West Virginia's highest court ruled that brokers of tax refund anticipation loans (RALs) are covered by state consumer protection and lending laws.
RALs are short-term, high-cost loans based on anticipated federal tax refunds. Most are made by commercial tax preparers that target the working poor, especially those who are eligible for an earned income tax credit (EITC) and are unaware that they can get their refunds for free in 7 to 10 days. In addition to paying tax return preparation and electronic filing fees, borrowers also pay document processing fees and a loan fee that carries a triple digit or higher annual percentage rate (APR). Many people are paying these fees unnecessarily, as they may be eligible for free tax preparation services from the Internal Revenue Service and programs such as AARP's Tax-Aide.
Tax preparers frequently market RALs as "quick refunds" rather than loans. Many customers do not realize they are taking out a loan, that the fees will reduce the size of their refund and that if the refund is smaller than expected or is delayed, the borrower remains liable for the full amount of the loan. According to 2004 IRS figures, 78 percent of RAL borrowers had adjusted gross incomes of $35,000 or less and 56 percent qualified for the EITC. When EITC recipients take out RALs, fees siphon millions of dollars out of the program that otherwise would go directly to needy taxpayers. In 2004, approximately $904 million of EITC benefits went to RAL-associated fees.
Christian and Elizabeth Harper hired Jackson Hewitt to prepare their federal income tax return for the 2005 tax year, purchasing simultaneously a high-fee RAL. They later sued Jackson Hewitt in federal court, alleging the company had breached its fiduciary duty to them as their tax preparer and committed unfair or deceptive acts in violation of West Virginia law.
The tax preparer argued that it did not loan the Harpers any money, but merely facilitated the RAL transaction between the borrowers and a national bank and, therefore, the West Virginia consumer laws relied upon by the Harpers did not apply to it. Jackson Hewitt asked the court to dismiss the suit.
After the federal court asked the West Virginia Supreme Court to consider Jackson Hewitt's arguments, the state court flatly rejected them. The court ruled that Jackson Hewitt was covered by the state's lending law, which the court described as "a comprehensive attempt on the part of the West Virginia Legislature to extend protections to consumers and persons who obtain credit in the state." It also refused to dismiss the claim relating to the sale of products and services.
What's at Stake
AARP's "friend of the court" brief filed by attorneys with AARP Foundation Litigation pointed out the pernicious effects RALs have on poor and near-poor working people. Older people with low incomes — especially minorities — are at greater risk of being targeted by RAL lenders.
The state court rejected the lender's arguments and returned Harper v. Jackson Hewitt, Inc. to the U.S. District Court in West Virginia for further consideration of the dispute.