WEBVTT 00:00:00.000 --> 00:00:02.520 Welcome to today's deep dive. I'll be your host 00:00:02.520 --> 00:00:05.000 as we explore fascinating topics today. And as 00:00:05.000 --> 00:00:06.879 always, I'm joined by our resident financial 00:00:06.879 --> 00:00:09.660 expert. Thanks for having me. I'm really excited 00:00:09.660 --> 00:00:11.560 to get into the weeds on this one. I am, too, 00:00:11.699 --> 00:00:14.320 because we are looking at something today that 00:00:14.320 --> 00:00:17.679 affects millions of people. Yet almost no one 00:00:17.679 --> 00:00:19.839 actually understands how the plumbing works behind 00:00:19.839 --> 00:00:22.059 the scenes. Right. It's one of those invisible 00:00:22.059 --> 00:00:24.280 industries. Exactly. I mean, we all know the 00:00:24.280 --> 00:00:26.839 agonizing limbo of tax season. You file your 00:00:26.839 --> 00:00:28.960 return. You realize the government owes you a 00:00:28.960 --> 00:00:31.600 chunk of your own money. But you are stuck at 00:00:31.600 --> 00:00:34.820 the mercy of federal processing times. It is 00:00:34.820 --> 00:00:37.140 the absolute worst waiting game. It really is. 00:00:37.320 --> 00:00:39.899 So today we are looking at a multibillion dollar 00:00:39.899 --> 00:00:42.899 industry built entirely on monetizing that exact 00:00:42.899 --> 00:00:45.729 waiting period. Yep. We're pulling from a highly 00:00:45.729 --> 00:00:48.490 detailed Wikipedia dive covering the entire life 00:00:48.490 --> 00:00:51.210 cycle of a financial product known as the Refund 00:00:51.210 --> 00:00:55.009 Anticipation Loan, or RAL. A fascinating piece 00:00:55.009 --> 00:00:57.969 of financial history. Our mission today is to 00:00:57.969 --> 00:01:00.590 uncover how a seemingly mundane financial product, 00:01:00.770 --> 00:01:04.269 born in a local accounting firm, exploded into 00:01:04.269 --> 00:01:07.170 a national behemoth. We'll look at the controversial 00:01:07.170 --> 00:01:09.930 mechanics operating beneath its surface and exactly 00:01:09.930 --> 00:01:13.109 why major banks suddenly decided to abandon it 00:01:13.109 --> 00:01:15.329 entirely. Ah, it really is a wild ride. Okay, 00:01:15.409 --> 00:01:18.030 let's unpack this. Before we get into the massive 00:01:18.030 --> 00:01:20.049 scale of this industry, let's look at the friction 00:01:20.049 --> 00:01:22.430 that created it. The core problem for the taxpayer. 00:01:22.689 --> 00:01:25.049 Right. You've got this guaranteed money, but 00:01:25.049 --> 00:01:28.230 it's trapped. Back in the day, that wait wasn't 00:01:28.230 --> 00:01:29.969 just a few days. It could be months. Literally 00:01:29.969 --> 00:01:33.510 months. So the appeal of a third party. Sitting 00:01:33.510 --> 00:01:36.090 across the desk offering to front you that exact 00:01:36.090 --> 00:01:39.609 amount of money in 24 hours is incredibly strong. 00:01:39.769 --> 00:01:41.890 Oh, it is the ultimate pitch for convenience. 00:01:42.150 --> 00:01:44.010 I mean, you get your money right away. The weight 00:01:44.010 --> 00:01:45.950 is eliminated and you can just get on with your 00:01:45.950 --> 00:01:48.290 life. Exactly. But when you look at the actual 00:01:48.290 --> 00:01:51.090 mechanics of these refund anticipation loans, 00:01:51.329 --> 00:01:53.829 which are essentially short term consumer loans, 00:01:53.909 --> 00:01:56.769 usually lasting just two to three weeks, it reveals 00:01:56.769 --> 00:02:00.250 an incredibly massive, intricate intersection. 00:02:01.019 --> 00:02:03.579 Well, you have federal tax policy colliding with 00:02:03.579 --> 00:02:06.859 retail banking, all driven by a profound understanding 00:02:06.859 --> 00:02:10.099 of consumer psychology. It's a perfect storm 00:02:10.099 --> 00:02:13.120 of financial convenience and, as we'll see, deeply 00:02:13.120 --> 00:02:15.699 hidden costs. What really struck me in the source 00:02:15.699 --> 00:02:17.979 notes is that this didn't start in some towering 00:02:17.979 --> 00:02:20.340 Wall Street boardroom. No, not at all. There 00:02:20.340 --> 00:02:23.120 was no team of investment bankers dreaming this 00:02:23.120 --> 00:02:27.009 up. The origin story is intensely local. Very 00:02:27.009 --> 00:02:30.969 grassroots. The year is 1985. The place is Virginia 00:02:30.969 --> 00:02:33.710 Beach. We have an accountant named Ronald Smith 00:02:33.710 --> 00:02:36.889 who is running a local firm called Action Accounting 00:02:36.889 --> 00:02:39.770 and Taxes. Okay. And he simply decides to start 00:02:39.770 --> 00:02:42.090 offering his clients