Mr. President, I rise to introduce the Taxpayer Abuse Prevention Act. Earned income tax credit (EITC) benefits intended for working families are significantly reduced by the use of refund anticipation loans (RALs), which typically carry triple digit interest rates.
According to the Brookings Institution, an estimated $1.9 billion intended to assist low-income families was received by commercial tax preparers and affiliated national banks to pay for tax assistance, electronic filing of returns, and high-cost refund loans in 2002. Fifty-seven percent of consumers who received RALs in 2003 earned the EITC. The Children's Defense Fund recently conducted a review of EITC refunds in eight states and the District of Columbia. In Texas, it is estimated that EITC families lost an estimated $251 million in tax preparation fees and high interest loans. EITC families had an estimated $82.6 million diverted to tax preparers in Ohio.
The interest rates and fees charged on RALs are not justified because of the short length of time that these loans are outstanding and the minimal risk they present. These loans carry little risk because of the Debt Indicator program.
The Debt Indicator (DI) is a service provided by the Internal Revenue Service (IRS) that informs the lender whether or not an applicant owes federal or state taxes, child support, student loans, or other government obligations, which assists the tax preparer in ascertaining the applicant's ability to obtain their full refund so that the RAL is repaid. The Department of the Treasury should not be facilitating these predatory loans that allow tax preparers to reap outrageous profits by exploiting working families.
Mr. President, unfortunately too many working families are susceptible to predatory lending because they are left out of the financial mainstream. Between 25 and 56 million adults are unbanked, or not using mainstream, insured financial institutions. The unbanked rely on alternative financial service providers to obtain cash from checks, pay bills, send remittances, utilize payday loans, and obtain credit. Many of the unbanked are low- and moderate-income families that can ill afford to have their earnings unnecessarily diminished by their reliance on these high-cost and often predatory financial services. In addition, the unbanked are unable to save securely to prepare for the loss of a job, a family illness, a down payment on a first home, or education expenses.
Mr. President, my bill will protect consumers against predatory loans, reduce the involvement of the Department of the Treasury in facilitating the exploitation of taxpayers, and expand access to opportunities for saving and lending at mainstream financial services.
My bill prohibits refund anticipation loans that utilize EITC benefits. Other federal benefits, such as Social Security, have similar restrictions to ensure that the beneficiaries receive the intended benefit.
My bill also limits several of the objectionable practices of RAL providers. It will prohibit lenders from using tax refunds to collect outstanding obligations for previous RALs. In addition, mandatory arbitration clauses for RALs that utilize federal tax refunds would be prohibited to ensure that consumers have the ability to take future legal action if necessary.
I am deeply troubled that the Department of the Treasury plays such a prominent role in the facilitation and subsequent promotion of refund anticipation loans. In 1995, the use of the DI was suspended because of massive fraud in e-filed returns with RALs. After the program was discontinued, RAL participation declined. The use of the DI was reinstated in 1999, according to H&R Block, to "assist with screening for electronic filing fraud and is also expected to substantially reduce refund anticipation loan pricing." Although RAL prices were expected to go down as a result of the reinstatement of the DI, this has not occurred. Use of the Debt Indicator should once again be stopped. The DI is helping tax preparers make excessive profits from low- and moderate-income taxpayers who utilize RALs. The IRS should not be aiding efforts that take the earned benefit away from low-income families and allow unscrupulous preparers to take advantage of low-income taxpayers. My bill terminates the DI program. In addition, this bill removes the incentive to meet Congressionally mandated electronic filing goals by facilitating the exploitation of taxpayers. My bill would exclude any electronically filed tax returns resulting in tax refunds distributed by refund anticipation loans from being counted towards the goal established by the IRS Restructuring and Reform Act of 1998, which is to have at least 80 percent of all returns filed electronically by 2007. Mr. President, my bill also expands access to mainstream financial services. Electronic Transfer Accounts (ETA) are low-cost accounts at banks and credit unions intended for recipients of certain Federal benefit payments. Currently, ETAs are provided for recipients of other federal benefits such as Social Security payments. My bill expands the eligibility for ETAs to include EITC benefits. These accounts will allow taxpayers to receive direct deposit refunds into an account without the need for a refund anticipation loan.
Furthermore, my bill would mandate that low- and moderate-income taxpayers be provided opportunities to open low-cost accounts at federally insured banks or credit unions via appropriate tax forms. Providing taxpayers with the option of opening a bank or credit union account through the use of tax forms provides an alternative to RALs and immediate access to financial opportunities found at banks and credit unions.
I want to thank my colleagues, Senators Bingaman, Sarbanes, Dayton, and Durbin for cosponsoring this legislation. I also thank Representative Jan Schakowsky for introducing the companion legislation in the other body. I ask that the text of the Taxpayer Abuse Prevention Act be printed following my remarks. I also ask unanimous consent that the text of a support letter and accompanying fact sheet from the Association of Community Organizations for Reform Now, the Children's Defense Fund, the Consumer Federation of America, Consumers Union, the National Consumer Law Center, and the Center for Responsible Lending be included in the Record. In addition, I ask unanimous consent that the text of the national summary of the refund anticipation loan studies done by the Children's Defense Fund be included in the Record.
Mr. President, I urge my colleagues to support this important legislation that will restrict predatory RALs and expand access to mainstream financial services. Thank you Mr. President.
