• Small chains, such as Mo’ Money Taxes and Instant Taxes, appear to be embroiled in controversy over RAL/RAC checks that have allegedly bounced or not been honored, as well as other problems. In addition, the Arkansas Attorney General obtained a settlement in its case against Mo’ Money Taxes over alleged violation of the Arkansas RAL Act and the Arkansas Deceptive Trade Practices Act.

In , the FDIC reached a settlement with Republic in which the bank agreed to cease making RALs after , and to pay a $900,000 civil penalty

Refund anticipation loans (RALs) are loans secured by and repaid directly from the proceeds of a consumer’s tax refund from the Internal Revenue Service (IRS). Because RALs are usually made for a duration of about seven to fourteen days (the difference between when the RAL is made and when it is repaid by deposit of the taxpayer’s refund), fees for these loans can translate into triple digit annual percentage rates (APRs).

RAL lenders and preparers targeted the working poor, especially those who receive the Earned Income Tax Credit (EITC), a refundable credit intended to boost low-wage workers out of poverty

Historically, RALs drained hundreds of millions of dollars from the pockets of consumers and the U.S. Treasury. The EITC is the largest federal anti-poverty program, providing nearly $57 billion to over twenty-five million families in 2010.

This report updates the NCLC/CFA annual reports on the RAL industry and the drain caused by RALs from tax refunds and EITC benefits. Those interested in background information on the industry and regulation should refer to the first NCLC/CFA RAL Report published in . In addition to our yearly reports, we have issued special reports on the IRS Debt Indicator, “pay stub” RALs, a rebuttal of industry-funded RAL studies, RALs and fringe tax preparers, and three reports regarding mystery shopper testing of RAL providers.

During the past few years, there have been a number of major developments in the RAL industry. The three biggest banks in RAL lending – JPMorgan Chase, HSBC and Santa Barbara Bank & Trust – had left or were forced out of the business by . As a result of these actions, there were only three small, state-chartered banks making RALs in 2011– Republic Bank & Trust, River City Bank and Ohio Valley Bank, all based in Louisville, Kentucky.

In , the FDIC notified these banks that the practice of originating RALs without the benefit of the IRS Debt Indicator was unsafe and unsound. Republic appealed the decision to an administrative law judge, and sued the FDIC in federal court. In ended complaint that detailed widespread legal violations in Republic’s RAL program and proposed a $2 million civil penalty.

Even with the end of RALs, low-income taxpayers still remain vulnerable to profiteering. Tax preparers and banks continue to offer a related product – refund anticipation checks (RACs) – which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee, as discussed in Section I.G below. Some preparers are exploring partnering with non-bank fringe lenders to make RALs, discussed in Sections II.C and II.F below. Finally, the reforms that have signaled the end of RAL lending have been issued by the IRS and banking regulators. With different regulators, these decisions could be easily reversed.

RAL volume had already been atic changes top cash advance Vermont in the industry discussed above. The latest available IRS data indicates that RAL volume dropped significantly from 2009 to 2010, by about 30%. This follows a 14% drop from 2008 to 2009. About one in twenty taxpayers applied for a RAL in 2010.