Tax Day Spurs a Brawl
Sides Square Off Over Refund Check Loans
You might think you’ve got worries as Tax Day looms, but one industry is finding the season particularly, well, taxing.
Businesses that loan people the money they expect to get back from Uncle Sam in their tax-refund checks are fending off attacks from consumer groups and critics in Congress just in time for this year’s tax deadline. The House is likely to consider a bill next week that deals with the practice, known as refund-anticipation loans. And the measure could affect some big names such as H&R Block and Jackson Hewitt as well as the banks that actually lend the money, including JP Morgan Chase, HSBC and Pacific Capital Bank, which has gone on a hiring spree for lobbyists in recent weeks.
“The worst actors in this marketplace ought to be very nervous about this bill,” said Rep. Earl Pomeroy (D-N.D.) a member of the Ways and Means Committee, which passed the Taxpayer Protection Act of 2007 before the spring recess. Pomeroy called the Ways and Means measure “a first step” to send “a strong signal that Congress is concerned” about the loans and the practices of the companies that profit from them. The bill includes a provision that would give the Internal Revenue Service the authority to deem any of the loan companies “predatory.” Once companies received that predatory label, the IRS would no longer be able to provide information about whether anyone else has first dibs on the expected refund, making the loans a bigger risk for the lenders.
Consumer groups this week have stepped up their advocacy efforts, saying the loans come with excessive fees and prey on the poorest working Americans. At the same time, some of the banks have announced they will end some of the most controversial loan practices.
A coalition of more than 70 mostly consumer lobbying organizations this week sent a letter to all Senators calling for a ban on the loans made to customers who qualify for the earned income tax credit, a government program aimed at helping the working poor by limiting their tax burden. The letter also called for regulation of tax preparers and for the IRS to set up a way for anyone to file electronically through the IRS Web site.
In the Senate, Finance Committee members of both parties, including Chairman Max Baucus (D-Mont.) and ranking member Chuck Grassley (R-Iowa), have called for more disclosures, at minimum, when it comes to the refund loans. And consumer groups say they hope the refund-loan issue comes up at a hearing the panel has slated for Thursday that will look at the paid tax preparers industry in general, according to two committee spokespeople.
Chi Chi Wu, a lobbyist with the National Consumer Law Center, said the consumer groups oppose the loans because of their high costs and the risks they pose to the earned income tax credit program.
“RALs skim off a percentage of that benefit and the money goes to the banks as opposed to the families it’s intended to help,” Wu said. As many as 60 percent of the loan recipients get the tax credit, she said.
Jean Ann Fox, director of consumer protection at the Consumer Federation of America, also signed the letter, which will be sent next week to all House Members when they return from recess.
She said the Ways and Means measure, which has the backing of H&R Block, doesn’t go far enough to rein in the loans.
“These are the working poor,” she said. “They need the money so quickly. But they pay triple-digit interest typically for a loan that lasts about 10 days.”
Fox said she expects more legislation on the RALs to move this year. “This product is under strong attack, and there’s growing concern about it,” she said.
But representatives for companies that make the RALs say that eliminating them actually would hurt the working poor by hampering the speediest way for them to access the money.
And in recent weeks, Pacific Capital Bank, which previously had little footprint in Washington, hired a team of outside lobbyists, including Democrats Robert Raben of the Raben Group and Nikki Heidepriem of Heidepriem & Mager and a group of bipartisan lobbyists at McDermott Will & Emery. The outside team also includes Issue Dynamics, which will handle outreach to consumer groups and help with grass-roots organizing, Heidepriem said. “This is just really getting into gear here,” Heidepriem said.
Heidepriem added that the people who apply for the refund loans often have limited access to credit and, in the absence of the RALs, would turn to options that have higher interest rates. “It’s really not for us to say how people are using this money and whether it’s a kind of acceptable thing to do,” she said.
And her side contends that if the IRS is no longer allowed to give banks information on other debtors who might have first dibs on the refunds — known as debt indicators — it will not end the loans but make them risker for the banks and perhaps more expensive for loan customers.
“Whatever one’s concern about some RALs, it’s hard to imagine how eliminating the debt indicator alleviates those concerns,” Raben said. “The hard issue with RALs is figuring out how to respond to legitimate concerns, like the growth of the profile, that some have, without eliminating a product that millions seem to rely on.”
Tax lobbyist Ken Kies, who previously represented HSBC but currently does not have a client engaged in the issue, agreed. “If you take away the debt indicator, it’s not that companies won’t do RALs anymore, they’ll just charge more because the risk will be greater,” he said.
Pacific Capital’s senior vice president and director of investor relations, Debbie Whiteley, said the company has brought on the team of outside lobbyists to make sure that Members understand how the loan programs work and the benefits of legitimate players. The company on Tuesday announced that it would stop one of the most controversial kind of refund loans — those based on paycheck stubs and not actual tax filings. Pacific Capital’s announcement came on the heels of a similar move last week by HSBC.
Diane Soucy Bergan, a spokeswoman for HSBC, said that the business change is a focus of the company’s discussions on Capitol Hill.
Chris Spencer, a spokesman for JP Morgan Chase, another company that offers RALs through tax-preparation companies, said that the company is “consistently monitoring potential legislation in our industry … and how it would impact our business.” Spencer added that JP Morgan Chase discloses all the fees associated with the refund loans and does not make the paycheck-stub loans, either.
Many of the tax preparation services such as H&R Block and Jackson Hewitt are in the business of setting up their clients with the RALs made by those banks.
Ellen Marshall, a lobbyist with Jackson Hewitt, referred comment to the company’s public relations department, which did not respond to calls seeking comment, but Congressional sources said that Jackson Hewitt takes issue with the RAL measure in the Ways and Means bill.
Linda McDougall, a spokeswoman with H&R Block, said that her company supports more regulation of RALs. “Over the past several years, we have dramatically lowered RAL prices, upgraded disclosures and ensured that all settlement options are presented objectively so that our clients can make informed choices,” McDougall said in a company statement.
For now, Pomeroy remains unconvinced.
“We want the IRS to go in there and clean these up,” he said. “In my opinion, it’s a suspect transaction now. In our view it doesn’t pass the smell test.”