Uncle Sam isn't the only one collecting money from New Yorkers this tax season. In low-income neighborhoods, a big bite of the tax refunds meant to put money back in the pockets of the working poor goes to tax preparers who offer quick money, but at a high price.
Analyzing data from 2008, the Neighborhood Economic Development Advocacy Project (NEDAP) found several New York City zip codes in the Bronx and central Brooklyn that see more than $1 million in money from their tax refunds siphoned off in fees on so-called “refund anticipation loans.” They are the same neighborhoods in which a high percentage of people qualify for the Earned Income Tax Credit.
Until this year, some of the biggest banks in the country – HSBC, JP Morgan Chase- were doing brisk business in refund anticipation loans in low income neighborhoods. That's happening less this year, but other financial products- notably refund anticpation checks- are still targeting working poor, according to a study by the National Consumer Law Center.
Refund anticipation loans offer people all or most of their tax refund within 24 hours. The tax preparer, working in concert with a bank, makes a short-term loan to the tax filer. When the person's refund from the IRS arrives a few days later it goes straight to the tax preparer as repayment. For the bank it is a near zero-risk loan. They're advertised heavily in low-income neighborhoods, and when New Yorkers are short of money, getting a refund right away seems like a good idea.
Last year Georgia Williams, a home health aid and retired hotel worker who lives in the Fordham section of the Bronx, got a refund anticipation loan through Jackson Hewitt. She knew the loan was expensive, but she had bills to pay.
"Well, I needed it at the moment. I needed it at. the. moment,” she said. “What I'm working for now, with my pension and whatever, by time I clear my debts that I owe... I'm always short on cash,” she said.
Others aren't aware of the high interest rates and fees on the loans because the price quoted comes out of their refund amount, explained Jamila Abramson, program and outreach coordinator for University Neighborhood Housing Program, a nonprofit in the Bronx that offers free tax prep, in an effort to fight what it considers predatory lending.
“The problem behind that is you are paying up to 400 percent in interest. Where sometimes clients are alarmed that they may be paying 29 percent APR on a credit card,” she said. Refunds for people who qualify for the credit can be high and tax preparers see a money making opportunity, Abramson said.
“We've seen clients with $20,000 or $23,000 income receive a $9,000 refund from the federal and $3,000 from the state, which is substantial. It's almost half of their annual income,” she explains. Abramson and her volunteer tax preparers are working to keep more of those EITC dollars in the Bronx.
A refund anticipation loan of $1500 on a $2,000 tax refund this year costs $62 at Jackson Hewitt. That doesn't sound like much, but for a ten or 14 day loan, that's 129 percent interest.
Under pressure from the IRS, the Office of Thrift Supervision and the federal Office of the Comptroller, HSBC, which had partnered with H&R Block, stopped making refund anticipation loans this year. JP Morgan Chase, another major player in RALs got out of the business as well. But Jackson Hewitt is still making the loans. And H&R Block is offering Refund Anticipation Checks, which NCLC warned can also be predatory.
Jackson Hewitt did not return a phone call and email sent to their corporate communications office, but a front-line employee said the tax products serve a purpose.
Mayra Paguada, a Jackson Hewitt tax preparer who works at a franchise on the Grand Concourse in the Bronx said approximately 70 percent of her clients qualify for the Earned Income Tax Credit. Those who want their refunds up front, through refund anticipation loan are usually desperate for cash.
"Usually my experience, what I see it's people who really have emergencies that they really need that money," she said. "Because it's not the whole refund you get, its only the $1,500."
Paguada is diligent about informing her clients about the terms of the loan and the fees they are paying, she said, arguing that the RAL is useful, as long as someone understands the terms.
“Because some people get in a bind, they need their money,” she said. But not all preparers are as conscientious as Paguada. When NEDAP sent secret shoppers to paid tax prep locations across the city this year they found widespread abuses, said Alexis Iwanisziw, senior program associate. Tax preparers failed to disclose fees associated with refund anticipation loans and presented refund anticipation checks – another fee-based product - as the default filing option.
"What we found is that tax preparers are using more fees and not necessarily informing people about their choices. The refund anticipation check makes it easier to charge higher fees, because the cost is coming out of the amount of someone's refund and they don't really notice the cost," Iwanisziw said.