Regulating Tax Refund Loans

City considers regulating tax-refund loans

Seattle is looking to regulate so-called "refund-anticipation loans" that rush money to borrowers but which critics say often target low-income consumers who can ill afford the high rates.
A bill slated to be introduced at the City Council today would require certain disclosures to ensure borrowers know the terms and to inform them about significantly cheaper, though slower, alternatives to get their tax refunds. It also would give the city and consumers a hammer over violators.

If the bill advances, Seattle would apparently become only the second city in the nation, after New York, to adopt such legislation.

Known as "tax-refund anticipation loans" (RALs), the loans are made by banks but brokered through tax preparers such as H&R Block to help consumers get almost instant refunds. Thousands of Seattle tax filers have used the loans, which are secured by the borrower's expected refund.

How an RAL works


Consumer visits tax preparer to calculate refund, agrees to loan.


In partnership with tax preparer, bank issues loan, and tax preparer presents check to consumer within 48 hours.


IRS deposits refund directly with lending bank, which takes its fees and reimburses tax preparer.

Source: H&R Block

But because the loans are short-term, the annualized interest rates often reach triple digits.

Take the case of Mike Thomas of Seattle, who recounted his visit to the Wallingford H&R Block last year for his 2002 taxes. The tax preparer calculated he had $900 coming.

In a bind to pay his rent, Thomas opted for the fast money under an RAL.

On top of paying $85 to prepare his taxes, he said he agreed to fees that added up to $215. Overall, his visit cost $300, one-third of his refund, he said.

What H&R Block never mentioned, Thomas said, was the option of skipping the RAL and just filing electronically, which typically generates a refund within two weeks. In retrospect, he says that would have been much cheaper and quick enough for his needs. His RAL carried an annualized interest rate of more than 600 percent.

Sharon Volker, branch manager of the Wallingford H&R Block store and 15 others in the area, was skeptical of Thomas' story. She said tax preparers routinely advise consumers about all options, including e-filing separate from RALs.

In addition, Volker said, the actual cost of Thomas' loan was most likely closer to $60. If true, that works out to an annualized interest rate of more than 170 percent. After hearing other stories like Thomas' — and based on his familiarity with RALs from his days as director of the city's office for senior citizens — Seattle City Councilman Tom Rasmussen is sponsoring legislation to regulate such loans.

Tax-refund anticipation loan (RAL)


For a tax refund of $2,000, you might pay
RAL loan fee: $75


Electronic-filing fee: $40


Tax preparation: $100


Total: $215

This RAL has an APR (annual percentage rate) of 142 percent, assuming it beats by 10 days the IRS refund a taxpayer would have received by filing electronically.

Source: National Consumer Law Center

He acknowledged that fast-refund loan options are attractive to cash-strapped people and may be their only alternative. Still, he said he wants consumers to make informed choices.

Earlier this year, at the council's Housing, Human Services and Health Committee chaired by Rasmussen, Jennie Romich, a University of Washington assistant professor of social work, testified that between 10,000 and 30,000 Seattle tax filers have used RALs in recent years.

Nationwide in 2002, consumers took out 12.7 million RALs and paid $1.14 billion in associated fees, according to a recent report by the National Consumer Law Center and the Consumer Federation of America, two consumer-advocate groups critical of the loans.

Fifty-five percent of those consumers also participated in the federal Earned Income Tax Credit program, aimed at impoverished families. They paid RAL-associated fees totaling $525 million, the report found.

Romich, who supports Rasmussen's bill, more recently figured that between 6,000 and 7,000 Seattle tax filers participate in the anti-poverty program.

Rasmussen's bill would allow Seattle tax preparers to offer RALs only when specific disclosures are made in writing, in English and Spanish (the taxpayer can bring along a translator for other languages if necessary), double-spaced, in a type size at least 50 percent larger than the type in this story. The disclosures would need to include:

• The annualized interest rate for the refund-anticipation loan.

• The date when a refund would be expected through electronic filing without a refund-anticipation loan.

• The actual amount the consumer would receive after fees are applied.

• A statement that if the Internal Revenue Service reduces or denies a refund, the customer would still be responsible for repaying the entire loan amount and all related costs and fees.

Proposed enforcement mechanisms include periodic visits by city inspectors to ensure compliance, with violators subject to $250 fines. Consumers could also take complaints to the city hearing examiner, who could order the tax preparer to pay damages and penalties.

Last Thursday, managers and owners of local H&R Block offices testified against the bill at a City Council public hearing, contending it was unnecessary. They said that their employees already make disclosures such as the ones the bill would mandate and that their customers want RALs. One called the bill a "flawed measure" that in some instances runs counter to applicable federal rules, including how interest is computed.

For the sake of uniformity, bank lobbyist Gary Gardner urged the council to table the bill to give the Legislature a chance to enact a comparable measure.

Jenny Lawson, a leader with the Washington chapter of ACORN (Association of Community Organizations for Reform Now) a nonprofit group that is an advocate for low-income people, told council members she'd already approached the state.

Chuck Cross, acting director of the state Department of Financial Institutions' consumer-affairs division, said his office was interested in regulating RALs, as a growing number of states have done.

But Cross said his office concluded it was blocked by state law, which limits the department's jurisdiction over brokers to mortgages.

Unless the Legislature extends the department's authority, it cannot protect consumers statewide as Seattle is considering doing for its residents.

Besides addressing RALs, Rasmussen's proposal also covers other types of "bank products" used in combination with tax preparers to speed up refunds. Among them are refund-anticipation checks and assisted direct deposits.

The former involves setting up a temporary checking account in the consumer's name, into which the IRS deposits the refund. A bank check is then issued to the consumer, minus fees. The consumer may then have to pay to have the check turned into cash.

Assisted direct deposits route the refund through the lender's account, from which fees are deducted before the balance is transferred to the consumer's account.

Despite the industry's opposition, Rasmussen's proposal is not as tough as a "model act" promoted by the National Consumer Law Center, which among other things would cap at 36 percent the annualized interest rate for RALs.

New York City adopted a "taxpayer bill of rights" in 1990 and stiffened it last year with additional disclosure requirements. Two years ago, the city reached a $4 million settlement with H&R Block to resolve a lawsuit alleging it engaged in misleading and deceptive trade practices relating to refund-anticipation loans.

The Seattle bill is expected to get a hearing before Rasmussen's committee Sept. 9.

Peter Lewis: 206-464-2217 or plewis@seattletimes.com