Agency strongly supports Tobocman bill requiring consumer disclosures for tax refund loans
LANSING, March 14, 2008 – With the April 15th Tax Day deadline for filing income taxes one month away, Office of Financial and Insurance Services (OFIS) Commissioner Ken Ross urged Michigan consumers to think twice before they agree to a refund anticipation loan (RAL) also known as “tax refund loans” or “instant loans.”
According to the National Consumer Law Center, RALs drained the refunds of approximately 9 million U.S. taxpayers during the 2006 tax-filing season and consumers paid an estimated $900 million in fees to get quick cash for their refunds. The annual percentage rate (APR) for a RAL can range from about 50% to nearly 500%. If application fees are charged and included in the calculation, the APRs range from about 80% to nearly 1,200%.
“Refund anticipation loans may seem like a good deal and are often sold as a customer convenience, but excessive fees and outrageous interest rates should raise red flags. This is especially true where a consumer is filing electronically, which significantly reduces refund turnaround time,” said Ross. “OFIS strongly supports a pro-consumer bill sponsored by State Representative Steve Tobocman that requires that specific loan information be provided to someone considering a refund anticipation loan. While I would advise against entering into one of these transactions in the first place, if a consumer is considering a RAL, they should at least be provided with this basic information on the front end.”
“RALs can be attractive to residents who want their tax refunds quickly, but often consumers are paying hundreds of dollars to get a refund that takes only a couple of weeks to process,” Tobocman said. “A RAL is not your tax refund – it’s a loan, complete with interest rates and hidden fees. This legislation will not prohibit RALs, but it will ensure that consumers are educated and that tax preparers are upfront about what RALs entail.”
House Bill 4645, sponsored by Tobocman, requires the facilitator of a RAL to disclose in writing the following items prior to a taxpayer completing an RAL application:
● A listing of estimated loan fees and annual percentage rates (APR)s for three or more representative RALs
● A statement that the refund anticipation loan is a loan and not the taxpayer’s refund
● The taxpayer may file the return without applying for a loan
● Average time for receipt of refund
● The IRS does not offer any guarantees with regard to the tax refund
● The taxpayer is responsible for repayment of the loan and all fees whether or not the tax refund is paid
● The estimated time period in which the loan will be made
● The estimated fees charged if the loan is not approved
● The total fees for the loan
● The availability of electronic filing
● The APR for the loan
HB 4645 is currently in the Michigan Senate Banking and Financial Institutions Committee.
