Six Things You Should Know From the NCLC/CFA Report on RALs
On Wednesday, the National Consumer Law Center and Consumer Federation of America released their 12th annual Refund Anticipation Loan (RAL) Report. While it victoriously declares “the party’s over for quickie tax loans,” the report also warns that other dangers remain in place for taxpayers, specifically the low-income families we serve.
Here are some things you should know from the report:
- RALs are dead – Only Republic Bank is backing RALs this tax season, and per the terms of their settlement with the Federal Trade Commission, will stop offering them after April of this year. At their peak in 2004, RAL fees topped $1.2 billion nationwide.
- There are, of course, exceptions– According to the report, some commercial preparers are considering fringe lenders to fund RALs in the future. And not just smaller preparers – in November, Liberty Tax revealed they plan to partner with a non-bank lender to make RALs.
- Paid preparers play games with their fees – Big surprise right? The report outlines various secret shopper results in which customers had an extremely difficult, or sometimes impossible, time getting even a vague quote. Even when the secret shoppers were able to get a quote, “the fees were much more than the vague estimate.” This is consistent with an investigative report in New York City, in which tax preparers received a combined $1 million in fines for unfair advertising practices. The report calls for mandatory fee disclosure in a standardized, comprehensible manner.
- RACs stand to take the place of RALs – While RAL uptake has gone down in recent years, Refund Anticipation Check (RAC) uptake has gone up and the product became even more popular in 2010. A RAC involves a one-time-use account opened by the preparer for deposit of the refund. Once the IRS deposits the refund in the account, the customer receives a check or prepaid card with the amount of the deposit less the tax preparation fee and other fees. For those with an account with direct deposit available, RACs offer no advantage.
- RACs are bad – Just like RALs, RACs delay payment of the preparation fee and therefore customers are less reactive to it. Preparers use this to bury often extremely high fees, and customers often get a RAC simply to avoid paying the fee up front, making it essentially a loan for tax preparation. Most RACs cost $30, and assuming a tax preparation fee of $189, this loan has an APR of 414%!
- States are issuing tax refunds on prepaid debit cards – Connecticut, New York, Oklahoma and South Carolina are now offering the option to receive a state tax refund on a prepaid card. While this offers some obvious benefits for recipients, especially the unbanked, it has caused some controversy regarding who stands to make money in the process. NCTC will be closely monitoring and analyzing this interesting trend, with an eye on how it affects the low-income families we serve.
I highly recommend you read the full report. Even if you’re familiar with RALs, RACs and other products, you’ll find some interesting (if depressing) facts.
By Dan Fair, Manager of Communications & Member Relations