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Tax Refund Anticipation Loans Harder To Get In Tight Market

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By EILEEN AJ CONNELLY

The Associated Press

Published: March 22, 2009

NEW YORK - The credit crunch is rearing its head in an unexpected place - the short-term loans that appeal to mostly working-class taxpayers who want their federal tax refunds fast.

Disappointed applicants from coast to coast say they've been turned down for refund anticipation loans, known as RALs, where they've routinely received them in past years.

It's an interesting development because RALs are a major revenue generator for tax preparers. In 2007, nearly 9 million taxpayers paid more than $900 million in fees for such loans according to a report by the Consumer Federation of American and the National Consumer Law Center.

RALs, which average about $3,000, are cash advances backed by tax refunds and are typically repaid within 14 days. Consumer advocates have long criticized them for their hefty fees, and interest rates that can exceed 100 percent on an annual basis.

But information technology worker Mike Armstrong was in a bind. He needed emergency dental surgery and his car was in the shop when he went to an H&R Block tax preparation office in Laguna Niguel, Calif. Even though the Marine Corps veteran knows RALs are expensive, he needed his $1,900 refund fast, so he agreed to pay more than $200 in fees and finance charges.

Armstrong, 30, was told his credit score would be checked if he applied for an instant refund loan. Knowing he has a spotty credit history from his days in the Marines, he instead chose the chain's "Classic RAL," which offers the money in one to two days. "That's the one I always get," he said. "I've never been denied for it, even in my worst credit days."

He was turned down.

Indeed, one hurdle that many are having a tough time getting over is that HSBC, the bank that issues RALs to H&R Block customers, conducts credit checks and risk assessments to judge the likelihood loans will be repaid.

Still many applicants say they were unaware there was a chance they could be rejected for what is essentially a guaranteed loan.

H&R Block spokeswoman Nancy Mays said an explanatory flier labeled "Facts About Refund Anticipation Loans" is given to every RAL applicant. The sheet, which was provided to The Associated Press, clearly spells out that an RAL is a loan, and details the fees and surcharges that might apply. But while the flier states, "Approval for an Instant RAL is more limited than for a Classic RAL," and elsewhere mentions applicants can be denied, it does not specifically state whether either is subject to a credit check. Mays said customers are required to sign a consent for a credit check.

Although consumers may be expected to know that loans typically require a credit check, the people who seek RALs often have little contact with financial institutions.

Moreover, many people who seek RALs have weak credit histories. "More than half, couldn't get a loan under normal circumstances," said John Hewitt, chief executive of Liberty Tax Service, a tax prep chain based in Virginia Beach, Va. "If the bank wasn't fairly certain that they would get the money from the IRS, they wouldn't get a loan."

RAL programs have been the target of numerous lawsuits in the past decade.

This year, RAL rejections are the subject of a mounting number of complaints with state attorneys general, the Better Business Bureau and on Web sites like ConsumerAffairs .com. Many state they would have been unwilling to pay the tax preparation fees, which average about $180, if they knew they wouldn't get the loans.

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