Refund Anticipation Loans - Research Paper Example

Refund Anticipation Loans (RAL’s) Introduction At this point in time people who are in need of money would seek ways on how to obtain such needed amount at the shortest possible time. Now, companies would then take this as an opportunity to offer services like short term loans. One of which is what we call “Refund Anticipation Loan” (RAL). This type of short term loan is now becoming an option to some of the Americans who are experiencing monetary difficulties. Although this has been offered by some companies for years now, there are many concerned consumer advocates who are discouraging people to patronize it, accusing tax services companies of unfair collection of fees. In spite of the high fees associated with RAL’s, most of those coming from the poor families are the ones who usually apply for it. There is an on-going battle between the government, the consumer advocates and tax preparation companies on the continued offering of Refund Anticipation Loans. Part I Refund Anticipation Loans (RAL’s) Defined A refund anticipation loan is a type of short term loan that is applied by a taxpayer, who wants an early claim on his tax refund. The amount that is acquired through the loan will be repaid by the taxpayer’s anticipated tax refund. It may also be called as “Rapid Refund” or “Instant Money.” A contract is provided by the financial institution to be signed by the taxpayer that serves as an assurance that the loan will be paid back through the taxpayer’s tax refund (“Refund Anticipation Loan Fraud”). Common interest rates for RAL’s start from 50% up to over 500%, the basis of which is the length of the time that is needed to process tax forms at the Internal Revenue Services (IRS), that is According to the Center for Responsible Lending. Although this type of loan has been claimed as a way for taxpayers to have their tax refunds earlier in their pockets, more often than not it is advanced only for just a few days or less as compared to the actual date that the IRS releases the tax refund (“Tax Refund Resources for Consumers”). RAL’s give taxpayers the opportunity to get their tax refund at a sooner date and be able to use the money earlier rather than wait for a couple more days. Even so, problems occur when someone opts to use a refund anticipation loan. Basically the lender knows that the money borrowed will be paid no matter what since the guarantee is the taxpayer’s tax refund; therefore, it is considered as a safer type of loan compared to the other types, but then risking everything just to get the money sooner seems to not sound good at all (Pritchard). Refund Anticipation Loans reflect the taxpayer’s income tax return. Those who would want to avail of this can apply in banks or lenders if they can’t wait till the IRS distributes the tax refunds (“Advantages of Refund Anticipation Loan”). Some Advantages of Refund Anticipation Loan Speed It will take just a couple of days for the borrowed money to reach the borrowers’ hands. So for those who will encounter any emergencies and are desperately in need, a refund anticipation loan is an instant solution to their problems, instead of waiting for weeks or months from the government (“Advantages of a Refund Anticipation Loan”). Ease While some people struggle to find companies that will allow them to borrow money due to a bad credit history or the incapacity to pay, with RAL’ s it may not be that difficult. Simply because there is security on the lenders’ part that the borrowed money is repaid through the tax refund, so getting the loan application approved is not at all hard (“Advantages of a Refund Anticipation Loan”). Fees Fees for services rendered are instantly deducted by the tax preparer from the refund. This could be advantageous to those who cannot even afford the fees that professional tax preparation companies charge (Deutch). Disadvantages of Refund Anticipation Loans It may be the solution to some people’s financial problem, but still there are things that have to be considered first before finalizing the decision to apply for RAL’s. High Rate of Fees Deducted The high rate of interest and services deducted by tax preparers is one of the disadvantages. The involvement of third party lending banks contributes to the high interest rates that are being charged (Deutch). Payment of the Exact Amount Borrowed In the event that the refund received by the bank from the IRS is not enough to repay the loan, then this will make the taxpayer liable for the payment of the excess amount that was not covered by the actual amount of refund (Deutch). The Absence of Loan Education People’s ignorance results to quick decision-making without even trying to weigh the other possible options available. Like any other financial decisions considering the advantages and disadvantages must be done first before deciding