The Cruelest Month

Like mushrooms after a spring rain, signs pop up at this time of year in hardscrabble urban neighborhoods across the country, promising quick and easy money. You might get the impression that they mean actual tax refunds from Uncle Sam, but they don't. The advertised cash is really a bank loan made against the expected return, carrying staggering annual interest rates that can range from nearly 90 percent to 1,800 percent, including fees. In the trade it's called a "refund anticipation loan," a RAL. More than half the people who get RALs have incomes low enough to qualify for the federal earned-income tax credit, one of the last shreds of the social safety net. Taxpayers spent an estimated $1.5 billion for RALs and related fees in 2002.

H&R Block, America's best-known tax preparation service, got a nice piece of the action. In 2001 H&R Block arranged 43 percent of all refund loans, working with big-name institutions like Household Finance, the leading provider of RAL funding. In 2002 H&R Block realized a 57 percent profit on RAL business.

It's a well-thought-out and--thus far--perfectly legal scam, in which the tax professional calculates the amount of the customer's refund and offers an instant refund, which turns out to be a loan provided by a collaborating bank. The customer gets a check for the amount of the refund, all right, but minus a healthy percentage deducted for interest along with an average $32 fee to the tax preparation service for arranging the loan and another $25 fee for the lending bank. The National Consumer Law Center estimates that the three fees plus interest on the average refund of $2,100 add up to $250. The arrangement even includes a "dummy" temporary account in the taxpayer's name, set up by and for the bank to receive the refund.

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