Connecticut Attorney General's Office
Press Release
Blumenthal, Sen. Duff And Rep. Barry Seek Protections Against Predatory Tax Refund Anticipation Loans
January 23, 2009
The Second Circuit Court of Appeals struck down Connecticut's law, which attempted to cap interest rates and require clear consumer disclosures, because it was preempted by federal law.
In a letter to Connecticut's congressional delegation, Blumenthal and Duff urged that Congress -- facing a new day and new administration -- enact legislation or other regulations providing protections at least as stringent as Connecticut's law sought to achieve.
Tax refund anticipation loans are typically marketed by tax preparation businesses to low-income consumers as providing immediate access to an expected tax refund. A consumer pays a loan fee for the RAL, which can amount to an annual percentage rate of as much as 300 percent or more.
Aside from the extraordinary interest rates, RALs put low-income consumers at great risk if their tax refund is lower than anticipated and the consumer remains liable for the full amount of the loan.
"Predatory lenders can turn desperately needed tax refunds into financial nightmares -- particularly for struggling low-income families," Blumenthal said. "We are calling on congress to seize this new day and prohibit tax refund loan abuses -- just as Connecticut attempted years ago.
"Connecticut responsibly prohibited abusive and misleading fees associated with tax refund anticipation loans, but the court struck down our state law. The federal government, under former administration, claimed sole power to protect citizens -- blocking state protections -- but failed to employ its protective powers. The feds should step forward to protect people -- or get out of the way."
Sen. Duff said, "Refund anticipation loans put money in your pocket faster than waiting for a traditional refund, but they do so at a high interest rate and with high fees. In 2006, nine million consumers paid $1 billion in fees on these loans, making them a lucrative business practice for some tax preparers but not necessarily the best choice for taxpayers. The state had very specific regulations in place regarding these loans in order to protect consumers; however, the federal court struck down our law. The federal government should follow our example and make sure that, when these loan products are offered, consumers are not being taken advantage of."
Rep. Barry said, "It is our duty to act swiftly and respond to the court's finding that Connecticut may not enforce this important consumer protection law."
In 2004, Connecticut enacted legislation to regulate the marketing and rates of RALs. The law mandates clear disclosures of the terms of the loan, including fees and annualized percentage rate; restricts the marketing of RALs to tax preparation service providers; and limits the effective interest rate on RALs to 60 percent for the first 21 days of the loan and 20 percent thereafter.
Although marketed by tax preparer businesses, most RALs are actually made by national banks. In Pacific Capital Bank, N.A. v. Connecticut, a national bank challenged the Connecticut statute as preempted by federal law.
Despite the fact that the Connecticut law explicitly does not apply to national banks, but only regulates non-bank tax preparation business that markets the loans, the court concluded that Connecticut law interfered with the business of a national bank and was therefore preempted. Connecticut has been enjoined from enforcing the law.