State urges low-income taxpayers to avoid refund loans

State officials yesterday urged low-income consumers to avoid high-cost refund anticipation loans, saying a crackdown on tax preparers who issue the loans has had only limited success.

Many tax preparers typically offer consumers who want a very quick turnaround on their tax refund the option of taking out a loan for that amount secured by the refund. Officials said the short-term loans typically carry hefty fees, which convert to annual interest rates ranging from 70 to 700 percent.

Chi Chi Wu, an attorney with the National Consumer Law Center, said Internal Revenue Service data indicate 12.7 million refund anticipation loans were issued in 2002, of which 123,000 were in Massachusetts and nearly 22,000 in Boston. She estimated the loans generated more than $1 billion in fees.

State Banking Commissioner Steven L. Antonakes and Beth Lindstrom, the head of the state's consumer affairs office, said at a news conference yesterday that it makes no sense for someone to effectively borrow their own money at exorbitant rates.

"It is clear that refund anticipation loans are a rip-off," Lindstrom said.

Antonakes said his office has had limited success in curbing refund anticipation loans. Under state law, any business issuing loans for less than $6,000 has to obtain a license from the state and cap its interest charges at a 23 percent annual rate.

The commissioner said several companies have stopped offering refund anticipation loans as a result of warnings from his office. But he said other tax preparers have found a way to skirt the law by having out-of-state banks issue the loans and collecting no fees themselves.

H&R Block, for example, is offering refund anticipation loans to customers but stopped collecting fees for facilitating them last March. Antonakes said he assumes the company is recouping its costs by increasing charges for its tax preparation services.

Ann Haynes of Brockton said H&R Block got her hooked on refund anticipation loans years ago by making her think the cost of the loan was actually the cost of filing her taxes quickly. She estimated the loans cost her more than $2,000 in fees over 14 years.

Denise Sposato, a spokeswoman for H&R Block, said the company gives its customers a variety of options for recovering their refunds and is very clear about the terms if the customer chooses a refund anticipation loan. She said the H&R Block refund anticipation loans are issued by a California bank and carry annual interest rates ranging from 32 to 129 percent depending on the size of the loan.

Sposato said H&R Block stopped collecting an administrative fee on the loans last March after hearing from the Massachusetts banking commissioner's office. She said the company plans to phase out the fee in all 50 states over the next three years.

She said H&R Block plans to keep offering the loans because consumers want them. "Consumer groups hate them," she said, "but consumers like them."

State Revenue Commissioner Alan LeBovidge said a number of companies and nonprofit groups provide tax preparation and filing services for free to qualified individuals and can usually obtain refunds for clients in a matter of days if a return is filed electronically. He said a list of the firms is available on the agency's website at www.massdor.com.

Bruce Mohl can be reached at mohl@globe.com.