Thankful for RALs’ Decline – But RACs Still Around
It may be turkey time for the rest of the country, but NCTC members and commercial preparers are busy gearing up for the upcoming tax season. One big difference we’ll see in 2013 is the departure of refund anticipation loans (RALs). Last tax season was the final one in which these high-cost, high-risk loans will be made, at least on a large scale by banks. In December 2011, Republic Bank & Trust, which was the last of the RAL-lending banks, entered into a settlement with its federal regulator agreeing to cease making RALs after the 2012 tax season.
The sale of RALs as a widespread industry-wide practice is over, and RALs will no longer drain the tax refunds of millions of mostly low-income taxpayers. However, we will probably see the occasional payday lender or other fringe player making a tax-time loan. The National Consumer Law Center is interested in information about fringe RAL lending, and we encourage NCTC members to contact us with any examples.
Even if fringe players do offer non-bank RALs, they will have nowhere near the financial capacity to make millions of loans – after all, it takes $1.5 to $3 billion in capital to make 1 million RALs. Non-bank lenders also do not have the legal ability, unlike banks, to flout state laws that regulate credit. They will be subject to state small loan laws, usury caps, or loan broker requirements in states that have them. Seventeen states (and District of Columbia) do not authorize extremely high-cost payday lending at all.
But we can’t rest yet. Even with the end of RALs, low-income taxpayers still remain vulnerable to profiteering. Tax preparers and banks continue to offer a related product – refund anticipation checks (RACs). Preparers sometimes charge significant add-on fees to RACs, using different names such as “document preparation,” “application,” “service bureau,” or “technology access” fees. RACs may also represent a high-cost loan of the tax preparation fee.
Tax preparation fees can also represent a source of abuse. They can be expensive, sometimes as much as $300 to $400 or even more. More disturbing is the lack of transparency about these fees; taxpayers are often unable to obtain estimates to comparison shop. The next challenge is to ensure that RACs are made unnecessary, and tax preparation fees subject to a standardized, easy-to-understand disclosure.
By Chi Chi Wu, Staff Attorney at the National Consumer Law Center in Boston. Chi Chi also serves on the Policy Committee of NCTC’s Board of Managers.