onto something especially when money is not necessarily needed (Deutch). Tax Preparation Companies Tax Preparation Companies provide services like refund anticipation loans. It is always important to check the background information of the company that offers someone this type of loan. Due to the urgent need of someone to obtain cash, less effort is spent by tax preparation companies to advertise their services, since there are a lot of people who are in need of loans right now. One known company that used to offer RAL services is H&R Block. It has branches in the United States, Australia and Canada making it the largest taxpayer services in the country, with over ten thousand offices in key states of the U.S. including South Carolina. The company is proud of their expert taxpayer professionals that have undergone hundreds of hours of training on taxes and tax law amendments. Aside from RAL’s (H&R Block is no longer permitted by the government to offer RAL’s in 2011), various services on tax preparations are offered by H&R Block that have an equivalent amount of fees depending on the chosen type of service (“H&R Block Incorporated”). Then there is also Jackson Hewitt Tax Service which is the second largest taxpayer services company in the U.S. having 3300 franchised outlets all over the country. They offer services such as free electronic filling, tax preparation training, tax audit representation and tax refund anticipation loans. Not all applicants are qualified to apply for RAL from Jackson Hewitt. In most cases previous taxpayers who have been approved of this service a year ago may not be able to avail of it. This all lies on the decision of the lending bank (“Jackson Hewitt Inc.”). These two giant companies are having a stiff competition in the taxpayer services industry, despite the many controversies and allegations thrown to them. Their most prominent enemies are the consumer advocates who continue to discourage people from patronizing their services most particularly the refund anticipation loans. Lawsuits vs. H&R Block and Jackson Hewitt There was a lawsuit filed by a South Carolina resident that has accused H&R Block of overcharging its rate of interest on the refund anticipation loans. The court has rejected the complainants’ charges saying that H&R Block is not associated to services like tax refund loans. Instead the court says that the company serves as Beneficial National Bank’s disclosed agent. Now if Beneficial has abided with all federal and state laws, then this means H&R Block Inc, has also abided by those laws. Beneficial is located in Delaware; it has offered tax refund loan services to South Carolina residents who are able to meet the requirements. The court has based the decision under section 85 of the National Bank Act that states the national banking association’s right to impose interest charges on a loan as long as it permitted by the State’s laws. It further explains that a national bank’s location is determined by its charter address; therefore Beneficial may offer services to South Carolina residents even if rate charges are based on Delaware laws, because its charter address is in Delaware. Under the Delaware law a bank is allowed to charge fees such as loan fees, points, finder’s fees and other charges as long as they are written in the loan documents. Beneficial has given proper evidence that shows the loan documents containing the approval to collect fixed amount finance fees, that led to the court’s ruling that Beneficial’s charging of finance fee is allowed under section 85 of the National Bank Law and the Delaware Law (Dreher, Hayden, and Tomkies 1327). Last January 31, 2010 Jackson Hewitt Tax Services filed a lawsuit against its rival company H&R, allegedly accusing H&R of conceptualizing an advertising campaign that has slandered the plaintiff’s reputation. The campaign “Second Look” according to Jackson Hewitt Services is being used by the company to drive away consumers from them. There are those who think that since H&R Block can no longer offer refund anticipation loans in 2011 due to federal regulations imposed by the Office of the Comptroller of the Currency (OCC) that has not allowed HSBC to offer such loans (HSBC serves as the banking partner of H&R Block), they are trying to avert customers from availing the RAL services of Jackson Hewitt by spreading false information like showing errors on the returns, that are allegedly by the other commercial preparer company that points to Jackson Hewitt Services (Spencer). Limits to RAL Some states have formulated regulations that will control RAL activities. The states of Illinois, Minnesota, Wisconsin and North Carolina are among those who have these regulations. In North Carolina’s law, Facilitators must be able to register with the state, RAL fees must be filed with the state and unreasonable acts are not