This may be the
last year in which tax preparers and their partner banks are able
to skim hundreds of millions of dollars from tax refunds by selling
refund anticipation loans (RALs). Two major
consumer groups say regulatory actions by banking regulators and
the IRS may spell the end of the popular but extremely expensive
In their annual report on the issue, the National Consumer Law
Center (NCLC) and Consumer Federation of America (CFA) document how
regulatory actions by the IRS and banking regulators may
potentially spell the end of RALs.
The report also takes a look-back at RAL lending in
prior years, finding that the loans drained the refunds of about
7.2 million American taxpayers in 2009, costing them in the
neighborhood of $606 million in loan fees, plus over $58 million in
other fees. In addition, another 12.9 million taxpayers spent $387
million on related financial products to receive their refunds.
“We will be glad to see the last of these
high-cost, high-risk loans,” declared Chi Chi Wu, NCLC Staff
Attorney. “It’s not a moment too soon to stop
multi-million dollar corporations from skimming off the tax refunds
of hard-working families.”
RALs are bank loans secured by the taxpayer’s
expected refund -- loans that last about 7 to 14 days until the
actual IRS refund repays the loan. Using the most recent data
available from the IRS, NCLC and CFA calculate that about 7.2
million taxpayers received RALs in the 2009 tax filing season (for
tax year 2008). This represented a 14% drop from the 8.4 million
taxpayers who took out a RAL in the 2008 filing season.
RALs are mostly marketed to low-income taxpayers,
including recipients of the Earned Income Tax Credit (EITC), the
nation’s largest federal anti-poverty program. According to
IRS data, 87% of taxpayers who applied for a RAL in 2009 were
low-income, and nearly two-thirds (64%) were EITC recipients
In addition to RALs, refund anticipation checks
(RACs) are another product offered by tax preparers and their
partner banks. With RACs, the bank opens a temporary bank account
into which the IRS direct deposits the refund check. After the
refund is deposited, the bank issues the consumer a check or
prepaid card and closes the temporary account.
Consumers without a bank account may pay extra to
then cash the RAC check. RACs generally cost about $30. In 2009,
about 12.9 million taxpayers received a RAC.
More limited, even more expensive
In 2011, RAL availability is more limited, but the
loans are more expensive. For example, Republic Bank states that it
charges $61.22 for a RAL of $1,500, which translates into an APR of
149%. If the refund exceeds $1561.22, the taxpayer will be charged
another $29.95 when the remainder of the refund arrives in the form
of a RAC, for a total of $91.17 in fees.
Tax preparers may also charge their own fees in
addition to a RAL or RAC fee charged by the bank. These add-on fees
can range from $25 to several hundred dollars.
Changes in the industry
During the past year, there have been a number of
major developments in the RAL industry. Concerns over RALs have
prompted a number of regulators to take action against them.
Collectively, these developments signal the end of RAL lending.
“We are pleased that the IRS and bank
regulators may have effectively put an end to loans that siphon off
hundreds of millions in taxpayers’ hard-earned money and
federal benefits meant to lift hard-working Americans out of
poverty,” said Jean Ann Fox, Director of Financial Services
In August 2010, the IRS announced it would stop
providing the Debt Indicator, a service that helped tax preparers
and banks make RALs by acting as a form of credit check. The Debt
Indicator revealed whether a taxpayer’s refund would be paid
or would be intercepted for government debts. Consumer advocates
had strongly urged termination of the Debt Indicator, and applauded
the IRS’s action.
In April 2010, JP Morgan Chase voluntarily exited the
RAL market. Chase had been one of the three biggest RAL providers,
serving about 13,000 independent preparers. This left many
independent preparers without a source of RALs.
In October 2010, the Office of Thrift Supervision
issued a supervisory directive to MetaBank, effectively prohibiting
that bank from making RALs. Previously, MetaBank had announced its
intent to make RALs, and was expected to be the RAL partner for
MetaBank also had previously provided Jackson Hewitt
with a “pay stub” RAL in the form of its iAdvance line
of credit on a prepaid card. The OTS directive resulted in the
termination of the iAdvance program, citing “unfair or
deceptive acts or practices.”
In December 2010, the Office of the Comptroller of
the Currency issued a directive prohibiting HSBC from offering
RALs. HSBC had been H&R Block’s RAL-lending bank partner.
This followed a similar OCC action in December 2009 that forced
Santa Barbara Bank & Trust, which had been Jackson
Hewitt’s main RAL lending partner, out of the RAL market.
As a result of the OCC and OTS’s actions and
the departure of JPMorgan Chase, there were only three
state-chartered banks this year making RALs—Republic Bank
& Trust, River City Bank, and Ohio Valley Bank/Fort Knox
Financial Services. All three banks are small banks, and have only
a fraction of JPMorgan Chase’s or HSBC’s RAL lending
capacity. Republic is the RAL lending partner for both Jackson
Hewitt and Liberty Tax Service in 2011.
On February 10, 2011, Republic announced that its
federal regulator, the FDIC, had notified the bank that the
practice of originating RALs without the benefit of the Debt
Indicator is unsafe and unsound. Ohio Valley Bank received a
similar notice, and its Board of Directors voted to discontinue
making RALs. River City Bank also announced that it would exit the
RAL business after the 2011 tax season, following conversations
with the FDIC.
The FDIC’s actions signal that the three
remaining RAL lending banks have been forced out of the RAL market.
Two of the banks have accepted the FDIC’s decision, but
Republic Bank & Trust has stated it will appeal the decision to
an administrative law judge, and potentially to a federal court.
Unless Republic’s appeal is successful, the FDIC’s
actions mean there will be no banks left that could make RALs in
2012, effectively ending the product.
Even with the end of RALs, low-income taxpayers still
remain vulnerable to profiteering. Tax preparers and banks continue
to offer RACs, which can be subject to significant add-on fees and
may represent a high-cost loan of the tax preparation fee. Consumer
advocates recommend taxpayers consider alternatives to RACs.
“Consumers should think about opening a real
bank account to get their refunds fast, instead of paying $30 for a
one-time use account,” recommended Jean Ann Fox of CFA.
Another option is prepaid debit cards, including any
existing payroll or prepaid card that the taxpayer already has.
There are prepaid card options specifically targeted for tax time,
such as the Get It Card from Advent Financial Services or the
H&R Block Emerald Card. A few even permit taxpayers to have the
costs of tax preparation deducted from their refunds.
Earlier this year, the U. S. Department of Treasury
announced a pilot project to offer 600,000 low-cost prepaid cards
to families who may not have a bank account to receive their tax
refunds, a move applauded by consumer advocates.
Consumer advocates recommended that taxpayers be
cautious when considering other types of prepaid card options.
“As with any financial product, taxpayers
should compare costs and consumer protections when choosing among
prepaid cards,” recommended Chi Chi Wu, NCLC Staff
Another development is that the IRS has stated it
will explore the idea of permitting a portion of tax refunds to go
directly to pay for tax preparation. A split refund option would
allow taxpayers to pay for preparation fees out of their refunds
without the need for a RAC. Consumer advocates have supported the
idea, if properly limited in amount to prevent abuse.
Other potential future developments could be less
beneficial. Unscrupulous preparers could partner with non-bank
lenders to make RALs, perhaps employing tactics used by high-cost
Finally, the reforms that have signaled the end of
RAL lending have been issued by the IRS and banking regulators.
With different regulators, these decisions could be reversed
End Times for Tax Refund Anticipation Loans
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