Consumer Alert: Tax Refund Loans

As income tax season approaches, the Oklahoma Department of Consumer Credit has issued an alert regarding Refund Anticipation Loans offered through some tax preparation companies.
Donald K. Hardin, Administrator of Consumer Credit, said that consumers should be wary of tax refund loans called Refund Anticipation Loans (RALs) that come with high interest rates and fees.
“In effect, taxpayers are paying a high fee to borrow their own tax refund money for a few days,” Hardin said.
“We’ve heard that some of these loans with interest rates as high as 700% per year,” Hardin said. Nationwide, about 12 million consumers pay between $1 and $2 billion in fees for the loans, he added.
With modern electronic filing, tax refunds are usually received from the IRS in about ten days, Hardin said. The tax refund loans came onto the market several years ago, when refunds took as long as two months to process, he said.
“If the IRS denies or delays a refund, the individual is still responsible to repay the RAL to the lender,” Hardin said. In some cases, refunds are applied to delinquent student loans or tax obligations from previous years. “Filing for a refund is not a guarantee that the RAL will be paid with the refund,” he added.
Hardin added that only tax preparation companies that are licensed by his agency are authorized to assist consumers in obtaining third-party loans for a fee. “We require them to be bonded and include a five-day cancellation provision, as well as to disclose other details to the consumer,” he said.
An exception exists for RALs for which the tax preparation companies receive no compensation, Hardin added. “If they collect a fee for setting a taxpayer up with a RAL, they need to be licensed,” he said.
Hardin said studies show that RAL consumers are three times as likely to be recipients of the Earned Income Tax Credit, a federal program designed to supplement the incomes of low income wage earners. The IRS reports that 79% of RAL recipients in 2003 had incomes of $35,000 or less. “The result is that some of the tax dollars which should be going to low income families are siphoned off as fees for these loans. That was not the intent of the EITC program,” he said.
Hardin’s agency will also be looking for misleading advertising related to the loans. “The loan itself is not a refund, it is a loan,” he said. “To imply that the loan is the refund may be considered untrue or misleading, which is a violation of the law.”
Violation of the Credit Services Organization Act constitutes a misdemeanor, and consumers can sue for their damages as well as punitive damages, Hardin said.
“There’s a great potential for unscrupulous businesses to try to take advantage of consumers through these loans,” Hardin said. “That’s why the legislature wanted these folks to be licensed and bonded before dealing with the public.”

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