Domino RAL

I am sure this post will get some people dancing in their seats. But, as you celebrate the RAL problems, please remember that there are good people, taxpayers and preparers, who are getting hurt.

 

I like domino displays. I admire the skill and patience of the people who set them up only to have them knock themselves down in a few seconds. All it takes is a little push on one to start it. Its fall causes the second one’s fall and soon there is no stopping the cascade.

I don’t know what triggered the start of the RAL (Refund Anticipation Loan) domino cascade. I don’t think much can be done to stop it this year. I do know that the RAL industry is in crisis and good people are going to get hurt.

RAL are short term loans based on the refund you expect to receive. They are made after the return has been e-filed and usually approval is within a day –two at the most.. They have been a target of community organizations for years because of the high fees and they seem to target lower income clients. They have also attracted people to the industry who are more interested in the money to be made from fees than preparing a correct return.

Several years ago, the industry began to change. The Department of Defense banned RALs for Military personnel and their spouses. Pressure forced the banks which offered them to reduce the fees they charged. This caused the banks to cut the incentives they paid to the software companies and preparers. Then, just before Christmas, one of the banks (Santa Barbara Bank and Trust – SBBT) which fund RALs, announced that regulators would not approve their RAL program. Preparers scrambled to find a new bank to handle their RALs but there were not a lot of options. SBBT was finally able to sell their RAL division to the relief of their remaining preparer customers. But this was short lived relief when business as usual actually became business with no RALs.  SBBT clients could only offer the two week programs.

The shake up at SBBT affects everyone in the tax industry who offers RALs. The other RAL banks increased their client base but does that mean the same amount of loan money over more taxpayers and a higher decline rate?  How will the increased clients affect customer service and processing times? What about the taxpayers who want the RALs and change preparers? The original office will lose a client and the new office many not have the resources to handle a large client increase. Taxpayers many be waiting longer for appointments and receiving reduced services or increased fees with the new preparer. And it’s not just the independent offices which could be hurt. SBBT provided a major part of Jackson Hewitt’s RAL funding. The last estimate was that 50% of their offices would not be offering RALs.

Electronic filing opened last Friday, and over the weekend a major part of the discussions on my tax forum was about the RALs; who had approvals and how many were declined. Also, what reason is being given for the declines? That was nothing new but this year there seemed to be more urgency about the discussion. There is urgency on the part of the taxpayers too. News reports have been showing up about riots at tax office. Riots caused because taxpayers were not able to get their loan money when it was promised. This is money the taxpayer were counting on receiving. Money, I am sure, many had already spent. And just because there may not be a riot at the door does not mean that there are not angry taxpayers at other offices. Taxpayers who are waiting longer to learn they didn’t receive the loan or that the loan was for less than they expected.

Something needs to be done about the RAL industry. I don’t think much can be done this year. Also, I don’t think the banks involved can be counted on to fix the problems. I expect the IRS or Congress will step in with a patch. Maybe they’ll fix the problem but I doubt it. No matter what is done, there will be small business owners who will be hurt. And there are taxpayers who will get mad because they can’t get their refund when they want it. And that is why this mess has happened. A need was created and fed. It grew without supervision with everyone raking in the money. When supervision was proposed, it was for the wrong reason and wasn’t enacted. Now the system is falling apart one domino at a time.

Comments

[J Smith]

Great Post!

The most intresting and accuarate points that you made was, that there are good tax prepares out there that are now affected by the crisis, and the second point supports the fact that the last 2 years it was more hectic trying to get clients approved for the loan, than anything only for it to turn back on the preparers as if we did something wrong.

I understand the program wasn't one way or the other, but I'm glad I can finally say that the ral headache is almost gone.
GOOD LUCK IN 2011!!!!