A federal judge has ruled that New Jersey cannot limit the interest rates and fees national banks can charge for taxpayer RALs (refund anticipation loans) even though the judge noted that the loans’ APR average 115%. Nope, not a typo, that’s well over 100%. New Jersey law limits interest and fees to 30% of the loan’s value as part of its usury laws.
Pacific Capital Bank N.A., which makes loans through Jackson Hewitt Tax Service, filed suit to stop enforcement of the law. New Jersey sought to make it a criminal offense to exceed the cap.
Robert E. Levy, an attorney for Pacific Capital Bank indicated the bank might have stopped doing business in New Jersey if the ruling had not been in their favor. What a shame that would have been (please read with proper amount of sarcasm).
In her ruling, US District Judge Freda Wolfson, who sits in Trenton, indicated that the provisions of the federal National Banking Act would trump state legislation. She wrote, “While the court appreciates what has motivated the state’s initiative, concern for consumers who are subjected to high interest RALs, relief lies with Congress, not with the Court.”
The loans have already attracted a great deal of controversy. The IRS has recently noted that the loans provide a financial incentive for tax services who issue them to take improper tax positions. Several states have passed laws requiring more disclosure as to the process behind the loans. And New Jersey is the second state to challenge the usurious rates charged by these lenders.
I’ll flat out say that I despise these loans. I think they unfairly target the poor and others who may not understand their real options. I have a number of colleagues that have worked with or for many of the tax factories that issues these loans and appalled by their stories. And my own experiences with seniors at the IRS VITA site who told of being misled as to when they might expect their refunds without a RAL are infuriating.
What is most appalling – beyond the interest rates – is the fact that these lenders often exaggerate the time that it takes to receive funds from the IRS. Judge Wolfson noted in her ruling that the average taxpayer can receive a refund from the IRS by Direct Deposit in 11 days. 11 days. Or 115% interest if you use a RAL.
So, quite frankly, if Pacific Bank never stepped foot in the Garden State again, I wouldn’t cry for them. RALs are not a service. They’re a travesty.