Good Riddance to the Tax Refund Loan

April 17, 2012

Refund anticipation loans are among the financial products that rely on low-income communities that may not have access to fair credit or traditional banking products. More than 90 percent of people who applied for these loans in 2010 were low-income, according to IRS data. The refund anticipation business took off around 2000 after the IRS reintroduced the debt indicator, which allowed lenders to check whether a borrower had any debts that would put a refund in jeopardy of being seized. By partnering with larger banks, tax preparers that advanced refunds at high interest rates could be protected against state usury laws by claiming to be agents of the banks. In the summer of 2010, the IRS shut down its debt indicator tool after reports of fraud and misuse among loan programs. Thanks to renewed regulatory oversight, as of this past April 30, refund loans are no more. Still, many low-income urban neighborhoods have a “payday alley” full of storefronts offering high-interest loans against a consumer's paycheck. Research has established that these loans can be debt traps that keep borrowers in a cycling of new loans. As consumer advocates and state lawmakers work to limit these lenders, five national banks have stepped in to fill the gap with checking account “advance” products. A group of 250 consumer advocacy groups and civil rights organizations have written to warn bank regulators of these new products. “It took a while on refund anticipation loans,” says Kathleen Day of the Center for Responsible Lending. “It took a while – and a recession – before they did their job on mortgage lending. And our basic message is we don’t want them to wait” on bank payday lending.
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