BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Joseph L. Dunn, Chair
2005-2006 Regular Session
AB 843 A
Assembly Member Nunez B
As Amended July 1, 2005
Hearing Date: July 12, 2005 8
Business and Professions Code 4
ADM:cjt 3
SUBJECT
Tax Preparers: Refund Anticipation Loans
DESCRIPTION
This bill would provide that any tax preparer who
advertises the availability of a refund anticipation loan
(RAL) may not directly or indirectly represent the loan as
a client's actual refund. Any advertisement that mentions
a RAL would have to conspicuously state that it is a loan
and that a fee or interest will be charged by the lending
institution whose name would be required to be disclosed.
This bill would require every tax preparer who offers to
facilitate, or who facilitates, a RAL to a client to
display a schedule showing the current fees for RALs, for
electronic filing of the client's tax return, for setting
up a refund account, and any other related activities
necessary to receive a RAL.
This bill would require that a tax preparer who facilitates
a RAL provide the borrower, prior to the borrower's
completion of the loan application and prior to the
borrower's consummation of the loan transaction, certain
written disclosures containing specified information.
This bill would provide that any tax preparer who offers to
facilitate, or who facilitates, a RAL may not engage in
certain specified activities.
This bill would define various terms related to RALs,
(more)
AB 843 (Nunez)
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including "client," "refund anticipation loan," "borrower,"
and "refund anticipation loan fee schedule."
(This analysis reflects author's amendments to be offered
in committee.)
BACKGROUND
Refund anticipation loans (RALs) are short-term, high-cost
loans secured by and repaid from the proceeds of a
consumer's income tax refund. Instead of waiting to
receive tax refunds, RAL customers borrow against part or
all of their expected tax refund. Consumers pay several
fees to get a RAL: a loan fee for the RAL, an
"administrative" or "electronic filing" fee, and a fee to a
tax preparer for filling out the state and federal tax
forms. The National Consumer Law Center (NCLC) reports
that, in 2004, typical loan fees ranged from $35 to $105.
Administrative fees ranged from $30 to $55, and tax
preparation fees averaged $120. For the average refund of
about $2,100, the total amount of the three fees would be
around $250. Typical loan fees translate into Annual
Percentage Rates (APRs) of about 70% to over 700%.
However, some tax preparers and RAL lenders have been
reporting lower APRs by "unbundling" charges in order to
make the loans appear less expensive.
RALs speed up receipt of cash from tax refunds, but not by
much. A RAL can put cash into a consumer's hand in a
matter of days, or even on the same day for an extra fee.
However, the IRS has stated that a consumer who uses
electronic filing and has a bank account into which the
refund can be direct deposited can receive a refund in 10
days or less.
In 2002, about one in ten American taxpayers took out a
RAL, over half of them low-wage workers who receive the
Earned Income Tax Credit -- a refundable credit provided
through the tax system intended to boost low-wage workers
out of poverty. The NCLC reports that approximately 12.7
million consumers paid about $1.5 billion in RAL and
associated fees in 2002. This bill is intended to assist
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consumers who are considering taking out a RAL by providing
a number of disclosures to those consumers and by
regulating RAL advertising.
CHANGES TO EXISTING LAW
1. Existing law defines "tax preparer," except as
specified, as a person who, for a fee or other
consideration, assists with or prepares tax returns for
another person or who assumes the final responsibility
for completed work on a return on which the preliminary
work has been done by another person, or who holds
himself or herself out as offering those services.
[Business and Professions Code (B&P) Section 22251.]
Existing law further defines "tax preparer" as a
corporation, partnership, association, or other entity
that has associated with it persons who have as part of
their responsibilities the preparation of data and
ultimate signatory authority on tax returns or that holds
itself out as offering those services or having that
authority. [Id.]
Existing law defines "tax return" as a return,
declaration, statement, refund claims, or other document
required to be made or filed with state or federal income
taxes or state bank and corporation franchise taxes.
This bill would define "client" as an individual for whom
a tax preparer performs or agrees to perform tax
preparation services.
This bill would define "refund anticipation loan" as a
loan, whether provided by the tax preparer or another
entity, such as a financial institution, in anticipation
of, and whose payment is secured by, a client's federal
or state income tax refund or by both.
This bill would define "borrower" as a client who
receives the proceeds of a refund anticipation loan.
This bill would define "refund anticipation loan fee
schedule" as a listing or table of refund anticipation
loan fees that includes three or more representative
refund anticipation loan amounts. The schedule would
list separately each fee or charge imposed, as well as a
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total of all fees imposed, related to the making of
refund anticipation loans. The schedule would also
include, for each representative loan amount, the
estimated annual percentage rate calculated under the
guidelines established by the federal Truth in Lending
Act, 15 U.S. Section 1601, et seq.
