The NCLC/CFA 2011 Refund Anticipation Loan Report
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 tenth annual report on the RAL industry from the National Consumer Law Center and Consumer Federation of America. After ten years, it appears that RALs are on their way out. This may be the last year the high-cost, high-risk loans are made.
Dramatic changes have occurred in the RAL industry in the past year. These changes include:
- The IRS eliminated the Debt Indicator, a service that helped tax preparers and banks make RALs by indicating whether a refund would be intercepted for certain debts.
- JPMorgan Chase, one of the three largest RAL lenders, exited the market voluntarily.
- The Office of Thrift Supervision prohibited MetaBank, a potential new entrant into the RAL market, from making the loans.
- The Office of Comptroller issued a regulatory directive against HSBC (H&R Block's RAL partner bank) prohibiting it from making RALs.
- The FDIC notified the RAL-lending banks that it regulates that the making of RALs without the Debt Indicator is "unsafe and unsound."
As a result of these changes, there may not be any banks left making RALs next year. For this year, there are only three small, state-chartered banks that make RALs—Republic Bank & Trust, River City Bank, and Ohio Valley Bank/Fort Knox Financial Services. However, barring a successful appeal by one of these banks, the FDIC's notices to them will end RAL lending.
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. Unscrupulous preparers could partner with non-bank lenders to make RALs, perhaps employing tactics used by high-cost loan companies. The reforms that have signaled the end of RAL lending have been issued by the IRS and banking regulators and could be administratively reversed.
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 declined significantly from 2008 to 2009. Tax preparers and their bank partners made approximately 7.2 million RALs during the 2009 tax-filing season compared to 8.4 million in 2008, and a high of 12.4 million in 2004.
- Consumers paid an estimated $606 million in RAL fees in 2009 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 2009 paid another estimated $58 million in add-on fees, such "application," "administrative," "e-filing," "service bureau," "transmission," or "processing" fees. Since the major preparation chains did not charge these fees in 2009, we based this estimate on an assumption that about 20% of RAL borrowers are charged this fee.
- Federal and state regulators have continued to take enforcement actions over RALs, including:
- The Office of Comptroller of Currency issued a Policy Statement setting forth its expectations for national banks making RALs.
- The Arkansas Attorney General filed a lawsuit against Mo' Money Taxes for violations of the Arkansas RAL Act, including failure to make required disclosures and charging illegal add-on fees.
- The New York State Division of Human Rights obtained successful decisions on its ongoing lawsuits against H&R Block and Jackson Hewitt for discriminatory targeting of minority communities for RALs.
- The State of New Jersey and the New York City Division of Consumer Affairs both conducted sweeps of tax preparers to uncover deceptive RAL advertising.
- The North Carolina Commissioner of Banks took action against Mo' Money Taxes for its failure register as required by the North Carolina RAL law.
- During 2010, Maryland enacted a RAL law that was based in part on the NCLC Model Act. The Maryland law prohibits tax preparers from charging any fees other than the fee charged by the bank for the RAL or RAC, i.e., it prohibits add-on fees. Colorado and Louisiana enacted RAL laws that primarily provide for disclosures.
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.
The authors would like to thank Carolyn Carter for editorial review and Denise Lisio for editorial assistance.
This research was funded by the Annie E. Casey Foundation. We thank the Foundation for its support but acknowledge that the findings and conclusions presented in this report are those of the authors alone, and do not necessarily reflect the opinions of the Foundation.