By Bowdeya Tweh
More than 1.5 million U.S. taxpayers have taken out loans
against their anticipated 2016 refunds, fueled in part by the
federal government's delay in disbursing money to certain
filers.
Tax preparers are making unsecured loans that are free of
interest and upfront fees in an effort to aggressively court
customers. The emergence of these refund-advance loans marks a
shift away from higher-margin products offered more than a decade
ago that were derided by consumer groups, lawmakers and regulators
for saddling consumers with excess fees.
This year, the Internal Revenue Service delayed refunds until
late February for taxpayers claiming the earned-income tax credit
or additional child tax credit, a tactic aimed at reducing
fraudulent filings and incorrect refund distributions.
H&R Block Inc. said Wednesday that it has approved 840,000
refund-advance loan applications worth about $700 million this tax
season, its first time offering the fee-free product. Meanwhile,
Liberty Tax Inc., which runs Liberty Tax Service and SiempreTax+,
said Wednesday it had a 40% increase in such refund advance loans
from a year ago, rising to 175,000 loans approved as of Feb.
28.
Privately held Jackson Hewitt Tax Service Inc. provided 485,000
refund advance loans this tax season, double the volume from the
previous year.
The IRS expects to process more than 153 million individual tax
returns this year. Through March 3, the agency said it had
processed about 39% of that total.
Estimates of how many people took advantage of these types of
products industrywide this season aren't yet available, but levels
are likely to be higher than a year ago, bolstered by H&R
Block's entry into the market and the IRS refund disbursement
delay.
Tax-prep companies have focused marketing efforts on customers
who are early filers, many of whom are cash-strapped and rely on
refunds for critical living expenses or to pay down debt.
"What we're seeing is a change in consumer behavior," said
George Tong, a San Francisco-based senior research analyst at Piper
Jaffray Cos. As a result, companies are willing to absorb loan
program fees as part of customer acquisition costs, Mr. Tong
said.
But not all tax-preparation companies are joining the fray.
Intuit Inc., which owns TurboTax, doesn't provide
refund-anticipation loans. Chief Executive Brad D. Smith told
analysts last month that after exiting that line of business a
decade ago, the company wasn't planning a return because "we didn't
feel that that was the right approach for families who were looking
to get money in their pocket."
Tax preparers hoped the refund advance promotions would lift
traffic through the early part of the tax season. But through March
3, the number of returns filed was down 8.5%, and electronic
returns filed using professional tax preparers dropped 10% from the
comparable 2016 period, according to IRS data.
Consumer advocates say the current generation of loans are
different than predatory products of years past, but they still
require supervision.
"There are some potential risks, but as far as we can see, the
consumers aren't being charged a fee," said Chi Chi Wu, a staff
attorney with the National Consumer Law Center in Boston.
Still, Illinois Attorney General Lisa Madigan cautioned
residents in a February news release to "be skeptical" about these
types of products. Prepaid debit cards loaded with refund advances
can carry fees for certain types of transactions, such as ATM
withdrawals.
In a conference call with analysts, H&R Block Chief
Executive William C. Cobb declined to speculate on the program's
future but said "we're very pleased with our first year with this
product." The loan, offered through Feb. 28 with partner Meta
Financial Group, lent up to $1,250 to eligible tax filers who
visited branch offices in advance of their refund.
Meta Financial said Tuesday it originated $1.26 billion of
refund-advance loans between Dec. 12 and Feb. 28. The company
originated less than $100 million of those types of loans in the
entire tax season a year earlier. Investors in Meta have benefited
from its growth, as its stock has more than doubled in value in the
past year.
"We want to offer products that bring value to consumers. It
only helps to reduce the number of payday loans or predatory loans
that exist in the market," said Brad Hanson, president of Meta,
which operates MetaBank with its $4.2 billion of assets.
MetaBank enters deals with tax preparers to originate and fund
advance loans and provide the back-end systems to support the
loans. Tax preparers, which already handle marketing the products
to customers, cover loan origination fees and limited guarantees to
cover potential loan losses. Mr. Hanson declined to disclose
financial details about arrangements with individual tax
preparers.
Liberty Tax Chief Executive John Hewitt told analysts Wednesday
that its increase in advance loans was "right in line with our
expectations." The company added more heft to its product in 2017,
doubling the total loan advance amount available to filers to as
much as $1,300.
Jackson Hewitt started prequalifying people for its fee- and
interest-free refund advance loans in November, providing tax
filers with amounts ranging from $200 to $1,300 as early as Dec.
15.
So far this tax season, the average taxpayer refund is $3,138,
up 0.7% from 2016, according to IRS data.
Write to Bowdeya Tweh at bowdeya.tweh@wsj.com
(END) Dow Jones Newswires
March 11, 2017 08:14 ET (13:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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