2. Existing law requires, among other things, that a tax
preparer maintain a bond issued by a surety company
admitted to do business in California for each individual
preparing tax returns for another person. The principal
sum of the bond must be $5,000. [B&P Section 22250.]
Existing law also requires a tax preparer to register
with the California Tax Education Council (CTEC), and
obtain a "certificate of completion" based upon
completing a tax education curriculum, as specified.
[B&P Sections 22253, 22254, 22255.]
Existing law requires a tax preparer, prior to rendering
any tax preparation services, to provide the customer in
writing the tax preparer's name, address, telephone
number, and evidence of compliance with bonding
requirements, including the bond number, if any. [B&P
Section 22252.]
Existing law requires, except as specified, that a tax
preparer not disclose confidential information concerning
a client or prospective client without the written
permission of the client or prospective client. [B&P
Section 22252.1.]
Existing law exempts certain persons from the
requirements of the tax preparer provisions, including
certified public accountants licensed by the California
Board of Accountancy; active members of the California
State Bar and their employees; trust company and trust
business employees; financial institutions regulated by
the state or federal government, as specified; and
persons enrolled to practice before the Internal Revenue
Service pursuant to federal regulations. [B&P Section
22258.]
Existing federal law provides various laws and
regulations governing refund anticipation loans. Key
provisions of the IRS Revenue Procedure 2000-31 and the
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Handbook for Authorized IRS e-file Providers of
Individual Income Tax Returns require:
Tax returns involving a RAL must be electronically
filed with the IRS, which requires the tax preparer to
be a federally regulated Electronic Return Originator
(ERO).
A tax return preparer who is an ERO cannot also be
a lender.
All parties to RAL agreements must ensure that
taxpayers understand that RALs are interest bearing
loans and not substitutes for or a faster way of
receiving a tax refund.
Reference to funds advanced must clearly and in
readable print refer to a loan, not a refund.
Ads must clearly indicate the taxpayer is borrowing
against the anticipated refund and not obtaining the
refund itself from the financial institution.
Fees charged by EROs must be the same for all
customers.
This bill would provide that any tax preparer who
advertises the availability of a refund anticipation loan
may not directly of indirectly represent the loan as a
client's actual refund. Any advertisement that mentions
a refund anticipation loan would have to conspicuously
state that it is a loan and that a fee or interest will
be charged by the lending institution whose name would be
required to be disclosed.
This bill would require every tax preparer who offers to
facilitate, or who facilitates, a refund anticipation
loan to a client to display a refund anticipation loan
fee schedule showing the current fees for refund
anticipation loans, for electronic filing of the client's
tax return, for setting up a refund account, and any
other related activities necessary to receive a refund
anticipation loan. The fee schedule would also be
required to include a statement indicating that the
client may have the tax return filed electronically
without also obtaining a refund anticipation loan.
This bill would require that a tax preparer who
facilitates a refund application loan provide the
borrower, prior to the borrower's completion of the loan
application, a clear, written disclosure containing the
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following information;
The refund anticipation loan fee schedule;
That a refund anticipation loan is a loan, and is
not the borrower's actual income tax refund;
That the taxpayer can file an income tax return
electronically without applying for a refund
anticipation loan;
The average times, according to the Internal
Revenue Service, within which a taxpayer who does not
obtain a refund anticipation loan can expect to
receive a refund if the taxpayer's return is: 1) filed
electronically and the refund is directly deposited to
the taxpayer's bank account or mailed to the taxpayer,
and 2) mailed to the Internal Revenue Service and the
refund is directly to the taxpayer's bank account or
mailed to the taxpayer;
That the Internal Revenue Service does not
guarantee that it will pay the full amount of the
anticipated refund and does not guarantee a specific
date that a refund will be deposited into a taxpayer's
financial institution account or mailed to a taxpayer;
That the borrower is responsible for repayment of
the loan and related fees in the event that the tax
refund is not paid or not paid in full;
The estimated time within which the loan proceeds
will be paid to the borrower if the loan is approved;
and
The fee that will be charged, if any, if the
borrower's loan is not approved.
This bill would provide that a tax preparer who
facilitates a refund anticipation loan must provide the
borrower, in either written or electronic form, the
following information, prior to the borrower's
consummation of the loan:
The estimated total fees for obtaining the refund
application loan;
The estimated annual percentage rate for the
borrower's refund anticipation loan, using the
guidelines established under the Federal Truth in
Lending Act; and
A comparison of the various costs, fees, and
finance charges, if applicable, associated with
receiving a refund by mail or by direct deposit
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directly from the Internal Revenue Service, a refund
anticipation loan, a refund anticipation check or any
other refund settlement options facilitated by the tax
preparation service.
