This essay was first published by Reuters' Great Debate blog. Kai writes about predatory lending as a reporting fellow of the Investigative Fund at The Nation Institute.
Tax season is full of familiar rituals--mounds of receipts on the kitchen table, midnight news reports from the post office and, of course, all those wacky come-ons from tax preparers promising easy money.
There are the Liberty Tax guys dancing at strip malls in Statue of Liberty costumes. The "FA$T CA$H" banners plastered on storefronts. And in a cult classic of advertising, all over the South there were those ridiculous Mo' Money Taxes commercials in which buffoonish Southerners bumble through financial crises. Each one ends with advice on how to avoid a similar mess: "Just come on down to Mo' Money!"
All of these campy promos are actually selling costly loans against your own money, but they have in fact generated lots of easy cash--for the lender, if not the borrower.
Refund anticipation loans, as they are called, have been risk-free business for most of the past decade. Lenders offer roughly 10-day advances of tax refunds, for which they charge exorbitant subprime fees. More than 12 million taxpayers got anticipation loans in their peak year, in 2004, according to the National Consumer Law Center. IRS data shows that over 90 percent of people who applied in 2010 were low-income.
Don't be fooled, though, refund anticipation loans are no fringe market. Throughout the so-called boom years, the same banks that sit at the center of our high-end economy spread this fraud-ridden industry throughout its bottom tier. Take for instance Mo' Money, which has faced several fraud probes. Until 2010, its storefronts were actually agents of JPMorgan Chase. The bank backed roughly 13,000 independent preparers in this business.
But as of Apr. 30, no banks will remain in the refund loan market. They've been driven out by a combination of watchdog advocacy and renewed regulatory oversight--and as a result, an industry that strips hundreds of millions of dollars a year from low-income taxpayers is now in rapid decline. In 2010, when the largest banks pulled out, the industry's take in loan fees plummeted to $338 million, down nearly 60 percent from just three years prior and nearly three-quarters from its peak.
There's a crucial lesson for regulators and lawmakers in this change of fortune.