Debt Indicator Controversy
Mark Ernst was clear in his May 6th speech at CERCA (Council for Electronic Revenue Communication Advancement) that he intends to revisit the debt indicator. According to Ernst,
The Debt Indicator as it is currently delivered is a public good – meaning the IRS provides this information so that consumers can get an advantage they wouldn’t be able to get otherwise. In as much as the DI is the primary underwriting tool, that advantage should really come in the form of lower prices. But in fact prices are higher for RALs today than they were when the DI didn’t exist. That suggests that the entire value of the DI is going to industry participants and none is going to consumers when, arguably, all of its value should go to consumers.
Ernst is laying out the motive for provision of the debt indicator in the framework of a public good. I don’t think he means to have co-0pted a famous term in economics. The debt indicator is neither “non-excludable” or non-rivalrous. People can easily be prevented from using the debt indicator. Moreover, my consumption of a debt indicator query does not eliminate the need for another tax preparer to use the debt indicator again for a different tax filer.
But I have digress.
The main point is that the CERCA address should have the RAL industry’s attention. In 1994, when the IRS ceased to provide information on outstanding tax obligations of RAL applicants, RAL volume dropped from 9.5 million returns to just 6 million. Two major RAL providers, Mellon Bank and Greenwood Bank, exited the market entirely.
The IRS resurrected the practice under a new name – the debt indicator – in 2000. Immediately, RAL demand soared to 10.5 million in 2000 and 12.7 million by 2002. I think it is fair to say that the debt indicator is an example of public intervention that enhances private fortune.
Ernst’s observation is that presence of the debt indicator has not lowered the cost to consumers. The National Consumer Law Center has published an excellent review of the changes in RAL pricing.
Eliminating the debt indicator did more than just reduce the use of RALs. In California, the Attorney General noted that it cut down on tax fraud. In 2005, IRS Taxpayer Advocate Nina Olson testified before Congress that 85 percent of fraudulent tax returns came with a refund loan.
Bank after bank is dropping its RAL program. This year, Chase voluntarily announced its intention to cease RALs. The OCC made Pacific Capital drop out. There were ten RAL providers in 2000.
Filed under: Refund Anticipation Loans | Tags: debt indicator, IRS, Mark Ernst
samsondoggie
May 27, 2010
Joe —
Maybe there is an important distinction between your calculation and our calculation. We're factoring in what the consumer experiences. RALs come with add-in fees. That's part of the problem – the consumer gets dinged by the tax preparer once the RAL account has been established. I know that the banks don't get all of that RAL money. Mo' Money, for instance, was charging a technology fee and an e-file fee on top of the RAL interest that Chase charged. Sure, the RAL is only 36 percent from the bank's perspective, but it is much higher from the consumer's perspective.
Bank Talk gets about 1000 hits a day.
Michael De Los Santos
May 27, 2010
Joe,
Stop just looking at it from a bank's perspective and their bottom line. The key here is how it affects consumers. With all the fees added on by the tax preparers the 36% is negated, therefore more money being lost by the consumer that has no bearing at all on what the bank gets.
I guess as long as you get yours that's all that matters right? Who cares about the people you are supposed to be serving. I don't know you, but you sound like a classic bank guy.
Joe Sica
May 27, 2010
HA… I'm not classic anybody really… But you are correct! Its what benefits the consumer/taxpayer that counts the most. And it seems we agree that the cost of credit itself is fair. At less than $2.50 per $100 loaned for a short term period I would be hard pressed to get those terms from any of my credit sources. How about you? Then fees are your concern….Again, we agree. "Two years" ago I brought up ancilary fees as a concern directly to Nina, then David Williams and finally asked Senate Banking staff to ask GAO to do a study on them. I hawked a bill in congress for, at minimum, full disclosure "up front" so the taxpayer was empowered. Seems RALs are to complex to understand and simply robbing taxpayers, many who really need the money, by banning them is an easier solution. There ARE ways to combat out of control ancilary fees … and we are working on that.
Joe Sica
May 27, 2010
So no, its not that I just get mine, really. I've been a RAL reform advocate for years before you guys discovered them. Only I have been shocked by the resistance to change in and out of government – as if kicking them around rather then fixing any issues is a good vote getter, or maybe a nice issue for consumer groups to latch on to and/or yes, a fair amount industry greed. RAL pricing is pretty much contained…. and next fees will be severely curtailed … Beyond that the IRS really then needs to collect the industry fee data itself (and real time like banks already do) to analyze any abuse areas… And finally – taxpayers who need their money quickly can get it fairly with a bank product until IRS delivers refunds more efficiently. Unless all you can see is to ban them, I don't think we are far apart… again, I guess collectively finding solutions isn't fashionable. I'm always available to talk open and honestly….else my mother would be ashamed of me. Joe
samsondoggie
May 27, 2010
Joe —
You know, I agree with you that there is a pressing problem with how some tax payers are going to settle the costs of their tax preparation. If the IRS is going to change the debt indicator, then they should probably do it as soon as possible. It is a very important point and it is very relevant to any conversation about RALs right now.
I'd also concede that Block is going to have a very powerful advantage in the market going forward.
Is 36 percent fair? It is legal, I'll give you that.
About Bank Talk – it looks to me like Bank Talk is about four to five times more popular than Pacific Capital's web site. We're ranked 123,000 in US sites, whereas PCBC is about 460,000th. So in terms of a place for getting out a message, this is the forum.
Joe Sica
May 27, 2010
With a customer's consent, the IRS releases tax transcripts to a mortgage lender. The transcripts are an important part to underwriting the loan (else why ask for them). With a customer's consent the DI provides the same function for RALs. How then does the government decide who it wants to help or not? Or should it be preoccupied with making sure the customer is "aware" of the transaction they are entering into? Without the DI, counter to where they just got to, costs will increase. Without RALs the need doesn't evaporate. "Someone" will offer a product to fill that need – and it probably will proliferate in an unregulated environment. So, would government just be turning a blinds eye in driving RALs out? How does any of that help the taxpayer in need? RALs are in a highly regulated area now where regulators get to …well, regulate them. Why chance going underground?
Joe Sica
May 27, 2010
And if RALs evaporated and there was only a RAC type of world, what incentive would banks have to guard the tax system as they do now? In protecting their loans, the banks employ sophisticated screens and staff dedicated to finding fruad. The banks return tens of millions in suspect fraud refunds to the IRS annualy. Thats not going to happen when there is no loan to protect. There is so much win, win, win that doesn't get discussed. Again, lets talk about solutions that empower the taxpayer…and then, let them make the choice not you or I…. and I hear you on Pacific's website…Too funny… scary actually.
samsondoggie
May 28, 2010
That's an interesting point. Maybe the banks do stop some fraud. Certainly, they also experience losses, too.
The pressing question is what is the IRS going to do next.
Thanks for sharing the humor on web traffic!