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Fewer Ripoffs at Tax Time as Feds Squash "Refund Anticipation Loans"

David Callahan

Regulation is such a dirty word these days that it's easy to forget what a big difference it can make in the lives of ordinary people.

Take, for instance, the Federal government's successful push to ban refund anticipation loans.

It's hard to keep up with all the ways that the financial industry rips off Americans, so maybe you haven't heard of this particular "product." Here's how a refund anticipation loan (RAL) works: Let's say that, thanks to the Earned Income Tax Credit, you're due a sizeable refund from the IRS come tax time. You're poor and strapped, so you want this money now, not later. So, as of just recently, you could walk into an H&R Block or a bank and get an RAL.

The only catch is that the fees and interests rates were outrageously high -- in some cases translating into an APR of 150 percent a year. Who was most likely to pay through the nose in this fashion? Well, as The Consumerist has reported:

The fee-laden, high-interest loans have often been accused of being marketed to the people who need their refund the most. According to the IRS data, 92% of taxpayers who applied for a RAL in 2010 were low-income, and two-thirds (66%) were recipients of the Earned Income Tax Credit.

With the rise of RALs, tens of millions of dollars began flowing out of the pockets of the poorest people into America and into the coffers of the financial industry, a phenomenon that anti-poverty advocates call "asset-stripping."

The Center for Responsible Lending reported last year that "Consumers paid an estimated $606 million in RAL fees in 2009 to get quick cash for their refunds—essentially borrowing their own money, sometimes at extremely high interest rates."

Refund anticipation loans constituted a phenomenal gravy train for the well-off at the expense of the working poor, minting multimillion dollar fortunes in some cases -- as Gary Rivlin documented in Mother Jones and in his deeply disturbing book, Broke USA. RALs are just one example of a whole industry Rivlin spotlighted that exploits the working poor -- in yet another instance of how free enterprise can keep people down just as it can lift them up.

But this year will be the last tax season in which mainstream financial institutions offer RALs, according to the National Consumer Law Center. Why? Because government fought against this insidious practice and largely won (for now, anyway.)

State authorities started fighting RALs in the Bush years, with California Attorney General Jerry Brown suing H&R Block. Arkansas, North Carolina, New Jersey, New York and other states also began to go after RALs. Then, under Obama, federal agencies -- prodded by advocates -- came out swinging against RALs. As the Center for Responsible Lending reported last year:

  • The IRS eliminated the Debt Indicator, a service that helped tax preparers and banks make RALs by indicating whether a refund would be intercepted for certain debts.
  • JPMorgan Chase, one of the three largest RAL lenders, exited the market voluntarily.
  • The Office of Thrift Supervision prohibited MetaBank, a potential new entrant into the RAL market, from making the loans.
  • The Office of Comptroller issued a regulatory directive against HSBC (H&R Block’s RAL partner bank) prohibiting it from making RALs.
  • The FDIC notified the RAL-lending banks that it regulates that the making of RALs without the Debt Indicator is “unsafe and unsound.”

Experts are predicting that smaller operators will fill the void as banks get out of RALs. That is sure to be the case. Squeezing the poor is "big business," in Gary Rivlin's words, and that business won't fade anytime soon. But it's not as easy to make money off the most vulnerable as it used to be, and the new Consumer Financial Protection Bureau is going to throw up even more roadblocks.

So, even if you didn't get a refund this tax season, the demise of the RAL is a reason to feel good.