Refund madness: Paying 100% on your money

It’s getting more expensive to spend your own money.

Some years back, razzle-dazzle technological advances were hyped as ways to help drive down customers’ costs for basic banking services such as using an automated teller machine or cashing a check. Instead, the opposite has happened as transaction fees have risen. By now, those assessments are so common that many consumers grudgingly factor them in as the cost of convenience or doing business.

Funny what you can get used to.

Yet even the most jaded fee-paying customer should be outraged at what goes on at this time of year, during the tax filing season. This is when respectable lenders and tax preparation firms get down and dirty by marketing quickie tax refund loans to clients and then charging them annualized percentage rates that would make even payday lenders pea-green with envy.

Estimates are that more than 2 million use the service, and many are repeat customers. Borrowers often pay annualized rates of 100%, or $29 to $89, so they can get their refund cash within 48 hours of filing, instead of waiting a few weeks for the check from the feds.

Despite client demand and society’s insatiable lust for fast cash, this is an odious business, one that systematically exploits those who have the least and stand to lose the most. The free enterprise system won’t suffer if lawmakers and regulators crack down on “refund anticipation loans,” or even ban them outright.

And it wouldn’t hurt if the Internal Revenue Service, which must officially approve the tax filings before quickie refunds are made, decides to review its part in this process, too.

The nation’s major issuers of tax refund loans are already catching some well-deserved flak.

For instance, Chicago-based Household International Inc., which bankrolls refund loans made by tax preparation giant and partner H&R Block Inc., had its day in court. The two companies settled a class action, filed in federal court, for $12.5 million each after being charged with misleading low-income loan clients. What’s more, a federal court in Virginia recently ruled that Block of Kansas City, Mo., used false advertising to hide from clients the fact that they were actually taking out high-cost loans.

Yet bum advertising is just a symptom of the larger problem.

Considering the fees being charged, the loans reside in the same neighborhood as other predatory lending scams that lawmakers and federal regulators are anxious to rein in. Fast tax refunds dock right alongside payday loans, car title lending and various high-risk home mortgage and equity loans made by fast-buck artists.

In fact, to call the refunds “loans” is a misnomer.

A loan typically means the borrower and lender share some risk. The sad reality is that those using quickie tax refunds are merely getting their own money back, minus the lender’s ample cut. The lender’s comfort level is much higher, as the U.S. Treasury guarantees payback.

In a way, that means you, me – all taxpayers – are unwitting partners in the fast-tax-refund business because repayment of the loans comes from tax refund checks backed by the U.S. government.

Fast-refund backers will argue that no one is forcing people to pay $50 for a $300 refund, and that lenders have a right to sell the services they want. It’s a fair point. But there is also a broader issue.

The use of currency exchanges, payday lenders and quick-tax-refund services tends to boomerang on those who utilize them regularly, especially the working poor and inner-city residents.

One way to break that cycle is to get into the established financial services system by opening a low-cost checking account, constructing a record of credit and tapping into savings and lending instruments needed to build, or rebuild, a productive life.

Selling people their own refunds – at unconscionable rates, no less – is setting up a formidable barrier to that ever happening.

It’s also one more reason why this is a business that could, and should, go away and tax us no more.

Robert Reed is the editor of InvestmentNews sister publication Crain’s Chicago Business, in which this article first appeared.