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

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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In the midst of this year’s tax season, the Federal Deposit Insurance Corporation (FDIC) ordered Republic Bank to stop providing refund anticipation loans (RALs). Republic Bank funds RALs for Jackson Hewitt, the second largest RAL provider in the U.S., as well as Liberty Tax.

2010 was bad year for RALs and 2011 isn’t looking any better. Last May, JPMorgan Chase voluntarily left the RAL market due to concerns with growing regulation and scrutiny and stigma associated with RALs. In August, the Internal Revenue Service announced that it would stop providing tax preparation sites with debt indicators, the tool used to determine whether consumers would be receiving a refund, which RAL providers use to underwrite the loans. Then in December, the Office of the Comptroller of the Currency prohibited H&R Block’s lending partner, HSBC, from providing RALs, knocking H&R Block out of the 2011 RAL tax season.

Jackson Hewitt’s stock jumped when its major competitor, H&R Block was knocked out of the market, however, its stock dropped when the FDIC’s cease-and-desist order against its bank partner was issued.

A report recently 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.

Republic has the right to request an administrative hearing to contest the FDIC’s orders in the next 60 days, and a final notice, if reached, would not be issued until 90 days after the administrative hearing. With the FDIC’s action against Republic Bank, the two remaining RAL lenders, Ohio Valley Bancorp and River City Bancorp, are undoubtedly fearful for their future. They, as well as consumer advocates, working to end these types of abusive loans will be watching to see what Republic does next.

This post was coauthored by Kelly Ward.

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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.

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On October 6^th 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.

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The Internal Revenue Service (IRS) announced last week that starting with the 2010 tax filing season they will no longer provide tax preparers with the mechanism they had been using to underwrite refund anticipation loans (RALs). Specifically, the IRS will no longer provide a “debt indicator” tool which gives tax preparers an indication of whether a client will have any portion of the 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.

RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refunds, yet at a cost of interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL.

Because refunds are now widely issued electronically within 10 days of filing, the IRS decided that there was no longer a need for the debt indicator or an instantaneous refund. As IRS Commissioner Doug Shulman explained: “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.”

To replace the debt indicator, the IRS will begin exploring the possibility of providing a new tool to tax preparation sites. Instant access to cash and the ability to immediately pay for tax preparation services with RALs have been major selling points for consumers. The IRS is, therefore, investigating cost-effective and secure alternative product s to RALs.

Legislators and advocates alike have praised the decision to no longer provide the debt indicator. These high-cost loans, which are targeted at low-income families and those eligible for the earned income tax credit who need money quickly, are irrelevant given the speed at which federal tax refunds are now delivered. In eliminating these loans, taxpayers will no longer spend millions of dollars for a 10-day loan when they can receive the cash for the refund in approximately the same time period.

In recent blogs, the Shriver Center reported on the negative impact RALs have on low-income communities and the measures being taken to eradicate these product s from the tax preparation industry and from financial institutions. The Office of the Comptroller of the Currency (OCC), reacting to consumer advocacy including efforts by the Shriver Center, issued new requirements for tax preparers’ advertisement and sale of such loans earlier this year. Similarly, the FDIC mandated at least one cease and desist order and several RAL provided voluntarily agreed to stop proving such loans. The IRS’ recent investigation into RALS and the task force which it convened on this topic lead to its decision to eliminate the debt indicator tool. This latest development could spell the end for RALs, and the Shriver Center applauds the IRS’ action in ending this abusive practice.

Susan Ritacca coauthored this article.

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