permitted, fee schedules should be posted, the disclosure should be provided when a loan is being acquired, the fee charged should be the same with what was written in the filed and posted fees, and lastly unfair trade practices and violations has to be avoided (Duffy). In April 2010, JP Morgan and Chase willingly left the RAL market. Last August 2010 the IRS has declared that it will no longer provide the Debt indicator. The Debt Indicator shows the taxpayer’s chances of getting a refund; it was used by tax preparers to serve as credit checks. Then recently The Office of the Comptroller of the Currency OCC has issued a mandate to stop HSBC from offering such loans to the public, thus paralyzing H&R Block’s refund anticipation loan services. This move by OCC has affected the RAL market in a negative way that has earned the praises of the consumer advocates (“End Time for Tax Refund Anticipation Loans”). Part II Ethical Analysis on RAL’s Oftentimes people resort to refund anticipation loans because of the urgent need for money, or maybe they just can’t wait for a few more days from the government’s Internal Revenue Services to deliver the checks. Although this type of loan has helped some people obtain cash at a shorter period of time, but the overcharging of services fee by the tax preparers does not seem to be right. The primary issue here is whether Refund Anticipation Loans provide convenience to people or not. This topic is now becoming a moral dilemma to the people as to whether it should be or should not be avoided. Impartiality then enters the scene when a decision is made by the person that is influenced by the surrounding environment. Utilitarians believe that decisions should be based on the happiness of the majority. Utilitarians would say that as long as they are contented and have benefited from the outcome of their actions, then things remain good. So if taxpayer companies are basically enjoying the money they get from the high fee charges that they collect from the poor people who are into refund anticipation loans, then to the utilitarians that is just the right thing to do. Well certainly for the non-utilitarians it is something that is unethical because while those companies are gaining profits from their unfair charges, many are suffering from their unjust services. According to the famous philosopher, Emmanuel Kant, people have the instinct to distinguish what is right or wrong. Kantians believe in “Doing the right thing for the right reason.” The Consequences are not the basis of their actions; instead they opt to do what is really the right thing do (qtd. in Macarelli). If the Kantian principle is followed by those who provide RAL’s, then there is a possibility that consumer advocates would slow down their efforts to abolish it. The right thing to do with regard to RAL’s is for it to have conditions that will benefit both the tax preparers and the customers, and so if the unfair practices of tax preparation companies will not stop, then better yet the government must put an end to it. Proposed Legislations/Restrictions for RAL’s If given the chance to work for legislations that will regulate RAL’s, then definitely the formulation of regulations that will make RAL’S difficult to obtain will be prioritized, so that companies who offer it will no longer have the capacity to offer such services in the future. When legislations are imposed that will set limits to RAL, it will cause people to seek for safer alternatives of obtaining fast cash. If this happens, slowly tax preparer companies will lose some of its loyal customers and be forced to quit offering refund anticipation loans. In order to set limits to RAL there must be restrictions towards its implementation especially to the tax preparation companies. The tax preparer must be a registered company in the state where it is offering RAL’s. Interests and services fees charged by the tax preparers must be known to the person applying for the loan. Overcharging of fees is not allowed as well any unfair act that will be a disadvantage to the customer’s part. The customer must know about the details of the anticipated tax refunds like the actual amount to be received, so that when there is a remaining amount that has to be claimed (when all the fees have been deducted), then the money will be returned to the customer/taxpayer. Conclusion Even though companies engage in business with the goal of earning profit and to be known in the industry, it does not mean that they are free to do whatever means they have in mind in order for them to earn their target profit. Proper business ethics must be practiced by companies; this will eventually lead the company to a huge amount of success. It is always improper to take advantage of situations wherein someone is extremely in need of something. It is good to hear about legislations that are made by the government