Refund anticipation loans (RALs), which allow borrowers to receive their expected tax refunds in one to three days, cost Illinoisans more than $114 million in 2006, according to a new report. Tax filers in African-American communities were 3.5 times more likely to use RALs than were tax filers in other communities. Over 23 percent of tax filers in African-American communities used RALs to access their refund early, while only 6.8 percent of all tax filers statewide used RALs.
These high-cost, short-term loans secured by a taxpayer’s projected tax refund are arranged by for-profit tax preparers in partnership with large banks as a quick alternative to receiving a refund directly from the IRS through a paper check or direct deposit to a bank or credit union account.
Refund anticipation loans continue to disproportionately impact communities of color
“Almost one in four taxpayers living in African-American communities pays hundreds of dollars to receive his own money a few days early,” said Katie Buitrago, Policy and Communications Associate at Woodstock Institute. “Millions of dollars that could be used to pay down debt or provide a safety net for emergency expenses are being lost.” This analysis is from a report based on 2006 RAL data released today by Woodstock Institute entitled “Diverted Opportunity: Refund Anticipation Loans Drain Wealth from Low-wealth Tax Filers and Communities of Color” in conjunction with other consumer advocates.
The report found that recipients of the Earned Income Tax Credit, a federal anti-poverty program, were disproportionately impacted by RALS: In Illinois, 27 percent of EITC recipients choose to receive their refunds using a RAL, compared to only 3 percent of non-EITC recipients.
The rate at which both EITC recipients and non-EITC recipients in African American communities used RALs was much higher than the statewide average. EITC recipients in African American communities were 1.5 times more likely to use a RAL than are EITC recipients statewide. The contrast is even starker for non-EITC recipients: in African American communities, they were 3.6 times more likely to use a RAL than were other non-EITC tax filers statewide.
The report recommends several strategies to reduce the impact of RALs on low-wealth taxpayers, including capping RAL fees, expanding funding for free tax preparation, and requiring tax preparers to disclose lower-cost alternatives such as direct deposit alongside higher-cost RALs.
As some regulators crack down on RALs, others stop short of protecting consumers
State and federal regulators recently took steps to protect consumers from refund anticipation loans and other high-cost tax-time products. In a move lauded by consumer advocates, state regulators cracked down on high-cost consumer financial service companies, such as payday lenders and check cashers, who want to offer RALs. Advocates also applaud recent actions taken by federal banking regulators to enforce some consumer protections on RALs, as well as the Internal Revenue Service’s recent announcement of certification standards for tax preparers. However, Woodstock is concerned that one federal banking regulator has failed to adequately monitor banks offering high-cost tax-time products.
“Even as some federal regulators take steps to protect consumers, we believe the Office of the Comptroller of the Currency, the primary regulator for several banks supporting tax loan providers, is not fully implementing consumer protections that are currently on the books,” said Buitrago. “As taxpayers consider their filing options, we call on the OCC to keep consumers safe and enforce their existing disclosure and tax preparer certification requirements.”