Trust, forcing the company to stop giving money to fund 75% of Jackson Hewitt’s tax loans, according to a story by The New York Times.

Leaders of the bank appeared pleased to get out of the tax loan business. “It will help return Pacific Capital Bancorp to its roots of being a pure community bank,” the bank’s CEO, George Leis, told reporters.

Liberty Tax Service also was hit in 2009 when it lost a lawsuit in San Francisco Superior Court on allegations that it ran misleading advertisements that presented its high-cost loans as tax refunds, charging interest rates as high as 395%. The company was ordered to pay $1.2 million in fines.

“Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds from the IRS just weeks later,” Jerry Brown, who brought the lawsuit as the state’s attorney general at the time, said in a press release.

For years tax anticipation loans have come under fire from consumer advocates, who say that the industry’s practice of charging about 25% interest for short-term loans backed by federal tax returns amounts to predatory lending.

Consumers paid $738 million for tax anticipation loans in 2008, according to a study by the National Consumer Law Center, with an average annual interest rate of 72%. People who use tax prep loans are “essentially borrowing their own money, sometimes at extremely high interest rates,” the report found.