Wednesday, June 21, 2006

H&R Block is no stranger to offering enticements to get new clients. The largest U.S. tax preparer has spent millions fighting lawsuits claiming its "refund-anticipation" loans take advantage of low-income taxpayers by exorbitant high fees.

But there are lines the company says it will not cross. CEO Mark Ernst called on his top two competitors - Jackson Hewitt Tax Service Inc. and Liberty Tax Service - to stop selling what he calls pay-stub loans, unsecured cash loans made before a person has filed their taxes, saying they threaten the reputation of the entire industry.

"The economics of the product have more in common with payday lending than refund lending," Ernst said, referring to payday loans, often criticized for creating spiraling interest and debt.

"While there's no question that there's a need for unsecured credit, the association of these high-cost loans with tax preparation generally is not good for consumers and clearly takes the professional tax services industry into a direction that we should all wish to avoid."

It probably doesn't help that Ernst estimates the competitors' use of pay-stub loans contributed (along with myriad technical issues) to H&R Block losing around 250,000 clients in January.

Jackson Hewitt, which declined comment, also sells pay stub loans under the brand "Money Now." During its November-January fiscal quarter, when most Money Now products would have been sold, Jackson Hewitt sold 1.3 million "financial products," compared with 999,000 during the same period a year ago. Revenues in that period increased 25 percent to $17.2 million.

John Hewitt, CEO of Liberty Tax Service, said he "detests" pay-stub loans but offered them on a trial basis in Texas and North Carolina this winter after seeing how many customers he was losing to Jackson Hewitt.

"It's an inferior product and costs more," Hewitt said, but added that he believes "Jackson Hewitt saw an additional 250,000 to 300,000 returns."

If Jackson Hewitt continues to sell them next year, Liberty won't encourage its franchisees to also offer them, but it won't stop them either.

The central difference between refund-anticipation loans, which all three companies offer, and pay-stub loans, is timing.

In a refund-anticipation loan, the client files taxes and borrows against the refund expected from the IRS in the near future. Like a payday loan, the buyer pays fees in addition to the loan amount — fees critics say are higher than if the person had used other mainstream lending services.

Pay-stub loans, conversely, are sold before the client even has his or her W-2. Instead, the tax preparer uses the client's final pay stub of the year to estimate a refund and gives the client a loan based on that.

But figures in the W-2 could change and taxpayers owing child support or student loans might not get a refund at all, leaving some customers unable to pay back the pay-stub loans. Frequently, recipients take out refund-anticipation loans to pay off pay-stub loans, resulting in additional fees.

"We don't like refund-anticipation loans because they're costly and risky," said Chi Chi Wu, staff attorney of National Consumer Law Center, a frequent critic of the tax preparation industry's practices. "And pay stub loans are costlier and riskier."

The IRS has been trying to speed up the processing of refunds, which would ultimately reduce the demand for early refund products.

This entry was posted on Wednesday, June 21st, 2006 at 1:55 pm and is filed under National.