Consumer
Advocates Recommend Cheaper Alternatives for Getting Refund Fast
BOSTON, Mass.─
A bright note for consumers as this tax season begins: This is the
final year in which refund anticipation loans (RALs) will be
available from banks on a large scale, nationwide basis. After this
season, there will be an end to the hundreds of millions drained
from taxpayer refunds by these high-cost, high-risk loans. “We will
be glad to see the last of RALs, which were both high-cost and
high-risk,” says Chi Chi Wu, staff attorney at the National Consumer
Law Center (NCLC). “It’s not a moment too soon to stop multi-million
dollar corporations from skimming off the tax refunds of
hard-working families.”
Consumer
advocates suggest that taxpayers looking for quick refund cash
shouldconsider these lower-cost or free alternatives:
• Taxpayers with a bank account can
get their tax refunds in 8 to 15 days with e-filing and direct
deposit.
• Taxpayers without a bank account
can get a fast refund by e-filing and having their refund deposited
to a prepaid card, including any existing payroll or prepaid card
that the taxpayer already has.
• H&R Block is even offering free
refund anticipation checks (RACs) until early February if the
customer uses its prepaid Block Emerald Card to receive the
refund.
With RACs, the
bank opens a temporary bank account into which the IRS
direct deposits the refund check. After the refund is deposited, the
bank issues the consumer a check or prepaid card and closes the
temporary account. A RAC
allows the consumer to pay for tax preparation fees out of the
refund and provides the speed of direct deposit of tax refunds for
unbanked taxpayers, but generally at an additional cost.
Life after
Refund Anticipation Loans (RALs)
Even after the
end of RALs, tax preparers and banks will continue to offer RACs,
forwhich the banks generally charge about $30 - $32. Tax preparers
may also charge their own “add-on” fees, which can range from $25 to
several hundred dollars. Since of their main purposes is to defer
payment of the tax preparation until the refund arrives, RACs may
represent a high-cost loan of that fee. With the exception of free
RACs, consumer advocates recommend taxpayers consider alternatives.
Prepaid cards
are one alternative to allow taxpayers without a bank account to
receive a fast refund. Taxpayers, however, should be cautious when
selecting a prepaid card. “As with any financial product, taxpayers
should compare costs and consumer protections,” recommends Wu.
Taxpayers without a bank account should also consider opening a bank
account to receive their refund. “Getting a big refund is the
perfect time to open a savings account and start a nest egg,”
advises Jean Ann Fox, director of financial services for Consumer
Federation of America.
Low-income
taxpayers have a number of options for free tax preparation,
including Volunteer Income Tax Assistance (VITA) (1-800-906-9887 or
www.irs.gov) and AARP Tax-Aide sites (https://locator.aarp.org/vmis/sites/tax_aide_locator.jsp).
Choosing a VITA or AARP
Tax-Aide site saves taxpayers the cost of a tax preparation fee.
Many VITA sites also offer
services to help open a bank account or get a low-cost prepaid card,
which enables taxpayers to get fast refunds without pay a fee. Free
tax preparation may be available on bases, and since servicemembers
are required to have bank accounts, they are able to benefit from
the speed of electronic delivery of their tax refunds
There are also
a number of websites that allow taxpayers to prepare and file their
taxes online for free, such as the IRS
Free File
program (www.irs.gov) and the I-CAN! E-file site (www.icanefile.org).
Latest RAL
Data RALs are bank loans secured by the taxpayer’s expected
refund─loans that last about 7 to 14 days until the actual IRS
refund repays the loan. RALs are expensive. This year for Jackson
Hewitt customers, Republic Bank is charging $61.22 for a RAL of
$1,500, which translates into an APR of 149%. If the refund exceeds
$1561.22, the taxpayer is charged another $29.95 when the remainder
of the refund arrives in the form of a RAC,
for a total of $91.17 in fees. In fact, RALs are so expensive that
the Military Lending Act bans them for servicemembers. RALs were
also big business. Using the most recent data available from the IRS,
about 6.85 million taxpayers applied for a RAL in the 2010 tax
filing season (for tax year 2009), and NCLC and CFA estimate that
about 5 million received them.
This
represents a significant drop from the 8.4 million taxpayers who
applied for RALs and the estimate of 7.2 million who received them
in 2009. In contrast, the number of taxpayers receiving RACs has
increased to an estimated 14.6 million taxpayers in 2010, up from
the 12.9 million in 2009.
Last of the
Banks Forced Out of RAL Lending in 2011 During the past few years,
there have been a number of major developments in the RAL industry.
The three biggest banks in RAL lending -JPMorgan Chase, HSBC and
Santa Barbara Bank & Trust - left or were forced out of the business
by December 2010. As a result of these actions, there were only
three small, state-chartered banks making RALs in 2011– Republic
Bank & Trust, River City Bank and Ohio Valley Bank, all based in
Louisville, Kentucky.
In February
2011, the FDIC notified these banks that the practice of originating
RALs without the benefit of the IRS Debt Indicator was unsafe and
unsound. River City Bank and Ohio Valley Bank accepted the FDIC’s
decision, but Republic Bank & Trust decided to fight. Republic
appealed the decision to an administrative law judge, and sued the
FDIC in federal court. In May 2011, the FDIC issued an “Amended
Notice of Chargesfor an Order to Cease and Desist,” which detailed
widespread legal violations in Republic’s RAL program and proposed a
$2 million civil penalty.
In December
2011, the FDIC reached a settlement with Republic in which the bank
agreed to cease making RALs after April 2012, and to pay a $900,000
civil penalty. Thus, after this tax season, there will be no banks
left that make RALs.
Enter the
Payday Lenders
With the end
of RALs made by banks, a few high cost fringe lenders have stepped
into the fray. Liberty Tax Service, which is planning an initial
public offering, revealed in its prospectus that the tax preparation
chain plans to partner with an unnamed non-bank lender to make RALs.
Liberty’s website shows that it has partnered with SGS Credit
Services, Inc., which appears to be linked with Texas payday
lenders.
A prominent
payday lender, Advance America, is offering “fast” refunds though
its storefronts, although it is unclear whether the product is a RAL,
a regular payday loan, or a RAC
in actuality. The website for TaxWorks, a division of RedGear, which
is owned by H&R Block, is promoting a “Tax Season Cash Advance”
provided by Schear Lending Group and Atlas Financial Services.
Schear Lending Group appears to be somehow affiliated with
Ohio-based payday lenders. “Consumers have even more reason to
avoid RALs made by payday lenders,” advises Jean Ann Fox, “These
RALs are likely to be more expensive and riskier.”
RALs made by
nonbank lenders will most likely not be as widespread as bank RALs.
Nonbank lenders do not have the legal ability, unlike banks, to
flout state laws that cap interest rates, i.e., usury laws. Tax-time
loans from payday lenders and other storefront outlets that offer to
prepare taxes and make loans may be subject to state loan laws,
usury caps, or loan broker requirements in states that have them.
Seventeen states (and
District of Columbia) do not
permit payday lending at all.
Upcoming
Report Available in February 2012
NCLC and CFA
will publish their annual comprehensive report on the RAL industry,
regulation, and litigation in February 2012. The report will be
available on NCLC’s website at www.nclc.org and on CFA’s website at
www.consumerfed.org.
National Consumer Law Center® is a non-profit
organization specializing in consumer issues on behalf of low-income
people. NCLC works with thousands of legal services, government and
private attorneys, as well as organizations, who represent
low-income and elderly individuals on consumer issues.
The Consumer Federation of America is an association of nearly 300
nonprofit consumer groups that was established in 1968 to advance
the consumer interest through research, advocacy and education.
