You are here

Bait and Switch on Refund Anticipation Loans

Adam Rust's picture

Posted February 18, 2013

In most banking contexts, bait-and-switch tricks involve a last-minute surprise that increases the cost of borrowing. But in a development that turns bait-and-switch on its head, this year some chains are advertising the availability of loans that they will not always offer.

Following a successful effort by the FDIC to eliminate bank refund anticipation loan origination, some of the national preparers have come out with replacements to the traditional refund anticipation loan. It is no accident that in each case, the money

comes from a non-bank financial institution: the FDIC cannot touch a non-bank.

While non-bank status confers more freedom from regulatory enforcement, it also makes it much harder to access large sums of money. Making RALs is a liquidity game. In RAL 1.0, banks accessed brokered deposits in order to cash flow hundreds of millions of dollars in short-term advances during the peak RAL season from the middle of January to the end of February.

Things are different with RAL 2.0. Without those brokered deposits, the T1 line of refund money shrinks to the throughput of a 64K modem. The math is daunting. Imagine a non-bank with access to $50 million whose RAL funding calls for a maximum advance of $1,000. In that context, such an entity can only issue loans to 50,000 filers.

Nonetheless, $50 million or $100 million is not that much. Block is not offering loans of any kind, but they did a few years back and those numbers are useful as a point of comparison when trying to make sense of a number like $100 million. In 2007, Block entered into a $3 billion line of credit with HSBC to fund "RAL participations." Overall, consumers were buying millions of these loans every year during most of the previous decade. The fact that demand was gradually shifting from loans to checks did suggest that consumers were wising up to these products, but even when you extrapolate for less volume the likelihood is that overall demand might exceed 2 million loans.

In the face of that demand, there is plenty of evidence that the RAL 2.0 alternatives are difficult to qualify for. Some of these loans are actually being vetted by preparers that run credit with the expectations that applicants will come back with scores above 700.

For the preparer, the benefit is to drive traffic into a store. Given that the loan application process can only take place after the return has been filed, the opportunity is ripe for the taking.

Is it a classic bait-and-switch? Yes and no. On a literal level, the language in most of the ads includes some reference to the fact that a person has to apply for a loan. No one could really argue that a loan was advertised as a sure-fire opportunity. However, such language has been around for a while. In RAL 1.0, it was also possible to be turned down - usually because the debt indicator flagged a return. The difference here is in the actual chance. In RAL 2.0, getting a loan is at best a possibility. The downside to that is in the pricing of tax prep. In a market where only a few are offering a loan, the ones that do can exert more pricing power over consumers.