Action Line: Tax-time 'refund anticipation loans' to no longer be widespread
BY PHIL MULKINS World Action Line Editor
Sunday, January 20, 2013
1/20/13 at 4:35 AM
Dear Action Line: I've noticed these income tax preparers advertising on TV are also advertising quick loans based on expected refunds. Is this still allowed? - M.T., Tulsa.
Consumers who handle their saving needs by withholding too much from their wages for income taxes so they can get large refunds at tax time are always in a hurry this time of year for these refunds to arrive. Certain tax preparation services have taken advantage of this by offering them immediate cash through short-term loans secured by taxpayers' expected refunds - the refund anticipation loan (RAL).
RALs: A year ago, the price for typical RALs (from Republic Bank & Trust) for loans of $1,500 was $61.22., plus another $29.95 for a refund anticipation check (RAC) for the remainder of the consumer's refund. The $61.22 fee translated to an APR of 149 percent - money they charged for the taxpayer to get his own money.
The Center for Responsible Lending - a Consumer Federation of America "nonprofit, nonpartisan organization working to protect homeownership and family wealth by fighting predatory lending practices" - said in February 2012, "This is the last year high-cost, high-risk RALs will be made, at least on a large scale, by banks.
"In December 2011, the last of the RAL-lending banks entered a settlement with the Federal Deposit Insurance Corporation agreeing to cease making RALs after April 2012. While an occasional fringe lender may make a tax-time loan, the sale of RALs as a widespread, industry-wide practice is over. RALs will no longer drain the tax refunds of millions of mostly low-income taxpayers (go to tulsaworld.com/taxrefundtraps).
RACs: "Even with the end of RALs, low-income taxpayers still remain vulnerable to profiteering," says the center's report. "Tax preparers and banks continue offering a related product - 'refund anticipation checks' (RACs) - which are subject to significant add-on fees and represent high-cost loans of the tax preparation fees. Tax preparation fees can often be opaque and expensive, with taxpayers unable to obtain estimates of fees to comparison shop. The next challenge is to ensure that RACs are made unnecessary and tax preparation fees subject to a standardized, easy-to-understand disclosure."
Arkansas Attorney General Dustin McDaniel issued a consumer alert on RACs on Jan. 9: "Tax preparers offer RACs to consumers who don't have money to pay for tax preparation services or do not have bank accounts. With RACs, tax preparers and their partner banks open temporary bank accounts for the IRS to directly deposit tax refunds.
"Typically, consumers are charged fees of $30 for this service. Add-on costs may easily amount to more than $100 and that's in addition to 'tax preparation fees.' The fees and costs are all taken from the consumer's refund. "The thought of quick cash is appealing, especially to financially strapped consumers. However, the reality is that taxpayers pay high fees while essentially borrowing their own money in exchange for a rapid refund that they otherwise could receive in full by just waiting a few days."
Original Print Headline: Tax 'refund anticipation loans' to no longer be widespread
Submit Action Line questions by calling 918-699-8888, e-mailing phil.mulkins@tulsaworld.com or by mailing them to Tulsa World Action Line, PO Box 1770, Tulsa OK 74102-1770.
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