End of the RALs?

Around this time last year, William Outlaw, manager at Liberty Tax at 5415 Georgia Ave. NW, signed off on a few dozen refund anticipation loans, or RALs, short-term loans secured by tax refunds.

Cash-strapped customers were eager to get their money back within a day or two, even if it meant paying sky-high fees. This year, however, Outlaw estimates the number of loans issued is down by more than 20 percent.

“The banks have tightened up on risk taking and a lot of them won't accept loan applications,” he said. “Even with smaller amounts, some people are still being declined.”

A stricter regulatory environment is signaling the end of this controversial service, one consumer advocates decry as predatory because of its proliferation in low-income communities. Years of petitioning state and federal officials to rein in RALs yielded substantial results in 2010 that have crippled the market in a matter of months.

Under pressure from consumer groups, J.P. Morgan Chase, one of the three largest lenders underwriting refund loans, pulled out of the market in April. The Internal Revenue Service then announced in August it would no longer provide tax preparers and financial institutions a key credit check on taxpayers for RALs. And by December, H&R Block bowed out when its banking partner HSBC terminated their agreement, thanks to a directive from the Office of the Comptroller of the Currency.

As a result of the departure of J.P. Morgan and the actions of the OCC, only three community banks are originating RALs this year: Louisville-based Republic Bank & Trust, River City Bank in the same city and Ohio Valley Bank in Gallipolis, Ohio, according to the National Consumer Law Center.

Republic Bank is the lending partner for two of the last major tax preparers in the refund loan business, Liberty Tax and Jackson Hewitt. But even that relationship is tenuous, since the Federal Deposit Insurance Corp. came down on Republic last month for originating loans without having the IRS debt report. The FDIC's concerns led Ohio Valley and River City to announce plans in February to exit the RAL market at the end of the tax season.

“Refund anticipation loans as we know them are either going to be gone for next year or at most you'll have one bank making them,” said National Consumer Law attorney Chi Chi Wu.

According to a recent study by the center, approximately 7.2 million taxpayers used RALs in 2009, paying $606 million in loan fees, plus another $58 million in additional charges. Research showed the cost for a typical refund loan of $1,500 this year is $61.22, which translates into an effective APR of 149 percent.

Wu warns that in the absence of RALs tax preparers can still offer refund anticipation checks, subject to slightly lower fees. This product involves having a temporary bank account set up to receive the refund, which is then issued as a paper check or prepaid debit card.

H&R Block has kept its toes in the refund anticipation waters with checks and prepaid cards, though the company partly attributed its $12.7 million net loss for the three months ending Jan. 31 to a decline in the business.

Pam Hayes, manager of the Jackson Hewitt at 2314 Rhode Island Ave. NE, said she has noticed a lot more people opting for electronic filing and direct deposit, which provides refunds in eight to 15 days. She said it's a viable option for people with bank accounts, but a number of customers she comes across don't belong to banks.

Addressing this concern, the Treasury Department in January launched a pilot program offering prepaid cards with lower fee structures than existing products have. The agency invited 600,000 taxpayers making less than $35,000 to sign up and aims to expand the offer in coming years.