New York—Senator Diane Savino and Assembly member John Lavelle announced today legislation that will outlaw the predatory practices of those offering rapid tax refunds, otherwise know as rapid anticipation loans (RALs).
In recent years, “rapid refunds,” have been aggressively marketed to low-income taxpayers, especially those who qualify for the Earned Income Tax Credit, with the promise of a quick return. In reality, these are short-term, high-cost loans that have been marketed towards individuals who can least afford to pay the exorbitant fees that are charged.
These cash-strapped individuals typically pay annual percentage rates (APR) ranging from 170% to 700% per each loan, on top of the tax preparation fees and electronic filing fees, just to receive their refund a week or so faster than they normally would.
“These predatory lenders know that they are dealing with a captive audience who have no choice but to borrow against their own refund; sometimes forfeiting up to half of their own tax dollars in the process,” said Senator Savino(D-Staten Island/Brooklyn).
According to the Brookings Institute, neighorhoods with the highest percentage of working poor families, also have the highest percentage of commercial tax preparers offering rapid anticipation loans.
Those who are eligible for the EITC—a federal anti-proverty program, in the form of refundable credit—are particularly vulnerable because of the additional tax forms needed to apply for the benefit. In 2000, 40% of those applying for RALs were working poor families who received this benefit.
“Charging triple-digit interest for loans paid out of the Earned Income Tax Credit program diverts federal benefits into the pockets of companies that take advantage of the working poor,” said Assembly member John Lavelle (D-StatenIsland).
Legislation that the Staten Island officials introduced would require rapid refund lenders to disclose that the “refund” is actually a loan. Information regarding the fees that are being charged must also be given, in multiple languages, to the customer at the time of the application.
Furthermore, lenders must inform consumers of the speed at which a taxpayer may receive their refund if they were to file their taxes electronically—5 to 10 days—without the assistance of a tax preparer.
“This is common sense legislation, which will inform individuals of the true cost of these loans. Every consumer has the right to know what they are committing themselves too, regardless of what their economic status is,” said Senator Savino.
In addition to the disclosure requirement, the bill will cap the interest charged per loan to 60% APR within the first 21 days, and an additional 20% for the time period afterwards.
The elected officials urged individuals to instead take advantage of services offered by organizations, such as ACORN, that offer free tax preparation, including electronic filing and EITC assistance.
“Working families need to know that alternatives to these short-term loans do exist, and that with a little information and preparation they can quickly receive, and keep, all of their hard earned tax dollars,” said Senator Savino.