Refund Anticipation Loans Continue to Harm Low-Income Taxpayers

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Wednesday, March 31, 2010 at 6:00 am

Despite years of efforts to rein in the practice, lightly regulated tax preparers will be permitted to continue peddling high-cost refund anticipation loans once again this tax season to the most vulnerable filers, as tougher rules to curb the practice languish in bureaucratic purgatory.

[Economy1] Refund anticipation loans, or RALs, promise near-instant refunds, but the catch is that they’re very short-term and very expensive loans, according to Christopher Kukla, senior counsel for government affairs at the Center for Responsible Lending. “In terms of APR, these things carry a rate of 50 up to 1,000 percent,” he said, adding that the rate is often hidden in a bevy of ancillary fees. Watchdog groups have been waging a policy battle against RALs for years, working with agencies like the IRS and the Office of the Comptroller of the Currency. The government has been slow to respond to concerns, despite an ever-growing body of evidence about the harm these loans cause low-income filers.

Groups including the National Consumer Law Center and the Consumer Federation of America have mounted multifaceted campaigns to remove refund anticipation loans from the marketplace, but reform efforts have only crept forward. The OCC, which oversees many of the banks that provide the loan funding — including industry giants like HSBC and JPMorgan Chase — issued internal guidance for its examiners back in 2007 pertaining to the training and supervision of third-party tax prep firms, but it wasn’t declared public policy until this year. The office also waited until this year to issue a consumer advisory about RALs. “This was in direct response to the advocacy we’ve been doing, but it’s still really weak,” said Dory Rand, president of the Woodstock Institute.

The IRS has previously examined whether or not it should be legal for tax preparers to sell financial products. This January, though, in a move that frustrated watchdog groups, the agency decided to establish a task force to study RALs and the legality of allowing tax preparers to share filers’ financial information with lenders. Advocates like Jean Ann Fox, director of financial services for the Consumer Federation of America, are unhappy with the longer timeline creating this task force will entail. “We were disappointed this is as far as they went,” she said. “The IRS could have dealt with this to put a stop to it.” The IRS also announced plans in January to regulate the tax preparation industry, requiring tax preparers to follow ethical guidelines, undergo professional education and testing. Creating and implementing these standards will take a few more years, despite the six months’ worth of research that preceded the January announcement.

The stakes are so high because RALs prey on the most disadvantaged Americans. Groups like the Neighborhood Economic Development Advocacy Project, which offers assistance to low-income New York City residents, says RAL providers deliberately target poor, uninformed recipients of the Earned Income Tax Credit, many of whom are outside the realm of mainstream banking and rely on lightly regulated fringe products. In 2007, more than 80 percent of RALs in New York City were made to low-income citizens, and more than 60 percent went to EITC recipients. In some low-income neighborhoods, close to one in five taxpayers took out a refund anticipation loan. “These areas are some of the lowest-income areas in the country,” said Alexis Iwanisziw, NEDAP program associate. “This money should really be staying in the community and staying with the families.”

The primary concern is that tax preparers, especially independent shops, can play fast and loose with the facts they give consumers because they never come under scrutiny from the banks making the loans. According to the Woodstock Institute’s Rand, Chase, the bank responsible for supplying the loans to some 13,000 mom-and-pop tax prep outfits, only instituted a mystery shopping program this January, in response to Woodstock Institute queries about compliance with the OCC guidance.

In 2008, mystery-shopping programs conducted by watchdog groups found that customers received incomplete and sometimes inaccurate information about RALs and the costs they would incur. While new requirements on disclosures, marketing terminology and customer education have all been announced by the OCC, the agency is giving tax preparers another year to comply with these new regulations. Even the new disclosure requirements aren’t foolproof, points out Chi Chi Wu, staff attorney at the National Consumer Law Center. “The problem with any sort of written disclosures is they’re not that useful when [a customer] gets a RAL,” she said. “They get another piece of paper in the stack. It may not be something they look at right away.” By the time the tax filer looks through his or her paperwork, the charges have already been applied against their refund.

The big appeal of these loans, the Woodstock Institute’s Rand points out, is the prospect of instant money. Already, taxpayers who e-file and elect to receive their refund via direct deposit generally get their returns within two weeks. If the IRS sped up its payments to taxpayers outside the mainstream banking system and allowed them to receive that money on a debit card similar to those used for other benefits, the appeal of RALs would be diminished. “These improvements the IRS could make would eliminate a need for refund anticipation loans,” Rand said.

“We think as a federal policy change, one very obvious thing that needs to happen is that the EITC should be prohibited from being used as collateral in a loan,” said Sarah Ludwig, co-director of NEDAP. This practice is prohibited when it comes to other federal benefits like Social Security, and Ludwig says Congress should extend this prohibition to the EITC. “If that loophole was closed, it would to a large extent cut off RALs at the pass,” she said. The Consumer Federation’s Fox says legislation that would limit interest rates to 36 percent would protect taxpayers, but it has stalled in Congress. There is stiff resistance not only from fringe lenders but from mainstream financial services firms against a federal usury cap inclusive of fees and surcharges, since this would apply to other types of loans, such as credit cards, as well.

Both the number of RALs and the total cost of obtaining these loans has dropped slightly in recent years, in part due to market forces that made borrowing money everywhere harder to do. In 2006, 8.7 million RALs were issued at a cost of $833 million, which dipped to 8.4 million and $738 million in 2008. Fox says while this is heartening, leaving these loans on the marketplace makes too many taxpayers vulnerable to exploitation. “The volume’s been dropping over the years, but it’s time to take care of this at the policy level. This is deviating taxpayer money. Do you want to give part of your tax refund to a big bank?”