and some states that are somehow regulating the Refund Anticipation Loans. This is a sign that people are now aware that it is not a good solution to their financial problems. Despite of the fact that H&R Block can no longer offer RAL’s, there remain other tax preparation companies offering it. Still the fight of the consumer advocates to demolish RAL’s is still in its crucial stage. It’s one down and many more to go. Patience is a virtue and that is one thing that many people should always bear in mind. Works Cited “Advantages of a Refund Anticipation Loan.” Loan.com. Internet Brands, n.d. Web. 16 May 2011. . Loan.com: is an Internet site that provides solution to the frustrations of lenders and consumers. It gives information on the things to be expected during a loan process. It has its Truth About Loans center that provides 75 articles focusing on consumer questions on loans. Loan.com is operated by Internet Brands company that has many credentials. Deutch, Roni. “The Advantages and Disadvantages of Refund Anticipation Loans.” goarticles.com. go articles.com, 2011. Web. 16 May 2011. . GoArticles.com: It is a dual layered resource offering millions of quality articles and a membership base of over a hundred thousand authors. Their mission is to provide authors, publishers and users the best article database on the Web. Dreher, Darell L., Hugh M. Hayden, and Michael C. Tomkies. “Developments in the Interstate Delivery of Consumer Financial Services: Location, Fees, and Common Law.” The Business Lawyer 49 (2004): 1327. Web. 16 May 2011. . Business Lawyer: The website is operated by Darell Dreher, Hugh Hayden and Michael Tomkies who are respected lawyers in Ohio. They give advice to consumers regarding lending issues and assist clients with things that deal with financial transactions. Duffy, Daniel. "Refund Anticipation Loans." State of Connecticut. State of Connecticut, 2011. Web. 17 May 2011. . State of Connecticut (cga.ct.gov): is the official website of the State of Connecticut General Assembly. The information released are based on the imposed legislations of the state so it is considered as true and credible. “End Time for Tax Refund Anticipation Loans.” Consumeraffairs.com. ConsumerAffairs.com, 2011. Web. 17 May 2011. . ConsumerAffairs.com: it is a private, non-governmental entity that provides a forum for consumer complaints. It also gives expert advice from lawyers who examine if complaints have legal merit. “H&R Block Incorporated.” Fundinguniverse.com. Funding Universe, n.d. Web. 16 May 2011. . Funding Universe: is a company that offers loans and services to entrepreneurs. Their nationwide online network for investors and entrepreneurs is one of the largest with 700 investors and over 20,000 entrepreneurs. “Jackson Hewitt, Inc.” Fundinguniverse. Funding Universe, n.d. Web. 16 May 2011. . Funding Universe: is a company that offers loans and services to entrepreneurs. Their nationwide online network for investors and entrepreneurs is one of the largest with 700 investors and over 20,000 entrepreneurs. Macarelli, Sarah. “The Ethical Theory of Kantianism.” Associated Content. Yahoo! Inc, 2011. Web. 17 May 2011. . associatedcontent.com: This site is under the copyright of Yahoo Inc. The website allows trusted contributors to publish relevant information on different topics that are useful to researchers. Pritchard, Justin. “Refund Anticipation Loan.” About.com. The New York Times Company, 2011. Web. 16 May 2011. . About.com: About.com has 800 topic sites (Guide sites) that provide solution to the users dilemmas, from parenting to technology to travel and many other topics. It reaches up to 40 million visitors in the United States alone. The website has been operating for over 14 years and has been providing relevant and useful topics to users every single day of the week. “Refund Anticipation Loan (RAL) Fraud.” The SAR Activity Review: Trends Tips and Issues 7 (2004): 15. Web. 16 May 2011. . The SAR Activity Review: is a publication of the United States Department of Treasury. It provides information on the preparation, use and value of suspicious activity reports filed by financial institutions. Spencer, Patti. “Jackson Hewitt vs. H&R Block.” Pennsylvania Fiduciary Litigation. Spencer Law Firm, 2011. Web. 16 May 2011. . pennsylvaniafiduciarylitigation.com: Is a website operated by Spencer Law Firm. The law firm is headed by Patti S. Spencer, Esq. a nationally recognized Trust and Estate attorney. “Tax Refund Resources for Consumers.” Center for Responsible Lending. Center for Responsible Lending, 2010. Web. 16 May 2011. . Center for Responsible Lending (CRL): CRL has been protecting consumers from abusive financial practices. The mission of this non-profit community development lender is to establish economic opportunity in undeserved communities through responsible financial services. Read More