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.

Some might argue this makes the bill too weak. In fact, Frick had originally wanted a bill that would cap fees and interest rates, but was prohibited from doing so because of federal preemption policies that limit the degree of financial reform that can happen at the state level. However, Frick argues that the bill will still be effective and is more likely to pass into law because it’s been watered down a bit.

This consumer battle in Maryland highlights a larger issue in the movement to increase consumer protection nationwide. Should this reform come in the form of a sweeping overhaul from the federal government, or should it happen more incrementally at the state level?

Maryland isn't the only state tackling these issues, but Frick points out that for years, mostly under the Bush administration, state efforts have been hamstrung due to federal preemption policies that prevented states from taking strong independent steps towards financial reform. (You can read more about that here.)

“We would be happy for the federal government to take a more aggressive stance [on consumer protection], but if they don’t, they should at least get out of our way,” Frick said. “There is a tremendous consensus among citizens that they are being taken advantage of and something needs to happen. Unfortunately, I don’t have tremendous confidence that our political institutions can be as responsive as they should be.”


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