ugg scuff Tax refund anticipation loans on their way out
Technology has transformed how we file taxes. It’s to the point now that so many returns are filed electronically that the Internal Revenue Service no longer mails out forms.
The movement of taxpayers online also means refunds are frequently received within days instead of weeks.
It’s a change that’s dealt a serious blow to the tax refund anticipation loan (RAL) industry. For years it’s capitalized on the desire of taxpayers to get refund money in their hands fast.
RALs were used by about 5 million taxpayers last year to receive their expected refund in as little as one or two days. Such loans are often sought by low income earners living paycheck to paycheck. Their financial bind means they’re often willing to pay high fees to get their money quickly.
Often referred to as “rapid refunds,” the loans are provided by tax preparers in partnership with banks, which provide the funding. Applicants essentially borrow the amount of their expected return and repay the loan when the IRS delivers the actual refund.
More than 80 percent of RAL customers had an annual income of less than $40,000, according to a 2007 government survey. About 37 percent made less than $15,000.
Refund anticipation loans at their peak generated more than $1 billion for the tax preparers and banks that offered them. That was in 2002 when 13 million RALs were processed.
The number of loans has plummeted in recent years and industry observers believe RALs likely will be used by about 2 million tax filers this year.
The IRS dealt a major blow to the business in 2010. The agency stopped providing information about a borrower’s unpaid taxes, child support, federal student loans, and other debts that could be taken out of a tax refund.
Without this debt indicator it’s more difficult for a bank to gauge the amount of a refund, making it riskier to approve a loan against that amount.
The IRS said it stopped providing the data because it can deliver refunds in 10 days, and taxpayers no longer need to pay fees that amount to triple digit interest rates on the short term RALs. The loans typically last from five days to two weeks.
Borrowers often face charges for the application, e filing and a range of other costs, in addition to the bank’s finance charge. This can all add up to the equivalent of an interest rate in excess of one hundred percent and sometimes multiples of that, said the National Consumer Law Center. A $3,300 RAL carries a rate of about 72 percent when fees and charges are added up, the group said.
Federal bank regulators have increasingly pushed banks out of the business because without the IRS debt indicator there’s a greater potential for losses.
After taking action against two smaller banks, the real blow came when regulators informed HSBC Bank that it must stop offering RALs in December. Because HSBC funded the loans for H Block, the government’s action left the nation’s leading tax preparer unable to offer RALs.
This could cost H Block millions in revenue. About 17 percent of its customers got a refund anticipation loan in the 2010 tax season. This produced more than $146 million, or about 4 percent of annual revenue.
JPMorgan Chase voluntarily exited the RAL business in 2010. At the time New York City Consumer Affairs Commissioner Jonathan Mintz said he hoped it would “herald the ultimate and long overdue demise of these predatory and unnecessary loans.” His comments echo those of consumer advocacy groups, which have been pushing for an end to RALs for years.
One major concern of consumer advocates is that RAL fees are frequently paid by recipients of the Earned Income Tax Credit. The anti poverty program is a tax credit paid to workers earning below certain thresholds. If the tax credit exceeds the taxpayer’s liability, the IRS sends the worker a refund check.
Nearly 24 million taxpayers received $50 billion in benefits in 2009. The average credit exceeded $2,000, the IRS said.
In essence, RAL providers are reaping huge profits from a taxpayer funded government program designed to help low income workers.
“We don’t understand why our nation’s largest anti poverty program has a middleman charging usury rates to provide people their refunds,
” said Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, a nonprofit consumer advocate.
Nicole McKinney, a single mother of three teenagers, uses her experience with RALs when conducting financial education workshops and outreach programs through her job at the Multnomah County Commission on Children, Families Community in Portland, Ore.
McKinney, 37, used RALs up until her early 20s.
“I was a single mom, and I thought about what I could do with $1,000 right now,” she said. “I could get new shoes for my daughter. I really had no clue about the interest.”
McKinney later learned from a friend about a free tax preparation program offered through a nonprofit organization. She also began to get her finances in order and realized the high cost didn’t make sense. As she learned more about personal finance, she began working as an intern for Multnomah County helping low income residents access financial literacy programs.
The internship ultimately turned into a full time job.
The government crackdown on RALs has shaken up the tax preparation business for this year.
H Block, without a bank to fund its RALs, is expected to lose customers. The company declined an interview request about RALs.
And with most of the major banks once offering RALs out of the business, two major tax preparers are relying on Republic Bank Trust Co., based in Louisville, Ky., for funding.
Jackson Hewitt Tax Service, which has tax preparers in more than 6,000 offices, and Liberty Tax Service, a preparer with 3,500 offices in the United States and Canada,
both have contracts with the bank.