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 That law was repealed last year, and the fact that a bank could not check on the borrower’s credit worthiness meant that legally mandated underwriting requirements cannot be met.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

Jackson Hewitt is suing H&R Block for defamation. Image from Wikimedia Commons.

Tax preparation giant H&R Block is being sued by Jackson-Hewitt over an ad campaign blasting the short term loan program offered by Jackson Hewitt. Both companies offer some form of a refund anticipation loan or a loan against an income tax return. Tax season is when both companies make the bulk of their revenue.

H&R Block’s short term loan ads land company in court

An advertising campaign run by tax preparation giant H&R Block has resulted in the company being sued by competitor Jackson Hewitt, according to Reuters. The lawsuit alleges that H&R Block deliberately misled consumers about Jackson Hewitt through the commercials about a program called “Second Look,” which mentions Hewitt by name. The commercial offers a free review of returns prepared by competitors. The commercial says two of every three returns prepared by Hewitt had errors and had missed deductions. Hewitt is also claiming that Block made false statements about the short term loan program Hewitt offers, being refund anticipation loans, or RALs. Hewitt maintains that customers can get a loan of up to $1,500 in day.

The tax cash advance

Refund Anticipation Loans are a cash advance against an income tax refund. Filers who are due a refund can get a check for their expected refund amount, minus a fee for the preparer and loan lender. The tax preparer files the return and takes the income tax return as payment, while the borrower walks away with instant cash rather than waiting for a deposit or a check. H&R Block is unlikely to be able to lend these loans this tax season, as a key financier and partner of Block, HSBC, was forbidden from funding the loans by the U.S. Treasury.

IRS advises to e-file

The Internal Revenue Service does not have an official position on RALs but suggests people electronically file and elect to have their refund directly deposited. A refund can be deposited electronically in far less time than it takes for a paper check to arrive, whether the check is being sent to Jackson, Mississippi, or to Hawaii.

Source

Reuters

Tax season is here, and some people may be wondering whether the quick cash of tax refund loans is right for them. The plain and simple answer to that question is that if you don’t mind giving up an expensive chunk of change, go for it. Otherwise, if you’d like to have access to fast consumer credit during a cash emergency, payday loans are a less expensive route in that they are generally free of “fees upon fees” and the charges levied by less than scrupulous tax preparers.

Even the IRS views tax refund loans with suspicion

The Web site Consumer Affairs reports that one of the biggest RAL institutions in the game – Santa Barbara Bank & Trust – has been ordered out of the tax refund loans business by federal regulators. Santa Barbara Bank & Trust was the money man for Jackson Hewitt’s tax refund loans, so now that big-name tax preparation company has to scramble to find funding for over half its locations. Republic Bank & Trust, another big tax refund loans player, has dropped their RAL prices as the industry faces the heat of consumer advocates.

8.4 million American taxpayers were robbed in 2008

By Consumer Affairs’ count, tax refund loans drained $738 million from their hard-earned tax refunds in 2008, just so they could receive their money a few days earlier. What an unnecessary expense; and that doesn’t even take into account $68 million in “other fees.” Then there were 12 million more people who gave up $360 million on products similar to tax refund loans. Consumer groups like the National Consumer Law Center and Consumer Federation of America are sounding the alarm for taxpayers to wake up and smell the tax refund loans ruse.

An IRS task force is examining tax refund loans

Until they’ve put this ultra-expensive product down like Ol’ Yeller’s evil twin,  here some tips to avoid tax refund loans, RALs, RACs or whatever name tax preparers looking for a buck call them.

• File electronically to get your refund more quickly. Wait a week or two and you can save green!
• If you need help, use free sites offered by places like Volunteer Income Tax Assistance and the National Community Tax Coalition. Call the IRS at 1-800-829-1040 for more info. IRS Free File is also a place you should know about.
• Have your refund direct deposited. As check cashers typically charge two percent or more, it pays to have a checking account at a bank or credit union. Why pay $60 to cash a $3,000 refund check when you don’t have to?
• Know what you’re signing if you use a tax preparer. They can easily share or sell your tax return information, so if you see anything that gives them permission to do so, JUST SAY NO.

Tax refund loans can be dangerous; why not consider payday loans?

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