What they’re receiving is actually a loan arranged by a tax preparer. The collateral is the refund that the IRS typically mails out in two or three weeks after an electronic return is filed. That loan generally comes at a stiff price. Unlike a payday advance, there’s little risk that the IRS won’t pay a tax refund. Yet, like the payday lenders, the rates vendors charge for RALs, when expressed as an annual percentage rate, are typically in the triple digits, commonly in the 100 to 200 percent range.
The roots of the refund anticipation loan can be traced to the Nixon administration and a welfare reform measure called the earned income tax credit. The idea as conceived was a sound one. Rather than give cash payments to a mother with two children, provide her with a tax credit. It’s simpler and cheaper to administer and the incentive is tied to the amount of income that a low-wage parent is able to generate. In 2009, a mother with two children receives a cash refund equal to 40 percent of the first $12,000 or so she earns each year (that figure is closer to $14,000 for a couple); the credits start declining once she starts earning more than $16,420 in a year. A home-care nurse with two kids making $15,000 a year would receive an earned income credit of more than $5,000. An LPN with those same two kids and earning $22,000 would receive a refund closer to $3,000. This provision of the tax code put an additional $43 billion in the pockets of the poor and working poor in 2008, according to federal data.
“There would be a depression in this country every year if the earned income tax credit wasn’t there,” Ogbazion said. “It means billions of dollars each year that goes to buy cars, to pay the landlord, to pay the Christmas bills, to buy furniture.” And of course that same $42 billion has served as the honey pot allowing Ogbazion and a host of others to grow very wealthy despite the most modest clientele.
“It’s a beautiful, beautiful thing that Richard Nixon gave the country,” he said.
“We focused on the low-hanging fruit.” That’s how John Hewitt, one of the early champions of the refund anticipation loan, explained the idea in a newspaper interview. They targeted, he said, “the less affluent people who wanted their money quick.” Hewitt, who founded Jackson Hewitt and Liberty, two of the Big Three, recognized a simple truth: People who earn $15,000 or $20,000 a year live in a perpetual state of financial turmoil. They’re constantly behind in their bills, put off all but the most essential of purchases, learn to do without. And then once a year they receive a check from the IRS that can be equal to several months’ pay. Are they willing to pay one hundred dollars or more on top of tax preparation fees to receive the money tomorrow rather than anxiously watching the mail for two or three weeks? Financial planners might scoff but instant gratification is one of our defining national traits.
Beneficial Finance, one of the giant consumer finance companies, invented the concept of these specialized, tax-time, short-term loans but H&R Block jumped when Beneficial pitched the idea. Starting in the late 1980s, the tax giant became the first tax preparer to offer its customers a “rapid refund” arranged by Beneficial. By 1993, when Ogbazion entered the business, Bank One, based in Chicago and then the country’s sixth-largest bank, was also offering these instant gratification loans. It was Bank One, in fact, that agreed to partner with a twenty-year- old sophomore at the University of Cincinnati who wanted into the business.
The entrepreneurial bug bit when Ogbazion was around sixteen years old and working in the Procter & Gamble mailroom. His inspiration was the articles he was reading in
Ogbazion was a senior in high school when he received a letter from H&R Block inviting him to have his taxes done at no charge. He drove to an office in a strip mall near his parents’ home, where he was shocked to discover he needed to wait to see a tax preparer. He was still thinking about the packed waiting area days later when a friend mentioned that he too had gone to Block, where he used a nifty new product called the rapid refund. “He tells me, ‘You pay a couple of hundred bucks but you get your money in a few days,’” Ogbazion said. “That’s when the lightbulb went on. I understood why H&R Block was so packed.” H&R Block’s offer of free tax services, he realized, was nothing but a clever marketing ploy to sell RALs to people his age. Thinking back, he realized that the woman who had prepared his taxes had tried to sell him one but Ogbazion was that rare high- schooler who actually owed money to the U.S. Treasury. That fall he would enter the freshman class at the University of Cincinnati, living at home and commuting to school each day. He decided to also find an office in a central location large enough to house a tax preparation business.
Ogbazion still has the fax from 1992 that Bank One sent to a Mail Boxes, Etc. near his parents’ home, laying out the steps he would need to take to offer customers a refund anticipation loan underwritten by the bank. But he got cold feet that first year and almost postponed his plunge the next year as well. That’s when he wrote in his diary that he was depressed. “Bill Gates and Michael Dell had started a company at nineteen and I hadn’t,” he explained. It never seemed to dawn on him to do any research into the pros and cons of the business, as if starting a business required nothing more than nerve. He was probably right.
Ogbazion tells the story of finding his courage, in a hushed voice, as if sharing a moment of divine fortune. “I can still picture it,” he said. “I’m driving along and just happened to look to my left. I think about that sometimes. What if I hadn’t happened to look to the left at that moment?” He was driving to school and he noticed a FOR RENT sign in the window of the very office where he had gone to have his taxes done in high school. The landlord told him H&R Block had moved to a larger office a few miles away and it would cost $3,000 to rent the office for six months.
At that point Ogbazion had saved around $10,000. He had a Sears card and a Discover card that combined carried a cash limit of $5,000. He secured another $5,000 through a low-interest student loan. He re-contacted Bank One, where somebody told him he needed to select a software maker from the vendor list the bank provided. He randomly chose a Columbia, South Carolina, company and spoke to someone there. “They tell me, ‘You don’t need to know anything about the tax business; the software will walk you through everything; you hook up with Bank One and, congratulations, you’re in the RAL business,’” Ogbazion said. But he was also risking everything on this one idea. They offered a two-day tax preparation workshop and Ogbazion elected to pay for a trip to South Carolina.
Ogbazion gets dreamy as he describes those first few months he was in the tax refund business. He was carrying a full load at school and overseeing a staff of five or six he was paying $8 an hour apiece. He was a twenty-year-old African-American running his own business, but the only weirdness he felt was the age gap between him and his employees, one of whom was a retiree in his sixties. “The age thing was something I was much more self-conscious of than race,” he said. He named his new business Instant Refund Tax Service.
Ogbazion doubts he would have survived that first year if he hadn’t had the good fortune to take the place of an established giant like H&R Block. He stretched a cheap sign inside the store’s plate-glass window and distributed some door hangers around the neighborhood but other than that he did nothing to advertise. “I was blessed that six hundred people came back to that spot looking for H&R Block,” he said. “If I had located anywhere else I would have been out of business my first year.” He was fortunate as well that the great majority of his customers also opted for a quick payout that put extra money in his pocket.
Making it through that first year seems to have emboldened Ogbazion. He knew he would have to advertise and recognized that telling people about his one store would cost nearly as much as telling people about four stores. Ogbazion didn’t bother approaching any banks. He knew that he would need to find an alternative funding source.
Once again Ogbazion was fortunate. The credit card industry was also undergoing sweeping changes in the second half of the 1980s, among them the spreading popularity of the subprime credit card. There was no single creator of the subprime credit card (which could be said to have been invented the first time a bank decided to charge some of its customers 19 percent interest instead of 12 percent) but one early innovator and its most avid early champion was Andrew Kahr. An eccentric man with long, stringy hair and a generally antisocial personality, Kahr had earned his Ph.D. from the Massachusetts Institute of Technology when he was twenty years old and spent the next several decades striving to strike it rich. Earlier in his career he had even done some work for Associates, where he created a credit card product aimed at those with a taste for debt. This was in the late 1970s, when around half the people holding a credit card typically carried a debt. That figure was closer to 90 percent for those
