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Refund Anticipation Loans: Jackson Hewitt Swoops In

This tax season Jackson Hewitt could elbow its way into controlling a controversial market: refund anticipation loans. Federal regulators banned the tax preparer’s larger rival, H&R Block, from issuing RALs by ordering its banking partner to cease backing its loans. That could be a boon for the No. 2 preparer as it stands poised to gobble up a lion’s share of a once-split market.

H&R Block’s lending program screeched to a halt late last month when the Office of the Comptroller of the Currency ordered HSBC Holdings PLC to stop backing the tax preparer’s RALS and refund anticipation checks. “It was a startling turn of events,” says Morgan Stanley executive director Vance Edelson. “If you asked me a year ago whether it’d be H&R Block without the RALs and Jackson Hewitt with them, I would have said you were crazy.”

The OCC won’t comment, though analysts say the entity evaluates the risk these loans pose on the banks and regulates which banks can back them accordingly. HSBC likely wanted out of the business and pressured the OCC to act, says Edelson. That leaves one major player—Republic Bancorp, Inc.—to shoulder the risk and reap the profits of a lucrative yet contentious industry. Republic still backs Jackson Hewitt’s loans.

Refund anticipation loans give filers the option to pay a hefty fee to get their expected tax refund on the spot. In turn, the lender keeps the taxpayer’s refund when it comes back from the IRS. Jackson Hewitt customers can get a maximum of a $1,500 anticipation loan, which could carry an APR of 24% among other charges, according to Kartik Mehta, a research analyst for equity-research firm Northcoast Research. That fee is split between the bank—which gets north of $100—and a fixed $20 to Jackson Hewitt. H&R Block, meanwhile, charged a $96 fixed fee, split 50/50 with its bank. Smaller competitor Liberty Tax Service will also offer anticipation loans (the company got in trouble in 2009 for some of its loan-related marketing practices).

RALs have ruffled consumer advocates who’ve tagged the system as highly predatory, particularly for low-income families without easy access to traditional lending spigots. Data from the  Consumer Federation of America and the National Consumer Law Center indicate that in 2008, RAL fees took in $738 million from the refunds of 8.4 million taxpayers.

The IRS urges taxpayers to steer clear of RALs and says that e-filing a return and selecting direct deposit will get your refund quickly—sometimes within about 8 days. Morgan Stanley’s Edelson says, though, that since some 25% of Americans don’t have a checking account, the speed of direct deposit doesn’t help them. Even if they receive a check relatively quickly, they’d have to pay for check cashing fees on top of that, he says.

Still, the IRS has proposed banning RALs altogether—partly because they are concerned that such loans abet tax fraud. A preparer could be tempted to manipulate a return to result in a refund, even if the taxpayer really doesn’t have one. Why? No refund, no refund anticipation loan—and no extra profits for the preparer or its employer.

Readers, do you think tax preparers should be permitted to offer RALs?  How far should regulators go to limit the products they can offer?


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