RAC and RAL

Two other types of predatory financial practices confronted me in my recent survey of my neighborhood (5.7 Lenders per Mile). The solution to these practices is the Foundation Communities Tax Assistance Centers, one of which is also found in my neighborhood. Here is a PDF of their flyer, please spread the news. These are Volunteer Income Tax Assistance Centers sponsored by the IRS and are an excellent volunteer opportunity, although you might be too late for this year since the training sessions for the volunteers occur well before the present tax preparation peak. VITA centers may be found using Google maps from the IRS website.

Avoidance of refund anticipation checks and refund anticipation loans by the above or other means is the best practice. And why, you ask, would someone want a RAC or RAL? The answer is that this is often the means of paying the fees for commercial tax preparation. Hence the value of the free tax assistance detailed above.

For an overview of RAC and RAL volume, I will pick on Jackson-Hewitt Tax Services, the new kid on the block, but found in every Wal-Mart to my knowledge. Note the declining volume, which is mostly a decline in RALs that I will discuss below.

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Here is a volume comparison to H&R Block, which has two brick and mortar locations in the 1.4 mile perimeter of my neighborhood that I surveyed in my earlier post. (I didn't include them in the 5.7 lenders per mile calculation, however.)

Explore more JTX Data at Wikinvest

Besides being a means of paying commercial tax preparation fees, the RAC is a way for a person with a low-income and typically without a bank account to get an IRS refund in two weeks or less by direct deposit instead of six weeks or more by a paper check from the US Treasury. The problem from the consumer's point of view is that the tax preparers typically charge about thirty dollars to set up this account, which automatically closes when the account balance is zero. If the account is emptied using a paper check from the tax preparer, there are check-cashing fees as well. The account may also be loaded onto a debit card that has usage fees. A major hope for curtailing these practices is a Department of the Treasury pilot program that issues refunds on Treasury debit cards. If someone receives their pay on a debit card, the Treasury will also load the refund onto that card.

RALs have been declining in volume because the US Comptroller of the Currency has stopped federally-chartered banks from providing the money that the tax preparers use to make these predatory loans. There are some state-chartered banks that are fronting this money, but they are much smaller financial institutions that have much less money available for this purpose. Combining the interest charged for the short-term loan with the fees for providing the RAL in cash or loading it onto a debit card with usage fees, the annual percentage rate for a RAL varies from about 40-400%. For much more detailed information, see the 2012 CFA/NCLC Refund Anticipation Loan Report by the National Consumer Law Center and the Consumer Federation of America.

The executive summary of a recent US Treasury report summarizes the characteristics of the people targeted by providers of RACs and RALs as "lower income, young adulthood, single head-of-household filing status, receipt of the Earned Income Tax Credit (EITC), and use of a paid preparer." The report also finds that "RALs and RACs are highly spatially concentrated and that living in the poorest communities is associated with dramatic increases in use of these products, even after controlling for a taxpayer’s income and filing status." Anyone who had any interest or dividend income, indicating that they had an account with a bank or credit union, "used RALs and RACs to a much smaller degree than did those with otherwise similar characteristics."