Consumer Federation of America Asks Regulators to Address RALs

Written by Amanda Morgan on May 8, 2010 – 8:00 pm

The Consumer Federation of America (CFA) is a watchdog group that is pursuing those businesses offering refund anticipation loans. The consumer group has been “mystery shopping” and has uncovered many cases of deceptive practices on the part of a variety of businesses but especially among tax preparation groups.

The refund anticipation loan (RAL) is made when a company offers to give a consumer a loan equal to their anticipated tax refund. The idea is the consumer is able to access the funds much faster rather than waiting for a refund. In this particular request by the CFA, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is asked to enforce banking rules that already prohibit deceptive advertising and false tax return preparation.

The mystery shopping uncovered the fact that some commercial tax preparers are falsifying tax refunds that overstated refunds. The consumer would take out a loan based on the refund amount and then owe penalties and interest on an exaggerated amount in addition to having to pay back more than was actually refunded.

There is a federal 2007 guidance that requires RALs made by banks through commercial tax preparers to meet certain disclosure, capital, and advertising standards. Instead a number of lawsuits already brought by federal regulators in addition to consumer advocate mystery shopping have revealed that banks are not meeting the standards.

The CFA want the OCC to begin stricter enforcement of the banks making the RAL loans. The CFA wants activities stopped that include inflated refunds, false tax return preparations, misleading advertising, false refund claims, and others. In fact the CFA wants RALs barred entirely after the current tax season ends.

Making Refund Anticipation Loans is big business. There are millions of dollars in loans made each tax season and mostly to low income consumers needing the cash. In the opinion of the CFA, the RAL is predatory lending which is the basis for the request they be stopped entirely. Over 8 million taxpayers took out RALs in 2008 and they amounted to $378 million. In addition, there was $68 million in fees paid on these loans.

The CFA wants the largest RAL provider, JP Morgan Chase, to take responsibility for all 13,000 tax preparers giving RAL loans to consumers through the bank. Chase would have to act as the regulator and insure predatory lending is not occurring. This means Chase would have to monitor advertising, tax preparation practices, and perform random testing. Other banks funding RAL loans would have to do the same.

The letter from CFA to OCC was signed by a number of consumer advocate organizations. The CFA is a nonprofit organization and is made up of 280 consumer advocate groups. It claims 50 million memberships which is why it is able to exert its influence while protecting consumer rights. In the opinion of the CFA, the entire business of Refund Anticipation Loans should end.

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