The NCLC/CFA 2012 Refund Anticipation Loan Report
Chi Chi Wu, National Consumer Law Center
Contributing author: Jean Ann Fox, Consumer Federation of America?
Refund anticipation loans (RALs) are one to two week loans made by banks, facilitated by tax preparers, and secured by the taxpayer's expected tax refund. RALs can carry triple digit APRs, and expose taxpayers to the risks of unpaid debt if their refunds do not arrive as expected.
This is the twelfth annual report on the RAL industry from the National Consumer Law Center and Consumer Federation of America. This is also the last year that these high-cost, high-risk loans will be made, at least on a large scale by banks. In December 2011, the last of the RAL-lending banks entered into a settlement with the FDIC and agreed to cease making RALs after April 2012. While an occasional fringe lender may make a tax-time loan, the sale of RALs as a widespread industry-wide practice is over. RALs will no longer drain the tax refunds of millions of mostly low-income taxpayers.
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) - which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee. Tax preparation fees can often be opaque and expensive, with taxpayers unable to obtain estimates of fees 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.
Other findings of this report include:
- This year, the price for a typical RAL (from Republic Bank & Trust) for a loan of $1,500 is $61.22, plus another $29.95 for a refund anticipation check for the remainder of the consumer's refund. The $61.22 fee translates into an APR of 149%.
- The latest IRS data shows that RAL volume again declined significantly from 2009 to 2010. Tax preparers and their bank partners made approximately 5 million RALs during the 2010 tax-filing season compared to 7.2 million in 2008, and a high of 12.4 million in 2004.
- Consumers paid an estimated $338 million in RAL fees in 2010 to get quick cash for their refunds—essentially borrowing their own money, sometimes at extremely high interest rates
- In addition to RAL fees, consumers in 2010 paid another estimated $48 million in add-on fees, such "data and document storage," "administrative," "e-filing," "service bureau," "transmission," or "processing" fees.
- H&R Block announced it would not make RALs for the 2012 tax season. Block had previously lost its RAL partner bank, HSBC, when that bank's regulator ordered it out of the market. Block's announcement meant that it would not seek another bank to replace HSBC. In addition, Block offered a free refund anticipation check (RAC) during the first two weeks of the 2012 tax season for holders of its Emerald Card.
- Liberty Tax has begun exploring the option of RALs made by non-bank lenders. It has partnered with SGS Credit Services, Inc. and several other companies with similar names, which appear to be linked with Texas payday lenders. 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 affiliated with Ohio-based payday lenders.
- Small chains, such as Mo' Money Taxes and Instant Taxes, appear to be embroiled in controversy over RAL/RAC checks that have allegedly bounced or not been honored, as well as other problems. In addition, the Arkansas Attorney General obtained a settlement in its case against Mo' Money Taxes over alleged violation of the Arkansas RAL Act and the Arkansas Deceptive Trade Practices Act.
The 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 community groups and organizations, who represent low-income and elderly individuals on consumer issues. National Consumer Law Center® and NCLC® are trademarks of National Consumer Law Center, Inc.
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.