The BBC World Business Report recently aired a slightly revised version of this commentary:
In Washington, D.C., like other American cities, a strange ritual occurs on the evening of April 15.
As the sun sets and the clock ticks towards midnight, more and more cars converge on Washington’s old central post office.
Lines of cars form, waiting to hand envelopes and packages to postal workers who stand in the street and take their parcels.
What explains this unlikely ceremony? April 15 is tax day in the United States, the deadline to file your income tax returns for the previous year.
For perhaps millions of procrastinators, the familiar protocol is to wait until the last moment to prepare your tax forms, and then dash to the post office. I know this routine very well. I’ve done it more than once myself.
But for millions of other Americans, there is a different rush — to file their tax forms as soon as possible. These Americans are eagerly seeking refunds for overpayment of estimated taxes during the course of the previous year, or payment through a supplemental income program for low-wage earners. This program, known as the Earned Income Tax Credit, is probably the most important American anti-poverty program of recent decades.
Unfortunately, a booming segment of the financial services industry sees this hunger for refund checks as an opportunity for exploitation.
Quite large tax preparation companies — among them, H&R Block, and Jackson Hewitt — have innovated a deceptive scam. They offer “Refund Anticipation Loans,” that make loans to consumers for the amount they will get back from the federal tax authorities — at the cost of steep fees. Because the loans are for a very short period — typically 7 to 14 days — fees for these loans translate into super-high interest rates, in some cases as high as 700 percent on an annual basis. The U.S. National Consumer Law Center and the Consumer Federation of America have documented how such loans in 2004 drained $1.4 billion from the wallets of more than 12 million U.S. taxpayers — mostly lower-income working Americans.
These Refund Anticipation Loans are only one of a growing number of predatory lending schemes directed at lower-income people in the United States. Because mainstream financial institutions under-serve poor and minority neighborhoods in the provision of standard forms of credit, working people are often left with dismal options for short-term loans, low-cost borrowing or standard banking services.
Into this financial services vacuum come the predatory lenders — not infrequently connected to the very banking institutions that under-serve low-income communities.
In addition to Refund Anticipation Loans, predatory lending includes “subprime” mortgage loans with both high interest rates and extensive extra fees attached, and “payday loans” — short-term loans in anticipation of a paycheck, that may charge interest rates over 1,000 percent on an annual basis.
Led by the national community group ACORN and allied organizations, affected communities are fighting back against this organized theft from poor people. And they have achieved some considerable success in demanding changes by the largest predatory lenders, and winning local and state rules to curb predatory lending abuses.
But the United States has a long way to go to achieve real and comprehensive reform in this area — and low-income Americans don’t have time to wait.