Goodbye and Good Riddance: Refund Anticipation Loans

As we ring the 2012 New Year we can say goodbye and good riddance to Refund Anticipation Loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites. The allure of RALs was that they provided 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.

A report released by the U.S. Department of the Treasury confirmed what consumer advocates have known all along: the primary markets for RALs are impoverished communities. RALs are concentrated in the country’s poorest areas, with 46.8 percent of RALs in only 10 percent of the nation’s zip codes. The majority of RAL users can be classified as “working poor,” with median adjusted gross income for RAL users at less than $20,000.

But now RALs are dead. In December of last year the Federal Deposit Insurance Corporation entered into a settlement agreement with Kentucky based Republic Bankcorp Inc. that will prohibit the bank from continuing to fund RALs. The demise of RALs was slow and painful. Over the last several years, federal banking regulators and the Internal Revenue Service (IRS), recognizing the danger and negative impact of RALs, slowly but surely began to prohibiting the practice of selling RALs.

As early as 2008, the 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 2010 the IRS announced it was creating a Task Force to study RALs.  

In February 2010 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 issued cease and desist orders to banks funding RALs. In August 2010 the IRS announced that starting with the 2010 tax filing season it would no longer provide tax preparers with the mechanism they had been using to underwrite RALs. This so-called “debt indicator” tool gave tax preparers an indication of whether a client would have any portion of his/her refund offset for delinquent tax or other debts including unpaid child support or delinquent student loans. Preparers used this indication to decide whether or not to offer a customer a RAL as an incentive to immediately pay for the fees of tax preparation and get cash in hand. Since refunds can generally be received within 10 days of filing electronically, the IRS decided that there was no longer a need for the debt indicator or RALS. As IRS Commissioner Doug Shulman explained at the time: “Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.” Then in October 2010, the Office of Thrift Supervision (OTS) issued a supervisory directive to Iowa-based MetaBank Financial stating that the bank was guilty of engaging in unfair and deceptive practices through its funding of Jackson Hewitt’s RAL products and requiring it to obtain written approval before entering into any new third-party relationship agreements. 

Shortly thereafter, in January 2011, the OCC prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever, thereby ensuring that H&R Block, could not offer RALs. The year prior, 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, just as H&R Block was forced to leave the RAL market 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 for the 2011 tax season. Yet, in the midst of the 2011 tax season, the Federal Deposit Insurance Corporation ordered Republic Bank to stop providing RALs.

As soon as the Federal Deposit Insurance Corporation (FDIC) issued the cease and desist order to Republic Bank, the only two other banks funding RALS, fearing similar actions against themselves, announced that they would leave the RAL market. Since Republic charged on average $90 for a $1,500 RAL and earned over $44 million, or 69% of its net income, from providing loans to Jackson Hewitt and Liberty Tax in 2010, it quickly appealed the FDIC’s decision and the case resulted in the recently announced settlement agreement. Pursuant to the settlement agreement, Republic Bank while pay a fine of $900,000, but more importantly it must leave the RAL market by the 2013 tax season. In the meantime, federal regulators will closely monitor Republic’s tax-refund business. 

The death of RALs is a great achievement for consumer advocates and provides needed protection for low-income families. Yet, tax preparers are likely to begin marketing an alternative product, Refund Anticipation Checks (RAC), a less risky but still costly product to the consumer, instead. An RAC is a temporary bank account set up by a tax preparer on behalf of a taxpayer into which the IRS direct deposits a refund check. Consumers access that money through a check or prepaid card. When the money is gone, the account closes automatically. Consumers typically pay about $30 to set up the one-time use account. If they opt to get a paper check, they could end up paying a check-cashing fee, too. In 2009, about 12.9 million filers got refunds via an RAC, but this number is likely to increase now that RALs are gone.

Through generally cheaper than a RAL, enrolling in an RAC program doesn't make a lot of financial sense, either. Consumers would be wiser and save money by preparing their taxes themselves or going to an IRS Volunteer Income Tax Assistance (VITA) site and having their taxes prepared for free. The IRS Volunteer Income Tax Assistance Program (VITA) and the Tax Counseling for the Elderly (TCE) Programs offer free tax help for low- and moderate-income taxpayers. Trained VITA site volunteers also help those who are eligible receive the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), or credit for the elderly and disabled. Taxpayers should then open a low-cost or free checking and saving accounts with a BankOn affiliated bank so they can opt in for a direct deposit of their tax refund. VITA sites begin to open at the end of January, so begin preparing for tax season early to receive a tax refund for free.

Although RALs are dead, and no one will be at their funeral, consumers must remain vigilant and continue to avoid costly products at tax time.


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