Dear Mr. Chairmen and Ranking Members:

We are submitting this statement for the written record of the joint hearing held by the Oversight and Social Security Subcommittees on Thursday, June 19, 2008, to examine the status of the economic stimulus payments (ESP) provided for in the “Economic Stimulus Act of 2008” signed into law by the President on February 13, 2008 (P.L. 110-185).  

Santa Barbara Bank & Trust (SBB&T), a brand of Pacific Capital Bank, N.A., is one of the nation's largest providers of tax-refund related bank products -- refund anticipation loans (RALs) and non-loan refund anticipation checks (RACs).  We are particularly concerned about comments made during the hearing which inferred that the RAL industry was somehow responsible for the fact that ESPs were delayed up to eight and a half weeks for taxpayers who elected this year to use RALs or RACs in order to more quickly receive funds in anticipation of their tax refunds. 

In her written testimony, Nina Olson, the National Taxpayer Advocate, highlighted as a major concern the fact that more than 20 million taxpayers who obtained RALs and RACs during the 2008 filing season were ineligible to receive their stimulus payments quickly via direct deposit and had to wait up to eight and a half weeks longer to receive their checks by mail.  Ms. Olson noted that the delays were not caused by IRS error, but failed to provide any other contextual background as to why the IRS decided to mail checks to these particular taxpayers, rather than provide ESP quickly by direct deposit.

On February 15, 2008, the IRS issued a press release (IRS Press Release 2008-21) announcing that ESPs would be made by paper check to any taxpayer who received RALs or RACs in this year's filing season.  There were very good reasons for the IRS’s decision to deliver ESPs to these taxpayers by paper check.  Taxpayers who utilize RALs to more quickly obtain funds in anticipation of their tax refunds generally receive payment (minus fees for tax preparation, filing, financing or processing) within 24 hours after application.  In the case of RACs, taxpayers receive the net proceeds of their refunds (minus tax preparation and account set-up fees) when the refunds are received from the IRS (on average, 11 days after filing).  The lending institution that provides the RAL or RAC opens temporary bank accounts for its customers into which the tax refunds are deposited.  These temporary accounts are closed after delivery of a RAC to the taxpayer or satisfaction of the taxpayer’s RAL.

More important, a large percentage of taxpayers who utilize RALs or RACs to more quickly obtain funds in anticipation of their tax refunds do not maintain regular bank accounts at a financial institution.  As the National Taxpayer Advocate's 2007 Objectives Report to the Congress noted:

“It is estimated that approximately ten percent of American households do not have an account at a financial institution.  These unbanked taxpayers have fewer refund delivery choices. They can request that the IRS mail a paper refund check on either an e-filed or paper return. However, these options generally entail high check cashing fees and take up to six weeks to actually deliver the refund. For taxpayers unwilling to wait four to six weeks for a check, the only real option is to buy a bank product, which typically involves high fees."[1]

More recent data indicates as many as 28 million Americans are “unbanked.”[2]  “Forty-six percent (46%) of African Americans and thirty-four percent (34%) of Hispanic Americans do not have an account at a federally-insured financial institution.”[3]  Those without mainstream banking relationships cannot take advantage of IRS direct deposit of their refunds.  RALs and RTs bridge the potential eight-week gap that many taxpayers who need quick access to funds would otherwise have to wait to receive a paper check from the IRS.  Thus, a very large percentage of the taxpayers affected by the IRS's February 15th guidance would have received their ESPs by paper check regardless of whether they elected to obtain a RAL or RAC.

Ms. Olson's testimony also failed to note that all taxpayers who elected direct deposits of their income tax refunds into multiple bank accounts (by filing IRS Form 8888), or who failed to elect direct deposit of their refunds (approximately 30% of all filers[4]) were required to receive ESPs by paper check, not simply those taxpayers who chose to obtain RALs and RACs.

Several Subcommittee members were understandably concerned by Ms. Olson's testimony pointing out the delays in delivering ESPs to taxpayers who obtained RALs and RACs in this filing season.  Rep. Earl Pomeroy (D-ND) asserted that the RAL industry should have done more to notify taxpayers before they elected RALs or RACs that doing so would delay their ESPs.  The fact is that responsible tax return preparers did notify RAL and RAC customers as soon as they received notice of the IRS guidance of the potential delays in receiving their ESPs.  However, the vast majority of taxpayers who utilize RALs and RACs generally do so very early in the tax filing season.  In SBB&T's case, 75 percent of our RAL/RAC customers in the 2008 filing season had already made their decision to obtain RALs/RACs before the IRS’s press release was issued on February 15th.

In order to prevent additional ESP delivery delays, RAL lenders proactively worked with the IRS before the first ESPs were scheduled to be direct deposited to prevent ESPs from being deposited to the temporary accounts established to facilitate RALs and RACs.  In fact, SBB&T alerted the IRS to an error in a large tax practitioner’s software that would have caused over 500,000 ESPs to be erroneously deposited had the error not been corrected. The bank also provided the IRS with the solution to fix the error.  According to IRS policy, in the handful of cases where the IRS inadvertently deposited ESPs into a temporary account, SBB&T immediately sent a check to the affected taxpayer without charge.

