Refund anticipation loans could become endangered species
Refund anticipation loans are one of many loan products coming under an increased amount of scrutiny. Federal regulators are making it more difficult for banks to finance the loans and therefore harder for businesses to lend RALs and similar credit products to customers. The loans are wildly unpopular with consumer advocates, who insist they are detrimental to consumers.
Tax preparers running out of options for financing
Tax preparation services such as H&R Block and Jackson Hewitt are finding it harder to find financing for tax refund loan programs, as federal regulations make it more difficult for financial institutions to meet legal underwriting requirements. H&R Block was forced to close its refund anticipation loan program when its partner in financing the program, HSBC, was forced to withdraw from the partnership in the program by the Office of the Comptroller of the Currency, according to the Washington Post. H&R Block posted a net loss of more than $12 million in the three-month period that ended Jan. 31, and that partially was due to the loss of the product, according to NPR. JP Morgan Chase stopped financing the short term loans against tax refunds in April of 2010.
Change in IRS rule brings loan product to a halt
The Achilles heel to refund anticipation loans was an Internal Revenue Service rule that allowed tax preparers and creditors lending RALs to check on the status of a person’s tax refund if the person had taken out an RAL from that preparer. That law was repealed last year, and the fact that a bank could not check on the borrower’s credit worthiness meant that legally mandated underwriting requirements cannot be met. Only the River City Bank and Republic Bank and Trust banks in Louisville, Ky., and Ohio Valley Bank in Gallipolis, Ohio, were left financing RALs this year. River City Bank and Ohio Valley Bank are leaving the market at the end of tax season, leaving only one bank financing refund anticipation loans in the entire nation, at least for large tax preparers.
Refund anticipation loan basics
Refund anticipation loans are fairly simple. People get their taxes prepared by a preparation service like H&R Block or Jackson-Hewitt. If they are due an income tax refund, they can take out loans against their refunds. The loan is the amount of the refund minus a fee, usually about $65. The loans are somewhat similar to payday loans, as the loan is against future earnings. Just like payday loans, there is no credit check involved, but the loan comes with fees and has stiff penalties for the borrower in case of default. The loans are most prevalent in low-income communities and have been frequent targets of criticism from consumer advocacy groups. However, most people who take the loans have a pressing need for cash and don’t want to wait.