Bankruptcy

RALs - Will They Become Extinct?

By Nathalie Martin

Refund appreciation loans, or RALs, are among the priciest loan transactions out there.  Customers pay a fee (frequently 40% to 700% if expressed as an APR) to get their tax refund early.  The fees can be much higher.  I saw one where a consumer was owed a $4,000 tax refund, and paid $1,000 of that to a RAL provider, in order to receive the remaining $3,000 two weeks earlier than the customer otherwise would have.  In some parts of the country, for example in Indian Country, RALs seem like the only option.  This year I also saw a very well known tax preparers advertise FREE tax return preparation, only to find out they were actually providing high-fee RALs.  Not so free?..

But the RAL gravy train may be almost over.  The FDIC just ordered one of the last underwriters of the products to stop backing the controversial loans. The FDIC told Kentucky-based Republic Bank & Trust Co. that the loans are unsafe and unsound now that the IRS no longer offers banks its debt indicator, a tool loan providers used to determine whether a taxpayer had outstanding tax liabilities that could be garnished from a tax refund.

Republic, which finances RALs for Jackson Hewitt and Liberty Tax Service, has 60 days to contest the FDIC's assertion -- and it plans to do so, Republic President and CEO Steve Trager told Tax Analysts. Within 60 days, bank officials will have to defend the loans at a hearing before an FDIC-appointed administrative law judge, who will make a recommendation to the FDIC board of directors for a final ruling. The board of directors then has 90 days to make a decision.

Consumer advocates, including Adam Rust of the Community Reinvestment Association of North Carolina, have long criticized RALs for taking advantage of society?s weakest. In 2008, the median annual income of an RAL customer was $19,768. In 2009, RALs took more than $600 million in interest and fees from the refunds of 7.2 million taxpayers, according to the National Consumer Law Center.

John Hewitt, CEO of Liberty Tax Service, defended RAL fees, saying the one-time fees help deliver money quickly to people living paycheck to paycheck. If RALs weren't available, people would pursue other services with potentially higher interest rates. 

Critics of RALs argue that now that the IRS offers direct deposit of tax refunds often within 7 to 15 days, there should be less need for consumers to seek instant refunds. Treasury's new program offering tax refunds directly deposited onto prepaid debit cards should also decrease incentives for taxpayers to seek RALs, said Chi Chi Wu, staff attorney at the National Consumer Law Center. "The IRS is working on getting those refunds even faster. So really taxpa

Full post as published by Credit Slips on February 16, 2011 (boomark / email).