Bank fees are a hot topic these days, but one common annual practice remains under the radar: charging consumers for the privilege of borrowing against their own tax refund.

Refund anticipation loans, or RALs, are of an ultra-short duration: typically seven days to two weeks. They are repaid automatically when the IRS issues the borrower s refund. They are initiated by tax preparation services and issued by several banks, including JP Morgan Chase (JPM) and HSBC (HBC) (HSBC partners with H&R Block (HRB); Chase works with independent tax preparers. H&R Block also issues RALs through its affiliate, Block Financial Corporation.)

In 2009, nearly three million H&R Block customers received refund anticipation loans, paying nearly $143 million in fees, according to the company s annual report. One in five customers that walked into an H&R Block branch that year walked out with a loan against their refund. Elizabeth McKinley, a spokeswoman for H&R Block, says the company s tax preparers advise clients of no-fee filing options first and are trained to repeat the information if the client selects a RAL.

The consumer cost may not seem large at first depending on the loan s size, you could pay anywhere from $34 (for a $300 loan) to $130 (for a $9,999 loan). But considering the short duration of the loan, the borrowing cost is uncommonly high. That $34 fee is the equivalent an effective annual percentage rate of 500%; the effective APR for a $9,999 loan would be 50%, according to a recent report on the refund anticipation loan industry issued by the National Consumer Law Center and Consumer Federation of America, both consumer advocacy groups. Those calculations don t include additional fees sometimes charged by the tax preparer or the bank. A $40 add-on fee could boost the effective APR to anywhere from 85% to 1,300%.

Those costs are particularly daunting to lower-income taxpayers, the industry s most common target. About 86% of the taxpayers who applied for a RAL in 2008 were in the low-income category, and nearly two-thirds (63%) were recipients of the so-called Earned Income Tax Credit, the nation s largest anti-poverty program, according to the Internal Revenue Service. The NCLC estimates that refund anticipation loans drain as much as $507 million a year from EITC benefits.

H&R Block s McKinley says the average refund loan of $3,000 costs $62.14, or about 2% of the loan, and likens the fee to a convenience fee paid at an ATM or a higher expedited shipping fee paid for an online order. JP Morgan Chase did not return our calls seeking comment by press time.

There s no question that refund anticipation loans can make an easy, low-risk profit for the lenders that extend them. Each loan is secured by the [taxpayer s] refund, so that makes it pretty safe, says Chi Chi Wu, a staff attorney with the National Consumer Law Center, who co-authored a recently-released report on refund anticipation loans. Only 1% to 2% of tax refunds end up not being paid by the IRS, and in those cases the banks have the right to collect the loan from the consumer and begin charging interest on the outstanding balance. We ve seen the banks do this in the past, though some claim they have stopped the practice, says Wu.

Refund anticipation loans are hardly a new phenomenon and the size of the fees and the number of loans extended are on the decline. Banks extended 8.4 million RALs in 2008 and collected $738 million in fees, compared to 12.4 million loans and $1.24 billion in fees recorded for 2004. This year, these numbers will likely drop further, mostly because Pacific Capital Bancorp (PCBC), the main RAL lender for tax preparer Jackson Hewitt (JTX), exited the business in 2009 when the Office of the Comptroller of the Currency prohibited the bank from making loans in 2010 on capitalization concerns. NCLC estimates that as a result, nearly half of Jackson Hewitt s stores will not have a bank to provide RALs.

The IRS has also taken steps that may impact the industry. In January, the agency announced it would step up oversight of tax preparers, including the formation of a task force that plans to examine the sale of financial products through tax preparers. Depending on what this task force decides the IRS should do, they could shut down the RAL operation altogether, says Jean Anne Fox, the director of financial services at the Consumer Federation of America.

For now, the existing rules could benefit the RAL industry in two ways, Fox says. To begin with, the agency s privacy rules allow tax preparers to share taxpayers returns with lenders, though taxpayers must explicitly consent to this disclosure. Separately, a service called Debt Indicator allows taxpayers to obtain information about whether there are any claims against their tax refund (such as a tax delinquency or unpaid child support). If the taxpayer grants the preparer access to this information, it could be shared with a RAL lender, basically informing them ahead of time whether the taxpayer s loan will be repaid. Both those factors are under consideration this year, Fox says.

The IRS says its disclosure rules mean taxpayers are the gatekeepers of their own tax information. Our constant message to taxpayers is to e-file and use direct deposit to receive their refund in as few as 10 days, Bruce Friedland, a spokesman for the IRS, wrote in an email. But RALs are loans, which means they are financial products over which the agency s authority is limited.

Correction: An earlier version of this article misstated how lenders are granted access to applicants tax information. A paraphrased comment from Jean Anne Fox, the director of financial services at the Consumer Federation of America, suggested the IRS provides taxpayers Debt Indicator information directly to lenders. In fact, the IRS provides that information only to the taxpayer and their tax preparer, who may share it with the lender during the RAL application process.