Refund Anticipation Loans Ethical Analysis

• Ease

While some people are trying to find businesses that would enable them to borrow money due to poor credit records or failure to pay, RAL’s might not be that challenging. Simply since there is assurance on the side of the investor that the lent money is returned by means of a tax refund, it is not at all complicated to have the loan application accepted (“Advantages of a Refund Anticipation Loan”).

• Fees

Fees for services provided shall be excluded automatically from the payout from the tax preparer. This may be beneficial for many who are not even willing to pay the rates that reputable tax planning firms demand (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 It was the same as what was published 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 of 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 best thing to do with 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.