One of the most popular services available surrounding tax season is also one of the most expensive. Refund anticipation loans (RALs) are great products from a lender’s point of view; they are low risk and they are expensive. From a customer’s point of view, they provide a means to get cash when a household files its tax return rather than waiting for a check from the IRS. Tax preparation services like those offered by H&R Block sell these expensive loans in partnership with banks and other lending institutions. Since most customers who use these products need cash right away, they seem to be more willing to pay the high fees associated with these loans.
With the IRS sending direct deposits faster than ever, one might wonder why these products, and their cousins, the refund anticipation checks, are so popular. Millions of Americans simply don’t have bank accounts. Living paycheck-to-paycheck, these families see little need to store their money somewhere safe because they don’t have much to store in the first place. I am still amazed that 40% of H&R Block’s clients used these products last year, though, considering the high fees. I consider refund anticipation loans one of the worst forms of debt, second only to payday loans.
While I understand the function of thees products in the marketplace, I don’t like the concept of charging someone in a difficult financial situation to borrow his or her own money — and charging the borrower a high fee from an annual interest rate perspective. In a perfect world, no one would be living paycheck-to-paycheck, unable to make the rent or mortgage payment, and one step away from homelessness. Unfortunately the reality is that many households are facing these troubles.
In 2011, H&R Block will not be offering refund anticipation loans. A federal regulatory agency, the Office of the Comptroller of the Currency (OCC) has barred HSBC from offering these products. HSBC was H&R Block’s exclusive partner for refund anticipation loans. The customers who would be interested in these products will be directed to refund anticipation checks as a similar alternative, although it doesn’t provide the cash as quickly as a loan.
HSBC is not the only bank offering refund anticipation loans, and I am unsure why the OCC has singled out this one bank. If the bank was handling the sales of these loans in a reputable manner, the regulation should be applied consistently across all institutions. For H&R Block, these loans provided a significant portion of revenue, $130 million in 2010. Earlier this year, when HSBC was considering on its own not offering the refund anticipation loans to H&R Block, the tax return agency sued the bank.
Unless the situation changes, competitors like Jackson Hewitt will still be able to offer this product to their customers. TurboTax does not offer refund anticipation loans.
Updated January 19, 2017 and originally published December 31, 2010.