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joesica
Comment posted March 31, 2010 @ 8:18 pm

Martha, there is no “growing body of evidence” … it is ONLY consumer groups whining about RALs… 8 million people who “need” access to the money the government can't get to them faster yet happen to think the loan is a fair deal… Woodstock, CFA…Hello? How about some fair and balanced reporting. On average the RAL costs less than $2.20 per $100 loaned… Can you get those terms at YOUR bank Martha? I don't think so…. There is a LOT more to this story. It appears a certain ideolgy is at work here… The only thing these (so called) consumer groups will accomplish is to remove one of the only financial choices this segment of Americans has to help their situations. Until IRS delivers better refund efficiency, RALs are the best deal in town for these folks. Ask these groups what their solution until then is? So far I've only heard them say “these people can wait the few extra weeks”…oh, they can? Sad reporting….


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ajm8127
Comment posted April 1, 2010 @ 11:29 am

Better refund efficiency? I got my refund in two weeks. Are you one of those people who think the banks have absolutely no responsibility for the recent financial crisis?

I think the basis of the problem is that the financial institutions have made these processes so complex that to many people they are totally abstracted from them. They see that they can get money, and they go for it. The reform I believe these consumer groups are looking for is more clear cut information on how much interest they will be paying. Like when a mortgage commercial comes on and they say the fees are $x.xx per $1000 borrowed. As said in the article, the interest could be relatively low, but you add service fees on top of that (isn't that what interest is anyway; fees you pay the bank to lend you money?) you pay much more than the advertised rate. People who get theses loans can be rather undereducated and it is the belief of many that they banks see an opportunity to make money here from them, at their expense.

The number one thing to remember is when a business tells you they are just trying to help you out, that is seldom the case. People open businesses to make profit, not for philanthropy.


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Mary
Comment posted April 4, 2010 @ 6:27 pm

I took a Tax Preparers Course (from a large institutional tax preparation firm) last Fall with the intention of providing a professional service to the community as I segued into retirement. After eleven weeks of the twelve week course, the RAL program was presented to me and the other members of the class. Until that time, I had no knowledge of the program. I was appalled at the APR's shown in the documents given to me and questioned the instructor about the ethics of the program. Her reply was even more appalling. She explained that Federal law prohibits tax preparation firms from being co-payees on tax refund checks and from having tax refunds mailed to the taxpayer in care of the tax preparer, so once the return is filed, the tax preparer loses control over these funds. She explained that by making the RAL to the taxpayer, the tax preparer is paid out of the RAL at the time the return is e-filed. When I asked who in the firm would be counseling the tax payer about the terms of the RAL, making the required disclosures, and answering questions about the interest rates, etc., she said that each of us as tax preparers would be responsible to do this and, more appalling yet, that our compensation for the tax season would be based, in part, on how many of these RAL's we “sold.” I withdrew from the course at that point. The question I regret that I did not ask was: “What happens to the taxpayer who has agreed to a RAL at an exorbitant rate and who does not receive a refund because the tax preparer made a mistake in preparing the return?” This industry needs to be regulated. I was truly relieved to read this article. Email your representatives in Congress.


randyl
Comment posted April 5, 2010 @ 9:56 pm

If these people weren't so greedy and, instead, waited for their checks, this wouldn't be a problem.

Always blame a business, whose job is to make money, for the ignorance and greed of people.

Just like the home loans.

Stupid people deserve what they get. Get an education. Your failure to know what a contract entails is your own fault. It's written in English. What, don't know English?


randyl
Comment posted April 5, 2010 @ 9:57 pm

“They see that they can get money, and they go for it.”

Ignorance and greed at it's finest. Patience will reap it's own rewards, like a bigger refund check.


elebra33
Comment posted April 6, 2010 @ 7:59 pm

I see it as it really is, I'm a consumer, just above the poverty level. Uneducated, no, greedy, no. These are just your opinions I guess but just because someone chooses an RAL doesnt mean they're uneducated or greedy b/c they want the money back as soon as possible. Maybe the reason the low income taxpayers are getting the RALs is because it's hard enough to live on their everyday income (isn't that evident when you classify someone as “low-income”…but i digress). If they're having trouble making ends meet, and have the opportunity to potentially recieve their tax refund in less than 5 days, why wouldn't they? Also, the fees associated with a RAL are b/c it is a bank product, meaning it's not actually the money from the IRS. In most cases all fees are paid out of this refund amount and the taxpayer doesn't have to pay out of pocket. I've seen fincance charges (b/c it IS a loan based off of your refund, not your actual refund) no higher than $57 and bank fees (b/c the taxpayer is not having to pay tax prep fees out of pocket, and it's the banks money they're receiving, not their actual refund, again) no higher than $50. That may seem dumb or uneducated to some of you, but I think it is convenient for most taxpayers. You should always go to a reputable tax preparation company, and they DO explain disclosures and fees and anything else that is necessary for the taxpayer to know. I personally use Jackson Hewitt and have never had a RAL, but b/c they are such great people they explain every option to me. Go get a life for all of you who think the RAL's should be ceased and we start picking up debit cards. Really, how much sense does that make? It's still going to be a bank product and there's continuous fees associated with them. You obviously dont know what you're talking about.


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The number one thing to remember is when a business tells you they are just trying to help you out, that is seldom the case. People open businesses to make profit, not for philanthropy.


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Comment posted March 29, 2011 @ 7:59 pm

Funny how the same people who protest people CHOOSING a RAL are the same one’s you support FORCING higher taxes on responsible citizens. Land of the free, indeed.


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