loans against their upcoming 00:02:42.090 --> 00:02:45.270 tax refunds. He's advertising this locally and 00:02:45.270 --> 00:02:47.250 apparently he was the first and only firm in 00:02:47.250 --> 00:02:49.229 the entire United States offering this specific 00:02:49.229 --> 00:02:51.400 service at the time. It was a true lightning 00:02:51.400 --> 00:02:53.939 in a bottle moment for local commerce. He identified 00:02:53.939 --> 00:02:56.280 a very specific pain point for his clients and 00:02:56.280 --> 00:02:59.400 engineered a homegrown solution. But the catalyst 00:02:59.400 --> 00:03:01.439 that took this from a local accounting quirk 00:03:01.439 --> 00:03:04.319 to a viral financial strategy happened the very 00:03:04.319 --> 00:03:07.840 next year in 1986. And it involved a completely 00:03:07.840 --> 00:03:10.560 different industry. A salesman from a local car 00:03:10.560 --> 00:03:13.680 dealership, Charlie Fox Auto, saw what Ronald 00:03:13.680 --> 00:03:16.740 Smith was doing and had a brilliant, if opportunistic, 00:03:16.740 --> 00:03:19.599 realization. I love this part. How did that partnership? 00:03:19.919 --> 00:03:22.860 actually work on the ground. Picture this. A 00:03:22.860 --> 00:03:25.800 customer walks into the tax preparer, finds out 00:03:25.800 --> 00:03:28.539 they're getting a $1 ,500 refund, but they'd 00:03:28.539 --> 00:03:30.620 normally have to wait months to see it. Which 00:03:30.620 --> 00:03:33.659 is incredibly frustrating. Exactly. But the car 00:03:33.659 --> 00:03:36.620 salesman realizes that if the tax preparer confront 00:03:36.620 --> 00:03:39.819 that customer the refund money instantly, that 00:03:39.819 --> 00:03:42.280 customer suddenly has cash in hand right then 00:03:42.280 --> 00:03:44.680 and there. Oh, wow. Cash that could be used immediately 00:03:44.680 --> 00:03:47.599 as a down payment on a new or used car sitting 00:03:47.599 --> 00:03:50.990 right on the lot. That is so clever. and the 00:03:50.990 --> 00:03:53.530 accounting firm essentially teamed up. The customer 00:03:53.530 --> 00:03:56.229 gets their taxes done, gets the loan, and walks 00:03:56.229 --> 00:03:58.310 across the street to buy a Ford Taurus. Just 00:03:58.310 --> 00:04:01.169 one -stop shopping. This practice of using tax 00:04:01.169 --> 00:04:03.710 refunds in conjunction with car financing caught 00:04:03.710 --> 00:04:06.129 fire. It spread rapidly throughout the Virginia 00:04:06.129 --> 00:04:08.710 Beach area, and from there, it just swept across 00:04:08.710 --> 00:04:11.030 the United States. Here's where it gets really 00:04:11.030 --> 00:04:13.789 interesting, because you don't stay a local secret 00:04:13.789 --> 00:04:16.709 in finance for long. Absolutely not. The big 00:04:16.709 --> 00:04:19.750 players noticed this local phenomenon and decided 00:04:19.750 --> 00:04:23.170 to scale it to the moon. By 1988, a man named 00:04:23.170 --> 00:04:26.089 John Hewitt purchases Mel Jackson's tax service. 00:04:26.350 --> 00:04:29.589 A huge turning point. He takes this exact concept 00:04:29.589 --> 00:04:32.250 of the refund anticipation loan and builds an 00:04:32.250 --> 00:04:35.170 entire national franchise around it, which becomes 00:04:35.170 --> 00:04:38.269 Jackson Hewitt. Right. And then, the very next 00:04:38.269 --> 00:04:41.129 year, the giant of the industry, H &R Block, 00:04:41.370 --> 00:04:44.379 joins the party. They incorporate this loan product 00:04:44.379 --> 00:04:47.220 into thousands of their locations. The scale 00:04:47.220 --> 00:04:49.259 is just unbelievable. There's a data point from 00:04:49.259 --> 00:04:51.980 1989 stating that H &R Block actually doubled 00:04:51.980 --> 00:04:54.939 its business at over 4 ,000 locations purely 00:04:54.939 --> 00:04:56.959 because they introduced this new refund loan 00:04:56.959 --> 00:04:59.600 service. Almost overnight, this Virginia Beach 00:04:59.600 --> 00:05:01.939 idea morphed into a billion -dollar industry. 00:05:02.259 --> 00:05:04.519 What's fascinating here is the historical timing. 