Adventures in Taxland: RAL's

Next year RAL’s will be a thing of the past. I will not be sorry to see them go.

RAL stands for Refund Anticipation Loan. This was a product that tax preparation services offered to clients who were getting a refund from the IRS. It was basically a short term loan given in anticipation that you would be receiving a refund in a couple of weeks. You sign over your refund to a bank, along with some fees and interest, and the bank gives you a (very) short term loan. Because the fees are amortized over a very short time period, these loans have a very high effective interest rate. Consumer advocates hate’em. But consumer advocates appear to hate all bank fees and interest. I’m sure that they all take Ben Franklin’s advice, and neither a lender or a borrower be.

No cash trades hands on the front end, because the bank takes its fees and interest when the refund comes in, before forwarding the balance on to the client. So this type of bank product has a certain appeal to some kind of people. Mostly people who are broke. Especially people who are broke, and are getting a big slug of the government’s cash. After all, it’s not their money that is paying the bank fee, it’s the government’s money.

The tricky thing about giving out a loan secured by your tax refund is that you don’t always get the full refund. If you owe the IRS money from previous years, or back child support, the IRS takes that out of your potential refund. In those cases, it turns out the bank has made an unsecured loan to someone whose minutes on their burner cell phone are about to run out. Good luck setting up a payment schedule, Mr. Banker man!

The average Refund Anticipation Loan (RAL) was about $3000. The fee was about $30. So if 1% of these loans went south, it turns into a money losing proposition for the bank. In the past, the IRS attached a flag to the taxpayer’s computer file called a debt indicator. When you electronically filed the return, the bank would see the debt indicator, and decline to make the loan. So the risks were manageable for the bank.

Last year the IRS stopped putting the debt indicator on the files, causing the banks’ risks to skyrocket. All but one bank responded to the changed situation by dropping the RAL product line. That bank had a contract with a tax preparation service that competes with the one I work for, and they have announced that they will exit the RAL business when their contract ends this year.

So the RAL is dead, which brings me back to my starting point. Although no one would accuse me of being a consumer advocate, I didn’t like the idea of the RAL. Who couldn’t wait three weeks to get their refund? More to the point, processing the paperwork was time consuming, and I wasn’t compensated for it. IRS regulations prevented paid preparers from getting a commission on RAL’s, because it was a conflict of interest.

And, in the last two years, it turns out that almost nobody really did need the money three weeks sooner. Clients ask if they can get their money sooner, and when told we don’t offer that product anymore, the response is always “Oh. Okay.” We were offering RAL’s because the other guy was offering RAL’s, not because our clients needed the product.

But some clients really wanted the product. They went into it with their eyes open. This is the way the conversation would go:
Me: “Now you understand, if you are willing to wait just a couple of week, it will save you $30, plus the interest charges, right.”
Client: “Yeah. I still want to get the money sooner.”
Me: “Okay, it’s your choice. Please sign here.”

My clients may be better off without the ability to make that choice. But isn’t having choices, for good or ill, part of the nature of liberty?