What are RALs?
The dreaded tax season is back and so are notorious refund anticipation loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and Liberty Tax. The problem with RALs, in part, is how they are advertised. To the consumer it appears that the refund is a service of the tax preparer rather than a loan from the bank. Yet, in actuality Chase Bank is the largest provider of RALs in the country and contracts with 13,000 independent tax preparers to supply RAL products. Following close behind is HSBC, provider to H&R Block; and Pacific Capital Bank, provider to Liberty Tax Service.
The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. However, customers are often not aware of the usuriously high interest rates and hidden fees associated with the loan. Triple digit interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL are not unheard of.
High Costs to Low-Income Families
RALs are particularly toxic because they are heavily marketed in low-income neighborhoods. According to a recent report by the National Consumer Law Center, recipients of Earned Income Tax Credits (EITC), the government’s largest anti-poverty program, constituted 63% of the 8.76 million Americans who took out RALs in 2007. EITC recipients receive an average credit of $1,600, yet they often spend $500 or more in interest, typically a third of their refund for RALs.
A separate report from the Woodstock Institute states RALs pose a threat to the opportunity of wealth building among EITC recipients. According to Woodstock, EITC recipients are driven to high cost tax preparation sites because of the complexity of filing for EITC and they purchase RALs to pay for the upfront costs of such tax preparation.
On the state level, New York, Arkansas, and Maine have enacted laws prohibiting tax sites from charging add-on fees to RAL products, while Michigan mandates specific disclosure requirements for RALs. Sixteen other states are regulating RALs through their general consumer protection laws. In Illinois, the law actually prohibits consumer installment lenders, or payday lenders, from originating RALs.
Nationally, the IRS is in the process of creating a task force to review loans issued by tax preparation sites in order to regulate the industry. No rules, regulations, or recommendations have been issued yet. Meanwhile, in 2007 the Office of the Comptroller of the Currency (OCC) acknowledged that RALs posed a considerable threat to consumers and therefore established banking requirements to monitor tax preparers’ advertisement and sale of such loans. Monitoring by consumer advocates from 2007-2010, however, revealed that bank compliance with these OCC guidelines was negligible. Pressure from community organizations and consumer advocates, including the Shriver Center, recently resulted in the OCC issuing new guidance on the delivery of RALs in February of this year. As a result major banks and providers have revised their RAL programs: Jackson Hewitt lost its RAL partner when Santa Barbara Bank & Trust was forced to stop selling RALs, and the Federal Deposit Insurance Corporation (FDIC) mandated a cease and desist order for Republic Bank & Trust’s RAL program until reforms were implemented.
While the IRS, OCC, and FDIC should be applauded for these efforts, continued monitoring must occur. If no action is taken, RALs will continue to pose a threat to taxpayers and particularly diminish the possibility for low income families to save and pay down debt.
For more contact the Shriver Center’s Community Investment Unit.
This article was co-authored by Susan Ritacca.