00:05:04.740 --> 00:05:07.680 This massive boom in tax loan practices perfectly 00:05:07.680 --> 00:05:10.420 coincided with a major technological shift at 00:05:10.420 --> 00:05:12.040 the Internal Revenue Service. You're talking 00:05:12.040 --> 00:05:14.339 about electronic filing. Yes. The introduction 00:05:14.339 --> 00:05:18.160 of e -file. To understand why this is so crucial, 00:05:18.279 --> 00:05:21.060 you have to remember the landscape. Taxpayers 00:05:21.060 --> 00:05:23.519 were mailing in paper returns, which is why the 00:05:23.519 --> 00:05:25.639 refunds took two to three months. And that delay 00:05:25.639 --> 00:05:28.379 drove the demand. That massive delay is what 00:05:28.379 --> 00:05:30.519 created the overwhelming demand for anticipation 00:05:30.519 --> 00:05:33.319 loans in the first place. But with electronic 00:05:33.319 --> 00:05:36.120 filing, the IRS began providing tax preparers 00:05:36.120 --> 00:05:39.560 with something incredibly valuable, a 24 -hour 00:05:39.560 --> 00:05:42.259 confirmation. So the preparer hits submit on 00:05:42.259 --> 00:05:45.399 the computer, and in 24 hours, they get a green 00:05:45.399 --> 00:05:46.980 light from the government. Oh, it was so much 00:05:46.980 --> 00:05:49.430 better than just a green light. This is where 00:05:49.430 --> 00:05:51.730 the plumbing of the financial system gets incredibly 00:05:51.730 --> 00:05:54.889 cool. The IRS confirmation wasn't just a read 00:05:54.889 --> 00:05:57.829 -receive. It specifically stated that the submission 00:05:57.829 --> 00:06:00.649 was free of mathematical errors and, crucially, 00:06:00.829 --> 00:06:03.930 that the filer had no outstanding tax lens or 00:06:03.930 --> 00:06:06.709 delinquent federal student loans. Do you realize 00:06:06.709 --> 00:06:08.529 what that means for a lender? It sounds like 00:06:08.529 --> 00:06:10.750 an absolute guarantee. It was the holy grail. 00:06:11.290 --> 00:06:14.649 Unsecured consumer loans are usually risky because 00:06:14.649 --> 00:06:17.959 people default. But for the lender, this 24 -hour 00:06:17.959 --> 00:06:20.019 confirmation effectively meant there was a near 00:06:20.019 --> 00:06:22.300 certain probability the IRS would pay the refund 00:06:22.300 --> 00:06:25.240 within a few weeks. Wow. Assuming the income 00:06:25.240 --> 00:06:27.660 wasn't reported fraudulently, it turned a risky 00:06:27.660 --> 00:06:30.399 short -term loan into a practically risk -free 00:06:30.399 --> 00:06:32.779 government -backed certainty overnight. That 00:06:32.779 --> 00:06:35.759 is a massive advantage. The preparer could confidently 00:06:35.759 --> 00:06:38.420 issue the file of a check for the expected refund 00:06:38.420 --> 00:06:40.620 amount, knowing the government's money was practically 00:06:40.620 --> 00:06:43.040 guaranteed to arrive soon to pay off the loan. 00:06:43.439 --> 00:06:45.300 They were essentially arbitrary. prodging the 00:06:45.300 --> 00:06:47.779 government's processing time with zero risk. 00:06:48.019 --> 00:06:51.180 Which brings us to the math and ultimately the 00:06:51.180 --> 00:06:54.040 costs of the taxpayer. Because getting that money 00:06:54.040 --> 00:06:56.660 instantly wasn't just a polite favor from the 00:06:56.660 --> 00:06:58.600 tax preparer to help you buy a car. Definitely 00:06:58.600 --> 00:07:00.980 not. I saw something in our notes about an absolutely 00:07:00.980 --> 00:07:04.730 insane annual percentage rate. How did the math 00:07:04.730 --> 00:07:06.910 on these loans actually work out for the person 00:07:06.910 --> 00:07:09.470 sitting across the desk? It was staggering. It 00:07:09.470 --> 00:07:11.589 was essentially like paying a massive premium 00:07:11.589 --> 00:07:15.389 just to skip a line. We can look at a 1995 report 00:07:15.389 --> 00:07:18.189 from The New York Times that lays out the typical 00:07:18.189 --> 00:07:21.050 fee structure beautifully. Let's hear it. A standard 00:07:21.050 --> 00:07:24.129 tax filer using a service like Beneficial might 00:07:24.129 --> 00:07:28.189 pay a $30 electronic filing fee plus an additional 00:07:28.189 --> 00:07:32.670 $59 loan fee. So about $90 total. Exactly. Now, 00:07:32.709 --> 00:07:35.089 if you are getting a $1 ,000 refund, those fees 00:07:35.089 --> 00:07:37.670 might just seem like a minor acceptable annoyance 00:07:37.670 --> 00:07:39.930 to get your money today rather than next month. 00:07:40.110 --> 00:07:42.410 Right. It just feels like a service charge. But 00:07:42.410 --> 00:07:44.870 you have to calculate the annual percentage rate, 00:07:44.990 --> 00:07:48.350 the APR, on a loan that only lasts two to three 00:07:48.350 --> 00:07:51.310 weeks. When you run that math, those flat fees 00:07:51.310 --> 00:07:57.089 translate to a massive 250 % APR. A 250 % APR 00:07:57.089 --> 00:07:59.649 on a loan that is basically risk -free for the 00:07:59.649 --> 00:08:02.550 lender. Did that scale hold up as the industry 00:08:02.550 --> 00:08:04.589 got bigger? The numbers only grew as the industry 00:08:04.589 --> 00:08:07.589 matured. By 2004, the average fee just for the 00:08:07.589 --> 00:08:09.790 bank product side of the transaction, not even 00:08:09.790 --> 00:08:14.110 the tax prep, was $32. And an astounding 12 million 00:08:14.110 --> 00:08:16.370 taxpayers were utilizing refund anticipation 00:08:16.370 --> 00:08:19.610 loans in that single year. 12 million people. 