Federal Court Tells NJ That RAL Rates Are Fine

A federal judge has ruled that New Jersey cannot limit the interest rates and fees national banks can charge for taxpayer RALs (refund anticipation loans) even though the judge noted that the loans’ APR average 115%. Nope, not a typo, that’s well over 100%. New Jersey law limits interest and fees to 30% of the loan’s value as part of its usury laws.

Pacific Capital Bank N.A., which makes loans through Jackson Hewitt Tax Service, filed suit to stop enforcement of the law. New Jersey sought to make it a criminal offense to exceed the cap.

Robert E. Levy, an attorney for Pacific Capital Bank indicated the bank might have stopped doing business in New Jersey if the ruling had not been in their favor. What a shame that would have been (please read with proper amount of sarcasm).

In her ruling, US District Judge Freda Wolfson, who sits in Trenton, indicated that the provisions of the federal National Banking Act would trump state legislation. She wrote, “While the court appreciates what has motivated the state’s initiative, concern for consumers who are subjected to high interest RALs, relief lies with Congress, not with the Court.”

The loans have already attracted a great deal of controversy. The IRS has recently noted that the loans provide a financial incentive for tax services who issue them to take improper tax positions. Several states have passed laws requiring more disclosure as to the process behind the loans. And New Jersey is the second state to challenge the usurious rates charged by these lenders.

I’ll flat out say that I despise these loans. I think they unfairly target the poor and others who may not understand their real options. I have a number of colleagues that have worked with or for many of the tax factories that issues these loans and appalled by their stories. And my own experiences with seniors at the IRS VITA site who told of being misled as to when they might expect their refunds without a RAL are infuriating.

What is most appalling – beyond the interest rates – is the fact that these lenders often exaggerate the time that it takes to receive funds from the IRS. Judge Wolfson noted in her ruling that the average taxpayer can receive a refund from the IRS by Direct Deposit in 11 days. 11 days. Or 115% interest if you use a RAL.

So, quite frankly, if Pacific Bank never stepped foot in the Garden State again, I wouldn’t cry for them. RALs are not a service. They’re a travesty.

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4 thoughts on “Federal Court Tells NJ That RAL Rates Are Fine

  1. Kelly,

    I do not agree with your statements or your position in this matter. Although it may be true that the interest rate is greater than you or I would accept, this product does serve a section of our society. First, not all people filing tax returns have a bank account for fees to be deposited into. This leave only an IRS mailed check as an option. This could take up 3 weeks to arrive, if ever. It is not secure nor a guaranteed delivery method. Second, in order to have taxes done, most people pay a tax preparer for their services. Several bank products offer taxpayers to receive their refund in not only a secured manner (cashiers check) but with tax prep fees deducted. Meaning, taxpayer did not have to pay out-of-pocket to receive their overpayment of any possible taxes. The argument against Bank Products and the RAL banking industry is always made by people who do not depend on a tax refund nor plan financially around receiving a tax refund.

    And the argument that these products inspire tax preparers to be dishonest is absurd. With or without these products, tax preparers will charge for preparing tax returns and have the option of inflating returns and charging more for that.

    Think of it this way. To mail a letter to New York costs only .41 (soon to be .43). But, I can send it overnight with FedEx or UPS for a premium, around $10.00. Why is this an accepted practice? Can I not send a letter to New York for cheaper? In any business, consumers know that if they want it faster, they will pay a premium and it is up to them to decide if it is worth it.



  2. David,

    Your point regarding the USPS versus FedEx example is a good one, and is well taken. I do agree that there are times when paying a premium is appropriate.

    My argument, however, with the RALs is not that it is a premium for services but that the premium is both extraordinarily high and is – as you point out – targeted towards a certain demographic. In that regard, there are a lot of issues of concern.

    For one, you note that these services are accompanied by having a return done by a professional preparer. Fair enough. But clearly the professional preparer is doing a disservice to the taxpayer by not advising that waiting for a refund is not always necessarily. At the minimum, there are simple adjustments that can be made to put money back into the hands of taxpayers faster. But, of course, there is no incentive to provide this information at a service that sells RALs.

    Additionally, your remark that it is absurd that these products inspire tax preparers to be dishonest is not backed by the facts. The IRS has successfully prosecuted and/or shut down providers on the basis that they were preparing false returns to gain more refunds to sell more product – and the IRS themselves view RAL providers as a threat to the tax system. See this post: http://www.taxgirl.com/irs-may-say-no-to-rapid-refund-type-loans/

    There are also a number of lawsuits targeting providers, as outlined here: http://www.taxgirl.com/hr-on-the-chopping-block/

    Additionally, yours is one of a handful of “pro” comments on this issue. Largely, the feedback through comments and email has been extremely negative as to RALs.

  3. People are deceived all the time no matter what business industry they counter act with. I mean look at the banks alone. Some of their practices are terrible and they are allowed. We all have the free will to choose our own paths. The fact that RALS are loans should be properly posted and told. I tel my customers that paying their fees out of pocket is always the cheapest method. I even tell them about free file (briefly of course). And I always make it a point to tell them that if they don’t absolutely need it immediately then they shouldn’t use it.

    The fact is people do what they want. And most people are repeat tax people and know what they want. Most of these buyers need it now just for the sake of having money now…

    There are also RALCHECKs that are not loans..you pay $25-30 bucks for a temporary account to have funds direct deposited in there so their check can be printed in the office. This is a great service for clients with no cash up front. Why is this also a target? Someone isn’t doing their homework and are just clumping al these products together..

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