Enacts the refund anticipation loan act

Justification

Refund anticipation loans (RALs) are short term, high cost loans secured by and repaid from the proceeds of a consumer's tax refund from the Internal Revenue Service (IRS). Instead of waiting to receive tax refunds, RAL customers borrow against part or all of their expected tax refund. This Act is designed to reduce some of the most serious problems associated with RALs.

RALs drain billions from the pockets of consumers. They are targeted at the working poor who receive the Earned Income Tax Credit (EITC). Approximately 12.7 million consumers paid about $1.5 billion in RAL and associated fees in 2002. Over 50% of these RAL consumers, or 7 million, were working poor families who receive the EITC. The consumer protections included in the Act can benefit the growing numbers of consumers who are sold RALs. These protections will benefit not only consumers, but also the U.S. Treasury, which pays out the EITC benefits that are drained by RALs every year.

Filers often consider instant refund offers because they don't want to wait the six weeks it can take to get a mailed refund from the IRS. RALs speed up receipt of cash from tax refunds, but not by much. A RAL puts cash into the consumer's hand in one or two days, or even on the same day for an extra fee. However, the IRS has stated that a consumer who uses electronic filing and has a bank account into which the refund can be direct deposited can receive a refund in as little as 10 days. Many consumers don't have a bank account, so they can't take advantage of the IRS' direct deposit option for those who file electronically.

Consumers pay several fees to get a RAL: a loan fee for the RAL, an "administrative" or "electronic filing" fee, and a fee to a. commercial tax preparer for filling out the federal and state tax forms. RALs also carry triple digit Annual Percentage Rates (APRs) based on this usual 10 day period. Typical RAL loan fees translate into APRs of about 70% to over 700%. However, some tax preparers and RAL lenders have been reporting lower APRs by "unbundling" charges in order to make the loans look less expensive.

In 2004, typical loan fees ranged from $35 to $105. Administrative fees can range from $30 to $55, and tax preparation fees average around $120. What the consumer receives in hand is the refund minus the loan fee, the administrative fee, and the tax preparation fee. For the average refund of about $2,100, the total amount of the three fees might be around $250.

It may sound like an easy way to get your tax refund a little faster. But make no mistake: an RAL is a LOAN, with all of the costs that come with taking out a loan - and then some. Unlike a traditional loan, the interest rate (the annual percentage rate or APR) for RALs is sky high. Taking out one of these loans can he a costly trap for consumers who don't realize that a RAL is not a short cut to getting a refund but simply an outrageously expensive short-term loan. It is a vicious cycle of fees for a consumer who needs an instant refund or RAL.

This bill reforms refund anticipation loan practices to help consumers make sound financial decisions for their families.

Fiscal implications

None.

Local fiscal implications

None.

Effective date

January 1, 2010