March 2005

Refund Anticipation

From the NYS Assembly • Sheldon Silver, Speaker
Catherine Nolan • Chair, Banks Committee
What the experts are saying...

"We are amazed how many people who use (refund anticipation loans) still don’t realize what they have is a loan. Anytime you will get cash within one to three days of filing, it’s not an IRS refund. It’s a bank loan that has to be repaid."

- Jena Ann Fox, Director of Consumer Protection, Consumer Federation of America.

"You’re talking about a two-, three- or even four-thousand dollar loan that they’re on the hook for, (which is a huge setback for) people who are probably low-income and live paycheck to paycheck."

- Chi Chi Wu, Attorney, National Consumer Law Center

"We live in [an] ‘I want it now’ society, and a lot of people are enticed by the idea that they can get it just a few days quicker."

- Mary Ruth Herbers, Director, Center for Economic Progress

"They run between 67 percent and 774 percent APR (annual percentage rate). (Lenders) don’t tell you that a lower APR assumes the loan is for the entire year rather than the two weeks it typically takes to get your refund."

- Christopher Peterson, Washington lawyer

Assembly urges taxpayers to be wary of instant tax refunds
Refund anticipation loans are quick - but often costly

With tax season upon us, millions of Americans are expecting refund checks. For some, inundated with outstanding bills and day-to-day expenses, waiting an average of six weeks for a refund check seems too long. People are increasingly relying on short-term cash advances, or refund anticipation loans (RALs), which provide taxpayers their returns – or at least a portion of them – instantly.

To better protect consumers, the Assembly supports legislation creating the Refund Anticipation Loan Act and requiring tax preparers who offer these loans to fully disclose fees and other conditions associated with them.

Quick refund loans come at a price

With extraordinarily high annual percentage rates, processing fees and heavy service deductions, many of these refund anticipation loans take a significant bite out of the refunds due to working families.

Tax preparation agencies often have a financial interest in making RALs. Because it is a seemingly "instant" way for many taxpayers to receive their refund checks in advance, they often overlook the extent to which RAL fees and finance charges erode the full refunds they are due.

Loans targeted to low-income consumers

Unfortunately, the promise of an “instant” refund tends to entice families of modest means more than any other income level. Families struggling to make ends meet often see cash advancement on refund checks as a way to get fast money. In reality however, many consumers don’t understand that these so-called "refunds" are actually loans – with all the costs associated with taking out a loan. Some deceptive tactics can force consumers to pay triple-digit interest rates.

In 2003, nearly 60 percent of all refund anticipation loans – roughly 7 million – went to households that were eligible for the Earned Income Tax Credits (EITC), a program geared toward easing the tax burden faced by low-income Americans, according to a survey conducted by the National Consumer Law Center (NCLC) and the Consumer Federation of America. The survey of over 2,000 households found that 80 percent of RAL recipients earned a yearly income of $35,000 or less, and that the majority did not have an education level above high school.

Assembly fighting to protect taxpayers

To combat deceptive loan practices and better protect consumers, the Assembly has introduced the Refund Anticipation Loan Act (A.1971 Nolan). The measure would limit loan fees and prohibit debt collection abuses by businesses offering the loans, as well as provide consumers the right to recover damages, costs and legal fees. In addition, those offering RALs would have to register and provide bonding – a move designed to ensure state oversight and assure compliance with the law.

The Assembly has also introduced legislation requiring tax preparers who offer refund anticipation loans to fully disclose fees and other conditions associated with them (A.1366 Nolan). It would require the full disclosure of the terms for tax preparers who offer RALs, and a warning that the full amount of the RAL will have to be repaid if the refund is not the anticipated amount. Preparers would be subject to penalties for failure to disclose information about the loans.

The Assembly’s legislation will ensure that tax preparers offering RALs clearly explain all of the terms, and help ensure that applicants are made fully aware of the true financial costs of these loans, which are marketed as “instant” refunds.

Benefits of waiting for your refund

The temptation of obtaining a quick cash refund is overwhelming for many people. Taxpayers should consider the following before taking a RAL:

  • State and federal refunds used to take months but can now be processed in just days or weeks
  • Choosing to file electronically, or e-file, refund checks can be received in half the time
  • RAL interest rates and fees leave taxpayers paying extra to get their refunds sooner – patience is rewarded in the form of a bigger check

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