The New Realities of the RAL
Instant money. Money now loans. Quick refunds. Tax refund anticipation loans have dozens of names but this year, they may be anything but instant, quick, or…available. Guest Bloggers David Rothstein and David Marzahl take a look at the new realities of the RAL.
Just before Christmas, the Office of the Controller Currency (OCC) delivered a lump of coal to H&R Block, the nation’s largest tax chain, ruling that their partner bank (HSBC) was not stable enough to sell tax loans this year. This added to the growing list of banks that are out of the RAL market, most notably JP Morgan Chase and Santa Barbara Bank and Trust. Funneled down to the taxpayer level those expecting RALs will face new realities come January 14 when the IRS begins accepting electronic returns.
So what is going on here?
Regulation: While states lack the ability to regulate interest rates on loans (they are seemingly pre-empted by federal law), that has not stopped several states from calling for more disclosure by paid preparers. Most of the recent action has come from national regulators. Federal officials, including the FDIC and OCC, have increased audits and requirements for banks who sell tax loans. Tax loans require substantial capital, particularly in a short-time frame, for the beginning of the tax season. Federal officials questioned the ability of some banks to provide these loans and remain in good financial standing. Gary Rivlin’s new book, BROKE USA about the poverty business, noted that in a one month time span, from January to February, RALs generate billions of dollars for a few companies. One small, until now, detail about RALs is that they are very risky if you don’t know about the client’s tax debt. This year, the IRS announced they will be ending the debt indicator, a tool that allowed paid preparers to know if a client’s refund would be held by the IRS because of back taxes, delinquency, student loans, or child support. The debt indicator was an excellent predictor of default for banks, minimizing their loan losses and boosting their profits.
Market forces: Truth be told, RALs are not what they used to be. The IRS processing time for refunds has decreased, especially for returns that are e-filed and direct deposited. Some families are seeing their refunds in as little as a week! RALs, on the other hand, are not as fast as they once were. An American Banker piece from last year revealed that many RAL recipients do not receive their refunds for 2 days or longer. In paraphrasing IRS Commissioner Douglas Shulman’s statement, RALs are just not necessary anymore.
Scrutiny: RALs have come under increased scrutiny not just by regulators but also community groups, the media, and policymakers from both sides of the aisle. These groups have become increasingly uncomfortable with the predatory RAL design: lower income taxpayers aggressively targeted for a high-cost product that reduces their refunds, while paying paid tax preparers and big banks. The tax system has become central to our nation’s anti-poverty efforts, which is why RALs cause such concern. As the majority of taxpayers receiving the Earned Income Tax Credit relying on paid preparers and RALs (more in some urban areas), we have essentially privatized a core anti-poverty program and made poor people pay to get back their own hard-earned money.
Alternatives: For more than a decade, there has been a strong and growing grass-roots movement to help working families prepare their taxes. Often known as community tax preparation or the IRS coordinated Volunteer Income Tax Assistance (VITA) effort, volunteer tax preparers offer a free alternative for tax preparation. Thousands of trained and certified volunteers prepare more than 3 million returns, bringing more than $ 2 billion into communities each year. States and local communities participate in VITA but have also developed “one-stop” benefits and tax preparation modules. The Benefit Bank, Beehive, and other individual state models allow families to access public benefits, FAFSA, and tax preparation. This is all to say that if the cost of tax preparation is too high, families are welcome at the thousands of free tax sites, clinics, and self-help shops around the country. The U.S. Treasury Department also just announced a pilot project for this upcoming tax year that will allow filers to open a bank account when filing taxes, thus allowing a direct deposit and limiting the need for a RAC or waiting for a paper check.
The Future of RALs: Some companies will continue to sell tax loans, though they will look different. Jackson-Hewitt, with their RAL lender Republic Bank, will offer a maximum $1,500 tax loan for more than $60 not including preparer fees or charges. Some tax preparers will sell refund anticipation checks or RACs (the paper check, non-loan version of a RAL) to clients even if they do have a bank account, as the RAC allows the client to pay the preparer from the refund and not out of pocket. After the IRS issues the refund into a one-time bank account, the preparer deducts their fees and issues a paper check to the client. RACs have an average cost of $30 but could more given the new environment and many RAC purchasers will pay to cash the paper check. To that end, prepaid debit cards are also on the rise but vary widely in their fees, ease of use, and issuing bank and ATM network. In the rush of getting a tax return prepared, many taxpayers may unwittingly load their refund onto a very expensive prepaid card thus proving the maxim “buyer beware.” The end of RALs should be celebrated, given their role in draining millions of dollars from working families at tax time. With the availability of more low-cost settlement products, more tax refund dollars will be returned to taxpayers and stay in communities staggered by the economic downturn. At the end of the day the same issue that drove the growth of the RAL market remains – namely, the lack of access to low-cost, high-value bank accounts for millions of low-income working Americans. The Treasury pilot promoting direct deposit, as well as the commitment of many banks and credit unions to provide consumer friendly bank accounts at tax time, are welcome developments in a financial services landscape that has seen its share of predatory and sub-prime products targetting those least able to afford losing any of their tax refund.
David Rothstein is a researcher with Policy Matters Ohio, a nonprofit research institute that focuses on issues that matter to low- and moderate-income families. He co-chairs the advocacy working group for the National Community Tax Coalition.
David Marzahl is the President of the Center for Economic Progress. Marzahl is a founding Steering Committee member of the National Community Tax Coalition.