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There's no love lost between many CPAs and the providers of Refund Anticipation Loans with many accountants ranking RAL fees with loan sharking. But no matter your opinion on the virtues of such loans, this is not a great year for those organizations that provide them. And most of that stems from the forced exit of Santa Barbara Bank & Trust from the loan business after the Office of the Comptroller of the Currency refused to approve the bank's refund loan program.

The problems stem from the same problems that crippled the mortgage markets. Santa Barbara, a subsidiary of Pacific Capital, previously collateralized about a third of its RALs, about $2.2 billion last year. By selling those RALs, the bank were removed them from its balance sheet. However, unable to collateralize them in 2009 because of the economy, the bank was forced into more traditional borrowing, putting those loans on its books which in turn hurt the ratios is it required to meet, which led to the regulatory action.

But it isn't just the loan problems that have hit the RAL market. Earlier this month, Liberty Tax CEO John Hewitt said that the Internal Revenue Service was approving about 55 percent of RALs, down from typical levels of 75 percent each year. That will probably lead to higher loan loss reserves for lending institutions and is not going to encourage new players to enter the market..

There's a shortage of banks, illustrated by Hewitt's unsuccessful attempt late in 2009 to buy one and his statement that everyone is looking for the next bank to enter the RAL market.

Add to that an expected drop in number of returns filed, stemming from those whose incomes have fallen enough they don't have to file and those who decided not to file. That means less return volume to spread around. And Liberty executives noted that taxpayers who can't get loans are not going to be a source of referrals.

This season is going to be hard on some. Jackson Hewitt turned to Republic Bank, but was only able to get backing for 50 percent of its anticipated loan volume. It also received $44 million in technology and marketing fees from Santa Barbara last year.  Put lower RAL approval rates on top of that and Jackson Hewitt and probably some independents have some ground to make up.

Meanwhile, John Hewitt said fees charged on RALs this year have fallen significantly "are not quite so onerous". And for RAL supporters, that would be beneficial because the political pressure on the RAL business is likely to remain, as evidenced by the greater IRS scrutiny, which is just going to make the fundamentals of the loan business even tougher for 2010.

 

 

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