Tax refund anticipation loans from tax preparation services may become a thing of the past. Image from Wikimedia Commons.

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 That law was repealed last year, and the fact that a bank could not check on the borrower’s credit worthiness meant that legally mandated underwriting requirements cannot be met.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.

Sources

NPR

Washington Post

Tax preparation giant H&R Block has lost significant ground since the tax preparation service cannot offer a cash advance against tax refunds this year. Image from Wikimedia Commons.

The loss of the ability to offer a cash advance against tax refunds has caused revenues to fall for tax preparation giant H&R Block. The latest earnings reports for the company indicate that revenues so far are less than expected this tax season. Earlier this year, the company was forced to abandon refund anticipation loans when a key partner was sued by the FDIC.

Tax season off to a slower than normal start

A decline in people paying to have their tax returns prepared has led to a decline in revenues for tax preparation giant H&R Block, according to CNBC. Block expects  January earnings will come close to breaking even, but activity began to pick up in mid-February. From Jan. 1 to Feb. 15, online returns prepared through H&R Block increased by almost 28 percent, though total digital tax returns only registered a 7.3 percent increase since the start of the year. Preparation fees for H&R Block have declined by 7.6 percent since the start of the year, and part of the loss is because the company is no longer offering the popular refund anticipation loan, a cash advance against an income tax refund.

Blocked from lending by suit against key partner

Short term loans against tax refunds are similar to payday loans, in that a customer is advanced cash immediately instead of having to wait for their tax refund. The refund is signed over to Block, and borrowers receive less than the total refund because fees are deducted. In December of 2010, H&R Block announced that the company would not be offering refund anticipation loans, a very popular product among lower and mid-income customers. A key partner in the financing of the loans, HSBC, was enjoined by the Federal Deposit Insurance Corporation from lending refund loans. Nearly 17 percent of Block customers took out a refund anticipation loan in 2010.

FDIC countersued by refund loan lender

A prominent tax refund lender has sued the Federal Deposit Insurance Corporation for interfering in the tax refund loan business, according to Business Week. Republic Bank and Trust, a bank based in Kentucky, is suing the FDIC and claims the agency overstepped its boundaries by labeling the loan products “unsafe and unsound” when the FDIC ordered Republic to stop lending the loans last month. Republic lent more than $3 billion in refund loans last year to almost 836,000 people. The bank observed a default rate of only 2.13 percent. The suit alleges that the FDIC is trying to coerce loan lenders into dropping a product that government officials don’t like, even though the product is popular.

Sources

CNBC

Business Week

In an effort to find new customers, banks are aiming to help with a big public concern: debt relief. TD Bank, located on the East Coast, hosted a free pizza night for potential customers. Citizens Bank has promised to give new customers $1,000 if they are saving for their children’s college fund. Bank of the Wichitas, in Oklahoma, is hitting the market hard with a new advertising campaign with “Where bankin’s funner!” as their slogan. Regardless of their geography, banks are looking for new customers and finding creative ways to reach out to a new market.

Since the Federal Reserve set an extremely low interest rate, banks are trying to work with the numbers. This explains why most banks offer bonuses , but with conditions. For example, Citizens Bank’s $1,000 college fund is available, but only if customers open a new account and deposit at least $25 per month. To qualify, families must have children younger than 6 and agree to contribute at least $25 every month until the child is 18. Another example is HSBC’s program to give away Amazon Kindles but only to customers who open a new account with $50,000 and agree to maintain a combined balance of $100,000 at the bank.

Small banks

To find good interest rates, some searching is required. First of all, smaller banks are now trying to compete with large banking centers. They are offering “rewards” checking accounts that often return 4 percent or more. Studies show that small banks often carry interest rates that are twice the national average. Gabriel Krajicek, CEO of BancVue.com, stated, “Most small banks have maintained the higher interest rate package for over a year, so their reliability is great.” BancVue.com is a web site that lists reward-running banking programs from around the country, at a community level. It’s a great tool for consumers to look for banks offering the best perks.

Online banks

For consumers looking for debt relief, searching online may also aid their financial positions. Online banks gained popularity a few years ago and managed to gain a strong market share almost immediately. Although online banks still have less than 4 percent of total retail deposits, their revenues have grown more than $160 billion since 2000. Part of the reason is their rates are normally better than brick-and-mortar banks. Online banks have smaller overhead costs and can pass the savings onto their customers. James Kelly, COO of ING Direct, the largest online-only bank, stated, “Despite the economy, we’re getting as much money as we need.”

The downside of online banking, however, is that most have limited online services. For extra accounts such as auto loans or credit lines, consumers still have to go elsewhere. Also, many online banks don’t have their own ATM networks, so getting charged a fee for using a debit card is inevitable. Check cashing can also be a hassle with banks that do their business solely online. Customers have to grapple with a traditional bank and explain their online status or mail the check to their online facility and wait for days, sometimes weeks, for their money.

Finding funds

In the end, debt relief is available to those to search hard for it. Fortunately in today’s computer age, there are web sites that do the work and research for consumers. Web sites like BancVue.com build their business on becoming a banking resource for their visitors. Consumers need to find tools like these and use them to maximize their savings.