Until last tax season, I offered Refund Anticipation Loans (RALs) as part of the tax preparation process. I didn't like them but I understand the people who use them. I made sure I followed the rules for disclosure even when the client didn't want to hear all that legal stuff. I took offense at the "Big Brother" types who branded everyone who offered RALs as evil people taking advantage of the "working poor." Implied was the idea that these clients were unable to make their own financial decisions because they worked as CNAs and garbage collectors. When I opened my own office, I seriously considered not offering Rals but that would mean giving up the Refund Anticipation Checks (RAC) that was part of the program. I had good clients that needed that service.
The RAC (or RT/Bonus$/ or other name) was the backbone of the system. A temporary bank account was set up for the taxpayer and their refund was directly deposited into that account. When the bank received the deposit from the IRS, they pulled the fees from the account and distributed the remainder to the taxpayer. There was a set fee charged for the service which was taken out of the refund with the tax preparation fee. The taxpayer received their refund on the direct deposit timetable and didn't have to wait until they could save their money for the preparation fee. A RAL used the same process but with the taxpayer paying extra to get their money within a day or two. Until last year, you had to sign up to offer RALs to offer RACs but there are now companies that just offer the RAC type program with no RALs. In fact, the IRS is looking at a way to help these clients with fees and banking issues.
That is a good thing because in the last year the RAL business has begun a meltdown. Unfortunately, the meltdown is drawing in not just the banks but the tax professionals who offer them. If you get nothing else out of this post let it be this, while there are people who abused the RAL programs and took advantage of their clients, most are good, professional taxpayers who offered RALs because their clients wanted them. They followed the rules and helped their clients. Now many of them are trapped in the meltdown.
There have always been criticism of the RAL programs. Most were based on a taxpayer's surprise when they discovered how much they spent in fees to get their refund. Too many firms were taking advantage of the taxpayer's hurry to get their refund that they "skipped" the fees and conditions disclosures and too many clients focusing on the refund and not what was being explained to them. The resultant uproar forced the banks to change their pricing scheme from a set "fee" for a refund range to a percentage method. About the same time, the Department of Defense banned RALs from being offered to military personal and their spouses. With the change in pricing and loss of a large client segment, the RAL banks began to change how they did business to keep their profits up. They cut the fee they paid tax preparers for each RAL/RAC funded and began to limit the "paperwork" fee some firms were offering. For many tax firms, RALs stopped being worth the extra headache and work they caused and were dropped. Then the economy hit.
Last year, two days before Christmas, Santa Barbara Bank and Trust(SBBT) announced that they did not have regulator's approval for their RAL program. Although they attempted to make alternative arrangements, thousands of firms (including some offices of Jackson Hewitt and Liberty Tax Service) found themselves unable to offer RALs for the 2009 filing season. In April of 2010, Chase Bank announced that they would not be offering a RAL program for the 2010 filing season. Chase was the most conservation of the RAL banks and they had been in the RAL business since the start (Bank One was bought by Chase).Their departure from the business left many tax offices scrambling to find a new RAL lender. At that time, their choices were Republic Bank, River City Bank, Refund Advantage and SBTG (SBBT reformed). There are some smaller RAL programs which are tied to a specific software. Also, HSBC, the largest RAL bank dropped all their smaller clients and is exclusive to H&R Block.
Then in August, the IRS announced that they would not be sharing the debt indicator with the RAL banks or tax preparers beginning in 2011. This means that the banks don't know if the full refund will be issued and makes the loan precess more risky for them. The meltdown intensified. While some banks required offices new to them to have done a minimum number of RALs the previous year and to have a very low loss level on those loans, the minimum increased and spread to other banks especially with the news of the last week. Last week, H&R Block (HRB) filed suit against HSBC, their RAL bank, alleging that HSBC was trying to get out of their contract with HRB. HRB has not received any program information from HSBC which would allow it to begin planning for 2011. Then, SBTG announced that they would not be able to offer RALs in 2011. They are working to solve this problem and will offer RAC again this year. This announcement sent thousands of SBTG customers scrambling to find a new RAL bank. They found higher minimums which has forced most of the small offices out of the RAL business. Finally, River City, one of the few remaining banks, announced that they will not be accepting applications for the 2011 filing season after Friday October 29th and offices currently in the process of being approved have only to Nov 3rd to submit requested additional info. River City says they have over 2200 applications pending. This is a major change from prior years. I have gone to tax updates in December were the banks were still trying to sign up offices. I've seen application deadline but not before January. With RAL banks stopping their programs or limiting who they accept into their programs, thousands of tax firms are having to do a re-think on their 2011 season.
The general public is going to find it hard to get an advance on their Federal refund in 2011. The number of banks are severally limited and they have limited which offices will offer their RALs. And even if the taxpayer can find a tax preparer who can offer RALs, they need to know that there will be a greater chance of being rejected since the bank won't have the debt indicator. And they can expect to pay more for the service. The RAL industry is on life support with a DNR order. Had I done RALs last year, I would be contacting those clients and warning them not to count on a one day wait for their refund.