January 19, 2010: Major Changes to Regulate the Tax Refund Loan Industry

As tax season gets started, consumer advocates are warning taxpayers to stay away from refund anticipation loans, one of the most avoidable tax-time expenses. New research reveals these loans drained the refunds of about 8.4 million American taxpayers in 2008, costing them $738 million in loan fees, plus over $68 million in other fees.

Refund anticipation loans, also known as RALs, are bank loans secured by the taxpayer’s expected refund – loans that last about 7 to 14 days until the actual IRS refund repays the loan. That’s a good indication of just how needless RALs are: most taxpayers could have their refund in two weeks or less even without the costly loan.

The research was conducted by the National Consumer Law Center and the Consumer Federation of America, which together with a coalition of state and local consumer groups will be releasing reports on RALs in their regions. The groups include The Woodstock Institute, Community Reinvestment Association of North Carolina, Neighborhood Economic Development Advocacy Project, and the California Reinvestment Coalition.

Consumer advocates say major changes to the industry may spell the beginning of the end for these high-cost loans that target mostly low-income and minority taxpayers, particularly impoverished recipients of the Earned Income Tax Credit.

At the end of 2009, Santa Barbara Bank & Trust, one of the three biggest RAL lenders, was ordered out of the business by its federal regulator. SBBT provided the bulk of Jackson Hewitt’s RALs, leaving that company without a RAL source for over half of its stores.

Another RAL lender, Republic Bank & Trust, has dropped the price of its RALs to the same levels as H&R Block and JPMorgan Chase. This reduction means the vast majority of RALs now have reduced prices.

And finally, on January 4, 2010, the Internal Revenue Service (IRS) announced its plans to regulate the tax preparation industry. Currently, most tax preparers are not subject to any sort of licensing, competency or minimum educational requirements. As for refund loans, the IRS announced that it would create a task force to look at these products.

Consumer advocates applaud these recent actions by federal banking regulators and the IRS to protect consumers, but call for these further steps to be taken:

• The IRS should go further and enact rules to prohibit or regulate refund anticipation loans.
• Federal banking regulators must vigorously enforce their policies as to banks that offer high-cost tax refund products and stored value or debit cards used for tax refund deposits.
• Federal banking regulators should not allow any new banks to engage in offering high-cost tax-time products.

For more information or to arrange interviews with advocates, please call Tram Nguyen at (415) 864-3980.

The California Reinvestment Coalition advocates for the right of low-income communities and communities of color to have fair and equal access to banking and other financial services. CRC has a membership of more than 275 nonprofit organizations and public agencies across the State.