The increase in the number of workers eligible for the Earned Income Tax Credit (EITC) combined with the 2% reduction in the employee payroll tax means the U.S. workforce will have larger amounts of cash on hand in 2011.
This unexpected cash infusion will foster financial stability in struggling communities nationwide, but wage earners need to be cautious of programs that promise immediate returns. Predatory refund anticipation loans (RALs) are a grim totem of the tax season. In 2006, nearly 5.7 million families — 63% of total RAL users — qualified for an earned income tax credit, according to the National Consumer Law Center Inc. and the Consumer Federation of America. These families need access to their cash; however, a refund anticipation loan can douse savings considerably.
To keep money in members’ pockets, many credit unions offer a tax payer-friendly refund loan that provides urgently needed funding at a reduced APR and reasonable fee structure. These products are also clearly communicated to membership for what they are; refund-secured loans, not an accelerated refund.
In many cases, credit unions’ RAL alternatives are a better deal for members, who might otherwise take out a predatory loan from a for-profit institution. Still, few credit unions expressly market their loans and others steer members away from refund products.
“We promote that you don’t need it [a refund loan],” says Leigh Brady, senior vice president of education services at State Employees’ Credit Union ($21.5B, Raleigh, NC). SECU’s Tax Refund Express Loan is available to members who are determined to gain immediate access to funds, but the credit union offers better options such as its electronic VITA (volunteer income tax assistance) preparation as well as a similar program that charges a small preparation fee (for those with a $49,000+ household income). “Members can still have that refund in 8-15 days without a RAL,” Brady says. “Our focus is all about educating members to these options.”
SECU expects its number of RAL requests to decrease as it rolls out more options for a speedy return. Its controlled Cash Points Global product, for example, is linked to a Visa debit card, and members can have their refund deposited to that account within 8 days. “It’s a great alternative for folks who just can’t qualify for or handle a checking account and need an alternative,” says Brady.
Demand for Refund Express Loan has also declined at Alternatives Credit Union ($69M, Ithaca, NY), causing the credit union to discontinued the product.
“We offered it as an accommodation to members who wanted immediate availability of their refund, but increasingly e-file with Direct Deposit meets the needs of our clients,” says Tristram Coffin, CEO of Alternatives.
With that in mind, Alternatives is expanding its tax preparation outreach, which positions the credit union as a valued and trusted community resource.
“Last year, approximately 52% of our tax clients were not members of Alternatives,” Coffin says. “Roughly 10% of our existing members over the age of 18 also came to the credit union to get their taxes done.”
Serving those non-members provided the opportunity to not only establish new relationships but also pump $3.4 million in refunds back into Alternative’s community last year alone. To date, its tax services have contributed more than $11 million in funds to a region where members have an average annual income of less than $18,000.
“The impact of this program is substantial,” Coffin says.
And credit union programs like this continue to have a lasting impact on communities everywhere. Last year, SECU processed $15.2 million in VITA refunds, part of the larger $50 million plus total refunds the credit union helped its community claim.
“Early on we had to sponsor big promotions and deliver flyers to schools and agencies where we knew employees qualified because so much money was being left on the table,” says Brady. “Now, members know they’re eligible, they use the services repeatedly, and we’re seeing word-of-mouth promotion of the service.”