Jerry Kopel

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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