Happy New Year? Not for Refund Anticipation Loans
This tax season one of the largest tax preparation sites, H&R Block, will not be offering refund anticipation loans (RALs) thanks to the Office of Comptroller of the Currency (OCC). The OCC has prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever.
H&R Block was the leader in providing these loans, and in 2010 H&R Block collected about $146 million in loan related fees from tax payers. Until recently HSBC Bank has been the financial backer for the H&R Block RALs. In August of last year, however, the Internal Revenue Service (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 a result, HSBC, which began exiting the RAL business in 2007, attempted to break its long-term 2005 contract with H&R Block, its only remaining RAL customer.
H&R Block, on the other hand, contended that RALs can be done without the IRS debt indicator and filed suit against HSBC seeking to require the bank to perform its contractual obligations. Although the parties reached an agreement wherein HSBC would provide the loans for one more year, the OCC intervened and issued a regulatory directive prohibiting HSBC from funding the loans, leaving H&R Block with no financial partner to provide both RALs and some of its refund anticipation checks, "RACs." H&R Block shares also went down 7% as a result of this news.
Last tax season, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program. Upon this announcement Jackson Hewitt shares went up 35%.
H&R Block will continue to offer RACs which, though not an instant refund, provide a check to the tax filer in 7 to 10 days. In the meantime, its competitor, Jackson Hewitt, will be seeking to lure former H&R Block customers away.
As discussed in previous Shriver blogs, this is just the latest RAL repercussion. It seems that consumer advocates’ and financial regulators’ continual push for stricter guidelines and policies regarding RALs have paid off. Today, with quick turnaround from electronic filing and direct deposit, many taxpayers can likely receive their tax returns within ten business days, reducing the need for RALs. Now is the time to demand that the OCC protect low=income families and prohibit all RALs.
This article was coauthored by Kelly Ward.
I work at an H&R Block office. What I am seeing is very upset customers. Many taxpayers are now scrambling to come up with money that they usually had at this time of the year. Thank you advocates you are really looking after the public interest. Now many of my clients Property taxes are going to be paid late. Late fees they shouldnt of had. Great job. You know what is best for everyone.
What? People's "property tax payment" might be late because they can't wait 8 more days to get their refunds depostied by Direct Deposit? Dummy....people who need these predatory loans don't own property, they RENT. Thus, no property tax! You, as an H&R Block seasonal worker, are just mad because you get paid a little extra for writing these stupid loans.
As an IRS employee, I see problems with RALs all the time. They are a really bad idea as well as very expensive! A RAL is a LOAN between you and the bank based on your "anticipated" refund. It has nothing to do with IRS. If your refund is reduced by IRS due to math errors or held up do to an examination or audit, the bank will go after the taxpayer for repayment of the loan. IRS can't help you with your loan and neither can the person who prepared it and talked you into getting it. Direct deposit refunds or refunds issued from an online filed return will reach you now in under 10 days, sometimes sooner. My advice to those who don't have checking or savings accounts (I'm one of them), obtain a prepaid debit card and have your refund direct deposited onto it (that's what I do). More advice, don't rely on your refunds to pay your bills. Pay your bills and then your refunds will be extra money you can enjoy! Again I've seen lots of heartache resulting from people who wait on their refunds to pay their rent or their power bills and when the refunds get held up or reduced, they are in a whole lot of trouble. Hope this helps :)