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Published: April 2008

Final report still warns consumers about tax refund loans

The National Consumer Law Center and Consumer Federation of America have released their final report for 2008 on RALS or Refund Anticipation Loans.

The final report released from the NCLC and CFA provides a more in-depth update on an earlier report in January of this year about the RAL industry, in particular its effect on the Earned Income Tax Credit (EITC) benefits. RALs, which are secured by and repaid directly from the proceeds of a consumer's tax refund from the IRS, target the working poor including those who are recipients of the EITC, a refundable credit intended to boost low-wage workers out of poverty.

Click here to download a copy of the report.

According to the report, consumers should continue to be aware of the dangers and pitfalls to RALs. However, overall, there has been some good news. There has been significant reduction in the number of RALs, a decline of about 27% from 2004 to 2006. There were 12.4 million RALs reported by the IRS in 2004, versus about 9 million in 2006. The average taxpayer refund in 2006 was $2,600, with RAL loan fees for that amount at around $100. The report shows that taxpayers in total paid $900 million in RAL fees in 2006.  This compares to an estimated $960 million in RAL fees in 2005 and $1.24 billion in RAL loan fees in 2004.

The price of these loans has also gone down, according to the report. Both H & R Block, the nation's largest tax preparer, and JPMorgan Chase, dropped their prices to 1% of the anticipated loan amount, plus other fees. In addition, all of the major RAL banks announced this year that they would stop making "pay stub" and "holiday" loans, which were loans made prior to tax filing season, before taxpayers had even received their IRS Form W-2s. 

The report shows that competitors of H & R Block and JPMorgan Chase, such as Jackson Hewitt, have continued to make large profits off of their RALs. According to the report, consumers will be paying anywhere from $57.85 (Block) to $110 (Republic Bank) in order to get a RAL for a typical refund of about $2,600.  The effective APR for this RAL would be 83% (Block) to 140% (SBBT) to 161% (Republic Bank).  Because RALs usually run for a duration of about 7-14 days, APRs for these loans are often in the triple digits.

There has also been progress in protecting military Service members as well. The Military Lending Act took effect in 2007, prohibiting lenders from making loans that cost more than 36% APR to Service members.

Other key findings:

• The APRs for RALs can still range in the triple digits.  H&R Block and JPMorgan Chase claim that their RALs carry an APR of 36%, but that calculation does not include the fee for the dummy bank account used to repay the RAL, which doubles the APR.  Other tax preparers, such as Jackson Hewitt and Liberty Tax Service, continue to offer high cost RALs with APRs in the triple digits.  The effective APR for RALs based on a 10-day loan period ranges from about 50% (for a loan of $10,000) to nearly 500% (for a loan of $300). The APR for a loan of a typical refund size of about $2,600 can be from 83% to 194%.

• Consumers paid an estimated $900 million in RAL fees in 2006 to get quick cash for their refunds – essentially borrowing their own money, and some at extremely high interest rates.  This represents a decrease of 27% from 2004 to 2006, but is still a tremendous drain on the tax refunds of American taxpayers.  

• In addition to RAL fees, consumers paid another estimated $90 million in “document processing” or “application fees” in 2006.  Since the major preparation chains do not charge this fee, except for potentially some Jackson Hewitt franchisees, we based this estimate on an assumption that about 25% of RAL borrowers are charged this fee.  

• During 2007, a number of government agencies took enforcement actions involving RALs.  The U.S. Department of Justice sued five Jackson Hewitt franchisees that operated 125 offices for their role in preparing fraudulent tax returns that falsely claimed $70 million in tax refunds.  The California Attorney General filed lawsuits against Jackson Hewitt and Liberty Tax Service over their promotion of RALs.  Jackson Hewitt settled with the Attorney General, promising reforms of its practices and paying $4 million in consumer refunds plus $1 million in penalties and costs.  The New Jersey Attorney General’s Office sued a local tax preparation chain, Malqui Corporation, for deceptive advertisement of RALs.   The New York State Division of Human Rights sued both Jackson Hewitt and Liberty Tax Service for discriminatory targeting of minorities for RALs, in violation of NY Human Rights Law.   

• H&R Block, through its own bank, is now offering a credit product to its tax clients, the Emerald Advance Line of Credit which carries an interest rate of 36% plus an annual fee of $30, which is much less expensive than short-term fringe lending products such as payday or auto title loans.  This loan, which is offered prior to tax filing season, is not explicitly tied to tax refunds, although we assume many borrowers will end up using their refunds to repay it, since the loan is due in full on February 15.

• The IRS has finally opened a rulemaking proceeding regarding potential RAL regulation. In January 2008, the IRS issued a request for comments regarding whether it should develop rules restricting the sharing of tax return information to market RALs, RACs, audit insurance and other financial products typically sold to low-income taxpayers.  The IRS specifically asked for information about whether these products provide preparers with a financial incentive to inflate refund claims inappropriately.  The IRS is accepting comments on the issue until April 7, 2008.

• Fringe operators, such as used car dealers and payday lenders, also offer tax preparation and RAL services to their customers.  The problems with fringe providers engaged in tax preparation include the questionable quality of preparation and the inadequacy of privacy protection.  H&R Block has quietly joined with payday lenders and other fringe financial service providers to provide tax preparation services and RALs through its TaxOne subsidiary.  Car dealers are another type of business attracted to tax preparation.  Florida-based Tax Refund
Services Inc is a company that specializes in providing software and back office support to car dealers engaged in tax preparation.
rs.

For More Information

National Consumer Law Center or Consumer Federation of America

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