You see the B12 bus go by in the Bronx and an ad for Jackson Hewitt Tax Preparation services saying, "Loan money now; get your money right up front," with the image of a smiling family. Or you get something in the mail talking about how you will get a free Metro Card, or how you can instantly get a refund loan without having to wait for the IRS.
Yet all they are doing is to sell you a hoax. The fact is consumers can file directly with the IRS online and receive their money in less than 8-10 business days, but these notices from “spear fishermen” won’t tell you that. This is how people are lured into expensive loans with interest rates that balloon and later swallow up their refunds plus additional payments, says Spencer Freedman, an official with the New York State Division of Human Rights (DHR), which handles such cases.
The DHR enforces civil rights cases at the state level, while federal cases are handled by the Equal Employment Opportunity Commission (EEOC). Every year, the DHR handles 6,000 individual complaints related to other rights violations. It also fights predatory lenders such as the one above, and has never lost a case it initiated, agency officials say.
The state and federal agencies operate a little differently. When a complaint is brought to the DHR, the agency conducts an investigation and, when warranted, files a formal court complaint. The DHR also provides legal counsel for plaintiffs. The EEOC, on the other hand, conducts an investigation, and when the complaint is sustained, tries to mediate between the parties. It's only when mediation fails that the EEOC clears the way for the plaintiff to file a lawsuit in federal court. Unlike the DHR, the EEOC doesn't provide legal counsel.
The DHR has been investigating alleged abuses of what's known as refund anticipation loans (RAL) by a number of companies, including Jackson Hewitt, Liberty Tax Service, H&R Block and others. An RAL is a high interest rate short-term loan secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds, rather than waiting for their tax refund from the IRS.
DHR contends that by marketing and promoting high interest loans to minorities and military personnel in anticipation of refunds, these companies engage in predatory lending. Such loans have "stripped $324 million from New York City residents in 2005," says the DHR.
In early 2008, the agency filed a complaint against Jackson Hewitt, Liberty Tax Service, H&R Block, seeking to limit the tax preparers’ ability to market RAL. According to DHR's court filings, military families and ethnic minority families have found themselves in deep debt having to use their tax-refund and savings just to keep up with interest payments that can balloon up to 700% annualized when they get RAL.
The agency contends that the lenders target low-income minority communities who are desperate for money, and are relatively uninformed about the long-term cost of such loans. Indeed, John Hewitt, the chief executive officer of Liberty Tax Services, has admitted that tax preparation service companies such as his do tend to operate in low-income areas. Hewitt, who is also co-founder of Jackson Hewitt, hopes to prevail in the state lawsuit.
"We are defending it vigorously and we think that they will drop it because there is no merit," he says. "They claim we put our offices in low-income areas and or certain areas near military families. I have a couple of responses. Where do you think the New York State Lotto or the OTB offices are? Do you think they are in the low-income areas and high income areas?"
Other states have also investigated tax preparation companies on consumer fraud.
Margaret Reiter, the supervising deputy attorney general for California, says her office has had cases against all of the lenders for misleading advertising. After reaching a settlement with Jackson Hewitt in January of 2007, California still has cases pending against H&R block and Liberty, says Reiter.
Reiter says her office took action after being consumers complained and watchdog organizations substantiated those complaints with reports about deceptive advertising by these companies.
Investigations by her office unearthed several problems: In some cases, people signed up to get one of the loans and embedded in the multipage documents were provisions allowing the lender to use current anticipated refunds to pay off prior debts; there were also undisclosed additional fees that sometimes delayed the refunds; and, there were cases where borrowers' confidential information were not protected and even provided to third parties. In the end, the tax preparation companies were barred from engaging in some of these practices.
"It was a settlement so the judge did not issue a finding that they did anything wrong," Reiter says.
In addition, the companies now have to put in writing a statement that loan recipients can get refunds faster without extra charges or fees. Often this information is hidden somewhere in the middle of the documents, she says. Reiter says that her office determined that companies targeted minorities, and areas with incomes below $40,000 a year.
Freedman, of New York's DHR, says the cost of these loans can't be underestimated. According to a 2007 report by the National Consumer Law Center, the fees and costs for RAL's drained $650 million from people that were eligible for earned-income tax credit program in one year.
"Here you have a program that is applauded as an economic stimulus program and then the money is being siphoned off by some company that is making $80 million on fees. That is real problem," he says.
At Jackson Hewitt, which made $80 million last year, a third of the revenues came from predatory loans, DHR contends. "We try to address systemic forms of discrimination an individual person may not be able to do on their own," says Freedman, of DHR.
Part of the problem fighting predatory lending is that people don’t typically report when they are victimized. "People will not come into our doors and say I have been victimized and targeted because of my race or my military status," Freedman says, adding that loan recipients do not have access to the kind of statistical evidence the DHR has.
"These are often very short term loans,” he adds. “The annualized interest rates don't mature to that level in terms of the actual cost because it's being taken out of your refund within a couple of weeks."
Right now the DHR’s main goal is to get the big three - Jackson Hewitt, Liberty, and H&R Block - to stop targeting people with products like the refund anticipation loans.
Jackson Hewitt, for example, is the number two tax preparation company in the country, with more than 6,000 stores nationwide, many in ethnic minority neighborhoods. DHR found that the company markets itself almost exclusively in minority neighborhoods in New York State.
Hewitt disputes the state’s contention that some loan recipients' end up heavily indebted with 700% annualized interest rates. "They can spin the percentages any way they want. The fact of the matter is that the average costs of the loans are $80," he says.
Hewitt contends people who take the loans pay the extra cost just as someone using FedEx to send their mail as opposed to the US Postal Services would pay the additional cost: "Federal Express is $20 or you can send it with a 42-cents stamp. If you wanted to wire $2,000 by Western Union for someone who needs it, it would cost you well over $100."
In any event, Liberty only offers refund anticipation loans to less than 20% of its clients, unlike Jackson Hewitt which lends to 35% of its clients and H & R Block, which lends to 27% of its clients, Hewitt contends. "We agree that it's not for all people," Hewitt says.
DHR has no shortage of work. Freedman says DHR has been formally investigating subprime lending for some time now. According to a report in The Wall Street Journal, up to 50% of mortgage loans to Black families were classified as subprime; about 10 years ago, it was only about one-third.