00:08:20.110 --> 00:08:24.589 Yes. We also have data from a robust 2006 study 00:08:24.589 --> 00:08:27.310 by the National Consumer Law Center and the Consumer 00:08:27.310 --> 00:08:30.449 Federation of America. They found that a consumer 00:08:30.449 --> 00:08:33.669 could expect to pay about $100 in total to get 00:08:33.669 --> 00:08:37.470 a RAL for an average refund of about $2 ,150 00:08:37.470 --> 00:08:41.330 from a commercial tax preparation chain. If you 00:08:41.330 --> 00:08:43.570 are listening to this, you really have to ask 00:08:43.570 --> 00:08:46.470 yourself, why would anyone willingly accept those 00:08:46.470 --> 00:08:49.710 terms? It is a steep price. Why surrender $100 00:08:49.710 --> 00:08:53.490 or face a 250 % APR just to get your own money 00:08:53.490 --> 00:08:56.080 a few weeks earlier? It seems totally counterintuitive. 00:08:56.299 --> 00:08:58.600 It does until you look at the profound underlying 00:08:58.600 --> 00:09:01.899 demand for immediate cash liquidity. For many 00:09:01.899 --> 00:09:04.659 American households, that tax refund is the single 00:09:04.659 --> 00:09:07.480 largest lump sum of cash they will see all year. 00:09:07.639 --> 00:09:09.559 That makes sense. We are talking about families 00:09:09.559 --> 00:09:11.820 who have immediate pressing needs right in the 00:09:11.820 --> 00:09:14.759 middle of winter. Past due heating bills, necessary 00:09:14.759 --> 00:09:17.440 car repairs to get to work, or high interest 00:09:17.440 --> 00:09:20.340 credit card debt that is compounding daily. The 00:09:20.340 --> 00:09:22.840 instant cash isn't a luxury. It's a lifeline. 00:09:23.039 --> 00:09:25.259 So people are just desperate. However, that intense 00:09:25.259 --> 00:09:27.820 demand also led to massive friction in the system. 00:09:28.080 --> 00:09:31.419 As early as the 1990s, some filers realized they 00:09:31.419 --> 00:09:33.860 could exploit the setup. Oh, boy. They began 00:09:33.860 --> 00:09:36.879 deliberately misreporting their income to artificially 00:09:36.879 --> 00:09:39.700 inflate their anticipated refund. They grabbed 00:09:39.700 --> 00:09:41.720 the instant cash from the loan and then disappear, 00:09:42.059 --> 00:09:44.480 leaving the banks holding the bag when the IRS 00:09:44.480 --> 00:09:46.860 eventually processed the return and caught the 00:09:46.860 --> 00:09:49.220 fraud. So the risk -free loan suddenly had a 00:09:49.220 --> 00:09:52.519 massive vulnerability. Did the IRS step in? They 00:09:52.519 --> 00:09:55.779 did. This fraud became such an issue that in 00:09:55.779 --> 00:09:59.440 1994, the IRS actually stopped providing tax 00:09:59.440 --> 00:10:01.480 preparers with that crucial deposit confirmation. 00:10:01.860 --> 00:10:04.820 They just turned it off. Wow. They started sending 00:10:04.820 --> 00:10:07.539 refunds directly to taxpayers instead of to the 00:10:07.539 --> 00:10:10.299 banks that made the loans. The IRS was actively 00:10:10.299 --> 00:10:12.279 trying to discourage the practice because they 00:10:12.279 --> 00:10:15.340 saw it as an uneconomical offer for filers and 00:10:15.340 --> 00:10:17.220 a headache for the agency. Did that kill the 00:10:17.220 --> 00:10:19.750 industry? Interestingly enough, the halt caused 00:10:19.750 --> 00:10:22.809 such an uproar in the industry that the IRS reinstated 00:10:22.809 --> 00:10:25.629 the confirmations the very next year. Which perfectly 00:10:25.629 --> 00:10:27.870 sets the stage for the massive controversy that 00:10:27.870 --> 00:10:30.730 surrounded these products. Now, a quick note 00:10:30.730 --> 00:10:33.610 for you listening. We're about to explore a major 00:10:33.610 --> 00:10:36.659 political and social flashpoint. We are strictly 00:10:36.659 --> 00:10:39.039 looking at this from both sides impartially. 00:10:39.139 --> 00:10:40.960 Yes, we're just reporting the data from the sources. 