The National Consumer Law Center and the Consumer Federation of America are predicting that this year’s tax season will be the final one that refund anticipation loans will be available on a large-scale, nationwide basis.
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Consumer advocates have long warned against the use of RALs, arguing that they amount to high-interest loans targeted at low-income taxpayers. RAL providers began falling by the wayside last tax season after the loans became riskier for lenders to provide.
The Internal Revenue Service removed the debt indicator last tax season indicating whether a borrower owed money to the federal government for delinquent taxes, unpaid child support, or delinquent federally funded student loan payments (see IRS Won’t Offer Debt Indicator for RALs Next Year). Banking regulators and investors have also put pressure on RAL lenders like Santa Barbara Bank & Trust, HSBC and Republic Bancorp in recent years to quit the business (see Jackson Hewitt in RAL Trouble from Bank Partner, Government Orders HSBC to Halt RALs for H&R Block and FDIC Wants to Shut Down Republic RALs for Jackson Hewitt and Liberty).
The three biggest banks in RAL lending—JPMorgan Chase, HSBC and Santa Barbara Bank & Trust—left or were forced out of the business by December 2010, the National Consumer Law Center noted. As a result of these actions, there were only three small, state-chartered banks making RALs in 2011—Republic Bank & Trust, River City Bank and Ohio Valley Bank, all based in Louisville, Ky.
In February 2011, the FDIC notified these banks that the practice of originating RALs without the benefit of the IRS debt indicator was unsafe and unsound. River City Bank and Ohio Valley Bank accepted the FDIC’s decision, but Republic Bank & Trust decided to fight. Republic appealed the decision to an administrative law judge, and sued the FDIC in federal court. In May 2011, the FDIC issued an “Amended Notice of Charges for an Order to Cease and Desist,” which detailed widespread legal violations in Republic’s RAL program and proposed a $2 million civil penalty.
In December 2011, the FDIC reached a settlement with Republic in which the bank agreed to stop offering RALs after April 2012, and to pay a $900,000 civil penalty. After this tax season, there will be no major banks left that make RALs, according to the consumer groups.
“We will be glad to see the last of RALs, which were both high-cost and high-risk,” said National Consumer Law Center staff attorney Chi Chi Wu in a statement. “It’s not a moment too soon to stop multi-million dollar corporations from skimming off the tax refunds of hard-working families.”
With the end of RALs from banks, a few high-cost lenders have stepped in to take their place. Liberty Tax Service, which is planning an initial public offering, revealed in its prospectus that the tax preparation chain plans to partner with an unnamed non-bank lender to provide RALs. Liberty’s Web site shows that it has partnered with SGS Credit Services, Inc., which appears to be linked with Texas payday lenders, according to the consumer groups.
A prominent payday lender, Advance America, is offering “fast” refunds through its storefronts, although it is unclear whether the product is a RAL, a regular payday loan, or a refund anticipation check. The Web site for TaxWorks, a division of RedGear, which is owned by H&R Block, is promoting a “Tax Season Cash Advance” provided by Schear Lending Group and Atlas Financial Services. Schear Lending Group appears to be affiliated with Ohio-based payday lenders, according to the consumer groups.
RALs are bank loans secured by the taxpayer’s expected refund, and last approximately seven to 14 days until the actual tax refund from the IRS repays the loan. RALs can be expensive. This year for Jackson Hewitt customers, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an annual percentage rate of 149 percent. If the refund exceeds $1561.22, the taxpayer is 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. RALs are so expensive that the Military Lending Act bans them for servicemembers.
Until recently, RALs have been big business. According to the most recent data from the IRS, approximately 6.85 million taxpayers applied for a RAL in the 2010 tax filing season (for tax year 2009).
The NCLC and the CFA estimate that about 5 million taxpayers received RALs. However, this represents a significant drop from the 8.4 million taxpayers who applied for RALs, and an estimated 7.2 million who received RALs, in 2009.
Even after the end of RALs, tax preparers and banks will continue to offer refund anticipation checks, for which banks generally charge between $30 and $32.
Tax preparers may also charge their own “add-on” fees, which can range from $25 to several hundred dollars.
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. A RAC allows the consumer to pay for tax prep fees out of the refund and provides the speed of direct deposit of tax refunds for unbanked taxpayers, but generally at an additional cost.
Since their main purpose is to defer payment of the tax preparation until the refund arrives, RACs may represent a high-cost loan of the tax prep fee. The number of taxpayers receiving RACs has increased to an estimated 14.6 million taxpayers in 2010, up from the 12.9 million in 2009.
With the exception of free RACs, however, consumer advocates recommend taxpayers consider several lower-cost or free alternatives. Taxpayers with a bank account can generally get their tax refunds in 8 to 21 days through electronic filing and direct deposit. Taxpayers without a bank account can get a fast refund by e-filing and having their refund deposited to a prepaid card, including any existing payroll or prepaid card that the taxpayer already has. H&R Block is offering free refund anticipation checks until early February if the customer uses its prepaid Block Emerald Card to receive the refund.
Prepaid cards are one alternative to allow taxpayers without a bank account to receive a fast refund. Taxpayers, however, should be cautious when selecting a prepaid card, the consumer groups noted.
“As with any financial product, taxpayers should compare costs and consumer protections,” said Wu.
Taxpayers without a bank account should also consider opening a bank account to receive their refund.
“Getting a big refund is the perfect time to open a savings account and start a nest egg,” said Jean Ann Fox, director of financial services for the Consumer Federation of America.
Low-income taxpayers have a number of options for free tax preparation, including the Volunteer Income Tax Assistance program (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites (https://locator.aarp.org/vmis/sites/tax_aide_locator.jsp). Choosing a VITA or AARP Tax-Aide site saves taxpayers the cost of a tax preparation fee. Many VITA sites also offer services to help open a bank account or get a low-cost prepaid card, which enables taxpayers to get fast refunds without pay a fee.
Free tax preparation may be available on bases, and since servicemembers are required to have bank accounts, they are able to benefit from the speed of electronic delivery of their tax refunds.