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As tax times nears, there's rallying for
RALS
Feb. 18, 2011
By Jerry Kopel
Each year in Denver I record winter's presence by
the scurrying sound of furry squirrels' going after the remaining
crabapples hanging on our trees. And then this year I read HB 1400, CRS
5-9.5-101 to 109. It passed our legislature after a two year review. It
took effect Nov. 1, 2010, regarding "refund anticipation loan
facilitators" referred to in the rest of this column as RAL.
Squirrels don't grow the apples but the fruit is needed for the animals to
survive in their winter nests. RAL come into the scene when filled-out tax
forms are presented to U.S. Internal Revenue Service and consumers expect
a tax refund for overpayment. But there is a switcheroo. The tax refund
becomes a bank loan.
RAL need do nothing to provide the refund
surplus. RALs need to be authorized by IRS as electronic return
originators. The original tax refund goes to the lender. The consumer had
received a short-term loan to be paid in several weeks. The bank and the
RAL will use the refund to pay for the loan plus fees, interest and costs.
RALs are defined as a "person" in the generic sense and no form of
organization can escape the definition or in any way be involved no matter
how slightly, without being tagged as RAL.
However some RALs are
given immunity based on their connection to a money lender doing business
as a bank, thrift, savings, credit union or affiliated serving these money
lenders or as a certified public accountant or attorney.
Persons
directly employed by electronic return originator are persons the IRS has
authorized to use electronic submission of tax returns.
RALs not
immune are subject to criminal penalties for violating the statute. RALs
are expected to be familiar with certain federal restrictions such as
knowledge of the truth in lending law.
A court in my opinion will
have to determine the extent of immunity for an RAL because of
"incorporation by reference" in the law to other portions of the credit
laws.
Under HB 1400 the fee schedule must be provided by language
on a large sign visible at the RAL's location. Oral disclosures are also
required in the language RAL actually uses to communicate with the
particular consumer. The consumer has to be given a written statement that
hopefully will discourage consumers from trading a full refund for what
could become a large costly loan.
Willful violation by the RAL of
HB 1400 requirements is a misdemeanor punished by a small fine and a
county jail term of up to one year.
A quick reading of the new
article and how many are immune from coverage would not hint it was really
consumer oriented. That becomes clear once you read the statute references
incorporated into the RAL law.
CRS 2-4-401 catches everyone or
company under "person". CRS 5-6-103 defines "administrator" and in turn
refers to six other statutes adding power and duties regarding consumers.
The administrator is able to carry over decisions for injunctions (CRS
5-6-109) and actions on prison sentences. CRS 5-6-111 to 113 expand
administrator power and in 114 there is ability to seek for consumer 10
times of the excess pocketed by the RAL.
I recently had a
discussion with one of the top consumer credit attorneys in Colorado who
requested anonymity for mention in this column. We both agree the new
article can be considered as "window dressing" offering fewer credit
selling violators under the code. We differ as to the effect of
incorporation of consumer code references.
I have not read any
final court case decision that held the incorporated references did not
cover violations of the credit code. Incorporation by reference to 5-6-111
to 5-6-114 has one clear example: It brings the credit code in to the
article. The bank or the CPAs cannot be caught as to CRS 5-9.5-103 (1) (b)
excessive charges, but can be caught under the code if it amounts to
unconscionable agreements. CRS 5-6-114 discusses willfully violating of
this code. And the code does cover these "immune" creditors.
The
Sunrise investigation by Dept. of Regulatory Agencies followed a request
by the Bell Policy Center for regulation of the RALs. I assume this was
not a friendly request but one designed to lessen the RAL activity. That
reduction on RALs will likely happen in 2012 on 2011 income tax forms that
have reduced social security payments made to the government by two
percent.
Some suggestions
HB 1400 should be
reviewed earlier than 2019. Year 2014 should provide legislators with
exact information. The administrator should bring an early violation
action successfully to caution RALs of the penalty for criminal
violations. Every legislator should receive a copy of DORA's 2010 review
dated Feb. 11, 2010.
DORA's review found that in 2007 there were an
estimated 8.7 million RALs, or one for every 15 nationwide tax returns and
typically the person has a chain-store type tax preparer who submits the
tax return to IRS and the RAL application to a lender. The taxpayer pays
an application fee in addition to the tax preparation fee. The bank also
pays the facilitator a fee or incentive.
A 2008 federal report told
DORA nearly one third of the tax preparing RAL facilitors were located in
businesses that target low income customers such as car dealers, payday
loans, discount shoe stores, pawn shops, and rent-to-own stores.
The federal government is getting more involved in this side-show. The
Office of Controller of the Currency has blocked funding for tax refund
loans for H&R Block, Inc., the largest U.S. tax preparer. The order was
directed to HSBC Holdings PLC Bank. The IRS earlier this past year stopped
helping banks provide funds for tax refund loans.
A pilot program
now exists for 600,000 low and moderate-income taxpayers nationwide to
activate a debit card that can receive direct deposits. Half the 600,000
will carry a $4.95 monthly fee while the rest will be free.
My
consumer expert friend indicated a chill at the national level against
helping banks turn a person's surplus refunds into heavy duty loan costs.
I assume more barriers will follow.
(Jerry Kopel served 22 years
in the Colorado House.)
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