00:10:41.259 --> 00:10:43.259 We aren't endorsing any viewpoints here, just 00:10:43.259 --> 00:10:46.600 unpacking the arguments. Consumer advocates were 00:10:46.600 --> 00:10:49.539 looking at the raw math and screaming predatory, 00:10:49.679 --> 00:10:52.600 while the tax prep industry argued they were 00:10:52.600 --> 00:10:55.539 simply providing a highly requested service to 00:10:55.539 --> 00:10:58.759 willing adults. Let's look at the actual data 00:10:58.759 --> 00:11:01.019 behind both arguments, because the conflict was 00:11:01.019 --> 00:11:03.759 intense. Synthesizing the arguments from critics, 00:11:03.940 --> 00:11:05.919 particularly groups like the National Consumer 00:11:05.919 --> 00:11:09.120 Law Center, the core issue was that RALs were 00:11:09.120 --> 00:11:11.940 viewed as high -profit, low -risk loans that 00:11:11.940 --> 00:11:14.399 were aggressively and specifically marketed toward 00:11:14.399 --> 00:11:16.980 the working poor. Okay. The opponents argued 00:11:16.980 --> 00:11:19.360 that the sheer profit motive of the lenders resulted 00:11:19.360 --> 00:11:21.919 in these loans being pushed on low -income individuals 00:11:21.919 --> 00:11:24.820 far too often in neighborhoods that were already 00:11:24.820 --> 00:11:27.299 financially vulnerable. And what was their main 00:11:27.299 --> 00:11:29.750 piece of evidence? Critics claimed that many 00:11:29.750 --> 00:11:31.990 borrowers were intentionally led to believe the 00:11:31.990 --> 00:11:35.149 wait for a standard IRS refund was much longer 00:11:35.149 --> 00:11:37.470 than it actually was, creating artificial urgency. 00:11:38.639 --> 00:11:40.960 Furthermore, they argued that consumers often 00:11:40.960 --> 00:11:43.019 didn't even realize they were taking out a loan 00:11:43.019 --> 00:11:45.620 at all. How was that possible? The marketing 00:11:45.620 --> 00:11:48.440 heavily leaned on phrases like instant refund. 00:11:48.799 --> 00:11:51.179 So a customer thought they were just paying a 00:11:51.179 --> 00:11:53.919 processing fee, completely misunderstanding the 00:11:53.919 --> 00:11:56.340 triple -digit APRs they were actually being charged. 00:11:56.799 --> 00:11:59.500 The argument was that these consumers were sold 00:11:59.500 --> 00:12:03.080 on instant gratification at a steep, often obscured 00:12:03.080 --> 00:12:05.779 cost. Wait, with interest rates that high, didn't 00:12:05.779 --> 00:12:07.929 regulators step in? I saw him mentioned in the 00:12:07.929 --> 00:12:09.850 notes of a lawsuit back in the 80s against Ronald 00:12:09.850 --> 00:12:12.409 Smith, our pioneer from Virginia Beach. They 00:12:12.409 --> 00:12:14.590 absolutely did. State regulators were eyeing 00:12:14.590 --> 00:12:16.250 the math on these products from the very beginning. 00:12:16.409 --> 00:12:19.429 In 1988, Ronald Smith and another individual 00:12:19.429 --> 00:12:21.549 were jointly sued by the attorney general of 00:12:21.549 --> 00:12:23.929 Virginia in a Richmond state court for usury. 00:12:24.049 --> 00:12:26.269 Usury meaning charging illegally high interest 00:12:26.269 --> 00:12:28.889 rates. Basically, yeah, outrageously high interest 00:12:28.889 --> 00:12:31.940 rates. Now, it is important to note that Ronald 00:12:31.940 --> 00:12:34.100 Smith was eventually dismissed from the case 00:12:34.100 --> 00:12:36.480 with the state's attorney reporting he was not 00:12:36.480 --> 00:12:40.019 culpable. But it set the tone. But the interest 00:12:40.019 --> 00:12:41.360 rates weren't the only thing getting them in 00:12:41.360 --> 00:12:43.779 hot water, right? There was another mechanism 00:12:43.779 --> 00:12:46.419 buried in the fine print that caused even more 00:12:46.419 --> 00:12:49.129 trouble. Yes. And this is where the mechanics 00:12:49.129 --> 00:12:52.149 get incredibly murky for the average person filing 00:12:52.149 --> 00:12:55.029 their taxes. It was a deeply hidden mechanism 00:12:55.029 --> 00:12:57.389 within these loans known as third party cross 00:12:57.389 --> 00:13:00.289 collection collection or what tax prep firms 00:13:00.289 --> 00:13:02.610 often vaguely referred to in their paperwork 00:13:02.610 --> 00:13:05.610 as previous debt. This was essentially a trap 00:13:05.610 --> 00:13:08.399 for the unwary consumer. Walk us through how 00:13:08.399 --> 00:13:10.799 that cross -collection trap actually played out 00:13:10.799 --> 00:13:13.419 in the real world. Let's run a scenario. You 00:13:13.419 --> 00:13:15.940 walk into a tax office today and apply for a 00:13:15.940 --> 00:13:18.919 refund anticipation loan. You are directing the 00:13:18.919 --> 00:13:22.360 IRS to send your upcoming refund directly to 00:13:22.360 --> 00:13:25.179 the bank that is issuing you the loan. Let's 00:13:25.179 --> 00:13:27.559 call them Bank B. Now, suppose that four years 00:13:27.559 --> 00:13:30.360 ago you took out a similar loan through a completely 00:13:30.360 --> 00:13:32.639 different institution, Bank A, and for whatever 00:13:32.639 --> 00:13:35.860 reason, life happened and you defaulted on it. 00:13:36.190 --> 00:13:39.070 You owe Bank A money. Okay, so there's an old 00:13:39.070 --> 00:13:41.889 debt out there. Right. When you sit down today 00:13:41.889 --> 00:13:45.210 to get your new loan from Bank B, buried in the 00:13:45.210 --> 00:13:47.490 terms and conditions are cross -collection rules. 