CATrends: Refund Advance Loans for Military Members

Just in time for Memorial Day, a number of military members and their families are accusing several major tax filing companies of violating a federal law designed to protect active-duty service members and their dependents from predatory lending.

Class-action lawsuits filed in recent months against TurboTax, H&R Block and Jackson Hewitt – the three largest tax prep companies in the U.S. – allege the companies market their “refund advance” loans, which allow taxpayers to receive a portion of their anticipated federal refund almost immediately after filing, as having no fees and “0% APR.”

But according to the complaints, there are actually a number of mandatory ancillary fees – from refund processing fees to banking account fees – tied to receiving the loans. And when properly including these charges in the Military Annual Percentage Rate, as required by the Military Lending Act, the true cost of credit far exceeds the MLA’s 36% cap.

For example, a lawsuit filed against Jackson Hewitt earlier this month by a member of the U.S. Navy who received a $1,500 refund advance alleges that “when all mandatory fees are included in the MAPR calculation as required by the MLA, the effective MAPR … equals approximately 170.6%.”

TurboTax, meanwhile, is facing not one but two lawsuits, both of which were filed by dependents of active-duty service members.

One of the complaints filed against TurboTax alleges the company lures taxpayers with representations that its refund advance loans carry no interest or fees, then uses an “integrated fee architecture” that helps enable it to charge fees that “disproportionately impact service members and/or their spouses or dependents living paycheck to paycheck.”

The complaints also accuse the tax prep companies of failing to provide credit disclosures as required by the MLA.

In sum, the lawsuits claim that all three companies dressed up what are essentially payday loans in “free” marketing language while targeting a vulnerable population that Congress specifically passed a law to protect.

The lawsuits against Jackson Hewitt and TurboTax are pending. The claims against H&R Block were voluntarily dismissed earlier this month.

Find more of our coverage on the military.