WHEN CONGRESS HASTILY created and passed the Troubled Asset Relief Program (TARP) last fall to bail out the financial sector, the program didn't offer any consumer protection against the type of predatory lending practices that led to the financial crisis. It came as no surprise, then, when Santa Barbara Bank & Trust, a self-described "community bank" in California, announced in January that it was intending to use its $180 million in bailout money to make high-priced refund anticipation loans, known as RALs.
RALs are short-term loans borrowed against a consumer's tax refund. They're often advertised as "quick cash," because they allow people to get their tax refund in days instead of waiting for the IRS, which can take at least 10 days. Historically, poor communities have been targeted for these loans. According to the IRS, 85 percent of the people who took RALs in 2006 had incomes of $37,300 or less, and nearly two-thirds were recipients of the Earned Income Tax Credit. On average, a person pays between $200 and $500 in fees for a RAL.
This tax season, it's expected that low-income taxpayers will pay more than $1 billion in fees and triple-digit interest rates associated with RALs.
Refund anticipation loans are made by a handful of banks, including HSBC, JP Morgan Chase and Santa Barbara Bank & Trust. The banks give tax preparers--including H&R Block and Jackson Hewitt, as well as preparers found at places like used car lots--a share of the hundreds of dollars in "application," "processing" and "e-file" fees that can be made from a single loan. …