Rapid Rip-Offs

Tax refund loans, check cashers and payday lending drain money out of communities that can least afford it.

Each year at tax time, many tax preparers advertise what they call instant or rapid refunds. Refund Anticipation Loans (RALs) offer clients the opportunity to get their tax refund within a day or two, or sometimes on the day they file.

What many people don’t realize is that with an RAL they are actually borrowing against their refund at very high interest rates. If they don’t receive the amount of the refund they expect, they’ll have to repay the amount they’ve borrowed — maybe a lot more. Typical RAL fees range from $30 to $90. Some tax preparers even charge separate administrative fees. RAL interest rates are as much as 1,700 percent.

The Jackson-Hewitt agency charged University of Rochester cashier Dawn Marshall-Hosier $300 to do her taxes for “free.” “The fees come out when you sign on the line,” she says.

Over the last several years, thousands of 1199SEIU members avoided commercial tax preparers’ fees and RAL offers with the help of tax coalitions that include 1199SEIU. For the last six years, the union has been expanding its efforts to help members get millions of dollars owed them under the Earned Income Tax Credit (EITC), a refund available for lower income individuals and families with children. The union works with coalitions in New York State, Maryland and Massachusetts to provide free tax help so members can apply for the EITC.

Dawn Marshall-Hosier, a food service cashier at The University of Rochester in New York, got back some $4,000 under the EITC this year. She got help from the tax help coalition that included 1199SEIU. In 2003, the Jackson-Hewitt company did her taxes. 

“It cost me $300 to get my taxes done when they told me it wouldn’t cost anything. That money can buy a lot of shoes and groceries,” says Marshall-Hosier, a mother of four. “When you sign on the line that’s when you see all the fees come out. I was outraged when I learned that it was something I could have done for free.”

Consumers also lose money when they use check cashing outlets. In 2006, there were over 11,000 of these establishments in the United States, often clustered in low-income neighborhoods where residents have little access to financial services. Last year these stores generated $1.5 billion in revenue. Much of it was from high fees and interest rates. Fees are generally based upon the amount of checks cashed. Fees can range anywhere from one percent to 20 percent, depending on the service used, according to the American Association of Retired Persons (AARP).

Perhaps the most expensive type of loan is the payday loan. These are small, short-term loans usually of no more than $1,500 taken by borrowers to cover expenses until their next payday. These too are common in poor and underserved areas. These loans have very high interest rates—often as much as 500 percent APR. Studies indicate that 67 percent of payday borrowers take out 13 or more loans a year and make up over half of payday lenders’ $40 billion in yearly revenues.

Only five states prohibit the practice: Georgia, Massachusetts, Maryland, North Carolina and New York. Even in these states, borrowers have access to payday loans via the Internet. The federal government recently passed legislation capping the interest rates these lenders can charge military personnel. The payday industry contends the loans are for emergency purposes only. Studies show that nearly 70 percent of borrowers use the money for general, non-emergency purposes. 

“Social justice is really lacking in our society when it comes to the corporations and the financial organizations. It makes me upset,” says Marshall-Hosier. “I want my kids to know that their money can go a long way in today’s society and that there is economic equality. We are going to have to make a change.”

Long Term Care Insurance:
Do your Homework.

The need for long-term care is rising steadily. By the year 2020 there will be some 12 million people in the U.S. aged 65 or older who are expected to require assistance with activities of daily living. A majority of people recently surveyed by the American Association of Retired Persons (AARP) think Medicare pays for long-term care. It does not. This coverage gap has created a rich market for insurers.

Long-term care insurance can be an effective way to ensure care for someone while protecting his or her assets, but it can be expensive and complicated. Consumers have many choices among policies and little help to easily compare them.

There’s increasing evidence that some long-term care insurers are not living up to their end of the bargain. They are making it impossible to claim benefits. There are growing numbers of stories of Alzheimer’s patients retroactively denied coverage, families near financial ruin, and companies changing policies without notice.

Several companies are currently being sued. Among them are Conseco Insurance, which collected $4.2 billion in premiums in 2006 and the Penn Treaty Company, which collected $320 million in premiums in 2004. Conseco and a Penn Treaty affiliate, Bankers Life, have been accused of making long term care claims so difficult and confusing to file that people often giveup.

Long-term care claims are expensive and take a big bite out of profits. In California in 2005, nearly one in every four claims for long term care insurance was denied. 

There are several organizations, such as A.M. Best, that rate insurers. Their website is www.ambest.com. The AARP also provides information about long-term care on its website at www.aarp.org.