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Consumer Credit Regulation: 15.2.1.3 TILA and RACs

Banks claim that TILA does not apply to RACs, arguing that RACs are not loans because no monies are disbursed until the bank actually receives the tax refund. However, in many cases, consumers purchase a RAC solely for the purpose of deferring payment of the tax preparation fee until the refund arrives. In such cases, the RAC really represents a loan of the tax preparation fee and TILA disclosures should be made if there is a charge to defer payment.

Consumer Credit Regulation: 15.2.1.4 The Federal Rebate Act

The failure of a lender to rebate a portion of the loan fee if the loan is repaid earlier has been challenged as a violation of the Federal Rebate Act.60 However, the Ninth Circuit rejected that theory, holding that a flat-fee charge was not “interest” under the Federal Rebate Act.61

Consumer Credit Regulation: 15.2.2 Military Lending Act

One population that is protected from the high cost of RALs is active duty servicemembers and their families. The John Warner Defense Authorization Act of 2007, also known as the Military Lending Act (MLA), caps rates for loans to the military at 36% APR, including fees and insurance premiums.62 The Department of Defense issued regulations that cover RALs as a form of “consumer credit” which tracks the scope in Regulation Z, implementing the Truth in Lending Act.

Consumer Credit Regulation: 15.2.3.1 OCC Policy Statements

The three largest RAL lending banks during the 2000s—HBSC (formerly known as Household Bank), JPMorgan Chase, and Pacific Capital Bancorp/Santa Barbara Bank & Trust—were all national banks regulated by the Office of Comptroller of Currency (OCC).

Consumer Credit Regulation: 15.2.3.2 IRS Rules on RALs

The IRS has issued a handful of rules governing RALs in IRS Publication 1345, an IRS document that governs providers of electronic tax return filing or “e-file providers,” including the vast majority of tax preparers who facilitate RALs. The IRS requires e-file providers to disclose that:

Consumer Credit Regulation: 15.3.1 State Usury Laws

Despite the high APRs on traditional RALs, state usury claims often ran into the issue of federal preemption/rate exportation.89 All of the major RAL lenders were federally chartered banks or federally insured state banks chartered in states without usury caps.

Consumer Credit Regulation: 15.4.1 Claims Against Tax Preparers

Even if federal regulation of national banks and rate exportation by federally chartered or insured banks limits the ability to raise state law claims against the RAL lender,118 consumers can raise a myriad of state law claims against the tax preparer. For example, the New York State Division of Human Rights investigated H&R Block’s discriminatory targeting of minorities for RALs.119

Consumer Credit Regulation: 15.4.3 Debt Collection Abuses

A significant risk to RAL consumers had been the practice of cross-lender debt collection, where RAL lenders include a provision in their RAL agreements allowing them to take a consumer’s tax refund and use it to pay back any prior RAL debts to any other RAL lender.132 There were several lawsuits filed against RAL lenders and tax preparers over these cross-lender debt collection provisions.133 The California attorney general’s office enforcement actions against the three major tax preparers incl

Consumer Credit Regulation: 15.4.5.1 Sale of Chose in Action vs. Loan

When a tax time financial product is labeled as an assignment of the refund instead of a loan, the lender may argue that as a sale of a chose in action, credit laws such as the Truth in Lending Act and usury laws do not apply.142 Whether such a transaction is subject to credit disclosures and credit regulation depends on whether a court is willing to accept the transaction as the sale of a chose in action, or whether it determines that its substance is really that of a loan.

Consumer Credit Regulation: 15.4.5.2 Where Consumer Liable for Shortfall in the Refund

A key indicator that an assignment may in fact be a loan is if the transaction requires the consumer to repay the lender if the government fails to pay the full refund.148 Either the lender will be paid the principal plus interest by the IRS’s payment of the refund or the borrower will pay that exact same amount. There is no uncertainty in the amount of the payment. Neither the repayment itself nor the amount of the repayment is contingent upon a future event.

Consumer Credit Regulation: 15.5.2 FDIC’s 2011 Action Against Republic Bank

In February 2011, the FDIC notified Republic Bank that the practice of originating RALs was unsafe and unsound.164 The FDIC’s action was based on the IRS’s decision to stop providing the debt indicator, a service that helped tax preparers and banks make RALs by acting as a form of credit check.165 In response, Republic announced its plans to appeal the FDIC’s decision166 and filed a lawsuit against the FDIC.167

Consumer Credit Regulation: 15.5.3 CFPB Action Against Southwest Tax Loans

The Consumer Financial Protection Bureau (CFPB), in conjunction with the Navajo Nation, took an enforcement action involving RALs against Southwest (S/W) Tax Loans, a non-bank lender, and four H&R Block franchises that worked in partnership with this lender.173 The CFPB alleged that these defendants illegally schemed to steer low-income citizens of the Navajo Nation into taking out high-cost RALs.

Consumer Credit Regulation: 15.6.1 State Enforcement Actions

Over the decades, state regulators, enforcement agencies, and municipal regulators have all taken actions against tax preparers over RALs, RACs, and other tax-related consumer issues. In the 1990s, state attorneys general sued preparers over deceptive advertising of RALs.186

Consumer Credit Regulation: 12.2.2 States with Explicit Auto Title Loan Regulation That Permit High Interest Rates

Five states have auto title lending statutes that permit loans over 200%23 and another seven set no cap at all.24 While Wisconsin caps the interest rate at 33% a year that can be charged on loans not paid by their maturity date, until the maturity date the loan has no interest cap, thus making Wisconsin the ninth state without a cap.25 In all of these fourteen states, there is a significant presence of auto title lending

Consumer Credit Regulation: 12.2.3.1 Overview

Twenty-nine states plus the District of Columbia and Puerto Rico have not adopted special auto title lending statutes and do not include special provisions in their pawn statute for auto title lending.39 In those states, either courts will have to interpret the state’s pawn statute as applying to auto title loans (see § 12.2.3.2