AccountAbility Minnesota estimates it saved hundreds of low-income people nearly $300 each on tax preparation and refund anticipation loan (RALs) fees in 2008. Now three years old, its Express Refund Loan program is spreading slowly across Minnesota and the country.
AccountAbility has provided free tax-preparation help for low-income people for years. Starting in 2006, it began partnering with financial institutions to offer no-interest Express Refund Loans on a limited basis, said Bonnie Esposito, executive director. (The McKnight Foundation and Annie E. Casey Foundation subsidized the loan costs.)
“In Minnesota alone, $23 million is diverted to commercial preparers in fees and interest for tax preparation and refund anticipation loans,” she said. “Those are dollars that people could have in their pockets if they used a free site.”
Encouragement to open savings accounts
The program also encourages low-income people getting refunds but who are “unbanked” to open savings accounts, a small but important step to building wealth.
Low-income people often get tax refunds boosted by the federal Earned Income Tax Credit and the Minnesota’s Working Family Credit. Eager for the refunds, some go to for-profit tax preparers for filing help and an RAL. (It means they get the money one to two weeks faster than if they filed electronically and used direct deposit.)
Consumer groups, such as the National Consumer Law Center, have criticized RAL fees. (They range from $32 to $130 and can include a separate application fee. [PDF])
An expanding program
AccountAbility offered the Express Refund Loan program at seven metro sites this year. It targeted north Minneapolis in particular, the area with the highest dollar volume of RALs in the state, Esposito said.
AccountAbility has 18 partner agencies around the state, providing grants, training and technical help for tax-assistance programs. In 2008, AccountAbility expanded the Express Loan program to two partners, Community Action Duluth and White Earth Investment Initiative. (The White Earth area has the highest percentage RAL use in the state.) Next year, the loan program will expand to at least two more partners. (Deals aren’t done; names aren’t released.)
AccountAbility has helped other nonprofits replicate the program: Newark, N.J., (2008) and Atlanta (2009). It currently is talking to Tulsa and Baltimore groups about their possible startups.
AccountAbility traces its roots to the early 1970s, when volunteer accountants helped small business owners set up their books. The organization has evolved, putting more emphasis on helping low-income people access tax credits and build assets.
According to data collected as part of the Express Loan pilot, AccountAbility clients received an average federal refund of $2,115 and an average state refund of $641 in 2008. (That is higher than a typical client. Seventy percent in the pilot qualified for the Earned Income Tax Credit, averaging $1,876.)
That average $2,756 state and federal refund is potential savings. Volunteer tax preparers encouraged people to have their returns deposited directly to bank accounts. However, nearly one-third didn’t have accounts. To address that problem, partnering financial institutions provided new account numbers to AccountAbility staff. People getting refunds could apply to open accounts right at the tax preparation site.
Program wrinkle #1: Tax preparers don’t push the Express Refund Loans, but if people want them they have to open a no-cost savings account with one of the partnering financial institutions. (AccountAbility initially partnered with U.S. Federal Credit Union. It added City & County Credit Union and City-County Federal Credit Union. Other programs around the state have their own financial partners.)
The no-interest loans are available the next day (as long as there were no outstanding claims against the return. They check.)
Program wrinkle #2: Individuals can get a loan for the value of the federal tax return, but not the state return. The state return has to be deposited into the new account. The individual is free to withdraw the entire state return once it is deposited and close the account. AccountAbility hopes that people would save at least some.
The loans got individuals into financial institutions where they can learn about other services, such as loan consolidation or debit cards.
“With us it was a package,” Esposito said. “Our goal wasn’t to get people their money quickly or to get them to open a savings account … it was to establish this relationship with a mainstream financial institution.”
The program opened 77 savings accounts in 2006, its first year. It grew to 371 in 2007 and 932 in 2008, more than double the initial goal of 400 accounts.
Approximately 80 percent of savings accounts remain open. They have a small average balance, $95. (The accounts have a $5 minimum.)
In 2008, the project approved 733 Express Refund Loans statewide. AccountAbility estimates that people saved $290 on average compared to paying for similar commercial tax preparation and RAL.
The pilot finished this year. Next year, the partner financial institutions will charge a small fee to cover at some costs, Esposito said. That amount is being negotiated, but it will be in the $5-$20 range, less than the private market rates.