The use of refund anticipation loans is predicated upon the availability of the Earned Income Tax Credit.  While not every RAL recipient gets the EITC, a majority of them do get it. The business model would lose half of its customers in North Carolina without the EITC.

The problem is made worse because the decision to use a RAL in order to expedite an EITC-collateralized refund is more common in poor areas.  The next map distinguished North Carolina zip codes by the rate of RAL use among EITC recipients.

Shaded areas show where an EITC recipient is more likely to pay for a RAL.

The map shows that EITC recipients turn to RALs much more regularly in poor communities. The eastern half of the state is the location of persistent poverty.

This map is part of our recent report on the use of RALs in North Carolina (pdf).

No other situation prompts a greater chance of foreclosure than when borrowers find themselves with negative equity.  Being “under water,” as it is known, refers to the instance when a borrower has more mortgage debt out against their home than the underlying appraised value of that home.  Negative equity is always an estimate, because appraisals are an inexact science.  Nonetheless, even a back-of-the-envelope calculation with a modest degree of error still yields a reliable gauge on the nominal status.  A borrower is either in the money, or in the red.  it doesn’t make a huge difference if you are down by 30 percent or 20 percent – the negative equity is still hanging over your head and the implications, from a behavioral economics point of view, are still stark.

FirstAmerican Core Logic publishes its own estimates of negative equity.  The state-by-state data is free.  They make their money selling the data on a more narrow basis.  Even the state-level data is informative, though. Here are some interesting findings:

• Average outstanding loan-to-value in Nevada: 114 percent! That means that it is the exception to the rule when a borrower with a mortgage in Nevada is not “under water.” Indeed, FACL reports that 65 percent of all mortgages are in negative equity.
• The Northeast and the Upper Plains are the least likely places for this problem.  In New York, Washington, DC, Rhode Island, Connecticut, Nebraska, and Montana, average outstanding loan-to-value is less than 57 percent. In New York, the figure is less than 50 percent. There is no data on South Dakota, although it seems possible that this is another state that would the lowest ratios.
• More than 47 percent of homeowners in Arizona are in negative equity.
• In Michigan, more than 37 percent are in negative equity.
• Nationwide, more than 10.5 million borrowers owe more on their home than it is worth today.
• Markets with the highest loan-to-value ratios for outstanding mortgages: Las Vegas-Paradise (122 percent), Riverside-San Bernardino-Ontario (103 percent), Orlando-Kissimmee (96 percent) and Phoenix (96 percent).
• High LTVs are in areas with lots of subprime mortgage origination, but also in areas where home prices are depressed by long term job loss: Detroit (89 percent) and Warren-Troy (86 percent).

This data only includes homes with mortgages.

I  visited Mo’ Money Taxes twice over the weekend.  My conclusion is that Mo’ Money is exactly what it claims to be.  Mo’ Money costs more money.

Indeed, when I went into the Mo’ Money in a strip mall on one of Raleigh’s outer suburbs, the staff was more than able to give me an estimate.  Their estimate was simple and straightforward. Although it was based upon several moving parts (the amount of my refund, the projected cost for the tax prep, and my RAL fees), the preparer seemed both certain and giddy that I’d be better off in short order.

I am not sure why he was so certain.  Indeed, all I had done was bring in a pay-stub from August. That was all they told me that I would need when I called on the phone.  Maybe he was certain because we were in a real office, and he was using a real computer.  He was definitely giddy. He seemed so thrilled to be a part of my sudden fortune.

I could feel the rush. Money was coming my way fast. He made a few mouse clicks, sent a page to his printer, and gave me the good news: Mo’ Money would have a check for me (once I brought in my W-2s) of $2992.85 in no more than 48 hours. It was a bit odd, because this rush of fortune was such a contrast to the placelessness of this office. There were two desks, each with a flat top screen, a few folding chairs, and not much else.  There was only one item adorning the wall: an 8 by 11 sheet of paper with a list of tax prep fees.  The office had a back room. I could see that there was a half gallon of milk sitting out on a shelf, next to a box of envelopes and some Glade.

He pulled the sheet out of the printer and handed it to me.  My one page estimate, which was actually IRS Form 8879 (for IRS E-File Signature Authorization) said that I would get a refund of $3415.  The difference, according to my tax preparer, was ‘fees’?”

