MODEL LAWS
Model Refund Anticipation Loan Act
Summary
A Refund Anticipation Loan (RAL) is a loan made to a person who is due a tax refund. The lender gives the person an amount less than the refund and the person signs his/her refund over to the lender.
The Model RAL Act requires registration and bonding by RAL facilitators unless they are financial institutions, certified public accountants, attorneys, or Volunteer Income Tax Assistance personnel.
The Act limits registration to preparers whose primary business is tax preparation (or restricted to licensed preparers, if the state licenses preparers). This restriction is intended to keep fringe preparers, such as used car dealers, payday loan stores, and other retailers from offering RALs.
The Model Act also prohibits debt collection abuses by facilitators, and prevents referrals to check cashers. It provides for mandatory disclosures orally, in wall postings, and in a disclosure sheet accompanying the RAL application. Importantly, the Model Act grants consumers a private right of action to recover damages, costs, and attorneys fees.
Frequently Asked Questions
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Q1: What is a Refund Anticipation Loan (RAL)?
A1: Refund anticipation loans (RALs) are short-term loans secured by and repaid from the proceeds of a consumer’s tax refund from the Internal Revenue Service (IRS). Instead of waiting to receive tax refunds, RAL customers borrow against part or all of their expected tax refund. -
Q2: How does the RAL process work?
A2: When the loan is made, the bank prepares to collect on the loan by opening a temporary or “dummy” bank account to receive electronic deposit of the refund. The documents signed by the borrower instruct the IRS to direct deposit the refund into that account. Typically the contract permits the creditor to take the money directly out of the dummy account without the consumer’s express authorization. The creditor is repaid when the refund appears in the dummy account. -
Q3: Is the tax preparer making the loan?
A3: RALs are usually not made by the tax preparer, but by a separate lender, usually a bank. Tax preparers facilitate the loans in partnership with the banks. (IRS rules do not permit tax preparers to act as RAL lenders.) -
Q4: What is a Refund Anticipation Check (RAC)?
A4: With a RAC, the bank opens a dummy bank account and waits for the IRS to direct deposit the consumer’s refund. After the refund is received, the bank issues the consumer a paper check, prepaid debit card or makes a direct deposit to the consumer’s own bank account, then closes the dummy account. RACs are used as the default product if the consumer is denied a RAL. They also are used if the consumer doesn’t choose a RAL but wishes to have the tax preparation fee deducted from his or her refund. RACs generally cost about $30. In 2006, nearly 10.8 million consumers received RACs, actually exceeding the number of RALs made that year. -
Q5: How is the IRS involved in RALs?
A5: The IRS does not have any involvement with RALs although there are regulations governing RALs that may be found in IRS Publication 1345. -
Q6: What are the IRS requirements for RALs?
A6: The provider of the RAL must:- Ensure taxpayers understand that by agreeing to a RAL they will not receive their refund from the IRS as the IRS will send their refund to the financial institution;
- Advise taxpayers that RALs are interest bearing loans and not a quicker way of receiving their refunds from the IRS;
- Advise taxpayers that if a Direct Deposit is not received within the expected time frame for whatever reason, the taxpayers may be liable to the lender for additional interest and other fees, as applicable for the RAL;
- Advise taxpayers of all fees and other known deductions to be paid from their refund and the remaining amount the taxpayers will actually receive;
- Secure the taxpayer's written consent to disclose tax information to the lending financial institution in connection with an application for a RAL;
- Adhere to fee restrictions and advertising standards below:
- Providers may not base their fees on a percentage of the refund amount or compute their fees using any figure from tax returns. Providers may charge a flat fee that must be identical for all customers. Providers may not accept from a financial institution a fee that is contingent upon the amount of the refund.
- Providers must not use improper or misleading advertising. If providers advertise the availability of a RAL, the provider and financial institution must clearly refer to or describe the funds they advance as a loan, not as a refund. The advertisement on a RAL must be easy to identify and in readable print. It must make clear in the advertising that the taxpayer is borrowing against the anticipated refund and is not obtaining the refund itself from the financial institution.
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Q7: Does the Model Law limit the fees lenders can charge?
A7: No, courts have ruled that attempts by states to limit the amounts lenders can charge are preempted by federal law. -
Q8: Why does the Model Law have a private right of action?
A8: A private right of action gives individuals the right to go to court to redress a violation of the law. Some consumer laws do not give a private right of action, in which case the government (the District Attorney or Attorney General or Consumer Protection Bureau) must bring the lawsuit. A private right of action is essential to ensuring that the Act has a meaningful impact, since many agencies do not have sufficient resources to investigate all violations and undertake enforcement actions.