More than 1.5 million U.S. taxpayers have taken out loans against their anticipated 2016 refunds, fueled in part by the federal government's delay in disbursing money to certain filers.
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Tax preparers are making unsecured loans that are free of interest and upfront fees in an effort to aggressively court customers. The emergence of these refund-advance loans marks a shift away from higher-margin products offered more than a decade ago that were derided by consumer groups, lawmakers and regulators for saddling consumers with excess fees.
This year, the Internal Revenue Service delayed refunds until late February for taxpayers claiming the earned-income tax credit or additional child tax credit, a tactic aimed at reducing fraudulent filings and incorrect refund distributions.
H&R Block Inc. said Wednesday that it has approved 840,000 refund-advance loan applications worth about $700 million this tax season, its first time offering the fee-free product. Meanwhile, Liberty Tax Inc., which runs Liberty Tax Service and SiempreTax+, said Wednesday it had a 40% increase in such refund advance loans from a year ago, rising to 175,000 loans approved as of Feb. 28.
Privately held Jackson Hewitt Tax Service Inc. provided 485,000 refund advance loans this tax season, double the volume from the previous year.
The IRS expects to process more than 153 million individual tax returns this year. Through March 3, the agency said it had processed about 39% of that total.
Estimates of how many people took advantage of these types of products industrywide this season aren't yet available, but levels are likely to be higher than a year ago, bolstered by H&R Block's entry into the market and the IRS refund disbursement delay.
Tax-prep companies have focused marketing efforts on customers who are early filers, many of whom are cash-strapped and rely on refunds for critical living expenses or to pay down debt.
"What we're seeing is a change in consumer behavior," said George Tong, a San Francisco-based senior research analyst at Piper Jaffray Cos. As a result, companies are willing to absorb loan program fees as part of customer acquisition costs, Mr. Tong said.
But not all tax-preparation companies are joining the fray. Intuit Inc., which owns TurboTax, doesn't provide refund-anticipation loans. Chief Executive Brad D. Smith told analysts last month that after exiting that line of business a decade ago, the company wasn't planning a return because "we didn't feel that that was the right approach for families who were looking to get money in their pocket."
Tax preparers hoped the refund advance promotions would lift traffic through the early part of the tax season. But through March 3, the number of returns filed was down 8.5%, and electronic returns filed using professional tax preparers dropped 10% from the comparable 2016 period, according to IRS data.
Consumer advocates say the current generation of loans are different than predatory products of years past, but they still require supervision.
"There are some potential risks, but as far as we can see, the consumers aren't being charged a fee," said Chi Chi Wu, a staff attorney with the National Consumer Law Center in Boston.
Still, Illinois Attorney General Lisa Madigan cautioned residents in a February news release to "be skeptical" about these types of products. Prepaid debit cards loaded with refund advances can carry fees for certain types of transactions, such as ATM withdrawals.
In a conference call with analysts, H&R Block Chief Executive William C. Cobb declined to speculate on the program's future but said "we're very pleased with our first year with this product." The loan, offered through Feb. 28 with partner Meta Financial Group, lent up to $1,250 to eligible tax filers who visited branch offices in advance of their refund.
Meta Financial said Tuesday it originated $1.26 billion of refund-advance loans between Dec. 12 and Feb. 28. The company originated less than $100 million of those types of loans in the entire tax season a year earlier. Investors in Meta have benefited from its growth, as its stock has more than doubled in value in the past year.
"We want to offer products that bring value to consumers. It only helps to reduce the number of payday loans or predatory loans that exist in the market," said Brad Hanson, president of Meta, which operates MetaBank with its $4.2 billion of assets.
MetaBank enters deals with tax preparers to originate and fund advance loans and provide the back-end systems to support the loans. Tax preparers, which already handle marketing the products to customers, cover loan origination fees and limited guarantees to cover potential loan losses. Mr. Hanson declined to disclose financial details about arrangements with individual tax preparers.
Liberty Tax Chief Executive John Hewitt told analysts Wednesday that its increase in advance loans was "right in line with our expectations." The company added more heft to its product in 2017, doubling the total loan advance amount available to filers to as much as $1,300.
Jackson Hewitt started prequalifying people for its fee- and interest-free refund advance loans in November, providing tax filers with amounts ranging from $200 to $1,300 as early as Dec. 15.
So far this tax season, the average taxpayer refund is $3,138, up 0.7% from 2016, according to IRS data.
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