|Chi Chi Wu, NCLC||Lizzie Lewis, OCA|
BOSTON - Last year, 123,000 taxpayers in Massachusetts accepted the Refund Anticipation Loan offered through their tax preparer. The Office of Consumer Affairs (OCA), Division of Banks (DOB) and the National Consumer Law Center (NCLC) in a press conference today urged consumers across Massachusetts and the U.S. to steer clear of RALs, one of the most avoidable tax-season expenses. By refusing to take the bait offered by those pushing Refund Anticipation Loans, taxpayers can pocket more than $1 billion of their own money. "How many people would pay extremely high interest rates just to borrow their own money?" says NCLC's Chi Chi Wu. "Well, that's exactly what they're doing when they take out RALs. They're a terrible deal for consumers."
Here's how they work: Clients of income-tax preparation services are offered "Instant Refunds" or "Quick Cash" infusions that are simply advance loans on their anticipated tax refunds. Most consumers don't need RALs since they could have their refund - in its entirety - by waiting 10 additional days or so and less than four days for state tax refunds if they file online and use direct deposit.
"Refund Anticipation Loans can cost the average taxpayer from $34.95 to $104.95 in fees, plus an additional $30-40 in "administrative" fees for a quick cash fix," said Beth Lindstrom, Director of OCA. "It is alarming because these numbers add up quickly and often the poorest taxpayers are the target."
In Massachusetts alone 123,000 residents took out RALs in 2002, nearly 22,000 in Boston. NCLC has found that the effective Annual Percentage Rates for these loans - interest - can range from an outrageous 70 percent to ridiculous rates of more than 700 percent.
"The tax preparers present it as, 'Oh, you should get the rapid refund,' " says consumer Ann Haynes. "I don't think people are aware of how much it's costing them, because they do need the money." Haynes and several family members have been RAL customers for years, and she says the cumulative cost to their struggling families has been steep. "I'm sure it's been many thousands of dollars."
The actual dollar cost? More than $1 billion nationwide. And the worst irony is that those who qualify for the government's Earned Income Tax Credit -- targeted at the lowest wage earners -- are disproportionately RAL customers. They're often the most cash-strapped and the most anxious to see the midwinter "bonus" of their tax refunds quickly, when they're trying to pay off holiday bills. Think of how many groceries could be purchased, debts retired or children's needs met in the poorest communities with that money.
"What frustrates me most about Refund Anticipation Loans is they are avoidable," said Department of Revenue Commissioner Alan LeBovidge. "Taxpayers who file their tax returns by telephone or computer can receive their state refund in approximately three and half days, or faster if they use direct deposit."
"RALs are just another form of predatory lending," said Commissioner of Banks Steven L. Antonakes. "The Division of Banks continues to do all it can to limit the availability of this short-term, high rate loan product. As a result of the Division's actions, many tax preparers have ceased from offering RALs. Other tax preparers continue to offer RALs through third party lenders but are prohibited from receiving compensation for brokering these loans. By eliminating the loans profitability, we hope to significantly reduce the incentive of tax preparers to offer this unnecessary product."
The experts' advice? Wait a few extra days and receive the full refund you earned. Consumer Ann Haynes added, "When I waited, I found it was not really a life or death situation." Now she no longer uses RALs.
To educate consumers about RALs NCLC today is distributing its "Don't Pay to Borrow Your Own Money" brochure statewide. You can get one by visiting NCLC's website at: http://www.consumerlaw.org/initiatives/refund_anticipation/content/RALBrochure.pdf
Consumers who still have questions about this product should contact the Office of Consumer Affairs toll free 1-888-283-3757 or online www.mass.gov/consumer.
Questions about filing online or how to receive a refund as quickly as possible should be directed to the Department of Revenue 800-392-6089 or online www.mass.gov/DOR.
Reprinted with the permission of the National Consumer Law Center and the Office of Consumer Affairs.