State Division of Human Rights Investigates RAL Practices
Agency: High-Interest Loan Providers May Be Targeting Minorities and Military Families

By Melissa Hoffmann Lajara , Trusted Professional Staff

A New York State Supreme Court judge recently ruled that the New York State Division of Human Rights (DHR) can investigate H&R Block’s lending practices to see if the company is targeting its high-interest Refund Anticipation Loans (RALs) disproportionately to minorities and military families.

The DHR also launched investigations and filed complaints in January against Jackson Hewitt and Liberty Tax Service, which the agency said are suspected of similar practices, in violation of civil rights laws.

The agency said it sued H&R Block for records access because the company ignored its subpoenas and questioned the division’s right to investigate. Jackson Hewitt and JTH Tax Inc.—which does business as Liberty Tax Service—have been cooperative, DHR Commissioner Kumiki Gibson said.

“I can’t say if H&R Block discriminated,” she said. “We’re not saying one way or the other where we think they are. What is surprising is that H&R Block, the biggest tax preparation company, they decided to fight [the division’s subpoena]. It just amazes me. You would think that they’d be interested to find out if they did something,unintentionally, to discriminate.”

Gibson said that documents already received from Liberty Tax Service and Jackson Hewitt “supported some of the data” indicating disproportionate marketing.

Jackson Hewitt, founder and CEO of Liberty Tax Service, said his offices exist in places other than low-income areas.

He said Liberty’s placement strategy is simple: “Wherever there’s going to be an H&R Block, there’s going to be a Liberty.”

It Began in the Bronx

DHR’s offices are in the Bronx’s Fordham Plaza, where a lot of low-income residents live. “In fact, we have an H&R Block office right up the street,” Gibson said. “We saw a sign up; we started looking into this [because] we had heard about these products.”

Gibson said she received information from the Department of Defense that indicated there were also disparities between the products being offered to minority neighborhoods and military families, and those in higher-income and predominately white neighborhoods.

“It at least compelled us to investigate,” she said. The investigations will continue, she said, until investigators determine whether the case warrants a hearing. If it does, both sides will present their evidence and an administrative law judge will make a ruling, Gibson said.

Gibson said she’s not ready to say if H&R Block did indeed discriminate, willfully or otherwise. She said her primary goal continues to be collecting evidence and information on the company’s lending practices

“It will advance to a hearing if there’s probable cause,” Gibson said. “I don’t [know] in the end if they will be found liable.”

The complaints against Jackson Hewitt and Liberty Tax Service seek to compel the companies to “immediately cease and desist in the unlawful conduct and comply fully with the Human Rights Law.”

RALs have come under increasing government scrutiny for what some perceive as providing little benefit at great cost to low-income taxpayers who may not completely understand the loan products or the interest rates and fees attached.

“The loans … are short-term loans based upon an individual’s anticipated paycheck or income tax refund,” the DHR said in a statement. “They usually charge exorbitant fees and interest rates, and borrowers can end up with very little or nothing after the fees and interest are paid.”.Gibson said the annual interest rates on RALs have been shown to be as high as 700 percent.

“What makes me so outraged about this … is a lot of the people who receive refund anticipation loans could receive free tax preparation services and get a refund [from the IRS] within seven to 10 days,” Gibson said. “At the end of the day, that’s what bothers me about this. The economy is really, really tight, oil prices are through the roof and taxpayers are paying for a stimulus package to put more money in people’s hands.”

“These companies,” she continued, “are taking that money out of people’s hands. We want them spending the money or paying their mortgages.”

Putting Up a Fight

Because of the legal battle, the agency had not, as of March 25, been able to get information from H&R Block, Gibson said.

“At every turn, H&R Block has fought our investigative rights in court. At every turn, they’ve lost,” Gibson said. “First … they filed a motion in court in Albany arguing we didn’t have the right to investigate them. We [filed a motion] to move the action back down to the Bronx.”

Although the court said H&R Block must cooperate with DHR subpoenas, Gibson said, “H&R Block, we understand, is going to appeal this decision.”

She’s right.

H&R Block said in a statement that the company “intends to appeal this decision, which is purely procedural and does not suggest that the Division’s investigation has any merit whatsoever.”