00:13:47.929 --> 00:13:51.129 These rules authorize Bank B to secretly seize 00:13:51.129 --> 00:13:54.389 your incoming IRS refund, completely deny your 00:13:54.389 --> 00:13:56.750 new loan application, and transmit your refund 00:13:56.750 --> 00:13:59.450 money directly to Bank A to settle that old debt. 00:13:59.629 --> 00:14:01.669 And let me guess, they still charge you a fee 00:14:01.669 --> 00:14:03.669 for the privilege of denying you. You guessed 00:14:03.669 --> 00:14:05.309 it. They would still hit you with an application 00:14:05.309 --> 00:14:07.940 fee. As the National Taxpayer Advocate described 00:14:07.940 --> 00:14:11.220 it in a scathing 2006 report, the banks used 00:14:11.220 --> 00:14:13.820 this occasion to collect debt owed to other banks. 00:14:14.000 --> 00:14:16.259 And the major controversy was that this practice 00:14:16.259 --> 00:14:19.179 was rarely, if ever, disclosed clearly to the 00:14:19.179 --> 00:14:21.419 person sitting across the desk. That feels incredibly 00:14:21.419 --> 00:14:23.779 deceptive. If we connect this to the bigger picture, 00:14:23.980 --> 00:14:27.100 this exact practice led to massive legal action. 00:14:27.279 --> 00:14:29.899 In February 2006, the California Attorney General 00:14:29.899 --> 00:14:32.940 filed a major lawsuit against H &R Block. The 00:14:32.940 --> 00:14:34.799 state alleged that the company was illegally 00:14:34.799 --> 00:14:38.240 marketing and selling high cost loans and specifically 00:14:38.240 --> 00:14:40.759 that they were not adequately informing customers 00:14:40.759 --> 00:14:43.600 about these alleged previous debts. So they were 00:14:43.600 --> 00:14:46.139 hiding the trap. The lawsuit claimed that when 00:14:46.139 --> 00:14:48.860 customers signed the new RAL application, they 00:14:48.860 --> 00:14:51.419 were unwittingly agreeing to automatic debt collection 00:14:51.419 --> 00:14:54.240 from completely different tax preparers or banks. 00:14:54.519 --> 00:14:56.879 The customer would expect to walk out with cash 00:14:56.879 --> 00:14:59.539 to pay their heating bill, but instead their 00:14:59.539 --> 00:15:02.120 application would be denied, their anticipated 00:15:02.120 --> 00:15:04.919 refunds seized to pay off a four -year -old debt 00:15:04.919 --> 00:15:06.700 they might have forgotten about, and they would 00:15:06.700 --> 00:15:08.860 leave the office poorer than when they walked 00:15:08.860 --> 00:15:11.100 in because of the fees. So what does this all 00:15:11.100 --> 00:15:13.919 mean? We have an industry handling 12 million 00:15:13.919 --> 00:15:16.620 taxpayers a year, generating massive, seemingly 00:15:16.620 --> 00:15:19.879 unstoppable profits, and deeply embedded in the 00:15:19.879 --> 00:15:22.889 American tax season ritual. How does the financial 00:15:22.889 --> 00:15:25.830 juggernaut with that much momentum suddenly face 00:15:25.830 --> 00:15:28.509 total collapse? The fatal blow wasn't actually 00:15:28.509 --> 00:15:31.129 a class action lawsuit or sweeping new piece 00:15:31.129 --> 00:15:33.409 of consumer protection legislation from Congress. 00:15:33.690 --> 00:15:36.690 It was a single devastating administrative change 00:15:36.690 --> 00:15:39.210 dealt directly by the Internal Revenue Service. 00:15:39.629 --> 00:15:42.250 Really? Just an administrative change? On August 00:15:42.250 --> 00:15:45.710 5, 2010, the IRS made a quiet but monumental 00:15:45.710 --> 00:15:48.289 announcement. They declared that for the upcoming 00:15:48.289 --> 00:15:51.679 2011 tax filing season, the agency would no longer 00:15:51.679 --> 00:15:53.759 provide preparers and financial institutions 00:15:53.759 --> 00:15:56.539 with the debt indicator. That indicator. That 00:15:56.539 --> 00:15:58.879 sounds incredibly clinical. But based on what 00:15:58.879 --> 00:16:01.340 we've discussed, this was the absolute linchpin 00:16:01.340 --> 00:16:03.860 of the whole system, wasn't it? Precisely. Remember 00:16:03.860 --> 00:16:06.120 earlier when I was geeking out about that 24 00:16:06.120 --> 00:16:08.740 -hour confirmation the IRS sent back in the 80s 00:16:08.740 --> 00:16:11.200 and 90s? Yes, the holy grail for lenders. The 00:16:11.200 --> 00:16:13.799 debt indicator was the modern evolution of that. 00:16:13.919 --> 00:16:16.620 It was a simple one -letter code sent from the 00:16:16.620 --> 00:16:19.389 IRS to the tax preparer's computer. But that 00:16:19.389 --> 00:16:22.009 single letter contained a universe of data. What 00:16:22.009 --> 00:16:24.210 kind of data? It told the lender everything they 00:16:24.210 --> 00:16:26.250 needed to know about the taxpayer's risk profile. 