Sen. Sherrod Brown Proposes Payday Loan Alternative Bill

Ohio’s Democrat Senator Sherrod Brown has introduced a bill that would allow some taxpayers to get a cash advance on their income tax returns instead of turning to so-called payday loan businesses that charge interest rates as high as 500 percent.

Ohio’s Democrat Senator Sherrod Brown has introduced a bill that would allow some taxpayers to get a cash advance on their income tax returns instead of turning to so-called payday loan businesses that charge interest rates as high as 500 percent.

The proposed program would allow those eligible for the Earned Income Tax Credit to get an interest-free advance on that credit before receiving their returns. Workers could enroll in the program through their employers, who would advance the money and report the loan along with other tax information they file in quarterly reports. The loans would be capped at $500.

The Earned Income Tax Credit was established in the 1970s to help the working poor. Currently, single workers making less than $14,590 without children or $38,511 with one child can qualify for the tax credit. More than 70,000 households in Hamilton County qualified in 2012, netting more than $2,000 on average from the credit.

More than 800,000 workers in Ohio could be eligible for Brown’s proposed program, based on current Earned Income Tax Credit eligibility standards.

“Ohioans shouldn’t be trapped with a lifetime of debt from predatory loans – particularly if they have tax refunds waiting for them,” Brown said in a statement. “My proposal would provide many people who work hard and pay their taxes with an alternative to the vicious cycle of debt we so often see with payday loans.”

The Early Refund Earned Income Tax Credit, as Brown is calling his proposal, would provide an alternative to payday lending companies, pawnshops, title loan businesses and other money lenders of last resort. The companies are especially popular in low-income areas and among people without access to traditional banks. The companies say they provide a vital lifeline to their customers.

The vulnerability of the businesses’ target market — low income people without access to other forms of banking —  means that payday loans are both very attractive and very hard to pay back. A single loan for an average of $400 can and often does balloon into a mountain of compounding interest and fees.

A study released in March by the Consumer Financial Protection Bureau found that 80 percent of borrowers from payday loan businesses took out another loan to pay off their first loan. Fifty percent of borrowers took out at least 10 loans a year. Only 15 percent of payday loan customers were able to pay back their loans without taking out subsequent loans within a two-week period, the study found.

Some have questioned whether the proposed program would place more burden on employers in the form of increased paperwork, and other critics point out a similar program ran nationally from 1979 to 2010. That program was only utilized by 3 percent of eligible workers.

But Brown’s program differs in a couple key ways. The old program spread the entirety of the Earned Income Tax Credit across each paycheck. That was unpopular — taxpayers liked getting a lump sum at the end of each tax season and sometimes ended up owing the federal government at tax time due to changes in income. Brown’s plan would still give taxpayers a lump sum, but wouldn’t release all of the tax credit early, meaning less likelihood of a taxpayer owing at the end of the year.

Progressive groups applauded the idea.

“The Earned Income Tax Credit is already one of the nation’s most effective anti-poverty tools, so strengthening this program is a common-sense proposal that should win support among Democrats and Republicans alike in the new Congress,” said Rebecca Vallas of the Center for American Progress. The progressive think tank suggested an early-access option for the tax credit in a report published last October.

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