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For Immediate Release: Thursday, January 27th, 2005 Contact: Jordan Isenstadt (c) 516.991.3842 (w) 212.490.9535
(f) 212.490.2151 State Senator Liz Krueger
to Introduce Legislation to Provide Greater Oversight of Refund Anticipation
Loans Low Income New Yorkers Are Being Ripped Off By Tax
Preparers & Banks With Prospect of Quick Returns Albany, NY – Saying “low income New Yorkers deserve better,” State Senator Liz Krueger (D-Manhattan) announced today that she plans to re-introduce a Refund Anticipation Loan Act, at a conference of the Children’s Defense Fund. “Consumers are being misled into thinking that refund anticipation loans are merely quick refunds,” said Senator Krueger. “These loans drain billions of dollars from the pockets of ordinary people. My bill will go a long way towards providing an oversight mechanism and curbing abusive tax refund loans that gouge low income, working New Yorkers.” The Refund Anticipation Loan Act is also being re-introduced in the Assembly by Catherine Nolan, Chair of the Banks Committee. 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. Consumers pay several fees to get a RAL, including a loan fee for the RAL, a fee to set up a "dummy" bank account into which the IRS will wire the tax refund, an “administrative” or “electronic filing” fee, and a fee to a commercial tax preparer for filling out the federal and state tax forms. 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. Because RALs only last about 10 days, fees for these loans translate into outrageous annualized interest rates ranging from 70% to over 700%. The RAL act includes provisions to limit RAL fees, prohibit debt collection abuses by facilitators, and prevent referrals to check cashers. It provides for mandatory disclosures accompanying the RAL application. In addition, the bill contains registration and bonding requirements designed to ensure oversight and assure compliance with the act. Importantly, the act grants consumers with a private right of action to recover damages, costs and attorneys fees. “RAL’s are often marketed to people who need their tax refund the most. Over half of RAL consumers are recipients of the Earned Income Tax Credit (EITC). This legislation seeks to fully inform the consumer of what they are getting themselves into when they take out a RAL. Hopefully, with full disclosure, consumers will realize that it is more beneficial to wait for their refund to come directly from the IRS,” stated Assemblywoman Catherine Nolan. “Cash-strapped consumers will pay close to a billion dollars in RAL-related charges in the next year,” said Senator Krueger. “That money belongs in the pockets of consumers, not in the coffers of wealthy banks and tax preparation businesses. We must pass this legislation immediately to cease this despicable practice.” "Tax prep companies blanket New York neighborhoods with ads for fast cash and instant money," said Sarah Ludwig, Director of the Neighborhood Economic Development Advocacy Project (NEDAP), a fair lending resource center based in New York City. "This instant refund is actually a high cost loan packed with predatory fees. Low income taxpayers also can go to one of hundreds of free tax preparation sites in New York, and would receive their entire refund from the IRS in just seven to ten days if they have a bank or credit union account." “It is clear that refund anticipation loans are targeted at the working poor who receive the Earned Income Tax Credit,” stated Senator Krueger. “This money is necessary for the survival of low income consumers and is needed to lift them out of poverty. Instead the tax preparers and the banks involved in these schemes are taking advantage of those who rely on their services, claiming their money through fees and exorbitant interest rates.” The Earned Income Tax Credit (EITC) is a refundable credit provided through the tax system and intended to boost low-wage workers out of poverty. The EITC is the largest federal anti-poverty program, with over $36 billion provided to over 20 million families last year. A
common experience that one might have at a tax preparation office, such as
H&R Block, is: Upon
walking in and requesting an RAL, you are first required to sign a contract
that gives a bank the right to be a primary creditor in the case of
default. After agreeing to accept the
consequences of the RAL, the consumer is only then provided with rate
information, including loan charges and fees. Moreover, consumers are not allowed to take the contracts off
premises to comparison shop.
“Essentially, tax preparers are hiding the realities of refund
anticipation loans from consumers,” stated Senator Krueger. “The people who apply are not told about
the sky-high fees and charges that they will incur until after they have
already decided that they want the RAL.
They are blinded by the prospect of receiving quick tax money. This is clearly a scam and we must put an
end to it.” The U.S. Supreme Court recently rejected an appeal by H&R Block Inc. to break up a class-action lawsuit accusing the company of gouging millions of taxpayers through RALs. The Supreme Court's ruling was a decision not to review the case at this time, which is still months before the trial. The claim was filed on behalf of an estimated 17 million customers, alleging that Block and Household may be liable for class action damages under federal racketeering laws “It seems that more and more banks and tax preparers are trying to get in on the business of taking a cut out of consumers’ tax refunds,” said Senator Krueger. “My legislation will work to stop this practice by requiring greater disclosure and making refund anticipation loans more transparent. In the final analysis, we must work vigilantly to protect consumers from deceptive lenders.” -30- |
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