Tax Loans Are Losing Some Allure

Refund anticipation loans have been a profitable business for tax preparers like H&R Block and Jackson Hewitt.

Tax preparers like Jackson Hewitt and H&R Block are changing the ways they offer refund anticipation loans.

There is still a good business in fronting customers cash equal to the tax refund they expect to receive from the government. There is just a lot less of it now. The number of refund anticipation loans declined 22.5 percent last year and that was after two years of little-to-no growth.

Fees from the service, which peaked at .24 billion in the 2004 tax year, according to data gathered by the National Consumer Law Center, dropped an equal percentage, to 0 million, in 2005. No one is ready to proclaim the demise of the refund anticipation loan, but the dropoff is probably no fluke. Figures for the 2006 tax year are not yet available as the tax filing deadline is not until April 17.

(Why the 17th and not the 15th? April 15 falls on a Sunday, so Monday, April 16, would be the filing day except that it is the Emancipation Day holiday in the District of Columbia. Since District holidays are considered to affect the whole nation, procrastinators get two extra days to finish their tax returns.)

The refund loan change is occurring in part because consumers are wising up to alternatives that are fast and less expensive. Also, a shift to a new form of the loan is proving risky to the preparers. At the same time, the largest tax preparer, H&R Block, has cut fees for the loans as much as a third and issued a debit card that consumers without bank accounts can use that gives them the opportunity to bypass the loans altogether. Block, besieged by its troubles in subprime mortgage lending, says that its tax business results are "solid."

Anyone who files a return electronically and has the government directly deposit the money into a bank account can expect the money to arrive in as few as seven days. (The Internal Revenue Service says it will deliver in less than two weeks.)

It is catching on. The I.R.S. said that 35.6 million taxpayers who filed early chose to have their refunds deposited directly into a savings or checking account, up 5.2 percent over last year at the same time. It also said 82 percent of all refunds are deposited directly.

Anyone earning less than ,000 a year can file taxes electronically free under the Free File program. That means a quick refund, and, since the I.R.S. banned refund anticipation loans under this service, there is no risk of temptation. Seventy percent of taxpayers are eligible for the service. (Taxpayers can also split a direct-deposit refund into as many as three separate accounts, the I.R.S. said.)

The refund anticipation loan business works like this. After filling out a customer's tax return and finding that money is due from the United States Treasury, a tax preparer will ask if the customer wants the money now rather than waiting. This is good business because the loan carries almost no risk to tax preparers. They know the exact amount the government will send to pay off the loan. They can also check with the I.R.S. before granting the loan to make sure there are no liens against the refund.

Despite the low risk, tax preparers charge hefty fees: about 3 percent for sums of ,000 or more and as much as 12 percent for smaller sums because the base fee is usually or . The interest rate, though it applies only until the refund arrives, would make a loan shark drool.

The taxpayer does get the money within two days.

Whether it has been the ease of electronic filing or the additional disclosures about fees and interest rates that are hurting the business, the tax preparers have reacted with new products.

Those offerings, however, have carried higher risks for them. Last year, Jackson Hewitt, the No. 2 preparer, got a jump on its competition by offering refund anticipation loans based on the year-end pay stub rather than the W-2s that employers send at the end of January. Because the offer drew customers in early, H&R Block matched the service this year. Then Jackson Hewitt raised the ante by issuing holiday loans that were based on a November pay stub, and the others followed suit.

The pay stub refund loans turned out to be risky business. The preparer did not know the exact amount of the refund because the tax return was not prepared, which meant it was not going to get the guaranteed payoff from the government.

Enough of the borrowers never paid back the loans that HSBC, the bank that H&R Block uses to make the loans, announced quietly last week that it was exiting the business.

Dan Smith, a spokesman for H&R Block, said the company supported HSBC's decision to discontinue the product. "We encourage other national lenders to follow suit," he said.

John Hewitt, the founder and chief executive of Liberty Tax Service, said: "I am happy if it just goes away. It's just a bad product for the consumer and the bank."

In reaction to the new environment, H&R Block has introduced a debit card that cuts the cost of a refund anticipation loan. Called the Emerald PrePaid MasterCard, the debit card is issued by a bank that Block opened last year.

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