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Return of the RAL

posted by Katie Porter

Shutterstock_271430072It's tax time, and here comes another Porter blog post about refund anticipation loans (RALs). I've written several times before about RALs, but was given a reprieve the last few years by changes in policy that made them nearly extinct. (See here for Slipster Nathalie Martin's post on that development in 2011).

But RALs are proving as hard to kill as a zombie--or as difficult as effectively regulating payday loans, as scholars from JJ White to Chris Peterson to Nathalie Martin have noted. RALs are back and "free." Or that is the pitch, as Kevin Wack reports in the American Banker (subscription req'd.) The new RALs work like this: the lending bank charges a fee of $35 or so for each approved loan to the tax preparers. The preparers are forbidden by contract from passing that cost along to borrowers. Hence, the loan is free to consumers. There is no fee and no interest charged. But of course nothing stops the tax preparer from raising fees across the board or for certain kinds of taxpayers who are most likely to pursue an RAL--such as those receiving an earned income tax credit. The consumer groups have pushed back. They note that tax preparation fees are often opaque already and consumers do not receive a final cost until the end making it difficult to be sure that preparers are hewing to their promises to not pass along RAL fees charged by lenders.

It'll be interesting to see if RALs regain a big hold in the marketplace. In the early 2000s, over 10 million taxpayers paid to get their own money back sooner. In the last few years, that number had dropped to about 30,000. While one would think that direct deposit, efile services, and computer tax software would all be pushing against the RAL market making a comeback, I predict RAL numbers are back in the millions by 2020 unless regulators change course again.

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