Feedback: RAL Borrowers Need More Protection

January 21, 2010, 3:32 p.m. EST 1 Min Read

Underbanked

Many Tax-Prep Customers (RAL Borrowers) Up for Grabs

The regulatory crackdown on refund-anticipation loans is poised to redistribute market share from one tax preparer and its bank partner to their rivals.

By Maria Aspan

January 13
Underbanked

Tightening Screws on Tax Refund Anticipation Loans

The Internal Revenue Service, as part of its plan to regulate tax preparers on the federal level, said it will examine refund-anticipation loans and other tax-time financial products, just as banking regulators crack down on some of the few financial institutions that still fund such loans.

By Maria Aspan

January 11

To the Editor:

The scramble to secure tax refund loan partnerships ["Many Tax-Prep Customers (RAL Borrowers) Up for Grabs," Jan. 14, 2010] before the opening day of the 2010 tax season is the direct result of a regulatory crackdown that many consumer advocates believe was long overdue. With one major lender undercapitalized and another under increased scrutiny, it is clear regulators are beginning to take notice of the issue. However, both of these actions were taken to protect the safety and soundness of the banks themselves, not to protect the Illinois consumers who paid $114 million dollars in 2006 just to receive their tax refund loan a few days earlier than if they had waited for the IRS refund.

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.

It is critical that regulators aggressively implement existing tax refund loan guidelines. While we have seen the Office of the Comptroller of the Currency take steps to rein in one RAL provider, we have yet to see the OCC fully enforce its disclosure guidelines or adequately oversee tax preparers arranging loans for the other national banks it regulates. These protections work together to ensure that consumers can make an informed choice and do not fall victim to improperly inflated returns set up to maximize loan fees.

While increased regulatory scrutiny is needed in the short term, we look forward to the product's obsolescence. Let me be clear: tax refund loans disproportionately strip wealth from taxpayers qualifying for the Earned Income Tax Credit and those living in communities of color, and we wholly oppose this line of business. We look forward to the speedy processing of tax returns by the IRS, which will greatly diminish the need for a tax refund loan. At a staggering $114 million a year in lost assets a year in just one state, these improvements cannot come soon enough for Illinois or the country.

Dory Rand
President
Woodstock Institute
Chicago