H&R Block said it firmly stands by its RAL product, “which is offered in an equitable and consistent manner in H&R Block offices nationwide.”

“We are not aware of any consumer complaint that prompted the Human Rights Division’s investigation in this case,” the statement continued. “Furthermore, because the product is provided by a national bank, we do not believe it falls under the state Human Rights Division’s jurisdiction.”

Gibson said she believes the company will try to enjoin New York State Supreme Court Judge Betty Owen Stinson’s order to stop investigative proceedings until it has a chance to appeal.

Are RALs Even Necessary?

Gibson and some Society members noted that e-filing has made it possible for most taxpayers to receive refunds nearly as quickly as they do through purchasing a RAL.

“I would not advise anyone to participate in one,” said P. Gerard Sokolski, past Society president and member of the Tax Division Oversight Committee. “Certainly, if you file electronically, you get your refund back within a couple of weeks. To speed it up a week, it’s a horrible expense.”

Janice M. Johnson, a member of the Society’s Tax Division Oversight Committee, said she thinks that if RALs continue to be sold, “some kind of cap” should be placed on the fees and interest charged.

“There’s always the issue of when do lending rights tend to be extortionary,” she said. “There needs to be full disclosure. It’s really the government’s job to keep … people from being preyed upon.”

However, Scott M. Cheslowitz, also a member of the Society’s Tax Division Oversight Committee, said that banking products like RALs may provide a needed service, as long as terms are fair.

“There’s a market for it,” he said. “There are people who live hand-to-mouth. If they can get the money sooner, it can satisfy certain needs they have. There’s a business angle in supplying cash up front, and [practitioners] should be allowed to make a profit. The question is, what’s a legal profit?”

He said that although some practitioners may be taking advantage, many are not. “Nobody should be a predator with any product,” he said. “It’s probably the few bad eggs that create the need for more oversight. I’m sure there’s legitimate practice out there, but you’re not going to hear about it.”

Even Hewitt said RALs are bad deals for most Americans.

“I’m not a defender of RAL products most of the time,” Hewitt said. “For almost every American, it’s a bad deal. Less than 10 percent of Americans get a RAL and for some of them it’s a good deal.”

Coalition for Taxpayer Financial Choice?

The marketing of RALs is not restricted to the offices of H&R Block and others. A Web site for an organization that calls itself the Coalition for Taxpayer Financial Choice, available at www.taxpayerfinancialchoice.com, heavily promotes RALs and other quick-cash products.

According to its mission statement, “The Coalition for Taxpayer Financial Choice (CTFC) is an organization committed to helping all taxpayers gain access to clear, factual information about tax-related financial products that provide short-term financial solutions and to enable taxpayers to make educated choices about these products.”

The CTFC, which was founded in part by H&R Block, includes testimonials from individuals who purchased RALs and has a section to dispel alleged myths about RALs, including their high costs.

“Critics who cite exorbitant annual percentage rates often arrive at these numbers by inappropriately including costs beyond the finance charge, such as the cost of tax return preparation,” the Web site says. “[The] Truth in Lending Act provides specific guidance as to which fees must be included in the finance charge when calculating the APR …. Average RALs cost about 2-4 percent of the refund amount, similar to the cost of a credit card cash advance.”

The Web site also features a link to a study by Georgetown University’s Credit Research Center. The study was funded in part by a grant from Jackson Hewitt.

The CTFC could not be reached for comment, because of incorrect contact information on its Web site.

The DHR is aware of the CTFC’s Web site, but Gibson declined to comment on it..

The DHR is not the only government agency taking a closer look at RAL practices. Earlier this year the IRS released a set of regulations and a new revenue procedure “giving taxpayers greater protection and control over their tax return information held by tax return preparers,” according to a press release from the agency.

The IRS and the United States Treasury Department also announced in January that they are mulling a proposal that would prohibit tax return preparers from disclosing or using tax return information for the purpose of selling RALs and similar products.

IRS spokesman Kevin McKeon declined to comment on the efforts of the DHR, and has noted previously that the IRS has no jurisdiction over banking products.

Melissa Hoffmann Lajara, Associate Editor, can be reached at mlajara@nysscpa.org.