Refund Anticipation Loans Strip Wealth from Working Families in the Chicago Region Says Woodstock Institute Report

State Senator Schoenberg, Attorney General Madigan, Community Advocates Propose Reform

Tom Feltner

Communications/Development Associate

Woodstock Institute

(312) 427-8070

Melissa Merz

Press Secretary

Office of the Attorney General Lisa Madigan

(312) 814-3118

Anita Banerji

Chief Legislative Aide

Office of Senator Jeffrey Schoenberg

(847) 492-1200

[Chicago]- In the Chicago region, 38
percent of all Earned Income Tax Credit recipients are using a high cost refund
anticipation loan to get their refund faster. 
Costing about $248 in fees for the average tax preparation and loan with
annual interest rates in the triple digits, these products cost lower-income
families in the region over $48 million in lost income based on 2002 data, the
most recent available.

Earned Income Tax Credit (EITC) is a refundable tax credit program for
families. Since its inception in 1975, the program has been credited
lifting nearly 5 million families out of poverty annually.  In
total, lower-income taxpayers in the Chicago region receive about $903
million as a result of the
Earned Income Tax credit, with an estimated additional $45 million from
Illinois Earned Income Credit. 

“Working families throughout the Chicago region are spending hundreds of dollars to access
their own money a few days earlier,” said Tom Feltner, the report’s author. 
“With usage rates as high as 62 percent in some communities, we need to
develop policies to reduce the cost of this type of product and increase
funding for free tax preparation services,” he said.

an effort to ensure that working families do not lose the much needed public
benefit provided by the EITC, Attorney General Lisa Madigan, State Senator
Jeffrey Schoenberg (D-9) and community advocates, such as Voices for Illinois
Children, Work, Welfare & Families, Sargent Shriver National Center on Poverty Law, Metropolitan Family
Services, Woodstock Institute, Center for Tax and Budget Accountability, the
Center for Economic Progress and Citizen Action, proposed Senate Bill
2844.  The legislation prohibits RAL
facilitators from charging fees for any RAL with an APR in excess of 26% that
is issued to a borrower who is eligible to receive the Illinois Earned Income
Tax Credit.    

The bill further provides that RAL
facilitators must make certain disclosures to the borrower on a separate form,
including: informing the borrower that he or she is taking out a loan, the loan
fee schedule, the Annual Percentage Rate, and fees and costs connected with the
loan. The facilitator must sign and date an acknowledgment attached to the
disclosure form, as well as, retain the original copy of the acknowledgment and
provide the duplicate copy to the borrower.

“The majority of RAL recipients
are the working poor who can least afford to lose any amount of their tax
refund. Instead of simply receiving their entire anticipated refund, however,
RAL consumers receive a short-term loan with extremely high fees that will
deprive them of the full value of their Illinois Earned Income Credit,” Madigan
said. “Senate Bill 2844 can help ensure that the tax refund and benefits
afforded to low-income working families will not be eaten up by the exorbitant
fees and costs packed into these loans.”

“These unregulated,
high-interest loans and service charges are profitable for companies because
they take advantage of working families struggling to put food on the
table and trying to move toward economic independence,” Schoenberg said. “We
need to act as soon as possible to put an end to these unconscionable and
unfair lending practices.”

Schoenberg, who chairs a key
Senate budget panel and sits on the Financial Institutions Committee, said that
studies show nearly half of those who receive the “instant refund” loans
receive government financial assistance in the form of tax reductions and cash

reports major findings show:

  1. The Earned Income Tax Credit
    returned $903 million to working families in the Chicago region, with an average value
    of $1,764 per recipient.
  2. In the Chicago region, on average, 38 percent
    of all Earned Income Tax Credit recipients use refund anticipation loans to receive
    their refunds faster, paying $48,282,872 million in tax preparation and loan
  3. Sixty-two
    percent of all EITC
    recipients in the city of Robbins, Illinois used RALs––the highest in
    the Chicago region.  In contrast, only 29 percent of EITC
    recipients in Summit Argo, a community with roughly the same number of EITC recipients as Robbins, used RALs.
  4. Refund anticipation loan usage
    is particularly high in south suburban Cook County.  Of the top 15 communities ranked by refund
    anticipation loan usage, 9 of these communities were located in the south
  5. There is also a wide variation
    in RAL usage across the Chicago region.  Out of the 107 communities analyzed, 12 or 6
    percent had RAL usage at or above 50 percent of EITC recipients while 68
    communities or 29 percent had a RAL usage of between 18 and 30 percent.
  6. Throughout the state, refund
    anticipation loan usage varies by metropolitan area.  In Kankakee, Illinois overall usage was 50.4
    percent.  The Quad Cities region had the
    lowest usage rate, with only 26.8 percent of EITC recipients taking out RALs.
  7. The percent of EITC recipient
    usage also varies by the race and income of a zip code. Across the state, 53
    percent of recipients who live in predominantly minority tracts use RALs
    compared with only 27 percent of recipients in predominantly white tracts.  Similarly, 57 percent of recipients in
    low-income zip codes use RALS compared with 19 percent of recipients in
    upper-income tracts.

The full report Reinvestment Alert 29:  Refund Anticipation Loans Usage Rates
Negatively Impact the Asset Building Potential of the Earned Income Tax Credit
is available below.

icon Reinvestment
Alert 29: Refund Anticipation Loans Usage Rates Negatively Impact the
Asset Building Potential of the Earned Income Tax Credit

Institute, founded in 1973, is a nationally-recognized resource on credit and
capital needs of low-income and minority communities. The Institute engages in
applied research, policy development, and technical assistance to promote
community economic development.