Federal regulators have driven the banks from the RAL market. Only Republic Bank remains and this is its last season under an agreement with the Federal Insurance Deposit Corp. That body state to impose a civil money penalty of $2 million on Republic, claiming that lacking the debt indicator that the Internal Revenue Service once provided, continuing to offer RALs was an unsound banking practice. The FDIC reduced the penalty to $900,000 and agreed to let Republic continue for another year with a bevy of rules in place for the bank and electronic return originators. The move has left major players, particularly H&R Block, without any RALs while Jackson Hewitt had them in only half the states last year and this year.
Perhaps the first to publicize the move to consumer lending was TaxWorks, marketed by RedGear Technologies. That Kaysville, Utah-based operation placed information on its website last year that it would provide the Tax Season Cash Advance through the Schear Lending Group and Atlas Financial Services. RedGear is providing cash advance loans to customers who expect federal income tax refunds. Loans of $1,000, $1,250 or $1,500 were to be available depending on the refund amount and state. Fees were to start at $43. EROs needed to be approved by Citizens Bank or New Capital Bank to be eligible to participate.
However, Liberty, based in Newport News, Va., was probably the first to offer consumer loans. It started with a quiet test in Ohio and Texas in 2011 and has expanded that to Louisiana, Washington, Michigan, Arizona and Missouri for the current tax season. Hewitt expects his company to offer the program in 25 states in 2013. Hewitt is tight-lipped about the program and about plans for other bank products because of non-disclosure agreements; although he said there would probably be something new on the market in March.
One of the big complaints about RALs was the interest rate. However, Hewitt said that was forced by banking regulations. He noted that in consumer loans fees are typically added in addition to the interest rates on principal. He pointed to mortgages in which borrowers pay points up front in addition to interest. Banking rules, however, forced those fees to be added to the interest rates. He noted in Ohio, a lender can charge a 4-percent fee plus18-percent interest on a consumer loan and with that combination "It's right about where the RAL is."
Among vendors in the market, CCH's Small Firm Services, with its TaxWise and ATX applications, still has RALs, as does Drake Software and TaxWorks. But with even Republic's RAL funding significantly cut last year, all are heavily marketing products as such refund anticipation checks (also known as direct deposit checks, assisted transfers), and nonloan distribution products that enable preparer fees to be withheld from refunds that included debit cards. For example, H&R Block said it would offer what it terms refund anticipation checks for free as it tries to regain market share. As with other programs of these typies, preparer fees can be deducted from the refund.
Shannon Bond, manager for the commercial tax segment for CCH SFS, says she believes many preparers "are not prepared for the reality that is going to hit when it goes away". On the other hand, there were preparers that didn't want the scrutiny that is required by the FDIC agreement with Republic bank, that includes monitoring of EROs, along with required training and inspection. Despite all these influences, demand for bank products was expected to drop by 1 percent last year, but instead demand was flat, Bond says.
CCH has introduced a product called 3Fund that is designed to speed refunds and pay preparers. The 3Fund refund can be received as a direct deposit, via a check or through on a Western Union MoneyWise prepaid MasterCard. CCH charges $29.95 for refund via check; $19.95 for direct deposit and $14.95 per refund on the debit card.