March 24, 2004
REFUND ANTICIPATION LOANS
By: Daniel Duffy, Principal Analyst
You asked for background on refund anticipation loans.
Refund anticipation loans (RALs) are bank loans secured by a consumer's tax refund. They are typically issued by a tax preparation firm in conjunction with a bank and require a consumer to file his tax return electronically. They may require a consumer to open a temporary account in the lending bank for the Internal Revenue Service (IRS) to deposit his refund directly. If so, the consumer will be charged a fee for this service. The bank may also have a set-off against the account for automatic loan and fee payment.
We found laws in four states on RALs. North Carolina's law is the most encompassing. It (1) requires RAL facilitators to register with the state; (2) requires RAL fees to be filed with the state and prohibits them from being unconscionable; (3) requires fee schedules to be posted; (4) requires disclosures to be made when a consumer applies for a loan; (5) prohibits facilitators from, among other things, charging an amount that is different from the filed and posted fees; and (6) makes violations and unfair trade practice.
The laws in Illinois, Minnesota, and Wisconsin, like the law in North Carolina, require facilitators to make disclosures but do not require them to register or prohibit unconscionable fees. In all four states, the disclosures are about the amount of the fees, the time it takes to receive the loan, and the time it would take to receive a refund if the consumer does not apply for a loan.
Copies of materials provided by the National Consumer Law Center, H&R Block, and state laws are enclosed.
REFUND ANTICIPATION LOANS
A refund anticipation loan is a bank loan secured by a taxpayer's expected refund. Tax preparation companies frequently offer RALs in partnership with banks. A consumer must repay the full amount of loan and fees, even if the IRS disallows a deduction or there is a refund intercept for child support or student loan debt.
Instead of waiting to receive a tax refund, RALs allow a consumer to obtain a quick loan on credit. H&R Block, a tax preparation firm that offers RALs in partnership with Imperial Capital Bank, states in its literature that consumers can obtain a loan in one to two days. The loan lasts the length of time the IRS takes to make a refund on a tax return that has been filed electronically. The IRS says that a taxpayer who files his tax return electronically and requests direct deposit should receive it in less than 10 days (www.irs.gov/newsroom/article/0,,id=108680,00.html).
Facilitators typically require a consumer to open a temporary bank account to receive a direct deposit from the IRS. The facilitator charges a fee for this service. The contract may give the bank the right to take its fees directly from the account. Once the bank issued a check to the consumer for any remainder, it closes the temporary account.
LAWS IN OTHER STATES
We have identified legislation in four states about refund anticipation loans: Illinois, Minnesota, North Carolina, and Wisconsin.
The law requires a “facilitator” to disclose at the time the borrower applies for the loan:
1. the fee schedule,
2. the annual percentage rate (APR) rate using a 10-day time period,
3. the estimated fee for preparing and electronically filing a tax return,
4. the total cost for using a tax anticipation loan,
5. the estimated date that the loan will be paid if the borrower's application is approved,
6. the borrower's obligation to repay the loan and related fees if the tax return is not paid or not paid in full, and
7. the availability of electronic filing and the average time the IRS says a consumer can expect to receive a refund if the return is filed electronically.
The law defines “facilitator” as the person who, acting alone or in conjunction with another, processes, receives, or accepts for delivery and application, or in any other way facilitates a RAL. It defines “refund anticipation loan” as a loan arranged to be repaid directly from the proceeds of the income tax refund. The law defines “refund anticipation loan fee” as the charges, fees, or other consideration charged or imposed by the facilitator for making the loan. It does not mean charges, fees, or other consideration charged or imposed in the ordinary course of business by a facilitator for services that do not result in making the loan, including fees for tax preparation and electronic filing (815 Ill. Comp. Stat. 177/1).
The law requires tax preparers who offer to make or facilitate a RAL to make certain disclosures. It defines “refund anticipation loan” as a loan, whether provided by the tax preparer or another entity such as a bank, secured by the consumer's federal or state income tax refund, or both. The required verbatim disclosures are:
1. This is a loan. The annual percentage rate (APR), based on the estimated payment period, is (fill in the estimated APR).
2. Your refund will be used to repay the loan. As a result, the amount of your refund will be reduced by (fill in appropriate dollar amount) for fees, interest, and other charges.
3. You can get your refund in about two weeks if you file your return electronically and have the Internal Revenue Service send your refund to your own bank account.
If the client is subject to additional interest when a refund is delayed, the tax preparer must also disclose, “If you choose to take this loan and your refund is delayed, you may have to pay additional interest.”
The law requires all statements to be in a minimum of 14-point type, with at least a double space between each line and four spaces between each statement. The notice must be on a separate, single piece of paper signed and dated by both the tax preparer and client.
The law requires the preparer to bill separately for (1) return preparation, (2) electronic filing, and (3) providing or facilitating the refund anticipation loan.
