The Financial Industry Regulatory Authority, or FINRA, has deemed tax refund anticipation loans as being akin to payday loans. Many tax preparation companies offer filers the option of receiving cash immediately in the amount of their expected tax refund -- minus fees -- as a short-term loan that's repaid when the IRS check arrives. But when you calculate the interest rates applied on these loans, which are typically for just one to two weeks, it can run into triple-digit percentages on an annual basis.
Similarly usurious loans offered by payday lenders were the bane of the financial industry, and led to a substantial government crackdown on their operations.
Tax prep giant H&R Block (NYSE: HRB), however, wants to remove the stigma associated with refund anticipation loans. It is offering early tax filers same-day, zero-interest Refund Advance loans of up to $1,250. That could be especially attractive to the 30 million or so filers who claim an Earned Income Tax Credit or the Additional Child Tax Credit because of a provision Congress included in the Protecting Americans from Tax Hikes Act of 2015 (PATH): The IRS is now required to hold any refunds for returns claiming the EITC or ACTC until Feb. 15. H&R Block estimates about half of those taxpayers file their returns early, but may have to wait until the end of February before seeing their refunds, instead of having them hit their bank accounts in the usual 21 days.
If a loan is approved, funds will be loaded on a prepaid card by MetaBank, a federal savings bank that partnered with H&R Block's banking partner BofI Federal Bank. The loan amount will be deducted from the refund, so the amount refunded will be reduced by the amount paid directly to the taxpayer.
The number of people using the tax prep leader's services has declined over the past four years; these interest-free loans -- H&R Block will also pay the origination fees -- could help attract more tax filers to its offices. By comparison, nearly 34 million people used rival Intuit's online TurboTax program for do-it-yourself filers last year, up 12% from 2015.
Separately, H&R Block is also promoting a deal that would allow an additional 23 million taxpayers to file their Federal 1040EZ returns at its offices for free through the end of February.
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