by andrea
Refund Application Loans Deemed “Unsafe”
February 22, 2011 in Home From the Blog, Uncategorized by andrea
On February 10, 2011, the Federal Deposit Insurance Corporation (FDIC) notified Republic Bancorp – one of the last three financial institutions that funds Refund Anticipation Loans (RALs) – that the bank’s high cost RALs are “unsafe and unsound.” As described in their ruling, RALs, which are used by millions of taxpayers nationwide each year, are not of value to the end-users.
RALs are one to two week loans that are offered by tax preparers, made by banks, and secured by a taxpayer’s refund. RALs target low-income taxpayers, especially recipients of the Earned Income Tax Credits – an essential income-boosting credit for hard-working, low-income families. RALs can be expensive. This year, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an APR of 149%. According to the National Consumer Law Center (NCLC), in 2009, RALs skimmed over $600 million from the refunds of 7.2 million American taxpayers.
The RAL market changed dramatically this year when the Internal Revenue Service (IRS) announced that it no longer would provide access to the debt indicator, a tool used by tax preparers and related financial institutions to underwrite loans to taxpayers by showing whether a taxpayer will have their federal refund offset for delinquent tax or other debts. With the use of electronic filing and direct deposit of refunds, taxpayers can get their refunds quickly (in 7 to 14 days). As such, the need for these types of loans has been greatly diminished, although that alone has not yet eliminated the RAL market.
According to national advocates, including NCLC and the Consumer Federation of America, the FDIC’s recent decision may eliminate the RAL market altogether, and effectively put an end to these predatory products that siphon off millions of dollars in taxpayers’ hard-earned money. But it’s not over until it’s over. Two financial institutions are still in the market, and as part of the legal process, Republic Bancorp is entitled to a hearing before a judge appointed by the FDIC within 60 days from the date of service of the ruling (February 10).
The FDIC’s action comes on the heels of other financial institutions being forced out of or voluntarily exiting the RAL market. Now, the only FDIC-regulated banks in the RAL market are Republic Bancorp and two other banks. Rebublic Bancorp is the RAL lender for Jackson Hewitt and Liberty Tax Service, which are the second and third largest tax prep chains in the country. H&R Block is the largest, and they were forced to exit the RAL market this year because of a ruling against their lending institution in December, 2010.
FDIC Action Against Unsafe and Unsound Refund Anticipation Loans Press Release
Blog Credit: Tracy Fischman, Executive Director, AccountAbility Minnesota