Federal regulator worked to keep tax refunds away from high-cost loans
By Charlene Crowell
Every tax season, consumers across the country hope that when their returns are completed a refund will soon be on the way. Consumers that qualify for the Earned Income Tax Credit (EITC) program are likely among the most anxious to receive their refunds, as it usually represents a significant cash infusion.
Just as consumers wait a full year in hopes of receiving a refund, high-cost and high profit lenders are just as anxious to take substantial amounts from consumers’ hard-earned dollars.
One of the worst offenders is those who offer Refund Anticipation Loans, also known as RALs. Generally offered by banks and tax preparation services, RALs are one of the shortest term loans available and come with some of the highest fees. The loans, backed by turning over your refund to the lender, provide consumers with instant cash – but these consumers then forfeit a sizeable portion of their refund. The larger the refund, the larger the RAL fees.
Consumers using these predatory loans are often unaware of the range of choices now offered by the Internal Re-venue Service. Waiting periods for tax refunds are now just a day or two. With options such as e-filing and direct deposits, there is no need to give a bank or tax service your dear dollars.
The Federal Deposit Insurance Corporation (FDIC) used its regulatory authority to discourage banks from offering RALs. Many might presume that members of Congress would congratulate the FDIC for its consumer-friendly stance.
Instead, on March 16 members of the House Financial Services Committee criticized FDIC for alleged ‘abusive tactics’ rather than focusing on the FDIC’s push to prevent harm to consumers and risks to banks. The attack is unfortunate, given that most people want government to have their back.
It is even harder to understand in light of the economic devastation wrought by lax enforcement of financial regulation having led to the 2008 economic crisis. If there was a lesson to be learned from this still incomplete recession, it is that most people want effective and aggressive enforcement of consumer protection laws.
“Tax refund anticipation loans preyed on low-income consumers by charging extraordinarily high prices – as high as 500 percent APR – in exchange for receiving tax refunds a little early,” noted Mike Calhoun, president of the Center for Responsible Lending. “As the bank repaid itself, it also collected high fees directly from the refund …. The FDIC acted responsibly and should continue to take action when banks engage in suspect and predatory practices.”
In many cases, consumers eligible for the EITC may not owe any taxes at all; but must file in order to receive the credit. The actual EITC amount varies depending on the adjusted gross income, and size of the household. For 2015, a single head of household’s adjusted gross income could be as low as $14,820 or as high as $47,747. Similarly, a married couple filing jointly could have an adjusted gross income ranging from $20,330 to $53,267. Additional information on EITC is available on the IRS web.
A few hundred or a couple thousands of dollars may not mean much to trillion-dollar enterprises, but it can mean all the difference in the world to a financially-struggling family: catching up on past due bills, finally a chance to go see a doctor, or even putting a little aside for the family’s financial well-being.
If you’ve earned a tax refund, every dollar of it should be yours to keep.