Beneficial's Tax-Refund Lending Program Seen On Course After Pullout

Beneficial National Bank is unlikely to run into significant problems in its tax-refund loan program, analysts and Beneficial officials said Monday, now that the riskiest part - lending in anticipipation of earned- income tax credit refunds - has been halted.

Executives at Beneficial Corp. said the bank is much less vulnerabile on its main refund program, which is still running, than on the program that lent to customers who make less than $25,000 a year and are eligible for the earned-income tax credit.

Refunds other than those involving the earned-income credit continue to be deposited by the Internal Revenue Service into accounts at Beneficial.

"We're very comfortable with our program," said Ross Longfield, president of Beneficial Tax Masters Inc., the unit that runs the program. "The worst thing we could do from a risk point of view would be to discontinue the managed risk part of the program," he added.

Beneficial's credit checks should prove adequate to cover the straightforward tax refund program, which has been kept up and running, observers said.

"There's no significant risk entailed in the other portion because they do get direct deposit," remarked David Hochstim, a banking analyst with Bear, Stearns & Co. in New York.

Mr. Hochstim estimated that the Peapack, N.J.-based finance company will probably break even on its tax refund loan program this year. The refund anticipation loan program was expected to earn $15 million to $20 million after taxes.

But the IRS this year halted direct deposits to Beneficial accounts for people eligible for the special low-income program.

Although the IRS agreed last week to resume direct deposits as of next year, the interruption has played havoc with Beneficial's program, since a large part consisted of loans against anticipated earned-income tax credits. The company would not disclose exactly how much of its loans were typically made to low-income customers eligible for the credits.

The finance company is now saddled with both the risk that people who get refunds from the IRS might not reimburse Beneficial and with the extra cost of setting up a collection system to ensure that it does get paid back.

The decision to halt direct deposits for earned-income tax credits is the second to disrupt the program since the IRS last October decided to halt providing what are known as direct-deposit indicators for tax refunds, or information to banks like Beneficial that a tax credit claim is valid.

As a result, Beneficial reconfigured its computers to introduce a credit-evaluation system that winnowed out questionable tax-refund loans, narrowing the number of approved applications to 78% of all who applied, from 92% the previous year.

Meanwhile, Mellon Bank Corp. in Pittsburgh, and Greenwood Trust of New Castle, Del., a unit of Dean Witter Discover & Co., have halted their own tax-refund loan programs due to the change in IRS participation. Spokesmen for both institutions said they have no plans to resume such lending.

A third bank, Banc One Corp. of Columbus, Ohio, is continuing to run a tax-refund loan program, but only for longstanding customers on whom the bank has sufficient credit information.

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