00:16:26.570 --> 00:16:29.409 It disclosed whether the taxpayer owed back taxes 00:16:29.409 --> 00:16:32.029 or whether they owed other federally collected 00:16:32.029 --> 00:16:36.110 obligations, like unpaid child support or defaulted 00:16:36.110 --> 00:16:38.029 federal student loans. So it was a cheat code 00:16:38.029 --> 00:16:40.450 for risk assessment. If the debt indicator came 00:16:40.450 --> 00:16:43.190 back clear, the bank knew the government wasn't 00:16:43.190 --> 00:16:45.590 going to intercept the refund. They could issue 00:16:45.590 --> 00:16:48.309 the loan knowing the money was safe. But when 00:16:48.309 --> 00:16:50.450 the IRS announced they were turning off the debt 00:16:50.450 --> 00:16:53.129 indicator, the banks were suddenly flying entirely 00:16:53.129 --> 00:16:55.529 blind. Because they have no way of knowing if 00:16:55.529 --> 00:16:57.210 the IRS is going to actually keep the money. 00:16:57.370 --> 00:16:59.789 Exactly. They had no way of knowing if the $2 00:16:59.789 --> 00:17:02.330 ,000 refund they were about to loan money against 00:17:02.330 --> 00:17:05.569 was actually going to be intercepted by the Treasury 00:17:05.569 --> 00:17:08.390 Department to pay off the borrower's back child 00:17:08.390 --> 00:17:11.450 support. Without that one -letter code acting 00:17:11.450 --> 00:17:14.269 as a shield, the risk profile of these loans 00:17:14.269 --> 00:17:17.269 skyrocketed to completely unacceptable levels 00:17:17.269 --> 00:17:19.990 for retail banks. It's amazing how one administrative 00:17:19.990 --> 00:17:23.029 switch could dismantle a billion -dollar industry. 00:17:23.650 --> 00:17:26.109 But looking at the timeline, we also can't ignore 00:17:26.109 --> 00:17:28.069 the technological evolution that was happening 00:17:28.069 --> 00:17:30.869 at the exact same time. The technology that originally 00:17:30.869 --> 00:17:33.430 fueled the boom eventually evolved to make the 00:17:33.430 --> 00:17:35.529 loans completely obsolete. That's a great point. 00:17:35.630 --> 00:17:38.910 Electronic filing became ubiquitous. Right. By 00:17:38.910 --> 00:17:41.950 2017, the data shows that 70 % of U .S. taxpayers 00:17:41.950 --> 00:17:45.009 had access to free e -file and tax preparation 00:17:45.009 --> 00:17:48.529 services. And more importantly, the speed of 00:17:48.529 --> 00:17:50.289 the government finally caught up to consumer 00:17:50.289 --> 00:17:53.490 expectations. The waiting period shrank dramatically. 00:17:53.490 --> 00:17:56.109 If you e -filed your taxes and chose direct deposit, 00:17:56.309 --> 00:17:58.930 your actual real tax refund would arrive in your 00:17:58.930 --> 00:18:01.799 bank account in just 10 to 21 days anyway. Plus, 00:18:01.960 --> 00:18:04.500 taxpayers gained the ability to just go to the 00:18:04.500 --> 00:18:07.140 IRS website and click, where's my refund, to 00:18:07.140 --> 00:18:09.980 track their money themselves. That deep desperation 00:18:09.980 --> 00:18:12.480 of not knowing when a paper check might arrive 00:18:12.480 --> 00:18:14.599 in the mail, which drove the entire industry 00:18:14.599 --> 00:18:18.380 in 1985, was entirely eliminated by modern technology. 00:18:18.700 --> 00:18:21.339 It was a pincer movement of forces that the industry 00:18:21.339 --> 00:18:24.089 just couldn't survive. On one side, the banks 00:18:24.089 --> 00:18:26.269 couldn't price the risk without the IRS debt 00:18:26.269 --> 00:18:28.650 indicator. On the other side, consumers were 00:18:28.650 --> 00:18:31.150 increasingly unwilling to pay $100 in steep fees 00:18:31.150 --> 00:18:33.390 just to save a mere 10 -day wait for a direct 00:18:33.390 --> 00:18:35.269 deposit. It just didn't make financial sense 00:18:35.269 --> 00:18:38.950 anymore. The result was rapid and decisive. By 00:18:38.950 --> 00:18:42.269 the beginning of the 2013 tax season, major U 00:18:42.269 --> 00:18:45.509 .S. banks officially threw in the