Chicago Ordinance Would Protect Against Predatory Tax Preparers

A Chicago ordinance that targets predatory tax preparers will help low-income workers keep more of their income — hopefully before this tax season ends.

RahmThe regulations zero in on businesses that include hidden fees, have unfair payment rules and steer Chicagoans unfamiliar with the tax filing process to more expensive products. The ordinance is being introduced to the City Council today, a day after Mayor Rahm Emanuel announced it.

Targeted businesses are primarily those that prey on low-income workers eligible for the Earned Income Tax Credit (EITC), a critical income support for individuals and families struggling to make ends meet. Almost 70% of those who claim the EITC use a paid preparer for their tax return.

Tax prepares charge low-income filers an average $189 on their return. But more than half of low-income families are sold refund settlement products with hidden fees, which increase the cost of tax preparation by $100. Refund anticipation loans (RALs)  and Refund Anticipation Checks (RACs) are particularly costly. However, a recent report from the Consumer Federation of America and the National Consumer Law Center found that 2012 is the final year for the RAL industry.

According the NCLC & CFA  “Even after the end of RALs, tax preparers and banks will continue to offer RACs, for which the banks generally charge about $30 – $32. Tax preparers may also charge their own “add-on” fees, which can range from $25 to several hundred dollars. Since one of their main purposes is to defer payment of the tax preparation until the refund arrives, RACs may represent a high-cost loan of that fee”

This ordinance will “ensure that Chicagoans are made aware of their consumer rights before they sign away their tax refunds and hard-earned income to cover exorbitant fees and high cost loans by commercial tax preparers,” David Marzhal, President of Center for Economic Progress and IABG Steering Committee Member, said in a press release from Mayor Emanuel’s Office.

The Chicago ordinance would do the following:

  • Mandate that tax preparers inform customers of their rights and disclose any hidden fees, eliminate surprise costs and hard to find fine print during tax preparation.
  • Mandate that tax preparers provide costumers with a bill of rights, so customers know exactly what to expect and how to seek help if they believe they are victims of unscrupulous tax services.
  • Ban tax preparers from steering customers towards high-cost refund products.
  • Ban tax preparers from forcing customers to use a Refund Anticipation Loan or a Refund Anticipation Check if they seek general tax returns services.
  • Require tax preparers to disclose all costs and fees in the customer’s native language.

The city’s Department of Business Affairs and Consumer Protection will implement the new requirements if the City Council approves the ordinance, which we hope it will.

The Center for Economic Progress  and Ladder Up both provide Volunteer Income Tax Assistance (VITA) – free tax preparation services to low-income families in Illinois. For households with incomes below $50,000 and individuals with incomes below $25,000 CEP and Ladder Up offer free tax preparation at sites across the state.

Residents across the state can also locate a VITA site by contacting the IRS at 1-800-906-9887 or www.irs.gov or they can access an AARP Tax-Aide site. Choosing a VITA or AARP Tax-Aide site saves taxpayers the cost of a tax preparation fee.

Patty Pensa is a Policy Aide with IABG & Heartland Alliance.

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Our Love for Automatic IRAs

This Valentine’s day we are showing our love for Automatic Individual Retirement Accounts (IRAs).

As the wealth gap in Illinois grows so does the need for an Auto IRAs program. This innovative proposal could bridge the retirement savings gap, and especially assist low to moderate income workers save for their retirement.

retirement-savings

SB3278 / HB4497: The Illinois Automatic IRA Act was introduced by Senator Iris Martinez and Representative Deborah Mell, respectively. The Act would require Illinois businesses with more than 10 employees, but less than 100, and that have been established for more than 2 years to provide their employees with access to an Individual Retirement Account (IRA). Employees may opt-out of the Automatic IRA program and adjust their contribution at any time.  To reduce administrative costs, the IRA accounts would be pooled accounts administered by the State Treasurer’s Office.

