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

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments (2)
• Trackbacks

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.

 

• Email This
• Print
• Comments (1)
• Trackbacks