U.S. banks not only pulled off a multi-billion dollar tax dodge, but they extracted millions of dollars straight from the tax refunds of the working poor.
Walk through any low income neighborhood during tax season, and you'll see storefronts papered with signs for "Rapid Refunds" and "Instant Money." These ads mask what tax preparers are truly peddling: usurious bank loans, at rates of 50% -- 500% APR, for which taxpayers sign over their IRS tax refunds -- including their Earned Income Tax Credits.
Known as tax refund anticipation loans (RALs), these loans became rampant in poor neighborhoods and communities of color in the 1990s.
RALs are a prime example of the blurring between so-called "mainstream" and "fringe" banking. Some of the largest U.S. banks -- including Chase and HSBC -- came to dominate the refund loan business, colluding with tax prep firms like H&R Block and Jackson Hewitt to siphon off people's tax refunds and federal EITC dollars.
Not surprisingly, RALs quickly became big business -- not just for banks and tax preparers, but for rent-to-own stores, check cashers, payday lenders and used car dealerships that all found ways to get a piece of the action.
At the RAL industry's peak, in 2004, low income taxpayers paid $1.24 billion in fees, for the privilege of borrowing their own money for just a few days.
Fast forward to 2011, and these predatory tax-time loans may soon be a thing of the past. Spurred by economic justice and consumer rights groups across the country, the feds have, it seems, cut the legs out from under the industry.
Last year, the IRS dealt a major setback to RAL providers by eliminating its "debt indicator" --which had allowed tax preparers and banks to see if people's refunds might be garnished to pay back taxes or other debts.
Soon after, the OCC, the national bank regulator, ordered HSBC -- previously the largest issuer of RALs -- to stop making the loans. Chase voluntarily got out of the market in early 2010. And in 2011, the FDIC ordered the handful of remaining state-chartered banks making RALs to exit the business.
NEDAP, like groups across the country, has long fought for an end to RALs. From mapping the millions of dollars leeched from NYC neighborhoods to testifying at public hearings, drafting model legislation, and organizing protests and street theater in front of Jackson Hewitt's headquarters, NEDAP has worked every angle we could find to expose the predatory nature of RALs, and to shine a light on the big banks and corporations at the heart of a seemingly fringe industry.
Tax refund loans are almost -- but not quite -- history, and groups like ours are wary of celebrating their demise prematurely. Kentucky-based Republic Bank, for example -- one of the last RAL banks standing -- is fighting the FDIC's order to exit the business. And regulators that have cracked down on RALs in recent years could change course under different leadership.
Most likely of all, tax preparers and banks will continue to find ways to take lucrative bites out of people's tax refunds. Undercover testers sent to commercial tax preparers in NYC this year were steered to other costly bank products, and gouged by tax prep fees -- $540 in one case, for a simple return that took less than an hour to prepare.
Ending the array of rip-offs that target the poor is a ways off. Putting the nail in the coffin of RALs is a good start.
Gary Rivlin: Naming Names: Every Bank and Business That Is a Subprime Lender
Jonathan B. Mintz: The Top 10 Financial Products and Services that Must Be Regulated in 2010
Don McNay: The Season for Tax Refund Ripoffs
Refund anticipation loan - Wikipedia, the free encyclopedia
In 2006, 63% of RAL consumers were EITC recipients (Earned Income Tax Credit). EITC entitles low/minimum wage earners to get paid money (up to $5,666) for having children.
I know it’s fun to pick on banks/loan sharks, but really, why do we always like to choose to treat the symptom and not the cause? Are we just too embarrassed to admit the problem or are we just worried that admitting it will make us appear cold and callus?
We all know that people who opt into these types of “500% loans) are just not smart/responsible enough to be bringing children into to this world. There I said it.
The fact that SCOTUS has made such corruption legal speech demonstartes how corrupt our legal system has become!
Of course, banks become involved at this point. Fees are paid to these banks. Why doesn't someone write an expose on them?
I think this is an excellent example of a service that is provided to cognizant, willing adults that, although odious in my opinion, does not infringe on anyone else’s rights and should not be an issue for us. If grown adults make the wrong decision to use the services of one of these loan providers, that really is their decision and I have to assume that they are a better determiner of their current financial needs than I am or you are or any regulator is.
Kai
I have been poor, & have lived in abject poverty, but would not say that I was ‘desperately’ poor. I have lived in Asia for the last few decades & know what desperate poverty looks like, yet I have never seen it in the US to the same degree. We are talking about getting a refund, not selling organs so you can afford to eat.
That being said, I grew up on the Turtle Mountain Indian Reservation in North Dakota & later the barrios of Phoenix. I know the economics of payday lenders & tax refund lenders. I also know the decision process of the consumers of those services. Do you?
So, when I was poor & working construction & needed to pay my tuition at ASU & needed to get a cash quickly so I could get a degree to get out poverty…you would deny me that education because you understand my needs & finances & my decisions better than I do. For some reason you feel that you should be in charge of how I monetize my future assets. The charges are understood, I am a grown man, & the money is mine, not yours. Why do you want to both take my freedom & subject me to continued poverty in the process?
BTW, unregulated utilities is not the reason that utility prices have gone up. You are wrong on that isssue. If you want to worry about runaway costs, better to look at ‘regulated’ government services
PS - General Welfare does not mean the government can ignore everything else in the Constitution and do whatever it wants.
JUST WAIT FOR YOUR REFUND! Dont take out a loan!