One, two, three banks are out of the old RAL game: Regulator orders HSBC to stop financing high-cost tax time loans

2010 was a heartening year for consumer advocates working to eliminate income tax refund anticipation loans (RALs), the high-cost loans that strip assets from low-wealth tax filers. First, the Office of the Comptroller of the Currency (OCC), the federal regulator of national banks, issued a policy statement regulating the provision of RALs that strengthened its hand compared to previously unenforced policies. On the heels of that announcement, Chase announced it was leaving the RAL business. Chase was the second of the three major banks who provided RALs to withdraw, following Santa Barbara Bank & Trust’s forced exit in 2009. In August, the IRS announced it would stop facilitating the preparation of RALs by providing information on a borrower’s debts to tax preparers. Finally, the year ended with more happy news: the OCC ordered the third main RAL provider, HSBC, to stop providing RALs, leaving H&R Block without a bank partner for the upcoming tax season. Republic Bank and Trust, an FDIC-regulated bank that is currently the last bank around to provide RAL financing, is even limiting the amount of funding available to its RALs, including those arranged by Jackson Hewitt. With few financing options left for tax preparers who want to make wealth-stripping loans to working families, this could be the beginning of the end for RALs as a meaningful market.

Refund anticipation loans are loans arranged by tax preparers for the estimated amount of a borrower’s income tax refund. The borrower pays a high fee to receive the money within one to three days of filing his or her tax return, instead of waiting the ten days it would usually take to receive their refund from the IRS via direct deposit. The loan is repaid when the tax preparer receives the borrower’s refund from the IRS. However, if the refund turns out to be lower than the loan—because of unpaid child support or taxes, for example—the borrower is still required to pay back the full amount of the loan, plus interest.

Woodstock Institute’s research has shown that RALs are costly and have a disproportionate impact on communities of color. In 2006, Illinoisans spent $114 million on RAL fees and interest. That’s $114 million that could have been saved or spent on education, badly-needed repairs, or getting out of debt. Additionally, nearly a quarter of tax filers in African-American communities used RALs, which is 3.5 times more than the state average.

Woodstock has worked in conjunction with advocates across the country for years to end RAL practices that drain wealth from communities of color by documenting RALs’ negative impact, meeting with banks, regulators and the IRS, conducting public education and media outreach, and commenting on proposed policies.  While increased regulatory scrutiny is needed in the short term, we look forward to the RAL product's obsolescence. Tax refund loans disproportionately strip wealth from taxpayers qualifying for the Earned Income Tax Credit and taxpayers living in communities of color, and Woodstock Institute wholly opposes this line of business. We look forward to the speedy processing of tax returns by the IRS and the development of new mechanisms to help low-wealth people prepare and file tax returns, which will greatly diminish the need for tax refund loans. At a staggering $114 million a year in lost assets a year in just one state, these improvements cannot come soon enough for Illinois or the country.