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When I first became an attorney, I believed that practicing law was all about helping people. Perhaps that’s still true, but the definition of the people that we’re helping is certainly different from what I first envisioned.

This was made abundantly clear recently when a federal court ruled that a New Jersey law restricting the interest rates for refund anticipation loans violated federal law. The ruling was in response to a California-based Pacific Capital Bank N.A. action against the state of New Jersey to stop enforcement of the existing usury law. That’s right: A bank sued to prevent the state from limiting the amount of interest and fees that it could charge consumers.

New Jersey usury law limits interest and fees to 30 percent of the value of a loan. Pacific Capital Bank N.A., which makes loans through Jackson Hewitt Tax Service, objected to the cap on the grounds that it violated federal law. Jackson Hewitt, which did not directly participate in the suit, is the No. 2 tax preparer in the country with offices nationwide.

Pacific Capital Bank N.A. had a reason to be concerned about such a cap. U.S. District Judge Freda Wolfson, who sits in Trenton, N.J., noted in her ruling that the APR for these RALs averages nearly four times the New Jersey limit at a whopping 115 percent. If the law had been allowed to stand, New Jersey could have considered criminal charges against lenders that charged excess interest.

The actual amount of interest and fees comes as a surprise to many who understood that taxpayers paid a premium for the RALs but did not expect such excessive fees. Complaints have abounded that the terms of the refund anticipation loans are vague or unclear. As a result, several states have passed laws requiring more disclosure about the process behind the loans but no state has successfully enforced interest caps within state borders.

In her ruling, Wolfson indicated that while she appreciated the concerns about the loans, she was limited by federal law. The provisions of the federal National Banking Act, she found, trump state legislation. Wolfson wrote, “While the court appreciates what has motivated the state’s initiative, concern for consumers who are subjected to high interest RALs, relief lies with Congress, not with the Court.”

Of course, the ruling was a relief for Pacific Capital Bank N.A. Robert E. Levy, an attorney for Pacific Capital Bank, indicated the bank might have stopped doing business in New Jersey if the ruling had not been in their favor.

The ruling was not met with such enthusiasm by consumer protection advocates or the Internal Revenue Service. In fact, the IRS has noted that RALs provide a financial incentive for tax services that issue them to take improper tax positions. The IRS believes that the financial incentives to the lenders for these loans, made by tax preparers, lead to increased instances of fraud. There is a “financial incentive to take improper tax return positions in order to inflate refund claims inappropriately,” according to the IRS.

In response to these concerns, the IRS is considering restricting tax preparers from providing tax return information to lenders who provide RALs. When the IRS announced its plans, Jackson Hewitt immediately signaled opposition.

The nation’s No. 1 tax-preparer service, H&R Block, has not escaped its share of challenges in court for RALs. California brought suit against the company alleging that it has violated state and federal laws in marketing and providing high-cost RALs with interest rates exceeding 500 percent. The laws which H&R Block are alleged to have broken include those regulating debt collection and contracts, false and deceptive advertising, unfair business practice and the sharing of individuals’ tax return information. The state is seeking millions of dollars in restitution and fines.

New York has also brought suit against the tax preparation giant. The $250 million suit alleged that the company improperly marketed money-losing IRAs to its customers. The scheme, according to then-New York Attorney General Elliot Spitzer, resulted in more fees than interest for 85 percent of the customers in New York who purchased the IRAs.

Both of these lawsuits follow on the heels of a settlement filed in December 2005 to resolve claims in 22 states and the District of Columbia related to the H&R Block’s controversial “payday loans.” The exact terms of the settlement were not disclosed, but the company will pay claims to 8 million customers who took out “payday loans” between 1989 and 2005. The lawsuits had alleged that the lending practices for these loans were deceptive, resulting in excessive fees and usurious interest rates.

A similar lawsuit has overcome legal challenges in Chicago, where a federal judge moved that racketeering charges against H&R Block could stand. The suit, which started with one plaintiff and has landed in federal court, alleges fees and interest charged to consumers with annual rates of up to 2000 percent.

Critics charge that, in addition to providing incentives for fraud on the part of the preparers, loans and financial products marketed by tax preparation firms unfairly target the poor and others who may not understand their filing options.

I tend to agree with some of these charges; I have a number of colleagues who have worked with or for some of the tax companies that issue these loans and financial products, and their stories tend to corroborate many of the allegations raised by the IRS and in these lawsuits. At the IRS Volunteer Income Tax Assistance site where I worked for many tax seasons, seniors who were previously enticed by these loans and financial products advised me that they were misled by preparers as to when they might expect their refunds without an RAL to the tune of six to eight weeks. Wolfson noted in her ruling that the average taxpayer can receive a refund from the IRS by direct deposit in just 11 days.

We live in a capitalist society where consumers are free to choose the services and goods that they want, pretty much free of restrictions. We should certainly allow informed consumers to make their own choices. However, the evidence tends to suggest that those who are taking advantage of these kinds of tax-related loans and financial services are not properly informed about their options.

And let’s be honest. These tax giants have the best in the legal profession drafting their contracts and looking out for their best interests, and they have every right to do that. But at the end of the day, when we look at what’s happening with these loans and financial products we need to ask ourselves: Who is looking out for the taxpayers?

Kelly Phillips Erb is a founding shareholder of The Erb Law Firm. She is a member of the bars of New Jersey and Pennsylvania and the Tax Supper Club, and she presents regularly on a wide range of topics before local and national organizations. Phillips Erb authors the blog “Taxgirl.”

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