3. Existing law makes it a violation for tax preparers to
do any of the following:
Fail to register with the CTEC;
Make fraudulent, untrue or misleading statements to
customers;
Fail to sign a customer's return when payment for
services rendered has been made;
Fail to return a customer's records upon his or her
request;
Fail to maintain a copy of any tax return prepared
for a customer for four years from the date of
completion or due date of the return;
Engage in fraudulent, untrue, or misleading
advertising practices;
Knowingly give false or misleading information to
the consumer, as specified; or
Commit any other acts or omissions as specified.
[B&P Section 22253.]
Existing law provides that a person who violates the tax
preparer law is guilty of a misdemeanor offense
punishable by a fine not exceeding $1,000 or by
imprisonment in a county jail for not more than one year.
[B&P Section 22256.]
Existing law provides that any person may maintain an
action for enforcement of any duties specifically imposed
upon a tax preparer pursuant to the tax preparer law or
to recover a civil penalty in the amount of $1,000, or
for both enforcement and recovery, and provides the
prevailing plaintiff with reasonable attorney's fees and
costs in addition to the civil penalties. [B&P Section
22257.]
This bill would provide that any tax preparer who offers
to facilitate, or who facilitates, a refund application
loan may not engage in any of the following activities:
Require a client to enter into a loan arrangement
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in order to complete a tax return.
Misrepresent a fee, material factor, or condition
of a refund anticipation loan.
Fail to process the application for a refund
anticipation loan promptly after the client applies
for the loan.
Engage in any transaction, practice, or course of
business that operates a fraud upon any person in
connection with a refund anticipation loan.
COMMENT
1. Stated need for the bill
The author writes:
Refund anticipation loans (RALs) are high-interest,
short-term bank loans based on a taxpayer's expected
income tax refund. Taxpayers who take out RALs get
their money only a week or two faster than they would
get it from the IRS if they file their tax return
electronically. The effective annualized interest
rate for RALs based upon a 10-day loan period range
from about 40% (for a loan of $9,999) to over 700%
(for a loan of $200). According to the IRS, 79% of
RAL recipients in 2003 had incomes of $35,000 or less.
Over half of RAL consumers are low-wage workers who
receive the Earned Income Tax Credit (EITC), a
refundable credit provided through the tax system and
intended to boost low-wage workers out of poverty,
even though EITC recipients constitute just 17% of all
taxpayers. In 2002, RALs siphoned off an estimated
$740 million in loan fees and administrative or
application fees.
This bill will insure that consumers have all the
information they need to make a fully informed decision
about taking out a RAL.
2. Other states' legislation on RALs
The following states have introduced RAL legislation in
2005: Connecticut (HB 6830) (SB 1070), Iowa (SF 145),
New Jersey (AB 3881), New Mexico (SB 876) (HJM 100), New
York (AB 1366) (AB 1971) (SB 3198), Ohio (SB 59), Oregon
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(SB 968) (HB 2995), Texas (SB 1030) (HB 398), and
Washington (HB 1251) (SB 5692) (SB 5796).
Currently the states of Connecticut, Illinois, Minnesota,
North Carolina, and Wisconsin have imposed regulatory
restraints on RALs.
3. Model RAL Act, summary of provisions; relationship to
this bill
A Model RAL Act (Act) has been circulated among the
states. The Act includes provisions to limit RAL fees,
prohibit debt collection abuses by facilitators, and
prevent referrals to check cashers. It provides for
mandatory disclosures in both wall postings and a
disclosure sheet accompanying the RAL application. In
addition, the Act contains registration and bonding
requirements designed to ensure state oversight and
assure compliance with the Act. The Act grants consumers
a private right of action to recover damages, costs, and
attorneys' fees.
This bill incorporates many of the definitions and
disclosure requirements set forth in the Act. Current
California law requires tax preparers to be bonded and
provides legal remedies for violations by tax preparers.
4. Author's amendments
For purposes of clarity, the author proposes to amend the
bill as follows:
On page 4, line 19, before the word "schedule" insert:
"refund anticipation loan fee"
Support: Children's Defense Fund of CA; CA Public
Interest Research Group (CALPIRG); H&R Block; HSBC
Taxpayer Financial Services; Jackson Hewitt
Opposition: None Known
HISTORY
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Source: Author
Related Pending Legislation: None Known
Prior Legislation: AB 2868 (Nunez of 2004) would have
enacted the Refund Anticipation Loan Act for
the purpose of protecting consumers who enter
into RALs, ensuring that those consumers are
fully informed of the costs and consequences
of those loans. The bill would have required
the registration with the Commissioner of
Corporations of persons and facilitators, as
defined, soliciting the execution,
processing, receiving, or accepting of an
application or agreement for, a refund
anticipation loan. The bill would have
authorized the Commissioner to revoke a
registration upon making specified findings.
The bill was vetoed.
Prior Vote: Assembly Business and Professions (Ayes 6,
Noes 3)
Assembly Appropriations (Ayes 13, Noes 5)
Assembly Floor (Ayes 44, Noes 30)
Senate Business, Professions and Economic
Development (Ayes 4, Noes 2)
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