While at the Color of Wealth conference, I was fortunate enough to have lunch with Kai Wright who has been reporting on the devastating loss of wealth the credit crisis has caused in the black community. Yesterday over at The Root, he highlighted the fact that Magic Johnson is still shilling for one of the worst forms of predatory loans, the “refund anticipation” loan (“Money Now” in the language of Magic’s sponsor, Jackson Hewitt)

Here’s the thing: tax “refund anticipation” loans are the original subprime product. If you live in a majority-black urban neighborhood, you’re probably dreadfully familiar with the storefront shops that do brisk business this time of year. It works like this: You’re poor enough to qualify for the Earned Income Tax Credit—and thus you’re guaranteed a refund, if you file. So Jackson Hewitt and others—for a fee—will file your taxes and pay out your refund immediately, as a loan secured by the expected IRS check.

The fee, of course, is the rub. Interest rates on the fee can run from 50 percent to 500 percent; Jackson Hewitt’s rate ranges from 134 percent to 140 percent, according to consumer advocates who have long criticized the practice.

So you get your tax credit immediately, and then you pay Jackson Hewitt interest on it. The government finds a way to reward people who work hard for less money with a tax credit, and lenders figure out how to get that money out of pocket and then some.

I was concerned that my previous post didn’t contain any specific examples of how predatory loans work, but the above is as good as any.

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