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

The Illinois General Assembly got it right when it voted in December to double the state’s earned income tax credit (EITC). As the 2012 tax season approaches, low-income taxpayers in Illinois will receive, on average, $100 extra per year.

The EITC is a refundable income tax credit, which is available to low-income families on their federal income taxes. The American Recovery and Reinvestment Act (ARRA) provided a temporary increase in EITC and expanded the credit for workers with three or more qualifying children for the 2009 and 2010 tax years. Many states also provide a state EITC, usually based on a percentage of the federal credit. Previously, Illinois had one the smallest EITCs among all the states at only 5% of the federal EITC.

In 2010, 46 million Americans lived in poverty, the highest number in our country’s history. The EITC, the government’s largest anti-poverty program, has been credited with lifting millions of people out of poverty. In fact, when President Reagan signed the federal EITC into law, he called it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” In Illinois, for example, over 950,000 families benefited from the EITC in 2010, and experts estimate that number will climb to 1 million this year due to the economic downturn.  

We commend Illinois and Governor Quinn for taking such concrete steps by increasing the EITC. Unfortunately other states are not being so wise. Oklahoma, Indiana, Kansas, and others are proposing legislation to eliminate the EITC, while Michigan is attempting to reduce the program by 70%.

Oklahoma, for instance, has created a tax task force that has recommended that the state abolish personal income taxes all together, along with the EITC. If this tax package passes, 67% of Oklahoma’s citizens will pay higher taxes, and the 80% who rely on EITC refunds for a boost at tax time won’t receive them. Abolishing the personal income tax would further impoverish these families since sales and use taxes or other taxes might be increased to cover this lost tax revenue.

A similar story is unfolding in Indiana, where the EITC has proven to be a successful measure in stabilizing the incomes of nearly 500,000 low-income working Hoosiers who have felt the devastating affects of increased poverty and decreased wages as a result of the Great Recession. In Kansas, Governor Sam Brownback claims that fraud is the reason to eliminate the EITC; however advocates and legislators strongly disagree. Without this tax credit, 4,000 more Kansas children will live under the poverty line, and families will be denied the $90 million in credits. The result would be devastating for these families and children.

The EITC is beneficial not only because it puts extra money in the pockets of those in need, but also because it includes work incentives, grows the economy and can help lift families out of poverty. The country has not yet recovered from the recession’s economic fallout, and now is not the time to cut such vital support for the most vulnerable populations.

EITC Awareness Day is today, January 27, 2012. This is a national, grassroots effort spotlighting this potentially life-changing tax credit. Join with other charitable organizations, elected officials, state and local governments, employers, and other interested parties to educate your communities about the EITC, encourage those who are eligible to apply for it, and prevent it from being cut.  

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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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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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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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