Refund Anticipation Loans: The Noose Tightens
On October 6th the Office of Thrift Supervision (OTS) issued a supervisory directive to Iowa-based MetaBank Financial stating that because the bank was guilty of engaging in unfair and deceptive practices it will be required to obtain written approval to enter into any new third-party relationship agreements.
Last tax season, MetaBank began issuing refund anticipation loans (RALs) for Jackson Hewitt. RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like Jackson Hewitt that are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refund, however, they have interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL. As discussed in previous blogs, these loans are particularly toxic since they are targeted to low-income and minority communities.
Under the OTS directive, MetaBank will need prior written approval to:
- Enter into any new third party relationship agreements for any credit product, deposit product (including prepaid access), or automatic teller machine or to materially amend any existing agreements or publicly announce any new third party relationship agreements;
- Originate, directly or through a third party, income tax refund anticipation loans or other loans where the expected source of repayment is a tax refund; and
- Offer an income tax refund transfer processing service directly or through any third party during the 2011 tax season.
This action is the latest in a series of regulatory agencies’ actions against RALs. In 2008, the Internal Revenue Service (IRS) and the U.S. Treasury Department issued an advance notice of proposed rulemaking regarding the marketing of RALs. Although no final rules were issued at that time, in January of this year the IRS announced it was creating a Task Force to study RALs.
In February the Office of the Comptroller of the Currency (OCC) issued new guidance on the delivery of RALs. In addition to this new guidance, both the OCC and the Federal Deposit Insurance Corporation have recently issued cease and desist orders to a few banks funding RALs. Finally, in August, the IRS announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As the IRS correctly noted, “refund anticipation loans are often targeted at lower-income taxpayers ... [but] with e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”
This recent IRS decision may be one reason why some banks are refusing to fund RALs despite the fact that they have existing contracts to fund them. In October H&R Block filed suit against HSBC for breach of contract after HSBC stopped funding H&R Block’s RAL product. HSBC cited the IRS decision to eliminate the debt indicator as the purported reason for breaching the contract. If HSBC wins, then other banks may follow suit and withdraw from the market using the IRS’ decision as justification.
The Shriver Center applauds the OTS for its action; however, while RALs still remain in the marketplace, we concur with consumer advocates calling for supervised banks to underwrite RALs based on the borrower’s ability to repay the loan taking into consideration their income, assets, and debt-to-income ratio. Actions such as these by the FDIC, OTS, OCC and the IRS signify that regulators are attuned to the dangers of RALs and are moving closer to banning the product entirely. We can hardly wait for that day.
This post was coauthored by Susan Ritacca.
This post sickens me. First you repeat the outrageous lies spread by the consumer groups - there are no 500% APR loans, that is illegal. If the bank were doing that, they would already be shut down.
And because they "taget" the low income, they are therefore toxic? That is nonsense. And to suggest these same low income people can simply get their refund equally as fast from the IRS is preposterous. These people who NEED these products are unable to qualify for any other form of bank credit, no do they qualify for bank accounts. How can the IRS direct deposit a check to a person who has no bank account? It still takes a month to get a check from the IRS by mail. A tax refund represents 30% or more of the annual income of low income filers, and being able to gain access to funds quickly is often all that stands between them and their next meal, or paying the rent, or paying the utilities.
Its ridiculous to think that just because a bank stops offering these products means the customers will no longer want or need them. In fact they will continue to want and need them, but now they will go to unregulated loan sharks and payday lenders to get the financing they need. So what really will this accomplish? I will tell you: It will put the low income people in a worse spot than they already are. It seems like the the consumer advocate groups don't consult the consumers they are supposedly advocating for, otherwise they would be trying to fix the problem and find a way to deliver them a refund quickly - not make them wait longer.
What is discussed in this post is that banks are the ones financing entities like H&R block to provide return anticipation loans (RALS). The banks are not providing the loan directly to the tax payer, but rather are making a loan to the RAL provider (e.g. H&R Block, Jackson Hewitt). While the bank loan to the RAL provider may not be at 500% APR, the RAL itself may have an APR that high. This is because there are no regulations on RAL providers, as opposed to banks, as to the fees/rates that may be charged for these loans.
RALs are toxic for a number of reasons. First, these loans are specifically targeted to minorities and lower income families precisely because they are perceived (and often rightly so) to have a greater need to receive these their refunds immediately to help with bills/expenses. Yet, electronic refunds can be received very quickly (8-15 days if done via direct deposit). There is no discrimination as to the processing of refunds. Minorities and lower income families receive their refunds within the same time frame as wealth or moderate income families. For those who do not have a bank account, the tax preparer has the ability, for a small fee, to set up a temporary account solely for receiving a tax refund. So in many instances, there is no need to get a RAL.
However, some families do immediate needs. In these instances, there are still alternatives to RALs. Some banks and credit unions offer small dollar loans ($500 to $1,000) to people with no credit or marginal credit. These loans have been developed as an alternative other predatory high priced loans (e.g., payday loans, RALS, etc.). While not as easily available currently, more financial institutions have begun to offer them. Moreover, the FDIC has done a pilot program on small dollar loans which reveals that the risk and charge off rate for offering these loans is the same as other types of traditional loans. Given these results, the FDIC is asking more banks to offer these small dollar alternative loans.
Finally, if a RAL is the only option or the one best suited to the situation, then there must be regulations on the amount of fees that can be charged. If the reason for obtaining a RAL is to be able to pay for immediate needs, charging high fees for a RAL is what puts consumers in a worse financial situation.