The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

It’s that time of year again; W-2s are showing up in mailboxes across the country signaling people to start preparing to file their 2012 taxes. Like in years past, tax preparers are already bombarding the public with reminders about the impending tax season. Unlike previous years, however, there are a number of big changes in this year’s tax landscape.

First and foremost, 2012 is likely the last year for refund anticipation loans (RALs). As discussed in previous blogs, RALs are short-term, high-interest-rate bank loans sold through tax preparation sites, such as H&R Block or Jackson Hewitt. Although marketed as “instant refunds,” RALs are actually extremely high-cost bank loans that last 7-14 days until the actual Internal Revenue Service (IRS) refund repays the loan. All fees are deducted from the final RAL amount issued to the taxpayer. If, however, the RAL customer does not receive the expected tax return amount as calculated by the tax preparer, he or she is liable to the lender for the difference. By one estimate, consumers paid approximately $833 million in RAL fees in 2006 and $740 million in 2007.

The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. Yet, most taxpayers could have their refund in two weeks or less if they file electronically on their own. Fortunately, after this 2011 tax season, RALs will no longer be offered. In December of last year the Federal Deposit Insurance Corporation (FDIC) entered into a settlement agreement with Kentucky-based Republic Bankcorp Inc., the last bank in the country providing funding for RALs for tax preparation companies, which will prohibit the bank from continuing to fund them after this year.

While the demise of RALs was slow and painful, Jackson Hewitt, the sole tax preparer that will be offering RALs this tax season, is making sure that RALs have one last party on their way out. Jackson Hewitt’s flashy TV commercials ads are trying to turn tax time into party time. In particular, Jackson Hewitt, as the only player in the market, is trying to capitalize on this last tax season as much as possible. In addition to its traditional tax preparation and RAL services, Jackson Hewitt is also partnering with Wal-Mart. Wal-Mart recently entered the banking game by providing check cashing services and also began offering a prepaid card, the MoneyCard. Through its partnership with Jackson Hewitt, it will also provide so-called “free” tax preparation.

Over 3,000 Wal-Mart’s will offer free 1040 EZ assisted filing, and customers will be given their tax refunds in the form of Wal-Mart cash cards.  Most people, however, cannot use the 1040 EZ form. The 1040 EZ form does not cover anyone who wants to itemize deductions (usually homeowners) or anyone claiming student loan interest, health care credits, the earned income tax credit (EITC), child tax credits (CTC), or retirement credits. Because a 1040 EZ filing cannot be used in connection with refunds, households that use the 1040 EZ form to have their taxes prepared for free will be forgoing things like the EITC, which is the largest anti-poverty program in the United States. If a household elects to claim the credit, then Wal-Mart’s tax preparation service will not actually be free. 

Additionally, even for those that do have their taxes prepared for free, the cards on which their refunds are paid come with hidden fees. Fees for Wal-Mart’s Cash Card include $2 to withdraw cash from an ATM, $1 to check the balance, and $3 if $1,000 isn’t added to the card in a given month.

Tax time is a critical time helping for low- and middle-income families to save. Tax filers who are eligible for EITC, CTC, and other credits can receive free tax preparation by going to a Volunteer Income Tax Assistance (VITA) site and getting their tax refunds for free. Additionally, VITA sites will help these households file electronically thereby allowing them to receive their refunds within days without having to rely on predatory products such as RALs. With such savings, low- and middle-income families can open bank accounts, possibly through a Bank On program, which provides low-income families with low-cost accounts at mainstream banks and financial institutions, thereby launching them onto the path of long-term financial stability.

So yes, tax time can be party time, but just don’t invite Jackson Hewitt to the party.

This blog post was coauthored by Alison Terkel.

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The Sargent Shriver Center on Poverty Law joins advocates across the country in celebrating Chase Bank’s recent announcement that it will exit the Refund Anticipation Loan (RAL) industry.  Chase Bank was the largest provider of short-term, high-interest-rate bank loans, or RALs, contracting with over 13,000 independent tax preparers nationwide.  According to the Woodstock Institute, Chase provided 1.5 million RALs annually based on expected income tax refunds. 

As discussed in our previous blog, the Internal Revenue Service (IRS) is currently creating a task force to review RAL loans issued by tax preparation sites in order to regulate the industry.  While no rules, regulations, or recommendations have been issued yet, the formation of the task force and the increased scrutiny of such products by regulators appear to be having the intended effects. The Office of the Comptroller of the Currency (OCC) also issued new guidance on the delivery of RALs earlier this year.

Chase joins other banks and financial institutions that have recently left the market; 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.

Despite their history in the RAL industry, Chase claimed that its sale of RALs was no longer a “strategic fit” for their business model, and cited increased scrutiny and additional regulations as part of its decision to leave the market.  While we applaud Chase Bank for being responsible and exiting the RAL industry, its actions were the direct result of constant pressure from community organizations and consumer advocates, including the Shriver Center. In sum, Chase was forced to comply with the new OCC guidelines, or exit the RAL industry.  This withdrawal is another victory for working families and may mark the beginning of the end for refund anticipation loans.

This post was coauthored by Susan Ritacca.
 

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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.

Reforming RALs

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.

 

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