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Last gasp for RALs?

It could be the last gasp for tax refund anticipation loans: Jackson Hewitt is reported to be considering bankruptcy while its bank fights an FDIC order to cease and desist funding the loans, known as RALs.

“It looks like [RALs] are on the way out,” said Katie Buitrago of the Woodstock Institute.

Woodstock and other consumer advocates have long called on regulators to clamp down on RALs – and on banks to stop financing them – arguing they are high-cost credit products which drain wealth from low-income taxpayers and communities of color.

Woodstock estimates that RALs divert well over $100 million a year from Illinois taxpayers’ returns.  The product is marketed at recipients of the earned income tax credit, undercutting the effectiveness of this anti-poverty program.

The “continual push for stricter guidelines and policies regarding RALs” by consumer advocates and financial regulators “seems to have paid off,” commented Karen Harris at the Shriver Center’s blog.

A year of setbacks

The past year has seen a series of setbacks for RALs.

Last February, Newstips reported that the Office of the Comptroller of the Currency was cracking down on deceptive marketing about RALs.

In April, JPMorgan Chase announced it would no longer offer RALs.

In August, the IRS announced it would no longer provide tax preparers with “debt indicator” information, which reveals whether a taxpayer has outstanding tax liabilities that could reduce an expected refund.  Consumer advocates had pushed for the change, arguing that the only use of the debt indicator was to facilitate the sale of RALs.

In October, HSBC announced it would stop financing RALs for H&R Block, and H&R sued the bank.  But in December the OCC ordered HSBC to get out of the RAL business, and H&R followed by dropping the product.

In December, Jackson Hewitt and Liberty Tax Service entered agreements with Republic Bank and Trust, based in Louisville, the last major bank financing RALs. But in February, the FDIC began an administrative proceeding aimed at ordering Republic out of the business.  The agency said the product is too risky and that it “is of no value to the end user.”  Republic is fighting the proceeding in court.

Jackson-Hewlitt’s financial difficulties are linked to the clampdown on RALs, which are the company’s most profitable product, according to Reuters.

Market factors are also undercutting the attractiveness of RALs.  Electronic filing and direct deposit makes tax refunds available in a week or two, about the same timeframe as RALs offer.

Republic is charging about $62 for a RAL on a $1,500 refund – an APR of 149 percent, according to the National Consumer Law Center.  Tax preparation fees can boost costs to well over $100.

A free alternative

Meanwhile, volunteer income tax assistance (VITA) services continue to provide free tax preparation for low-income families.  The challenge is getting the word out, said Rolando Palacio of the Center for Economic Progress.

With nearly 1,000 volunteers at almost 30 locations in communities around Chicago and Illinois, CEP provides free assistance to help taxpayers claim the EITC and other tax benefits. (Locations and other information is available at 888‐827‐8511.)

The group celebrated its 20th anniversary last year.  Since 1990 CEP has served 270,000 families and brought $400 million in refunds to Illinois taxpayers.

CEP has partnered with banks to provide low-cost accounts for filers, helping them get direct deposit of refunds as well as access to banking services and a head start on saving.  The Treasury Department is now piloting a similar program, Palacio said.

The City of Chicago and the Illinois Department of Human Services have helped publicize the program with inserts in mailings, Palacio said.  But more could be done.

In the 2007 tax year, more than half of 6.3 million filers in Illinois used professional tax preparers; 110,000 used VITA and other free services, he said.

Increased federal funding is one thing that would help, Palacio said.  An $8 million demonstration program providing federal funding for VITA programs was increased to $12 million last year, but the need is far greater, according to the National Community Tax Coalition, a coalition of VITA services spearheaded by CEP.  The coalition calls for increased federal funding to VITA services on a permanent basis.

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