Attorney General's Opinion

Attorney General, Richard Blumenthal

October 24, 2005

Honorable Louis C. DeLuca

Senate Republican Leader

Legislative Office Building, Suite 3400

Hartford, CT 06106-1591

Dear Senator DeLuca:

You have requested an opinion as to whether the provisions of Public Act No. 05-107, An Act Protecting Consumers in the Making of Income Tax Refund Anticipation Loans (Act), and in particular the provision limiting the interest rate on income tax refund anticipation loans, are enforceable (a) against national banks doing business in Connecticut or (b) against "facilitators" of such loans by national banks. 

As you know, the Act was enacted to protect consumers who obtain income tax refund anticipation loans from abusive lending practices. In particular, the Act is aimed at limiting the extraordinarily excessive interest rates typically charged for such loans that can be especially punitive to consumers when a tax refund takes longer than usual to be received.  The Act also prohibits income tax refund anticipation loans from being made at any location whose principal business is not tax preparation. 

I conclude that the protections against abusive lending practices embodied within the Act are fully enforceable against "facilitators" of refund anticipation loans regardless of the source of the loan financing and are not preempted by federal law. "Facilitators" are those that process, receive or accept a loan application, issue a check representing the loan proceeds, or otherwise participate in allowing the making of the loan. Additionally, the General Assembly expressly exempted national banks from the provisions of the Act by exempting all banks from the Act's definition of "facilitator." 

Background

The Act amended General Statutes § 42-480, which addresses the making of income tax refund anticipation loans.  Such loans are defined as “loan[s] arranged to be paid directly from the proceeds of a borrower’s income tax refund,” Conn. Gen. Stat. § 42-480(a)(3), and are typically offered in connection with tax preparation services.  Section 42-480 imposes certain disclosure obligations on a “facilitator” of a refund anticipation loan.  Specifically, at the time of application for a refund anticipation loan, the facilitator shall disclose in a document separate from the loan application: (1) the estimated fee for preparing and electronically filing an income tax return; (2) the loan fee schedule; (3) the annual percentage rate as calculated under Regulation Z of the Federal Truth in Lending Act; (4) the estimated total cost to the borrower; (5) the estimated number of days within which the loan proceeds will be paid to the borrower; (6) that the borrower is responsible for repayment of the loan in the event that the tax refund is not paid; and (7) the availability of electronic filing of an income tax return and the average time to receive a refund if a return is electronically filed.  Id., § 42-480(b). 

A facilitator is defined as person who, either individually or with another, does any of the following: (1) makes a refund anticipation loan; (2) processes, receives or accepts for delivery an application for a refund anticipation loan; (3) issues a check in payment of refund anticipation loan proceeds; or (4) in any other manner acts to allow the making of a refund anticipation loan.  Id., § 42-480(a)(2).  The statutory definition of a facilitator expressly excludes a bank, savings and loan association, credit union, or person licensed under General Statutes §§ 36a-555 to 36a-573,¹ operating under federal or state law.  Id.

The Act adds two new provisions to § 42-480.  First, it provides that no refund anticipation loan shall be made at any location other than a location in which the principal business is tax preparation.²  Conn. Gen. Stat. § 42-480(c).  Second, it limits the annual interest rate on a refund anticipation loan to (1) 60 percent for the initial 21 days of the loan, and (2) 20 percent for the balance of the loan.  Id., § 42-480(d).  As reflected in the Act’s legislative history, the purpose of the bifurcated interest rate limit is to protect borrowers, who ordinarily expect a refund anticipation loan to be relatively short term, when they do not receive a refund for some longer period of time and become burdened with a long-term loan with a very high rate of interest that may effectively substantially diminish the amount of the tax refund.  See Sen. Tr. (internet version) (May 24, 2005) (remarks of sponsor Sen. Finch). 

Section 42-480, as amended by the Act, imposes a fine of $500 for each violation of either the existing disclosure provisions or the Act’s new provisions.  It further provides that the Attorney General may bring a civil action on behalf of an aggrieved borrower against a facilitator for three times the amount of the refund anticipation loan fee, plus attorney’s fees, for violations of § 42-480.  Id., § 42-480(e).

Analysis

Section 42-480 restricts and regulates facilitators of refund anticipation loans.  Facilitators are required to make the requisite disclosures to borrowers.  Facilitators are liable for violations, including the interest rate restrictions.  The definition of facilitator expressly excludes national banks. Thus, in response to your question whether the Act’s provisions can be enforced against national banks, the answer is that, by its express terms, the Act does not apply to national banks.

The Act does, however, apply to facilitators of refund anticipation loans who may facilitate – that is, process, receive or accept a loan application, issue a check representing the loan proceeds, or otherwise participate in allowing the making of the loan – a loan made by a national bank.

Under the National Bank Act, states are prohibited from exercising regulatory authority that forbids or significantly interferes with the banking powers of national banks.³  12 U.S.C. § 484(a); see Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33-34 (1996).  There is little question that preemption of state authority under the National Bank Act encompasses the regulation of interest rates charged by national banks. 12 U.S.C. § 85; see Smiley v. Citbank (South Dakota), N.A., 517 U.S. 735 (1996); Marquette Nat’l Bank of Minneapolis v. First Omaha Service Corp., 439 <st2:country-region>U.S.</st2:country-region> 299 (1978).  However, the Act does not regulate national banks.  A national bank is not subject to the requirements of the Act and cannot be liable for violations of the Act.  Indeed, national banks are expressly exempted from the definition of facilitator in the Act. 

Instead, the Act regulates the activities of a facilitator.  It imposes on a facilitator disclosure requirements and precludes a facilitator from participating in the making of a refund anticipation loan that exceeds the Act’s interest rate limits.  Nothing in the National Bank Act or the regulations promulgated thereunder precludes states from regulating a non-bank facilitator.  Moreover, because the Act does not apply to national banks, nothing in the Act’s provisions serves to prevent or significantly interfere with a national bank’s powers.  See Barnett Bank, 517 <st2:country-region>U.S.</st2:country-region> at 33; Atherton v. FDIC, 519 <st2:country-region>U.S.</st2:country-region> 213, 223 (1997); Anderson Nat’l Bank v. Luckett, 321 <st2:country-region>U.S.</st2:country-region> 233, 248 (1944).  Accordingly, the enforcement of the Act against a facilitator is not preempted by federal law.

Conclusion

For these reasons, we conclude that the Act, by its own terms, does not apply to national banks, but that the Act is enforceable against facilitators of refund anticipation loans made by national banks.

Sincerely yours,

RICHARD BLUMENTHAL

ATTORNEY GENERAL

Mark Kohler

Assistant Attorney General