New restrictions enacted on refund anticipation loans, high-risk home loan terms
CHICAGO, IL â€“ In a ceremony held at the Chicago Urban League, State Senator Jacqueline Y. Collins (D-16th) applauded as Governor Pat Quinn signed legislation she sponsored to protect borrowers from financial exploitation by both tax preparers who facilitate refund anticipation loans and mortgage lenders who burden low-income borrowers with unfair repayment terms. Senate Bill 1692 prohibits tax preparers from charging excess, hidden fees on refund anticipation loans (RALs) and also bans prepayment penalties, loan modification fees and balloon payments for high-risk home loans.
â€œThis law represents yet another hard-won victory in the battle against all forms of financial exploitation, particularly those taking disproportionate advantage of low-income individuals and racial minorities,â€ said Sen. Collins, who chairs the Senate Financial Institutions Committee. â€œThrough good times and bad, through booms and busts, the American dream remains just out of reach whenever people face discrimination, misinformation or predatory lending practices.â€
RALs allow customers to get their tax refunds right away but often at extremely high interest rates. Although states cannot limit the interest rates banks charge, the new law does cap rates on RALs offered by payday lenders. It also prohibits tax preparation firms from charging higher fees to RAL customers than to customers who do not take out loans and requires them to disclose interest rates, terms and the fact that customers can receive their refunds from the IRS in eight to fifteen days, interest-free. Fulfilling last yearâ€™s promise of tax relief for the working poor, it makes it illegal to lend money at interest in anticipation of a state Earned Income Tax Credit refund.
â€œWeâ€™re making it clear that it was our intention to put extra spending money into the pockets of hard-working Illinoisans, not into the pockets of predatory lenders,â€ Sen. Collins said. â€œAnd by addressing the problem of prepayment penalties that can trap people in disadvantageous loans and balloon payments that make it harder for families to stay in their homes, weâ€™re helping beleaguered households weather the storm of recession and avoid becoming another foreclosure statistic.â€
SB 1692, which takes effect January 1, 2013, also harmonizes state law with the federal Dodd-Frank Act to eliminate confusion about the definition of a high-risk loan.