Refund anticipation loans are loans arranged by tax preparers for the estimated amount of a borrower’s income tax refund. The borrower pays a high fee to receive the money within one to three days of filing his or her tax return, instead of waiting the ten days it would usually take to receive their refund from the IRS via direct deposit. The loan is repaid when the tax preparer receives the borrower’s refund from the IRS.
Refund anticipation loans allow taxpayers to receive their expected tax refund in one to three days, compared to the ten days it would take to receive a refund through direct deposit. RALs often come with very high fees and the borrower must repay the full loan amount—with high interest rates—if the refund turns out to be less than expected.
Since I do not own stock in Chase, I used a shareholder proxy kindly provided by colleague Adam Rust of the Community Reinvestment Association of North Carolina (CRA-NC) to gain entry (through tight security) to the shareholder meeting. When I got my turn at the microphone, I explained that, as a customer of Chase and its predecessor banks in Chicago for nearly 28 years, I want to be proud of the bank where I do business.
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.
Although these OCC actions come too late to protect millions of consumers who have already been harmed by deceptive marketing and high-cost RALs this tax season, Woodstock Institute welcomes the OCC efforts as a step in the right direction. The new OCC Policy will be effective only if it is rigorously enforced, however. The new Policy’s disclosure requirements and prohibition of deceptive marketing practices are only slightly stronger than an OCC policy that has been on the books since 2007 but never widely publicized or enforced.
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.
An alternative to using paid tax preparers is to visit a free tax preparer certified by the Internal Revenue Service. Persons who are low-income, disabled, homebound, speak English as a second language, age 60 or over, or a military service member or family member may be eligible for this reliable and free tax preparation service.
Failure to disclose interest rates, adequately supervise third party loan arrangers acting as agents of national banks, and maintain sufficient capital-these are the same criticisms my organization and others lobbed at the mortgage industry long before its collapse. These criticisms apply just as well to the tax refund loan industry. Rather than wait, we ask federal banking regulators to take additional steps to protect consumers now — before another $114 million in potential assets are lost this tax season.