Now marketed as free advances, the new products differ from those of the past in several ways. The pre-2011 version was easily labeled as high-cost and as a risk to the safety and soundness of the banks who originated them. The new model is built upon opaque pricing. Banks are participating, but they are doing so with competition from a variety of non-banks.
The new loans are described as free to the consumer. In the new model, the bank product's fees are placed upon the tax preparer. But is there such a thing is a free loan? Are preparers going to do the extra work required to process and disburse these loans without any compensation? Perhaps. But I have heard from several preparers who reject this claim. They contend that it is inevitable that their costs will be passed on to consumers through higher preparation fees.
Second, the size of the advance is much lower. Consumers are not going to be able to receive more than $750.
Most of the players who once originated or facilitated refund anticipation loans are now offering new iterations. Here are a few examples:
Jackson Hewitt/1st Money Center. Jackson Hewitt's Refund Advance can be for either $600 or $750, depending upon results from their vetting process. The funds come from Texas-based 1st Money Center. On the Tom Joyner Morning Show, Jackson Hewitt's Chief Marketing Officer said "Up to $750 refund advance. It is a no fee, 0% interest, 0% APR loan. It allows you, beginning today, get your taxes out of the way, because we’ve got high approval rates, you’ll be able to walk out with $750 in their pockets. As long as you have $1,250 in your refund, you should see if you’re eligible for that refund advance." Jackson Hewitt is also offering a pre-season $250 advance, and as is the case with its tax-time product, the funds come from 1st Money Center.
Liberty Tax: Filers can get up to $750. The loan is officially free to the consumer. Liberty is assessing a $45 fee per product to the franchisee. A staffer from our local Liberty Tax said that advances could be disbursed within 24-48 hours.
EPS Financial e-Advance: EPS is providing advances of either $400 or $750. EPS is telling franchisees that only four in five will be approved. EPS' model is to white label not only a refund advance product but also some other financial products. Many preparers use their prepaid card. EPS is giving a $25 rebate to preparers when facilitating the delivery by direct deposit of a tax refund to the E1 VISA.
Santa Barbara Tax Products Group PreFUND Loan: Once a division of Pacific Capital Bancorp, SBTPG has gone from being an independent company to a subsidiary of Green Dot. Tax preparers pay $35 to SBTPG for each PreFUND. Those loans can be for as much as $750.
Republic Bank (Kentucky) Easy Advance. Preparer pays a fee of $35 to facilitate the distribution of an advance of up to $750 to the filer. The filer is not required to take out a refund transfer for the remainder of his or her refund, but the ERO must sign up to participate in Republic's refund transfer program. Republic describes the product as a "tax refund related loan," but not "the actual tax refund." While the filer pays nothing for the EA, he or she will pay $24.95 for the RT. Republic takes between 24 and 48 hours before disbursing an advance. This means that advances will be made before the IRS has approved the return. If it happens that the IRS subsequently rejects the refund or reduces the size to less than the amount of the advance, Republic Bank takes the loss. There is no credit check. Instead of such a step, Republic uses a variety of its inputs to make an underwriting decision. Republic has been making Easy Advances this week and reports that about eighty percent of applications are being approved.The bank says that filers are getting advances with either a w-2 or with the last paystub of 2015.
MetaBank: In addition to Republic, Liberty Tax is also working with MetaBank. While MetaBank uses a different name for its service, the terms and conditions appear to be the same. Again, it is considered a "tax refund related loan" for an amount of up to $750. Preparers pay $35 for each advance that is approved and disbursed.
Consumers will have to go through the process of filing a return before they know they will receive an advance. There are two issues of concern. If the loan is contingent upon the size of a refund, then it incents revenue-seeking preparers and loan-seeking filers to boost refunds across the minimum threshold. Second, if consumers have to file before they know if they will qualify for a loan, competition suffers.
Will non-bank lenders use this moment to acquire new customers for other loans? 1st Money Center has an installment loan. The installment loan's terms vary from state to state. In Missouri, it has an APR of 245 percent. The stated cost is lower elsewhere. In the past, Refundo has had a relationship with LendUp.
Will participating banks be able to convince regulators that this is a safe and sound practice? Since these are non-recourse loans, a bank with faulty underwriting could quickly accumulate a lot of bad debt expense. Is the claim that these are only "tax-refund related" make sense to the FDIC and the OCC?
Kickbacks undermine the claim that these advance products are truly free to the consumer. Although the preparer is paying a fee to the lender, the preparer is likely to be receiving kickbacks from a variety of other actors. Those vendors pay kickbacks because they add their fees to the process elsewhere. Service bureau fees contribute greatly to consumer expense. Tax filers may not be the immediate payer of those fees, but it is inevitable that the costs will impact the fees for filing.