Would you take a loan with interest rates of 100 percent or more? Unlikely. Then why did 8.7 million American taxpayers do that in 2006? The answer is that they were promised fast cash, but in many cases, were unaware that they were taking out a loan at all. US taxpayers in 2006 spent over $900 million to get their tax refunds a few days early.
Who are these borrowers? Not surprisingly, they are lower-income taxpayers, eligible for Earned Income Tax Credit, and more often than not, living in communities of color. In fact, according to a recent report from Woodstock Institute, taxpayers in African-American communities in Illinois in 2006 were 3.5 times more likely to use RALs than taxpayers from other communities.
Why are these loans so popular? The widespread usage of tax refund loans, much like the predatory subprime mortgage, relies on the confluence of two factors. First, it requires a network of paid tax preparers to aggressively market these high-cost loans. And just like the subprime mortgage explosion, it depends on weak regulatory oversight, allowing nearly all of these paid preparers to handle complicated tax returns without any professional qualifications. As a result, nearly every corner or strip mall has a paid tax preparer with a strong financial incentive to inflate returns and maximize loan fees.
What can be done to prevent future abuses? ACCION USA supports the proposals put forth by Woodstock Institute - a cap on loan fees and a tax preparer certification process.
This tax season, taxpayers deserve to keep their entire return.