State Senator Schoenberg, Attorney General Madigan, Community Advocates Propose Reform
Office of the Attorney General Lisa Madigan
Chief Legislative Aide
Office of Senator Jeffrey Schoenberg
[Chicago]- In the Chicago region, 38 percent of all Earned Income Tax Credit recipients are using a high cost refund anticipation loan to get their refund faster. Costing about $248 in fees for the average tax preparation and loan with annual interest rates in the triple digits, these products cost lower-income families in the region over $48 million in lost income based on 2002 data, the most recent available.
The Earned Income Tax Credit (EITC) is a refundable tax credit program for working families. Since its inception in 1975, the program has been credited with lifting nearly 5 million families out of poverty annually. In total, lower-income taxpayers in the Chicago region receive about $903 million as a result of the Earned Income Tax credit, with an estimated additional $45 million from the Illinois Earned Income Credit.
Working families throughout the Chicago region are spending hundreds of dollars to access their own money a few days earlier, said Tom Feltner, the reports author. With usage rates as high as 62 percent in some communities, we need to develop policies to reduce the cost of this type of product and increase funding for free tax preparation services, he said.
In an effort to ensure that working families do not lose the much needed public benefit provided by the EITC, Attorney General Lisa Madigan, State Senator Jeffrey Schoenberg (D-9) and community advocates, such as Voices for Illinois Children, Work, Welfare & Families, Sargent Shriver National Center on Poverty Law, Metropolitan Family Services, Woodstock Institute, Center for Tax and Budget Accountability, the Center for Economic Progress and Citizen Action, proposed Senate Bill 2844. The legislation prohibits RAL facilitators from charging fees for any RAL with an APR in excess of 26% that is issued to a borrower who is eligible to receive the Illinois Earned Income Tax Credit.
The bill further provides that RAL facilitators must make certain disclosures to the borrower on a separate form, including: informing the borrower that he or she is taking out a loan, the loan fee schedule, the Annual Percentage Rate, and fees and costs connected with the loan. The facilitator must sign and date an acknowledgment attached to the disclosure form, as well as, retain the original copy of the acknowledgment and provide the duplicate copy to the borrower.
The majority of RAL recipients are the working poor who can least afford to lose any amount of their tax refund. Instead of simply receiving their entire anticipated refund, however, RAL consumers receive a short-term loan with extremely high fees that will deprive them of the full value of their Illinois Earned Income Credit, Madigan said. Senate Bill 2844 can help ensure that the tax refund and benefits afforded to low-income working families will not be eaten up by the exorbitant fees and costs packed into these loans.
These unregulated, high-interest loans and service charges are profitable for companies because they take advantage of working families struggling to put food on the table and trying to move toward economic independence, Schoenberg said. We need to act as soon as possible to put an end to these unconscionable and unfair lending practices."
Schoenberg, who chairs a key Senate budget panel and sits on the Financial Institutions Committee, said that studies show nearly half of those who receive the instant refund loans receive government financial assistance in the form of tax reductions and cash supplements.
The reports major findings show:
- The Earned Income Tax Credit returned $903 million to working families in the Chicago region, with an average value of $1,764 per recipient.
- In the Chicago region, on average, 38 percent of all Earned Income Tax Credit recipients use refund anticipation loans to receive their refunds faster, paying $48,282,872 million in tax preparation and loan fees.
- Sixty-two percent of all EITC recipients in the city of Robbins, Illinois used RALsthe highest in the Chicago region. In contrast, only 29 percent of EITC recipients in Summit Argo, a community with roughly the same number of EITC recipients as Robbins, used RALs.
- Refund anticipation loan usage is particularly high in south suburban Cook County. Of the top 15 communities ranked by refund anticipation loan usage, 9 of these communities were located in the south suburbs.
- There is also a wide variation in RAL usage across the Chicago region. Out of the 107 communities analyzed, 12 or 6 percent had RAL usage at or above 50 percent of EITC recipients while 68 communities or 29 percent had a RAL usage of between 18 and 30 percent.
- Throughout the state, refund anticipation loan usage varies by metropolitan area. In Kankakee, Illinois overall usage was 50.4 percent. The Quad Cities region had the lowest usage rate, with only 26.8 percent of EITC recipients taking out RALs.
- The percent of EITC recipient usage also varies by the race and income of a zip code. Across the state, 53 percent of recipients who live in predominantly minority tracts use RALs compared with only 27 percent of recipients in predominantly white tracts. Similarly, 57 percent of recipients in low-income zip codes use RALS compared with 19 percent of recipients in upper-income tracts.
The full report Reinvestment Alert 29: Refund Anticipation Loans Usage Rates
Negatively Impact the Asset Building Potential of the Earned Income Tax Credit
is available below.
Woodstock Institute, founded in 1973, is a nationally-recognized resource on credit and capital needs of low-income and minority communities. The Institute engages in applied research, policy development, and technical assistance to promote community economic development.