Auto IRAs are structured to help workers who do not have employer-sponsored retirement plan save. According to the recent CFED Assets & Opportunities Scorecard, only 46% of Illinois workers (ages 21-64) participated in an employment-based retirement plan in 2010. Low-income workers, particularly those that are in the service industry and those that are part-time, are less likely to be employed for a business that offers access to retirement savings opportunities.

Lack of access to retirement savings opportunities contributes to Illinois’ growing asset poverty rate. 1 in 4 Illinois households are asset poor with no savings while almost 1 in 2 Illinois households of color are asset poor.

Auto IRAs could help to address these growing asset poverty rates and the expanding racial wealth gap. Here are the top three reasons we love Auto IRAs:

  1. Builds Savings Over a Lifetime: Among non-retired adults ages 50 to 64, about one-third have less than $25,000 in total savings. We must create systems that empower Illinois workers to save for their future when they first enter the workforce.
  2. Addresses a Growing Over-reliance on Social Security: Social security alone is not enough, and was never meant to sustain Illinois residents in their retirement. Yet despite their hard work, many Illinois workers are employed in jobs that do not offer a retirement savings plan to supplement Social Security.
  3. Provides an Opportunity for Small Businesses: Almost all larger firms administer a retirement plan for their workers.  By establishing a retirement account that small business can successfully administer, the Automatic IRA proposal provides small employers with a competitive benefit at a minimal cost.

The idea for Automatic IRAs was first introduced in 2006 by the Heritage Foundation and has since gained bipartisan support with a bill introduced by Senator Bingaman (D-NM) at the federal level in 2010. President Obama’s 2013 budget also includes funding for a federal Automatic IRA program

IABG hopes that others will show their love for retirement savings. With the Illinois Automatic IRA Act, our legislators have an opportunity to do so. They have an opportunity to create a system that provides Illinois workers with an infrastructure to build financially secure futures.

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Texas Appleseed Report Profiles Alternative Small Dollar Lenders

Katy Welter
Chicago Appleseed Fund for Justice

A report released this week by Texas Appleseed, “Reshaping the Future of Small Dollar Lending,” makes the policy case for small dollar loans, and then profiles six market newcomers offering affordable alternatives to high-cost payday and auto title loans in Texas. They conclude with a number of suggestions for how Texas policy makers and financial institutions can nurture a non-predatory small dollar credit market.

asdl_report_TX

Like many states, Texas has a bundle of legislation aimed to reduce predatory lending. However, payday and title lenders have found ways around the laws, and have in fact exploded their business. In Texas alone, 2,000 new storefront lenders opened in the last six years alone. While mainstream financial institutions have not kept pace, a handful have explored this product, for which there is high consumer demand and tremendous opportunity within unbanked and underbanked communities.

For their report, Texas Appleseed studied four institutions. They also drew information on two other institutions from recent reports on national small-dollar lending programs, the FDIC Small-Dollar Loan Pilot Program and the National Credit Union Foundation’s REAL Solutions program.

For each institution, they identify strengths and challenges to the program, though they do not discuss profitability in detail. Overall, the report issued these recommendations to promote a more robust small dollar lending industry in Texas:

  • Texas needs basic standards for affordable credit to support fair competition in the small-dollar lending market.
  • Texas banks and credit unions should consider investing in positive lending models to promote the availability of affordable small-dollar loans in Texas.
  • Explore affordable small-dollar loan products offered by or in partnership with nonprofits as a strategy to serve nonprofit clients and other consumers who may otherwise fall through the cracks.
  • Texas would benefit from enhanced outreach and education about affordable small- dollar lending that targets both financial institutions and consumers.

The IABG recently studied a Chicago credit union’s small dollar loan program. We will be providing insights from that study and other research in the form of a toolkit for Illinois lenders interested in offering these important products.

Learn more about the Chicago Appleseed Fund for Justice, an IABG Partner.

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