A violation of the law is deemed an unfair and deceptive trade practice (Minn. Stat. § 270.30).
The law requires refund anticipation loan facilitators to register with the banking commissioner. It defines “facilitator” as someone who individually or in cooperation with another processes, receives, or accepts for delivery an application for a refund anticipation loan or a check in payment of loan proceeds or in any other way facilitates the making of a refund anticipation loan. A “refund anticipation loan” means a loan that the creditor arranges to be repaid directly from the proceeds of the debtor's tax refund.
Registration Required. Applications must be made in writing under oath. The application fee is $250 for each office facilitating loans. If the commissioner finds that the applicant's responsibility and general fitness commands the community's confidence and warrants the belief that the business will be operated lawfully, he must register the applicant. Once registered, the facilitator may engage in the business in each of the offices identified in his application. Registration holders must display a copy of the registration certificate in each office.
Registrations expire on December 31 and must be renewed annually. The renewal fee is $100 for each office. If the commissioner denies an application or a renewal application, the law gives the applicant the right to a hearing to appeal the decision.
Filing Fee Schedule Required. The law requires facilitators to file annually a schedule of refund anticipation loan fees with the banking commissioner and any change must be filed immediately. If the commissioner finds that a fee is unconscionable, the law requires him to notify the facilitator of that fact and that the consequences of charging an unconscionable fee are liability to the taxpayer of three times of the fee amount and possible loss of registration.
Fee Schedule Posting. The law requires each facilitator to post (1) the fee schedule in each office showing the refund anticipation loan and electronic filing fees and (2) a statement that the consumer can have the tax return filed electronically without also obtaining the refund anticipation loan.
Disclosures Required. The law requires facilitators to disclose when consumers apply for a loan:
1. the loan fee;
2. the electronic filing fee;
3. the time within which the loan proceeds will be paid if the loan is approved;
4. that the debtor must repay the loan and fees if the refund is not paid or paid in full;
5. the availability of electronic filing and the average time announced by the taxing authority to receive a refund if the taxpayer does not choose to obtain a refund anticipation loan; and
6. examples of annual percentage rates, defined in accordance with the federal Truth-in-Lending Act, for refund anticipation loans in the amounts of $500, $750, $1,000, $1,500, $2,000, and $3,000. The law states that regardless of federal law, if the facilitator requires the debtor to establish or maintain a deposit account to receive direct deposit of the tax refund, the facilitator must calculate the disclosed APR as if the loan maturity loan date is the estimated date that the tax refund will be deposited in that account.
Prohibited Activities. The law prohibits facilitators from:
1. misrepresenting a material fact or condition of a loan;
2. failing to arrange for a loan promptly;
3. engaging in a transaction, practice, or course of business that operates a fraud in connection with a loan;
4. facilitating a loan for which the loan fee is different from the posted or filed fee or in an amount that the commissioner has deemed unconscionable;
5. directly or indirectly arranging for payment of the loan for check cashing, credit insurance, or any other good or service unrelated to preparing and filing a tax return or facilitating tax anticipation loans; and
6. arranging for a creditor to take a security interest in the debtor's property other than the tax refund to secure loan repayment.
Enforcement. The law authorizes the banking commissioner to (1) issue cease and desist orders if he finds that a facilitator has violated this law or committed and unfair or deceptive trade practice and (2) revoke or suspend a registration. A facilitator who fails to deliver loan proceeds within 48 hours after the time promised is liable to the consumer in an amount equal to the refund anticipation loan fee. A facilitator who engages in a prohibited activity is liable to the consumer for damages equal to triple the refund loan anticipation fee or other unauthorized fee, plus a reasonable attorney's fees (N.C. Gen. Stat. §§ 53-245 to 53-254).
Wisconsin's consumer credit law requires creditors to make the following written disclosures on a form that is signed by the consumer before he enters into a refund anticipation loan:
1. any refund anticipation loan fees;
2. any charge or fee for filing a tax return electronically;
3. the total dollar amount of all charges and fees for the loan and filing electronically;
4. the anticipated time, within two business days, by which the consumer will receive the loan;
5. the fact that a consumer may file a tax return electronically without obtaining a refund anticipation loan;
6. the anticipated time within which the consumer could reasonably expect to receive a refund if the return is filed electronically and the consumer does not request a loan;
7. that the consumer must repay the loan and loan fees if the tax refund is not paid or not paid in full; and
8. the estimated annual percentage rate, based on the size of the loan, the loan fees, and the anticipated maturity date based on the date stated in disclosure six.
The law prohibits creditors from imposing a different fee or charge on a consumer who receives a refund anticipation loan than it imposes on consumers who do not obtain such a loan.
A violation is deemed an unfair or deceptive trade practice (Wis. Stat. § 422.310).