States Push for Consumer Protection

Consumer financial protection has been the hot topic for much of this week. Federal legislators are currently struggling to iron out a bill that would create an independent consumer agency, and celebrities are out in full force to promote the cause for reform.

While all this has been going on, a small but critical consumer battle has begun in Maryland. State legislators introduced a new bill that would combat the threat of refund anticipation loans.  Each year, millions of Americans are convinced by tax preparers to sign up for pricey loans in order to receive their tax refunds a little bit earlier than usual.   These loans typically come with an annual interest rate which amounts 72%, though the rate can actually be as high as 500%.

“If you think credit cards are bad, you should take a look at these,” said William Frick, a delegate from Maryland’s 16th district and the lead author of this new bill. “The main thing this bill would do is make clear to any tax payer that they don’t need to take out a loan to get their refund.”

Here’s how it works: if you’re expecting a $2,000 refund, your tax preparer could offer to pay you $1,900 right away, rather than wait for the IRS to process your return and send you the full $2,000 a couple weeks later. That’s a pretty expensive two week loan… in fact, this example represents an A.P.R. of about 130%. In 2008, more than 8 million Americans took out these loans, which cost a total of $806 million in interest and fees.

Tax payers usually receive their refunds in 1-2 weeks, which is pretty quick by most standards. Frick acknowledges that there are some who know this but are so “desperate” for the refund to come with lightning speed that they sign up for the loans anyway. Still, he argues most are just getting duped. “The statistics are pretty upsetting,” he said. “It tends to be the poorest tax payers” getting these loans.

According to Frick, there are a lot of small tax preparers who encourage these loans, but some big name companies like H&R Block do so as well. Frick’s bill would not regulate the practice of refund anticipation loans, but would instead force these businesses to disclose their practices up front.