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Let's Talk about What is Wrong with the Free RAL Model

Adam Rust's picture

Posted February 22, 2016

At first blush, it sounds like the new no-cost RAL model should be seen as a positive development. After all, who doesn't like free? There were many problems with the old refund anticipation model and not the least of those issues was the cost. It allowed banks to become the leading beneficiaries of the Earned Income Credit. In the end, the RAL was one more example of the poor paying more.  

But now things are different. Non-banks and banks alike are engaged in offering a product with no explicitly-stated cost. In fact, there are safeguards written into contracts which state that preparers may not charge for the loan, nor may they increase costs paid by consumers for their prep fee costs. 

It is easy to understand why someone would use the service. It costs nothing, and a portion of the refund comes back in a few days. 

But that sense of a free pass doesn't hold up to further scrutiny.  

The cost of the free loan is paid for through higher tax preparation fees. True, no one will see their preparation fees go up because they have chosen the "tax refund related loan." But that is a ruse. What it means is that everyone's preparation costs go up in the form of higher service bureau fees. 

The preparation companies tell the consumer that the loan is free. But the service bureaus market these loans with an entirely different message. In their pitch, they describe the loans as a way to increase revenues through tricky pricing. Consider this pitch from one service bureau:

Increase your own prep fee: Here's how... We charge a small $44 service bureau fee that is deducted directly from the taxpayer's return for each bank product you file.  With our free bank products, we're confident that even after this fee, your clients will save an average of $20 to $60 per return when compared to your current software provider's bank product fees, state bank fees, transmission fees, technology fees, and other junk fees. This is money you can stick directly into your own pocket by increasing your own prep fee $20 to $60 per return, while keeping the overall cost to the client the same as last year.  If you do 100 returns, that's an extra $2,000 to $6,000 in you your pocket this season.  Wouldn't you like more breathing room to increase your own prep fee?...

Wouldn't you rather recoup that money for yourself? If you're able to save your clients $20 to $60 in fees, this means you can increase your own prep fee by $20 to $60 without increasing the cost to your clients.  We can even show you how to add your own transmission, technology, and e-file fees on the price sheet - money that will go directly to you instead of the bank.  Your clients won't see any increase in price, but you'll earn additional revenue.  If you do 100 returns, you are effectively sticking an extra
$2,000 to $6,000 in your pocket.

There it is in black and white.

Combine that practice with the fact that a fair share of applicants are turned down for the loan and the deception increases one more degree. Lots of people are seeking out preparers precisely because they offer a refund. But only about 4 in 5 filers are approved. But just as the preparer doesn't increase the cost if you get a loan, neither does the preparer lower the cost of preparation when the application is denied. As a result, hundreds of thousands of people are going to pay extra in hidden tax prep fees for a product that they won't receive.

In the last week, numerous people have written comments on this blog, expressing their frustration after they were turned down for a "tax refund related loan." 

YEAH THEY DENY LOANS ALREADY 20% of the people have received denial like myself been going to Jackson Hewitt forever never again. Promised 689 dollar advance left office got denied what's that say about Jackson Hewitt and over 20% off the customers being fooled.

I was denied the 750 dollars advance in less than 1 hr with Jackson hewitt. Never been denied in the past. 

I agree I too will not be using them after this year. I have never had to wait this long for tax return and I am in desperate need of it this year. I gave them a chance because a friend recommended them, but they charged me a huge amount to do simple taxes and charged me to have it direct deposited into my account I will never do that again.

I was denied the 750.00 advance within 1 hour of filing my taxes at Liberty tax they say lots of people are denied.

Is this a good product? Is this a fair system? Is this a process that is free of deception? 

Free RAL Explanation to Service Bureaus Small.pdf