The regulatory environment continues to look more and more unfriendly to providers of income tax refund anticipation loans (RALs), which is great news for consumers. On the heels of recent actions by the Office of the Comptroller of the Currency (OCC) limiting RAL activity in the banks it regulates, the FDIC notified the largest remaining bank that provides RALs, Republic Bancorp, that it considers the practice to be “unsafe and unsound.” Republic can contest the notice within 60 days; the bank has indicated that it’s not going to let go of RALs without a fight.
Over at Bank Talk, Adam Rust of the Community Reinvestment Association of North Carolina (CRA-NC) has been providing excellent coverage of regulatory updates. Rust quotes from the FDIC’s notice to Republic:
The Federal Deposit Insurance Corporation (the “FDIC”) has communicated to the Bank in the past that, in its opinion, RALs, which are used by millions of taxpayers nationwide each year, are not of value to the end-users…Contrary to an evaluation by the Kentucky Department of Financial Institutions, the FDIC’s Notice contends that the Bank’s practice of originating RALs without the benefit of the DI from the IRS is unsafe and unsound.
This news is significant, as the FDIC regulates the last 3 banks that provide financing for refund anticipation loans. In response to the notice, two of the three remaining banks (Ohio Valley Bancorp and River City Bank) have announced that they will discontinue the product after this tax season. Meanwhile, Republic says it will fight the FDIC’s notice at an upcoming hearing.
Our research has shown that RALs strip millions of dollars of wealth from low-wealth tax filers in Illinois—more than $114 million in 2006 alone. RALs disproportionately impact communities of color: nearly a quarter of tax filers in African-American communities used RALs, which is 3.5 times more than the state average. We’ve discovered that tax filers are paying up to $125 in fees this tax season just to get their anticipated refund a week early. Like the FDIC, we believe this product offers little value to tax filers in the age of electronic filing and direct deposit. We support efforts by the IRS to further speed up processing of tax returns and the develop new mechanisms to help low-wealth people prepare and file tax returns, which will greatly diminish the need for tax refund loans.