When Congress hastily created and passed the Troubled Asset Relief Program (TARP) last fall to bail out the financial sector, the program didn't offer any consumer protection against the type of predatory lending practices that led to the financial crisis. It came as no surprise, then, when Santa Barbara Bank & Trust, a self-described "community bank" in California, announced in January that it was intending to use its $180 million in bailout money to make high-priced refund anticipation loans, known as RALs.
RALs are short-term loans borrowed against a consumer's tax refund. They're often advertised as "quick cash," because they allow people to get their tax refund in days instead of waiting for the IRS, which can take at least 10 days. Historically, poor communities have been targeted for these loans. According to the IRS, 85 percent of the people who took RALs in 2006 had incomes of $37,300 or less, and nearly two-thirds were recipients of the Earned Income Tax Credit. On average, a person pays between $200 and $500 in fees for a RAL.
This tax season, it's expected that low-income taxpayers will pay more than $1 billion in fees and triple-digit interest rates associated with RALs.
Refund anticipation loans are made by a handful of banks, including HSBC, JP Morgan Chase and Santa Barbara Bank & Trust. The banks give tax preparers--including H&R Block and Jackson Hewitt, as well as preparers found at places like used car lots--a share of
the hundreds of dollars in "application," "processing"
and "e-file" fees that can be made from a single loan.
"These multimillion dollar corporations are basically skimming off another layer of taxpayer money with these loans," said Chi Chi Wu, a staff attorney with the National Consumer Law Center, an organization that specializes in consumer law issues on behalf of low-income people.
While refund anticipation loans can be classified as abusive, predatory loans, they escape government regulation because they are bank loans, Wu said. National banks are immune to state consumer protection laws. Other than requiring full disclosure about RALs, all most states can do is sue for the fraud frequently associated with these loans.
Recently, the IRS began to implement the initial phase of a new system to process tax returns and issue refunds within 48 to 72 hours. "While this is significant, the refund anticipation loan business is anticipating this," said Kimberly S. Jones of the California Reinvestment Coalition, a group that advocates for fair access to banking and financial services. "Now, some preparers provide RALs where you can walk out of there with a check or a check card. But it's still a good thing, because it shortens the amount of time that they can accrue interest."
Staff from the California Reinvestment Coalition and other groups recently met with Congress members to alert them to how bailout money was being used. "There was a lack of awareness on how TARP funds were being used" said Jones, who added that the groups are going to keep pressing Congress and the media about this "because there is a genuine, and appropriate, disgust with how TARP has been spent."