towel. They 00:18:45.509 --> 00:18:48.109 completely stopped offering refund anticipation 00:18:48.109 --> 00:18:50.710 loans. End of an era. But they replaced them. 00:18:51.049 --> 00:18:53.289 Instead, the industry shifted to a different 00:18:53.289 --> 00:18:56.410 product called a refund anticipation check, or 00:18:56.410 --> 00:19:00.329 RAC. Now, it's vital to note that a RIC is not 00:19:00.329 --> 00:19:03.890 a loan. It is simply a temporary empty bank account 00:19:03.890 --> 00:19:06.690 set up by the tax preparer solely to receive 00:19:06.690 --> 00:19:09.269 the client's IRS refund when it finally arrives 00:19:09.269 --> 00:19:10.750 from the government. So what's the point of it? 00:19:10.829 --> 00:19:13.390 Its primary purpose today is to provide a mechanism 00:19:13.390 --> 00:19:15.609 for the client to pay the tax preparer's fee 00:19:15.609 --> 00:19:17.849 out of the refund itself, rather than having 00:19:17.849 --> 00:19:19.890 to pay out of pocket at the desk when they file. 00:19:20.009 --> 00:19:22.190 It is quite a journey. We started with a local 00:19:22.190 --> 00:19:24.390 accountant and an opportunistic car salesman 00:19:24.390 --> 00:19:27.470 in Virginia Beach back in 1986, inventing a clever 00:19:27.470 --> 00:19:29.710 way to front people cash for down payments on 00:19:29.710 --> 00:19:32.289 Ford Tortoises. A very American origin story. 00:19:32.529 --> 00:19:35.809 That hyper -local trick snowballed into a deeply 00:19:35.809 --> 00:19:38.890 controversial, multi -billion dollar financial 00:19:38.890 --> 00:19:41.910 mechanism utilized by 12 million Americans a 00:19:41.910 --> 00:19:44.970 year. And ultimately, it couldn't survive the 00:19:44.970 --> 00:19:47.490 combined forces of a single IRS policy change 00:19:47.490 --> 00:19:50.450 removing a one -letter code and the sheer efficiency. 00:19:50.640 --> 00:19:53.119 of modern e -filing and direct deposit technology. 00:19:53.559 --> 00:19:55.579 This raises an important question, though, because 00:19:55.579 --> 00:19:57.819 the story doesn't entirely end there. What do 00:19:57.819 --> 00:20:00.099 you mean? The data explicitly points out that 00:20:00.099 --> 00:20:03.720 even today, these newer refund anticipation checks 00:20:03.720 --> 00:20:07.059 and a whole hodgepodge of similar modern tax 00:20:07.059 --> 00:20:09.480 -time financial products still carry similar 00:20:09.480 --> 00:20:12.839 flat fees to the old loans. Even more concerning, 00:20:13.019 --> 00:20:15.460 they carry the exact same risk of third -party 00:20:15.460 --> 00:20:17.259 cross -collection. So the trap is still there. 00:20:17.589 --> 00:20:20.130 If you use RAC today just to pay your prep fee 00:20:20.130 --> 00:20:22.869 out of your refund, your money can still be secretly 00:20:22.869 --> 00:20:25.410 seized to pay an old bank debt before you ever 00:20:25.410 --> 00:20:27.670 see a dime, which leaves us with a profound thought 00:20:27.670 --> 00:20:30.509 to mull over. If millions of consumers today 00:20:30.509 --> 00:20:32.569 are still perfectly willing to open temporary 00:20:32.569 --> 00:20:35.549 bank accounts, pay high fees, and risk hidden 00:20:35.549 --> 00:20:37.950 debt collection just to avoid paying a couple 00:20:37.950 --> 00:20:40.029 hundred dollars in tax prep fees out of pocket, 00:20:40.329 --> 00:20:43.009 did the death of the refund anticipation loan 00:20:43.009 --> 00:20:46.029 actually solve the underlying problem? Or does 00:20:46.029 --> 00:20:48.819 it simply reveal a much deeper, persistent fragility 00:20:48.819 --> 00:20:51.700 in everyday consumer finances, where for so many 00:20:51.700 --> 00:20:54.140 people, tax season remains the only time of the 00:20:54.140 --> 00:20:56.460 year they ever see a lump sum of their own money. 00:20:56.599 --> 00:20:58.940 That is a heavy and fascinating thought to leave 00:20:58.940 --> 00:21:01.200 on, and it completely reframes how we look at 00:21:01.200 --> 00:21:03.740 tax season. I want to thank you, the listener, 00:21:03.839 --> 00:21:06.680 for joining us on this deep dive today. If there 00:21:06.680 --> 00:21:09.039 is one practical takeaway from the rise and fall 00:21:09.039 --> 00:21:11.759 of the RAL, it's that you should always, always 00:21:11.759 --> 00:21:14.220 keep questioning the fine print on any financial 00:21:14.220 --> 00:21:16.619 product you encounter in the real world, especially 00:21:16.619 --> 00:21:18.680 when someone is offering you your own money just 00:21:18.680 --> 00:21:20.299 a little bit faster. See you next time.