September 3, 2004
Governor Arnold Schwarzenegger
Sacramento, CA 95814
RE: AB 2868 (Nunez), Request for Signature
Dear Governor Schwarzenegger,
Consumers Union writes in support of AB 2868 (Nunez) which regulates Refund Anticipation Loan (RAL) providers. This important legislation increases consumer protections when taking RALs and will thereby aid low-income, working Californians.
Refund Anticipation Loans (RALs) are short-term loans against a customer’s anticipated income tax refund. In a RAL transaction, a tax preparer, in partnership with a creditor, provides a cash advance to a consumer in the amount of the anticipated tax refund less a fee. The businesses set up a “dummy” bank account into which the consumer’s tax refund is directly deposited by the IRS. After the deposit, the creditor accesses the account to reconcile the loan. In the event of a mistake in the tax filing, the consumer is responsible for any discrepancy between the amount of the loan and actual refund.
The fees for RAL are extraordinarily high. Typically, there are 3 fees associated with a RAL: a finance charge of $5-$85 based upon the size of the loan; a fee to set up the “dummy” bank account of approximately $25, and sometimes a flat administrative fee of anywhere from $25 to $32. Because the refund anticipation loan is based on a tax refund prepared by tax preparer, there is no justification for charging these excessive rates.
The disclosure of annualized interest rates is required under the federal Truth in Lending Act. Not all of the above fees are included in the disclosure of the APR, as tax preparers only include the finance charges in this calculation. Even still, one large RAL provider advertises that interest rates are as high as 129%. If the account set-up and administrative fees are included in the calculation (as was the case until very recently), the interest rates are staggering, akin to the triple digit rates charged by payday lenders.
These high charges are especially egregious in light of the large number of refund anticipation loan recipients who are low-income tax filers. According to the National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA), fifty- five percent of consumers who take refund anticipation loans receive the Earned Income Tax Credit, the largest federal antipoverty program. The purpose of the EITC is to lift low-income working people out of poverty and to reward work, not to provide a steady source of profit for a few companies. Refund anticipation loans drain hundreds of millions of dollars from this program every year.
RAL providers argue that RAL are beneficial for a number of reasons including speed, convenience and security. A consumer typically receives his or her RAL in two days. If the same consumer filed her taxes electronically and had the funds deposited directly into her bank account, she could receive the funds in approximately ten days.
As amended July 21, 2004, AB 2868 addresses the problem of debt collection. It is now commonplace for RAL providers to essentially engage in the collection of RAL debt from previous years. This collection is not limited to an outstanding debt owed to the lender with whom the consumer is currently working but to any lender in a refund anticipation loan transaction. Therefore, a consumer may have an outstanding loan from a previous year associated with one tax preparer and have the loan collected by another provider. Most consumers have no idea that such collection may occur and it is unclear if RAL providers are abiding by the Federal Fair Debt Collection Practices Act, which applies when one entity collects a debt for another.
Consumers Union applauds the effort to begin to reign in this industry. Two important provisions of the legislation include:
• The provider owes the consumer the utmost good faith and full disclosure in a RAL or other loan transaction. Consumers entrust tax preparers with an extremely important responsibility and with very sensitive information. Because of the nature of the tax preparation business, it is imperative to provide consumers with an assurance that the tax preparer is acting in the best interest of the consumer. Such a responsibility ensures that tax preparers do not encourage consumers to take these high cost loans unless it is truly in the best interest of the consumer. Furthermore, such a responsibility raises the level of trust that consumers have for preparers.
• Prohibit RAL facilitators from engaging in debt collection. This prohibition will ensure that Californians have the protections they enjoy under the California Fair Debt Collection Practices Act, because lenders, rather than facilitators, will be forced to collect their own debts. There is nothing prohibiting the lender from collecting its own debt, making the argument that consumers can somehow avoid debt collection specious.
We encourage you to sign the important consumer protection legislation.
Cc: Speaker Fabian Nunez
Richard Costigan, Legislative Secretary