It is somewhat ironic that critics of the RAL industry are concerned about the impact on taxpayers of the delays in delivering ESPs, yet seem to dismiss the very real value that RALs provide to taxpayers by giving them quick access to much needed funds early in the tax filing season.  Particularly for many low-income taxpayers eligible for the earned income tax credit, their annual tax refund represents the largest sum of money they will receive at one time in the entire year, and it comes at a critical time of the year after many families become overextended during the holiday season.

In her 2007 Annual Report to Congress, the National Taxpayer Advocate stressed the negative impact to low-income taxpayers of delays in receiving their tax refunds:

Tax refunds are particularly important to low-income taxpayers…A taxpayer for whom the refund is so significant often makes financial plans based on when he or she anticipates receiving the refund and may view the refund as a lifeline. For some taxpayers, a delay of two to four weeks in receiving the refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit card bills from the holiday season.[5]

The Taxpayer Advocate was specifically addressing the delays in this year's filing season resulting from the fact that Congress did not pass legislation to address the so-called alternative minimum tax "patch" until December 2007.  However, the same considerations apply to RALs as well.  If the ability to receive the proceeds of one's tax

refund two to eight weeks earlier than the IRS can deliver it means the difference between paying for housing or being evicted, paying for heat or enduring the cold, or

paying off credit card debt or defaulting, paying a reasonable fee to obtain a RAL is a sensible decision.

It is important to recognize that fees charged by SBB&T are indeed reasonable. Critics often use Annual Percentage Rate (APR) measurements of RAL costs to justify the argument that RALs are high cost loans that take advantage of taxpayers.  However, the use of APR calculations to measure the cost of RALs is very misleading.  Due to the short-term nature of a RAL, APR calculations create an inflated representation of their true cost.  In its 2006 Report to Congress on the Debt Indicator, the IRS contended that the APR is an inappropriate measure of the cost of a RAL:

“Unlike loans of one year or longer, APR calculations for loans not based on simple interest rates add multiples of costs that borrowers will never pay.  [When calculating APRs for RALs], finance charges are assumed to be paid 36.5 times over the course of the year, when in fact they are paid only once, no matter how long it takes to pay back the loan…The reason this is important information is because some critics of RALs cite the APR as the real interest rate that taxpayers are charged."[6]

The average RAL funded by SBB&T during this filing season was $3,200, for which the bank charged an account set-up fee of $31 and a finance charge of 2.5% of the loan amount, or $80.  This equates to a total cost of about 3.5% of the total loan amount.  These fees remains fixed regardless of how long a RAL is outstanding.  SBB&T does not impose late charges or additional interest charges, even if a RAL is never repaid.  Nevertheless, we are required by federal banking laws to calculate an APR on a RAL loan using an 11-day repayment period.  Under the example cited above, this transforms our fees of 3.5% of the loan amount to an APR of 115%, even though the total cost to the taxpayer remains at $111. 

RALs (when not viewed in the context of an APR) cost less than other common financial transactions that are entered into on a daily basis.  For example, Western Union charges consumers $145 to send $3,000 within the United States via wire transfer.[7]  Unlike RALs, a wire transfer is a completely risk-free transaction.  Fees for credit card advances can range from three to four percent of the advanced amount, plus interest charges -- or $96 to $128, plus interest, on a $3,200 advance.  Payday loans, without taking into account the even greater interests costs when rolled over, range from $15-$20 per $100 borrowed.  By comparison, the average SBB&T RAL costs consumers $3.50 per $100 borrowed.  When viewed in proper context of the relatively few choices that many RAL borrowers actually have to obtain credit, the cost of a RAL is comparatively inexpensive.

We appreciate having this opportunity to provide members of the Subcommittees with this additional background information explaining the reasons for the delays in delivering ESPs to taxpayers who obtained RALs and RACs, and request that you include our statement in the written record for the hearing.

Sincerely,

Joe Sica

SVP - National Government Relations Director

Santa Barbara Bank & Trust

5770 Oberlin Drive

San Diego, California  92121

[1]  National Taxpayer Advocate, 2007 Objectives Report to Congress, Volume II, p. 14 (July 2006).

[2] Remarks of FDIC Vice Chairman on June 21, 2007, to FDIC’s Alliance for Economic Inclusion.

[3] Id.

[4]  See http://www.irs.gov.pub/irs-soi/07ifss13.xls.

[5] National Taxpayer Advocate’s 2007 Annual Report to Congress, December 31, 2007, Volume I, p. 5.

[6]  IRS Report to Congress on the Debt Indicator, June 2006

[7] See www.WesternUnion.com for Western Union's charge for its "Money in Minutes" wire transfer program to send $2,999 (their maximum) anywhere in the United States.