Banks Balk at Making Tax Refund Loans Without Signal by IRS

The Internal Revenue Service's decision to stop indicating whether customers are entitled to claimed tax refunds used to collateralize loans is causing some banks to quit the business.

Without credit checks from the federal government, bankers fear these typically small-loan customers will take the money and run.

As a result, bankers say they are forced to raise rates, refuse customers, or get out of the business entirely. Lending against tax refunds was a $300 million business for banks last year, according to the Electronic Filing Coalition of America, a Washington-based trade group.

So far, Mellon Bank Corp. of Pittsburgh and Greenwood Trust of New Castle, Del., have shut down their refund-anticipation-loan operations.

Two other major players, Columbus, Ohio-based Banc One Corp., and Beneficial Corp., a Peapack, N.J.-based finance company, have also been affected by the IRS ruling.

Banc One says it will deal with the problem by offering refund anticipation loans only to those the bank has dealt with in the past and deemed creditworthy. Beneficial could not be reached for comment.

The first refund anticipation loan was made in 1988, according to the IRS. The loans average about $1,400 and are usually taken out by people who need their tax refunds immediately to pay monthly bills.

Tax rebates from the federal government can take as long as 40 days to arrive from the time of filing.

In the past, when taxpayers seeking such a loan submitted their returns, the IRS would review the filings quickly and let the lending bank know whether or not it agreed with the refund claim.

Banks relied on this confirmation, called a direct deposit indicator, to make the loan. The bank loan would then get repaid by the customer's tax refund via direct deposit from the government.

The IRS said in October it would no longer provide the information to banks. The agency said the electronic notification system didn't allow it enough time to review the more than $14 billion of tax refunds it paid out last year.

"Given the fact that the (refund anticipation loan) has been used by those that were filing questionable and fraudulent returns, the decision was made by the government that we could no longer provide a facilitation of one of the tools to rip us off," said IRS spokesman Don Roberts.

Mellon won't disclose how much business it will lose by shutting down its tax refund loan operation, but spokeswoman Tilda Walsh said more than 3 million customers used the program in 1994. The bank began offering such loans in 1989, she said.

"Without the direct deposit indicator we wouldn't be able to ensure that the credit quality for the (refund anticipation loans) would be acceptable," said Ms. Walsh.

Banc One won't offer its program to new customers.

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