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Fringe lenders take consumers' tax refunds (part II)

Across America this tax season, fringe lenders are pope ping up in places you wouldn't expect, trying to enter the mainstream.

"They go after the unsophisticated working poor: the solid, hard-working people who have jobs, modest homes, kids, and pay their bills, but live month-tomonth," laments Legal Services attorney Dan Wulz of Clark County, Nevada.

Used Car Down Payments

In many areas, used car dealerships provide tax preparation services, using the tax refund as the down payment on a car. Houston attorney Rich Tomlinson is representing a client who ended up paying over 26% interest for a truck he bought this way.

"Tax season is a vulnerable time for poor consumers," Tomlinson relates. "Spring is a time of hope, and the dealers catch consumers when they have a little money. Then they repossess the car or engage in some kind of yo-yo or spot loan that gets them in deeper trouble than before."

Rent-to-Own Dilemma

Attorney Kathryn Harlow at Cleveland Works, Inc., has a client who received a card as a result of a tax refund. It cost $100 to activate the card, and another $29 every time he uses it. And he can't transfer more than $400 out of the account at a time. This forces him to use the card over and over again, at $29 a pop. Harlow also reports finding a rent-to-own store near Columbus, Ohio, that offers to do customers' tax returns in exchange for using their tax refund as a down payment on furniture or appliances.

"The rent-to-own dilemma is that the buyers end up paying a much higher interest rate than if they'd bought the items using a more conventional type of credit," Harlow explains.

"Greatest Evil" in the Casino

Wulz has even seen fringe lenders set up tax preparation tables inside casinos. "The greatest evil here is that the borrowers do not understand - as lenders do completely - that they are getting on a debt treadmill that they won't be able to get off."

Fringe lenders may try to justify their outrageous rates because they describe the loans as "high risk - but I have not seen that here," Wulz observes. "They make people prove employment by bringing a paycheck stub, and prove residence by showing a utility bill."

Solution: Credit Unions

Consumer advocates believe fringe lenders are thriving because the majority of mainstream lenders have left the small loan market. They see credit unions as a solution.

"I hope credit unions will get back in the business of loaning relatively low amounts of money at reasonable rates of interest," says Wulz. "Realistic competition would put these legal loan sharks out of business."

The issue is also "ripe for federal legislation," contends Frank Torres of the Consumes Union. "Anytime, anywhere, there's always a loan shark out there. Title loans, loans on your paycheck, loans on your house, loans on your tax returns. And none of these tend to be good loans."

Ethical Lenders

To ensure consumers that credit unions are ethical lenders, CUNA will send an "Ethical Lender" certificate to credit unions that adopt voluntary standards and ethical guidelines. (See Page 8.)