Interest on tax refund loans slams low-paid workers

By Tony Pugh
Knight Ridder News Service

WASHINGTON — Revondia Payne's best payday was the one last month when she realized that Uncle Sam owed her $970 for being a low-wage worker.

To collect the money, Payne, 35, a part-time housekeeper at a nursing home, did what millions of working poor people do. She had a tax preparer do the paperwork for the benefit, called an Earned Income Tax Credit, along with her tax return. Then, to get the money faster, Payne took out the short-term loan that the preparer offered.

The deal cost Payne more than $300.

The interest rate on her loan came to 135.7 percent on an annualized percentage basis. The loan fees amounted to nearly double that.

Multiply Payne's case by 4.8 million — the estimated number of EITC recipients who take out loans from companies that do their taxes — and you understand why the biggest winners from a program meant to help low-income workers are H&R Block and Jackson-Hewitt, America's two biggest tax preparers, and the lenders they work with.

Together they score the lion's share of the estimated $1.75 billion that preparers and lenders take in from the $30 billion Earned Income Tax Credit program, according to a study by The Brookings Institution and the Progressive Policy Institute, two nonprofit research groups in Washington.

"There's an entire cottage industry making its profits off a federal program," said Alan Berube, a Brookings researcher who studies refund loans. "And the profits they're making are coming directly out of dollars intended to alleviate poverty."

The program isn't supposed to work out that way.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, said in an interview this week that he's worried about poor families being "hoodwinked into getting relieved of some of the money that they really need."

He wants more money for free tax clinics for low-income households.

When Congress authorized the EITC program in 1975, the idea was to lift the incomes of people dependent on low-wage jobs and keep the minimum wage low. The rationale, according to Grassley, was to compensate low-wage workers who pay a higher proportion of their earnings into Social Security than do high-wage workers. That's because Social Security taxes have an income cap. Last year, for example, no Social Security taxes were drawn on income over $84,900.

The EITC, paid to 19 million families last year, can make a big difference. A worker in a three-person family who took home $13,600 last year, for example, got a lift to roughly the poverty line from an EITC of $4,204.

The only rub is that for the quarter of EITC families like Payne who take their refunds in the form of loans from tax preparers, the bite can be 30 percent or more.

The 135.7 percent annualized interest rate for Payne's loan— disclosed to her as federal law requires — is breathtakingly steep by some standards. A three-year $10,000 auto loan at that rate would cost the borrower more than $40,000, for example.

But for such "refund anticipation loans," 135.7 percent is comparatively low, according to a study released by the Consumer Federation of America in January. It found APRs for two-week refund loans like Payne's that ranged from 67 percent to 774 percent.

Three financial institutions make 90 percent of these loans: Household Finance Corp., the suburban Chicago lender H&R Block uses; Santa Barbara (Calif.) Bank and Trust, Jackson-Hewitt's partner; and Chicago's Bank One Corp.

In Payne's, as in many other cases, the loan fees were more costly than the interest.

Her $80 fee total for a $768 loan exceeded, for example, the state of Maryland's $50 limit on new-car loan document fees.

Craig Streem, a spokesman for Household Finance, said his company's refund loan fees compared favorably to fees for, among other things, bounced checks, late payments on mortgage or installment loans and overdue subprime credit-card payments.

Denise Sposato, a spokeswoman for Kansas City, Mo.-based H&R Block, said customers are fully aware of their loans' overall costs.

"Ultimately that's their decision," she said. The loans provide a valuable service: fast cash, she said. "If we didn't offer them, they'd go somewhere else to get them," she said.

Michael Lister, president of Parsippany, N.J.-based Jackson-Hewitt, said he has never received a customer complaint about the loans.

"These are products people choose to take, and they're in demand," he said.