Buffalo and Erie County residents are once again among the targets of predatory tactics that make millions for lenders but wrench every last penny from those who can least afford it, low-income wage earners.
Although it takes only seven to 10 days for the IRS to wire taxpayers their refunds, tax preparation companies and lenders have aggressively marketed a product convincing taxpayers that they need to get their refunds immediately.
These loans are arranged by tax preparers, who have the borrower sign a form authorizing the IRS to send the refund to a dummy account the bank sets up for the customer. The bank then receives the borrower's tax refund in a matter of days, just as the borrower would have if he or she had waited it out.
Unfortunately, most of these borrowers do not realize they are actually taking out a very high-cost loan tied to their refund. The borrower walks away with less money because he or she paid significant fees to get this refund a few days earlier.
Refund Anticipation Loans, also known as RALs or "rapid refunds," carry staggering interest rates between 70 and 700 percent. Banks that make these loans circumvent New York State's 25 percent usury cap through federal pre-emption. In Erie County in 2002, 84.25 percent of RALs went to low-income tax filers.
Think about the actual cost of these loans. In addition to the very real impact this practice has on low-income families and their ability to feed, clothe and house their families, dollars siphoned away from these families also mean dollars that would have been in circulation in the local economy.
Clearly, RALs are a tool that destroys rather than builds wealth in our communities. A recent survey by the Consumer Federation of America and the National Consumer Law Center found that 70 percent of RAL borrowers did not know they were receiving a loan. According to New Yorkers for Responsible Lending, an advocacy group, "RALs drain an estimated $148 million from New York State taxpayers and their communities."
There has been a big local effort to establish Voluntary Income Tax Assistance sites that offer free tax preparation for low-income consumers. This effort is undermined by the actions of companies that aggressively target the same people.
A bill has been introduced in the Assembly and State Senate to combat abuses in Refund Anticipation Loans. This legislation would not only improve disclosures required for consumers, but it also would require tax preparers that offer RALs to register with the state Department of Banking and act in the best interests of their taxpayer customers.
A coalition of 115 community and consumer advocacy groups known as New Yorkers for Responsible Lending is working to bring meaningful oversight and regulation to these abusive high-cost loans. The coalition is also engaged in a public education campaign to inform consumers. For more information, contact firstname.lastname@example.org.
Kathleen A. Lynch is coordinator of the Western New York Community Reinvestment Coalition and a member of New Yorkers for Responsible Lending.