“Could you break that down for me,” I asked. “Am I getting a loan? Is that part of those ‘fees’?”

“Yes, he said. “It’s all in there.”

Since “it” was not really an answer that satisfied my need for clarity, I had to push back. That was as close as he could come to explaining my cost structure. I wanted more of answer. He called his co-worker over.  She knew a bit more about how to operate the computers, and it seemed as if she had some experience.  She began to work through some screens. In the silence, my tax prep helper ventured to offer his insight on how I might maximize my situation.

“Let me offer you some advice,” he said. “Don’t file jointly. File on your own.  Jointly is costing you a lot.”

He relaxed in his chair, smiled, and leaned toward me, held his hands together wish his thumb and pinkie extended but his other fingers rolled up against his palms. It was sort of a horizontal “hook-em horns” kind of expression.

“That is my advice.”

Indeed, he pointed out that if I filed on my own, claiming my children and leaving my spouse to cover her income without the benefit of any dependents, then I could walk out with $5021.06! Oh yeah! I could hardly wait! I was going to get Mo’ Money!

Then I realized that this would be incredibly wrong.

It was at that moment when his co-worker summoned us back to the computer screen. She had the answers for me, and although neither one knew how to make the printer print this page, she could show me the specific elements of the costs that would be taken out against my refund. It turned out that my fees for tax prep came to $315. The RAL fee would be $103.  The RAL came with four parts:

• technology fee ($15)
• e-file fee ($29)
• Bank fee ($32)
• Federal Bank Product Application Fee ($27).

The other costs would be made up by the interest on my RAL.

My intent, I said, was to see where I could get the best deal. Getting price clarity had not been easy.  I find it hard to believe that anyone would go to the trouble to find out how much they paid, especially if they were in a room with twenty other people waiting in line for a chance to work with their tax “advisor.” It took me an hour.

“Tell me about your training,” I asked.

“We finished our training on Dec. 27th,” he said. “I had to get it in before school started.”

Turns out my preparer is a first semester student at a local for-profit technology training institute.  He has a high school degree, four months at a for-profit school, and some over-the-break training session at Mo’ Money.  Gee…if I went to a VITA, couldn’t I get better advice, and for free?

The rest of the cost came from the short-term interest on my loan product. That loan, incidentally, came from Chase.

Ohio Valley Bancorp, a small bank with about $781 million in assets, is the sixth largest provider of refund anticipation loans. In 2008, Ohio Valley supplied 4,670 loans through its Refund Advantage program.

There must be something in the air in the Louisville metropolitan area.

Ohio Valley is regulated by the FDIC.

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I can’t make this stuff up.  If you wonder why the IRS  says that it needs to make sure that tax preparers need to meet some kind of professional standard, then look no further.

Mo’ Money Taxes is a medium-sized tax preparation company. They have over 100 locations in the Mid-South. Most of their firms are in Tennessee and Mississippi.  They have 10 locations in North Carolina.  I called an office to see if I could get my money fast. They said it was no problem.  “Bring in your paycheck, we’ll get you an estimate.”

The staffer in Raleigh indicated that they partner with Chase for their tax refund anticipation loans.

I saw a reference to the Household hotline for loans. That would suggest Household Finance, a division of HSBC. In 2007, the Commercial-Appeal said the same thing: “Mo’ Money’s is HSBC.”  HSBC is the partner with H&R Block for Block’s refund anticipation lending. Block has kept its RAL prices relatively low. This year, they are charging a handling fee of $29.95 for each RAL.

That is not the case with Mo’ Money, where RALs cost more money. HSBC says that a $3,000 RAL would come with a $62 fee.  NOTE: Chase is the partner for Mo’ Money. HSBC could have been the partner in 2007, as the Commercial-Appeal suggests, but they are no longer providing funds for RALs offered at Mo’ Money. Just to be sure, I went to a second Mo’ Money Store on Saturday. It was Chase there, as well.

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Hard to believe.  These ads should provoke some problems. Guess what? They are winning awards. Indeed, the Memphis Commercial-Appeal reports that Mo Money Taxes have won awards for their advertising. In 2004, they won a Telly (like Oscars, but for television advertisement) for their Dukes of Hazard-themed ad.

It would be hard to ignore how this makes a statement on race.

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In these advertisements, there is no claim to the quality of the tax prep. The main reason to go to Mo’ Money is to get your cash in 24 hours.