Nolan Introduces Refund Anticipation Loan Legislation

Aim is to increase consumer disclosure
March 31, 2004

Assemblywoman Catherine Nolan, Chairwoman of the Assembly’s Banks Committee, has introduced legislation aimed at addressing the numerous consumer complaints regarding Refund Anticipation Loans (RALs).

RALs are short-term loans secured by the taxpayer’s expected tax refund. They are not cost free and must be repaid in full. The purpose of the legislation is to provide full disclosure of the terms of the RAL and a warning that the full amount must be repaid if the refund is not in the anticipated amount.

The bill (A.9961) amends the banking law in relation to creating disclosure requirements for tax preparers who offer Refund Anticipation Loans. The legislation expresses that a tax preparer may not advertise RALs as refunds and any advertisement which mentions a Refund Anticipation Loan must state clearly that it is a loan and that a fee or interest will be charged by the lending institution. Additionally, the bill requires that before any taxpayer enters into a RAL, they shall be provided, in writing, in English and Spanish, in at least fourteen point type the following disclosure: no one is required to enter into a Refund Anticipation Loan, that it is a loan, the amount of the tax refund without the RAL, and the estimated date of the refund. If one decides to take out a RAL, the tax preparer must disclose the fee, the amount of the loan, the estimated Annual Percentage Rate of the loan and the date one should expect to receive the loan.

Any person, partnership, corporation or other business entity who violates any of these provisions shall be liable for a civil penalty of not less than two hundred fifty dollars nor more than five hundred dollars for the first violation and for each succeeding violation a civil penalty of not less than five hundred dollars nor more than seven hundred fifty dollars.

"Many RAL consumers do not realize that they are borrowing against their own tax refund. Because RALs are short term loans lasting only about two weeks, fees for these loans translate into triple digit annualized interest rates. In addition to the RAL fee, major tax preparation firms charge additional fees for RALs, such as "system administration", "document preparation", or "electronic filing" fees. These additional fees add up and the consumer often is not aware of their total cost," said Nolan.

"According to the Consumer Federation of America, consumers paid an estimated $1.14 billion in RAL fees and an additional $406 million in "administrative" or "electronic filing" fees in 2002 to get quick cash for their refunds. RALs are often marketed to people who need money the most. Over half of RAL consumers are recipients of the Earned Income Tax Credit (EITC)," said Nolan.

"The disclosure elements of this bill will help shine a light on business practices that may often result in predatory loans," said Lois Aronstein, State Director of New York AARP.

"This legislation seeks to fully inform the consumer of what they are getting themselves into when they take out a RAL. Hopefully with full disclosure consumers will realize that it is more beneficial to wait the ten days for their refund directly from the IRS," said Nolan.

"I am grateful to AARP for their support and hope that this legislation becomes law," said Nolan.