Death of tax-refund loans spurs search for successor products
WASHINGTON — The tax-refund loan, once a profit source for banks and tax-preparation companies, is vanishing under pressure from federal bank regulators and consumer advocates. Tax filers’ need for quick cash hasn’t eroded, and the companies are looking for ways to capitalize on that market.
Companies including H&R Block Inc., the nation’s largest tax-preparation chain, are turning to so-called refund-anticipation checks that let taxpayers without bank accounts take advantage of the speed of directly deposited tax refunds through an account established for the payment.
“There’s always going to be demand, and I believe someone’s going to come up with a product,” said John Hewitt, the president, CEO and chairman of Liberty Tax Service Inc., a Virginia Beach, Va.-based tax-preparation company. Liberty will offer loans to tax filers in at least six states with consumer- finance laws that allow it.
The shift away from tax-refund loans has occurred over the past few years. The Internal Revenue Service stopped telling tax preparers and banks whether refunds would be siphoned off to cover other debts. Bank regulators at the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency questioned whether refund loans were a safe product for banks and if they adequately protected consumers.
The shrinking of the refund-loan industry culminated Dec. 8 when Republic Bancorp Inc., the last bank company to finance refund loans, announced a settlement agreement with the FDIC. London-based HSBC Holdings and New York-based JPMorgan Chase & Co. had previously exited the business.
Under the settlement, Republic agreed to stop providing refund-anticipation loans after the 2012 tax season, pay a $900,000 penalty, drop litigation against the FDIC and submit to supervision of its tax-refund business.
Republic, which provides loans for Jackson Hewitt Tax Service Inc. and Liberty Tax, in 2010 earned $44.2 million, or 69 percent of its net income, from its tax business.
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Wu said payday lenders and other companies may fill the void left by the end of refund anticipation loans, known as RALs. “While RALs made by banks are gone, tax-time financial products aren't gone,” she said, adding that her group is examining
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