9/2/10
New Policies Aim To Reduce Payday, Tax Refund Loan Dependency
By Darrell A. Hughes
31 August 2010
(c) 2010 Dow Jones & Company, Inc.
WASHINGTON (Dow Jones)--The Obama administration will soon unveil a tax program aimed at providing low-to-moderate income taxpayers with tools to avoid using payday and refund anticipation loans.
The initiative would allow the U.S. Treasury Department's Internal Revenue Service to help Americans acquire traditional bank accounts and have tax refunds directly deposited into those accounts.
If successful, the program could potentially help steer millions of people away from high interest rate loans and into the mainstream banking system.
The Center for Economic Progress estimates as many as 26 million taxpayers could be benefit from the proposed program. The center reached its projection by subtracting total refunds from the 2010 tax season, 96.3 million, from those who received direct deposit refunds that same season, 70.3 million.
Assistant Treasury Secretary Michael Barr said more information about alternatives for tax refunds will be available soon. "You're going to see us innovate around ways to help people have better alternatives," Barr said earlier this month.
Before joining the Obama administration, Barr conducted detailed research on how such a refund direct deposit program could work. Barr authored a chapter in a 2009 book, "Insufficient Funds," which described how IRS representatives would have the authority to select a federally insured bank that offers low-cost accounts in a taxpayers' region.
The department could also use low-cost accounts that were created via the Federal Deposit Insurance Corp's "Model Safe Accounts Pilot" program, which was launched in early August. The FDIC pilot would require participating banks to accept $10 to $25 for a low-to-moderate income taxpayer to open a checking account, $5 for a checking account, among other low-cost features.
The Treasury Department is expected to release soon more specific details on the tax refund, direct deposit program.
This initiative follows other moves by the Obama administration to eliminate federal policies that play a role in risky financial decisions.
The latest policy shift came in early August when the IRS announced, beginning in the 2011 tax-filing season, it would move to restrict refund anticipation loans, which generally are short-term, high-interest rate loans based on a tax refund. The IRS did this by saying it would no longer provide tax preparers and financial firms with a key debt indicator used by banks to process the refund anticipation loans. These loans often come with high fees--which typically translate into annual percentage rates of 50% to nearly 500%.
Research conducted by consumer advocates, including Barr, show high correlations between those taxpayers who take out refund anticipation loans and those who use payday lending, along with those who use overdrafts and credit card cash advances.
Current disclosure and supervision make it "very hard for a consumer to understand the tradeoff between these different choices," Barr said.
The Obama administration hopes the "uniform system of supervision and regulation" set forth by the newly created consumer financial protection bureau will help with necessary changes across all financial products.
"We are trying to attack the problem on lots of different levels," Barr said.
-By Darrell A. Hughes, Dow Jones Newswires; 202-862-6684; darrell.hughes@dowjones.com
(Maya Jackson Randall and Cynthia Lin contributed to this article.) [ 08-31-10 1714ET ]
