With tax season underway, there’s lots going on with tax refund anticipation loans (RALs), including stepped up regulation and expanded support for free volunteer tax assistance programs which offer alternatives.
Consumer advocates continue to press for the elimination of refund loans, calling them a predatory financial product. “They’re a high-cost credit product, they’re not necessary, and they primarily target low-wealth people and communities of color,” said Katie Buitrago of the Woodstock Institute.
RALs are “wealth-draining products,” she said.
A Woodstock report issued in January found that Illinois taxpayers who pay “hundreds of dollars to receive their own money a few days earlier” spent $114 million on RALs in 2006, Buitrago said.
Filers in African-American communities are more than three times more likely to use RALs than others, according to the study. That’s in line with extensive evidence that “high-cost lenders tend to concentrate in communities of color,” Buitrago said.
Early last month, Woodstock joined with consumer advocacy groups across the country to call on the U.S. Office of the Comptroller of the Currency to enforce guidelines issued in 2007 holding banks that issue RALs responsible for the training and advertising of tax preparers who supply them with customers.
Concerns included misleading and deceptive marketing and a high volume of inaccurate returns.
On February 18, OCC announced a new policy statement (pdf) and a consumer advisory on tax refund products. The policy statement requires banks to ensure that tax preparers provide customers with statements itemizing RAL fees and explaining that RALs are loans which must be repaid even if returns are smaller than anticipated; that RALs can “substantially reduce [earned income tax credit] benefits”; and that alternatives to RALs, including electronic filing and direct deposit, are available.
The policy also bans marketing using terms like “rapid refund” that obscure the fact that RALs are loans.
Woodstock welcomed the policy statement and called for aggressive enforcement of its provisions. The group reiterated its call for a cap on RAL interest rates, and urged the OCC to prevent other banks from entering the field — and to “convene a meeting of RAL lenders, regulators, and advocates to discuss an orderly exit of banks from this market following the 2010 tax season,” according to a statement provided by Buitrago.
Two national banks currently provide RALs: HSBC, which finances loans through H&R Block, and JPMorgan Chase, which offers loans through 13,000 independent tax preparers. A California bank which financed most of Jackson Hewitt’s RALs was barred from the business by OCC last year.
Buitrago said meetings last year with JPMorgan revealed that the bank was not abiding by the 2007 guidelines.
Last November the Illinois Department of Financial and Professional Regulation barred consumer installment lenders from offering RALs and required currency exchanges, payday lenders and pawnshops to apply to IDFPR for licenses to handle RALs. Spokesperson Sue Hofer said there have been inquiries from businesses about the new requirements, but she had no information about requests for licenses.
Announcing the crackdown, Governor Quinn said the goal was “to limit access to these predatory loans.”
Woodstock has recommended that “fringe preparers” be barred from issuing RALs, noting that they offer the highest-cost loans, often featuring extensive add-on fees for administrative tasks.
In another regulatory development, the IRS recently announced that starting next year, it will begin requiring paid tax preparers to register, fulfill training and competency testing requirements, and abide by a code of ethics. The agency will also establish a national data base to track tax preparers.
Unlike paid preparers, volunteers at free community-based tax assistance centers undergo annual training and certification exams, said Jackie Lynn Coleman of the National Community Tax Coalition. In Illinois, free volunteer assistance for low-income families is available from the Center for Economic Progress throughout Chicago and in 30 communities statewide.
In many cases there are bank and credit union partners onsite who will help set up low- and no-cost savings and checking accounts to facilitate direct transfer of returns, said Raisa Allaire of CEP.
With a focus on maximizing use of the earned income tax credit, CEP helped 33,000 Illinois families obtain $52 million in refunds last year.
Some observers anticipate an increase in RAL use by economically-strapped taxpayers. Coleman said economic pressures can cut both ways. She said she was hearing about volunteer assistance sites “bursting at the seams.”
“People are refusing to use paid preparers because they really need the additional dollars,” she said. “They’re willing to wait, even willing to come back” if a volunteer site is full.
Since last year, a new federal grant program has assisted volunteer tax assistance programs with outreach to neglected communities. CEP has used the funds to reach out to rural and disabled populations, she said.
Still, free volunteer tax preparation sites serve a small fraction of taxpayers. In Chicago in 2006, about 60 percent of taxpayers used paid preparers, according to IRS figures provided by CEP; for recipients of the earned income tax credit, whose returns can be even more complicated, the figure was almost 73 percent. Not quite 3 percent of EITC recipients used volunteer preparers.
CEP has increased its volunteer base; it’s up to 2,100 statewide, up 200 from last year, Coleman said. “That’s not the case everywhere,” she said. NCTC has launched a national volunteer engagement drive.
One reason low-income taxpayers, including EITC recipients, are more likely to use RALs is because they can be used to cover upfront fees from paid preparers.
When it comes to the EITC, that undercuts the economic stimulus provided by what advocates call the most effective anti-poverty program going. Congress recognized this last year by increasing payments to larger families and expanding eligibility standards for single taxpayers as part of the recovery act.
Each year RALs take nearly $800 million nationally that could help low-income families — and be spent in local economies – and sends it back to Wall Street. But with growing awareness, stiffer regulation and greater access to alternatives, the future of this product may be limited.
Indeed, according to one report, tighter bank credit means RALs are taking longer to process – sometimes up to three weeks – “eliminat[ing] the incentive to take them out in the first place.”