This is a guest post from Kyle Psaty, who works for PerkStreet Financial, which offers outstanding, credit card-like cash back on a DEBIT CARD. He is the editor of the PerkStreet Financial Blog, which offers daily tips and tricks for saving money and budgeting wisely.
They’re called Refund Anticipation Loans (RALs among bankers) and every year they cost Americans millions out of their tax refunds. What’s worse, there’s a lot of evidence to suggest this money is being taken from some of poorest taxpayers out there. It’s a less-known example of bankers operating without the best interest of customers in mind.
In 2004, the fees from Refund Anticipation Loans cost 12.4 million Americans $1.24 billion according to data compiled by the Consumer Federation of America and the National Consumer Law Center. In 2006, the number of loans dropped to 9 million. The decline looked promising, but a recent article from The San Francisco Chronicle indicates that last year, 9 million Americans received these predatory loans, meaning the decline in popularity may not be continuing.
What makes RALs bad for taxpayers?
Refund Anticipation Loans are given out immediately after a person’s taxes have been prepared. They’re instant refunds, which sounds good except they often carry a hefty fee – about $100 per loan in both 2004 and 2006.
In previous years, H&R Block did the bulk of the RAL business in the U.S., but this year, the Office of the Comptroller of Currency ordered the institution that lent the money on behalf of H&R Block to stop backing RALs, so H&R Block pulled out of this unscrupulous industry.
Unfortunately, these loans are still legal for tax prep service providers like Jackson-Hewitt, this year’s big winner in the RAL game, which is charging a whopping 24% APR on the loans, and has certainly taken over the bulk of the RAL business in the wake of H&R Block’s departure.
Who Takes These Loans?
In the eyes of banking industry pros, the typical consumer taking out an RAL is a member of the “unbanked” community. These are often people who live hand-to-mouth and are likely taking these loans because they need to make other payments immediately. The fees are hitting people who are in a pinch – those who need their refunds stat.
Keep in mind that the IRS discourages people from taking RALs, noting that an e-filed tax return that’s direct deposited into an account often takes around 8 days to post to a filer’s checking account.
The problem is the “unbanked” don’t have checking accounts. How many Americans don’t have checking accounts right now? You guessed it: About 9 million.
People taking RALs are either in a real bind and cannot wait a week for their money, or they don’t have checking accounts to have their refunds direct deposited into. These folks will need to pay a check cashing service to cash their paper checks when they arrive from the IRS.
Why is the U.S. Government upset?
Predatory loans like the RAL could easily land on the chopping block now that the government has put renewed focus on banking regulation. But predatory lending isn’t the only reason the Government is upset about RALs. These loans could encourage shady practices by tax preparers – they potentially incentivize tax fraud for preparers. If a low-income family isn’t eligible for a refund, tax preparers could fabricate deductions that yield one in order to be able to give a consumer an RAL. After all, if there’s no refund, the preparer cannot profit from a Refund Anticipation Loan.
What should the Government do?
There are many potential regulations that could, and in all likelihood, will impact this business over the coming years. One move that could potentially curb the consumer need for these loans altogether involves paying refunds out in the form of debit cards.
In fact, the IRS launched a pilot program this tax season offering 600,000 tax payers earning $35,000-or-less the opportunity to receive their refunds on prepaid debit cards. If this move is well received by taxpayers – as it has been by Social Security recipients in recent years – it could also mean seriously reducing the cost of postage and paper that the government typically pays when issuing tax refunds and re-issuing lost refund checks.
Taxpayers without checking accounts will be able to avoid paying check cashing services and instead be able to spend their tax refunds by swiping the debit cards, which are reloadable. These cards don’t carry any risk of debt for recipients, since they’re debit cards, not credit cards, although they generally carry the exact same protection as credit cards – the pilot program cards are Visa prepaid debit cards that carry the same Zero Liability protection as Visa’s other debit and credit cards.
Hopefully, we’ll see the end of RALs in the near term. The sooner the better, since these loans seem to be taking millions from the pockets of hard-working, tax-paying citizens with a lack of other options.