Why we had second thoughts and finally said no to refund anticipation loans.

A client came into the office last week and wanted us to prepare his taxes again this year.  Good news.  However, he said he didn't want to go the refund anticipation loan route like he did last year.  Why?  He couldn't cash his refund loan check.  So the allure of getting his money quicker...approximately seven days...after paying a hefty bank fee, turned into a real problem.

"Nobody would cash my check without paying an additional fee" he said.  " So I finally deposited the money into my bank and waited five business days until they released the funds.  I wasn't really ahead of the game.  I lost money."

Refund anticipation loans (RAL) are bank loans secured by taxpayer's refunds.  They are marketed to moderate and low income consumers, those who we believe can least afford it.  They have proven to be huge source of revenue to the largest tax preparation firms in American. Hundreds of millions of dollars for H & R Block.  Never popular with consumer groups, the IRS, or state regulators because of their high costs, refund anticipation loans are generally filed by those taxpayers elgible to received earned income credit. Earned income credit is designed to assist low income working families by supplementing their refund based on family size and income earned.  The Consumer Federation of America estimated that various fees and charges drained $2.1 billion from the earned income credit program last year. 

This year the refund anticipation loan world became even dicier.

Panic struck the tax preparation industry on Christmas Eve 2009 after it was revealed that just weeks away from the beginning of the tax season rush, California-based Pacific Capital Bancorp, a major player in the lucrative refund anticipation loan business, was ordered by federal banking regulators to halt its RAL origination services.


The announcement was a shock to the tax prep industry, which includes big names such as Jackson-Hewitt Tax Service, Liberty Tax and H&R Block, all of which rely on RALs for a healthy percentage of their income.
A troubled bank these days isn't catastrophic except for the fact that fewer than a handful of banks fund RALs, loans sold to customers in advance of their government tax refund. Such a small number of RAL originators leaves little wiggle room should one find itself in trouble, as is the case with PCB's Santa Barbara Bank & Trust.


Now we learn that Illinois, Gov. Pat Quinn has barred currency-exchange stores from offering the loans without state permission. Is more regulation on the way?

This month, the IRS said  it would review RAL practices and its own Debt Indicator program and refund delivery service as part of its efforts to protect taxpayers using tax-prep services.  

And finally we learn that some lenders are now saying it will take two to three weeks before some taxpayers to get their refund anticipation loan because of new scrutiny by the remaining lenders.  So what is the point when you can get your refund in about ten days electronically filing your tax return with a direct deposit.

So does this mean an end to the refund anticipation loan program?

Probably.  But the current recession has seen somewhat of a resurgence in popularity of the program with some tax preparers.

We weighed the possibility of losing some billing by opting out of the program this year versus the long term client good will by saying don't spend all that money to get your refund back this year.  We landed on the side of our clients.