End of the Rapid Rip-Off: An Epilogue for Quickie Tax Loans

Strategic Insights -

As tax season approaches, Americans may be relieved to know that the era of refund anticipation loans (RALs) and their high-cost sibling, refund anticipation checks (RACs), may be coming to a close. The National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA) released a report, "End of the Rapid Rip-Off: An Epilogue for Quickie Tax Loans," which details the decline of these predatory financial products. Regulatory actions by the IRS and banking regulators have effectively put an end to RALs, which drained the refunds of approximately 7.2 million taxpayers in 2009, costing them $606 million in loan fees, plus over $58 million in other fees.

Key Takeaways:

  • The number of taxpayers receiving RALs decreased by 14% from 2008 to 2009, affecting approximately 7.2 million taxpayers.
  • RALs were mostly marketed to low-income taxpayers, including recipients of the Earned Income Tax Credit (EITC), who accounted for 87% of RAL applicants and 64% of RAC applicants in 2009.
  • RALs and RACs cost taxpayers $606 million and $387 million, respectively, in 2009, primarily due to loan fees and other charges.
  • The IRS and banking regulators have taken steps to effectively end RAL lending, with the FDIC's decision to deem RALs without the Debt Indicator as "unsafe and unsound" marking the beginning of the end.
  • Republic Bank & Trust, one of the remaining three RAL-lending banks, has announced it will appeal the FDIC's decision, but its appeal is unlikely to succeed, signaling the end of RALs in 2012.
  • Tax preparers and banks continue to offer RACs, which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee.
  • Consumer advocates recommend taxpayers consider alternatives to RACs, such as opening a real bank account or using prepaid debit cards specifically designed for tax time.
  • The IRS has stated it will explore the possibility of permitting a portion of tax refunds to go directly to pay for tax preparation, which has been supported by consumer advocates.

Statistics:

  • In 2009, approximately 7.2 million taxpayers received RALs, at an estimated cost of $606 million in loan fees and over $58 million in other fees.
  • In 2009, about 12.9 million taxpayers received RACs, primarily costing them $387 million in fees.
  • Republic Bank & Trust, the largest RAL-lending bank, charges $61.22 for a RAL of $1,500, translating to an APR of 149%.
  • The FDIC's decision to deem RALs without the Debt Indicator as "unsafe and unsound" has effectively ended RAL lending.

Sources:

  • National Consumer Law Center (NCLC) and Consumer Federation of America (CFA), "End of the Rapid Rip-Off: An Epilogue for Quickie Tax Loans" (www.nclc.org/images/pdf/high_cost_small_loans/ral/report-ral-2011.pdf)
  • IRS, announcement of termination of the Debt Indicator (http://www.nclc.org/images/pdf/high_cost_small_loans/ral/pr-ral-irs-debt-indicator-08-10.pdf)
  • Office of Thrift Supervision (OTS), supervisory directive to MetaBank (October 2010)
  • Office of the Comptroller of the Currency (OCC), directive prohibiting HSBC from offering RALs (December 2010)
  • FDIC, notification to Republic Bank & Trust, Ohio Valley Bank, and River City Bank regarding the safety and soundness of RALs (February 10, 2011)
  • U.S. Department of Treasury, announcement of a pilot project to offer 600,000 low-cost prepaid cards to families without a bank account (February 2011)