States Begin Regulation of Refund Anticipation Loans

Internal Revenue Service data show that mostly low-income individuals and families are getting refund anticipation loans. As other states begin to regulate such loans charging interest rates of more than 200 percent, legislation is likely to be reintroduced in the Illinois General Assembly in the next session.

Connecticut and Oregon have signed bills regulating refund anticipation loans, or RALs. Connecticut Gov. M. Jodi Rell signed Public Act 05-107, an Act Protecting Consumers in the Making of Income Tax Refund Anticipation Loans, on June 7. Connecticut becomes the first state in the country to regulate the interest rate for RALs. Oregon Gov. Ted Kulongski followed suit, on June 29, by signing a RAL bill, effective January 1, 2006, and giving consumers new protection measures. The Oregon law requires that the costs and terms of such loans be fully disclosed to consumers and that the loans be arranged by either licensed tax preparers or consultants. The law also authorizes enforcement of disclosure requirements by the state Board of Tax Practitioners; the board issues licenses.

In the last session of the Illinois General Assembly, Attorney General Lisa Madigan and Sen. Jeff Schoenberg introduced a bill to protect consumers who use RALs. Although Senate Bill 1958 stalled in committee, it is likely to be reintroduced in the next session.

Refund anticipation loans are made by tax preparers, issued by financial institutions, and secured by and repaid from the consumer tax refunds. When a taxpayer receives a RAL, the tax preparer lends the amount of the tax refund, minus interest and fees. When the taxpayer receives the refund check, it is direct-deposited into the bank that made the loan. It appears to be a way to get you a fast tax refund. But a RAL is a loan; the interest rate for RALs is in many cases more than 200 percent.

Based on Internal Revenue Service data from 2003, a report from the National Consumer Law Center and the Consumer Federation of America says that the average RAL had $281 deducted—$120 for tax preparation, $107 for loan and application fees and, $54 for check-cashing fees. The IRS data also showed that mostly low-income individuals and families are getting RALs; 57 percent of RAL recipients claim the federal earned-income-tax credit.

The Illinois Asset Building Group, or IABG, identifies financial security, including consumer protection issues, as one of its top priorities. IABG is a statewide coalition invested in building the stability and strength of Illinois families and communities through increased asset ownership. The Sargent Shriver National Center on Poverty Law and Heartland Alliance are IABG cochairs.

For more information, contact Rick Rand, Shriver Center, at 312.368.1091.