A coalition of community reinvestment and consumer organizations asked the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC), charged with overseeing consumer protections for national banks, to immediately implement its longstanding, but unenforced, disclosure requirements, advertising standards, and capital requirements for refund anticipation loans. The consumer organizations sent a joint letter on February 4, 2010.
At issue is a 2007 federal guidance, which requires banks making refund anticipation loans, or RALs, through paid tax preparers to review both the advertising and the professional qualifications of paid tax preparers arranging the loans. Advertising violations and incorrectly prepared tax returns suggest that the guidance has not been adequately implemented. A recent survey of consumer experiences with paid tax preparers from Philadelphia and Durham, North Carolina, as well as a recent settlement against one large tax preparer prompted the concern.
The letter requested that the OCC immediately enforce existing consumer protection policies, prohibit new financial institutions from entering the tax refund loan business, and eliminate the product entirely after the 2010 tax season.
Under the guidance, JP Morgan Chase, one of the largest tax loan providers, would be responsible for enforcing strong disclosure requirements, advertising standards, and professional certification of tax preparers. Chase currently provides loans through over 13,000 independent tax preparers.
Other national banks making RALs would also be subject to the guidance. Pacific Capital Bancorp, the parent company of Santa Barbara Bank & Trust, a major tax loan provider, was recently ordered by the OCC to stop making the loans.
“We are seeing the same problems with paid tax preparers as we did with mortgage brokers, namely, high-cost loans originated with little oversight from either the bank or the regulators,” said Dory Rand, president at Woodstock Institute. “We appreciate that the OCC recently shuttered the RAL operation at Pacific Capital Bancorp, however, two other OCC regulated banks, Chase and HSBC, continue to make RALs.”
Tax refund loans strip millions in wealth from low-income communities and communities of color each year, according to a recent Woodstock study. In 2006 alone, Illinoisans spent more than $114 million on tax refund loans, with borrowers in African-American communities far more likely to use RALs than are tax filers in other communities.
“Nearly one in four taxpayers living in Illinois’ African-American communities pay hundreds of dollars to receive their own money a few days early,” said Rand. “Millions of dollars that could be used to pay down debt or provide a safety net for emergency expenses are being lost.”