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Anticipating Refund Anticipation Loans

posted by Katie Porter

I've clearly become predictable in my posts, as someone recently wrote to me wondering where is my annual tax-time rant against refund anticipation loans (RALs). In fact, I have written about them twice before on Credit Slips, here and here. But I think this annual lending "opportunity" deserves another round of criticism; this is a bad product that just won't seem to die. The number of RALs held fairly steady between 2006 and 2007, around 9 million loans.

RALS are 1 to 2 week loans administered by tax preparers and banks working together. The loans are secured by the taxpayer's expected refund.  In their new report on RALS, the National Consumer Law Center and the Consumer Federation of America find that a typical RAL is about $3,000 and carries an APR of 77% to 140%. While the high APR for a RAL makes it similar to other short-term loans such as payday loans, there are some unique justifications for regulating or discouraging RALs that go beyond the high price paid by consumers.

First, about 2/3rds (63%) of RAL borrowers receive the Earned Income Tax Credit. Such taxpayers are only 17% of the entire population. The beneficial purpose of the Earned Income Tax Credit, which is funded by all of our tax dollars, is diluted when borrowers pay a chunk of their credit to banks and tax preparers for an RAL. Second, consumers taking out RALs appear to misunderstand their ability to access their tax refund quickly. A survey by the Treasury Inspector General for the IRS found that 85% of RAL taxpayers were willing to wait up to 9 days to receive their refund. Yet, if taxpayers e-file and use direct deposit, the average IRS processing time is 10 days. Third, RALs appear to increase tax noncompliance, probably because they incentivize preparers to inflate refunds. The IRS has determined that RAL users are 27-36% more likely to be noncompliant than non-RAL taxpayers.

States have tried to regulate RALs but faced preemption battles. In 2008, the Second Circuit invalidated a Connecticut statute that prohibited tax preparers from facilitating RALs with APRs that exceeded 60%. Federal legislation seems to be the only option for limiting RAL fees. If Senator's Durbins bill proposing a 36 percent cap on consumer lending becomes law, I may have to find a new way to mark the arrival of spring than a post on RALs!



One way to minimize abuse would be to reform the tax preparation system. Most taxpayers get substantially all their income from wages and bank deposits.

Both these sources send statements to the IRS. It would be simple for the IRS to prepare returns for these people and send them a copy already filled out. If everything was correct they would only need to sign it and return it. Otherwise they could revise it (say with special deductions) and return it for a recalculation.

Using the internet as an option this back and forth could be almost instantaneous if desired. Since the IRS already had all the information on the form it sent for approval, once the signature is received (via mail or online proxy) the refund could be deposited in the person's bank account or the check mailed immediately.

The tax prep scam is just another instance of the government turning over a function that it could provide for free to someone who gets to make a buck off it and adds no real value to the transaction.

What happened to the conservative insistence that services should be privatized because they would be cheaper and more efficient? That turned out to be another myth.

Robert's proposal is exactly how it works in Denmark, by the way.

Ya what pruf stan said...... I think? RALs and Bankruptcies don't mix. I hate it when debtors get those. Uhhh Rals are loans... Hello? You need BK courts permission.....

We all know that tax refund loan or refund anticipation loan(RAL) are getting more populay nowadays. These are loans made by your tax prepares against tax refund. If this personal loans are planned very well then this may result in good terms. But if your refund gets rejected by the IRS, then you have to pay it all back, plus staggering interest. And you will be needing your personal bank account if you want a direct deposited. However, the high interest rates draws a lot of criticism of tax refund loans, and the IRS is firmly committed to not getting involved.

Raivo Pommer
[email protected]


Die Kapitalabflüsse gestalteten sich in der Branche in Europa und den Vereinigten Staaten allerdings sehr unterschiedlich: Während amerikanische Hedge-Fonds in großem Umfang juristische Sperren nutzten, die eine sofortige Rückzahlung von Anlagegeld an die Kunden beschränkten oder hinauszögerten (Gates), ist dies bei europäischen Hedge-Fonds weniger üblich. Auch gibt es in Europa mehr Dachfonds, in die Privatinvestoren investieren. Diese hatten die erste Kündigungswelle bei Hedge-Fonds im Herbst 2008 ausgelöst. Die Kapitalabflüsse aus Hedge-Fonds waren daher in der zweiten Jahreshälfte vor allem in Europa relativ hoch. Die Mittel europäischer Hedge-Fonds schrumpften nach Einschätzung von Morgan Stanley um 25 bis 30 Prozent.

In den Vereinigten Staaten beliefen sich die Mittelabflüsse zunächst „nur“ auf 15 bis 20 Prozent. Dies erklärt, warum der weltweite Verband der Hedge-Fonds, die Alternative Investment Management Association (AIMA), kürzlich bekanntgab, dass das Anlagekapital der 1200 bei der AIMA registrierten Mitglieder jetzt zum Großteil von institutionellen Investoren gehalten werde und nicht mehr von vermögenden Einzelpersonen, wie dies früher der Fall gewesen war.

I think they make you set up a separate account for the money. One only the tax preparer can access. They make you pay to set up that account that you can't access and charge you an arm and a leg for the preparation and interest on the loan. WAIT THE 2 WEEKS! IRS direct deposits the refund anyway. My boss always tells our clients, "Don't count and plan to use your refund". Let it be a surprise. In other words, when doing your budget, leave the refund out of your Budget calculations. If you do that you won't "need" a RAL! Plus our 13 clients can't get one anyway. IT'S A LOAN! You can tell we get a ton of calls like that this time of year.

Raivo Pommer
[email protected]

EnBW Krise

Nach der Empörung über Millionen-Zahlungen an Ex-Manager unter anderem bei der Post sorgt auch der frühere EnBW-Chef Utz Claassen mit einer Pensionsklage für Aufsehen.

Der 45-Jährige verklagt seinen früheren Arbeitgeber, der die Zahlungen seines Übergangsgeldes zum Dezember 2008 eingestellt hatte. Claassen arbeite seit seinem Abschied von dem Stromkonzern für den Finanzinvestor Cerberus, erklärte ein Sprecher der EnBW am Donnerstag. Mit Aufnahme dieser Tätigkeit sei "der Grund für die Zahlung des Übergangsgelds entfallen", bestätigte er einen Bericht der "Financial Times Deutschland". Claassen habe der EnBW zudem noch keine konkreten Angaben über die Höhe seiner derzeitigen Vergütung gemacht. Der Manager hatte die EnBW nach vierjähriger Amtszeit zum Oktober 2007 verlassen.

Dagegen sagte der Anwalt Claassens, Klaus Menge, sein Mandant erhalte als selbstständiger Unternehmensberater lediglich Honorare. Laut Dienstvertrag mit der EnBW würden die Zahlungen allerdings erst eingestellt, sobald Claassen ein "Gehalt, Tantiemen oder Ruhegehalt bezieht oder das Gehalt einen bestimmten Betrag übersteigt", sagte der Jurist der Deutschen Presse-Agentur dpa. "Von Einkünften ist in dem Werk nicht die Rede", sagte Menge. Außerdem habe die EnBW kein Recht auf Einsicht in die finanzielle Situation Claassens. Nach seinen Einkünften habe sie vor der Einstellung der Zahlungen nicht konkret gefragt.

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