The nation’s big tax-preparation companies are so desperate for customers that they are willing to put money upfront — tax-refund loans with absolutely no hidden fees or interest charges, and no ironclad guarantees that the companies will be paid back.
Fast, free money. That’s what H&R Block, the nation’s largest tax-preparation chain, is advertising on giant banners outside its storefronts and in TV commercials featuring Jon Hamm of “Mad Men”: “You could get a refund advance of up to $1,250.”
It is the first time in six years the company has offered to front customers some money from their anticipated refund.
Two of H&R Block’s biggest rivals, Jackson Hewitt and Liberty Tax Service, are hyping nearly identical offers — dangling up to $1,300 cash.
The nation’s big tax-preparation companies are so desperate for customers that they are willing to put money upfront — with absolutely no hidden fees or interest charges, and no ironclad guarantees that the companies will be paid back.
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H&R Block, for one, has arranged a $1.65 billion funding line for its refund advances, giving pause to some Wall Street analysts who follow the company.
Two dynamics are harming H&R Block and its competitors. One is the widespread availability of cheap (and even free) online tax-filing alternatives.
The other is a series of regulatory moves that clamped down on refund anticipation loans, or RALs as bankers call them, which the companies formerly relied on to lure in people who needed cash. The loans typically came with high interest rates and fees, which customers paid on top of the money charged for tax preparation.
By 2012, such loans had become nearly extinct after a regulatory crackdown that forced most major banks out of the market. Consumer advocates, who had seen the loans as predatory, were thrilled.
The same advocates are looking warily at the resurrection of this type of loan. The new generation of refund advances are really, truly, no-hidden-fine-print free, though the tax preparers may use them to cross-sell other services.
Customers who qualify will be advanced a portion of their tax refund within a day or so, with no fees or interest, though they will still need to pay for tax-preparation services, which can cost hundreds of dollars.
Struggling tax companies acknowledge they are using the loans as a come-on to make up for the loss of walk-in traffic and people who have migrated to TurboTax and its alternatives. Each loan will cost H&R Block an average $32 to $36, according to regulatory filings — which the company will chalk up as a customer-acquisition expense.
“The early part of the tax season is really driven by consumers who need their refund to live,” said David Prokupek, chief executive of Jackson Hewitt. “Our goal is to help them get fast access to their money, at no cost. This has some risk for us, but we needed to do something in the stores that you can’t get online.”
The loan offers are open to all customers, but they are particularly aimed at low-income Americans who live paycheck to paycheck and rely on their tax refund as their biggest annual cash infusion. For many people, it is a critical way to pay off holiday debt, catch up on overdue bills or cover emergency expenses like car repairs.
Those taxpayers typically file their returns as early as possible. This year, tax filing season starts Jan. 23 and runs through April 18.
But millions of people will not be able to collect their refunds until late February because of a new federal rule that delays refunds for filers claiming certain tax credits.
“We think that’s going to cause real pain,” said Brad Hanson, president of MetaBank, the lender funding H&R Block’s and Jackson Hewitt’s loans. “We’re looking to bridge that gap, in a responsible way.”
Analysts estimate that around 1 million customers took out refund loans last year. This year, H&R Block alone may double that volume.
“We are looking to do a lot of loans to a lot of people, and we will be marketing this aggressively,” Bill Cobb, H&R Block’s chief executive, told analysts on a call.
The company has promised not to pass the cost on in any way to customers taking advances.
Some investors are not thrilled about that math: A Morgan Stanley analyst recently downgraded H&R Block, writing skeptically in a research note that the loans “may be a drag to margins.”
Of course, tax companies have found other ways to skim off customers’ money with add-on products. Many low-income customers lack the cash to pay tax-preparation fees upfront. Instead, they essentially finance them with a “refund transfer.”
For a fee — at H&R Block, it is $35 — the company will set up a temporary bank account to collect a customer’s refund and wait until it arrives to deduct the fee. H&R Block collected $165 million last year from those transfers.
The company also heavily promotes its Emerald Card, a reloadable prepaid debit card on which customers are encouraged to store their refunds. For some customers, H&R Block offers a credit line of up to $1,000 on those cards — for a $45 annual fee, at a 36 percent annual interest rate.
Qualifying for a refund advance does not involve a credit check, and the advance will not show up on customers’ credit reports. If a customer’s refund is smaller than the amount that has been advanced, or is garnished by the IRS, the lender will be required to write the loan balance off as a loss.
“In those cases, we do not attempt to collect, in any way,” said Greg Steinlicht, H&R Block’s vice president for financial services.
H&R Block declined to comment on what percentage of applicants it expected to be approved. Jackson Hewitt said its approval rate was running around 80 percent.
The company started prequalifying customers in November; so far, more than 450,000 people have been approved.