Senator Jacqueline Y. Collins secured passage in the Senate today of a package of reforms designed to protect Illinoisans from financial exploitation when they pay their taxes and when they buy a home. Once signed by the governor, Senate Bill 1692 will impose stricter controls on tax refund anticipation loans facilitated by tax preparers; it will also ban balloon payments and prepayment penalties on high-risk residential mortgages.

“Exorbitant interest rates, undisclosed terms and hidden fees associated with loans help keep the poor in poverty,” Sen. Collins said. “Measures like this one empower borrowers to make informed decisions as they seek to meet their financial obligations and improve their families’ quality of life.”

Tax refund anticipation loans (RALs) allow customers to get their refund money up front after a tax preparation firm estimates the amount. RALs have come under scrutiny recently, especially after problems at a Chicago location of Mo’ Money Taxes spurred the Office of the Attorney General to open an investigation. Customers complained that their refund checks were late, much smaller than promised or couldn’t be cashed. SB 1692 prohibits tax preparers from charging extra fees for facilitating these loans and caps RAL interest rates at 36% for non-bank entities like payday lenders.

“This legislation also prohibits loans in anticipation of the state earned income tax credit, which the General Assembly voted to increase last year,” Sen. Collins said. “The tax credit was designed to help the working poor pay for essential needs, and it is in the state’s interest to keep this money out of the pockets of predatory lenders.”

Prepayment penalties can trap homeowners in disadvantageous loans or keep them from relocating by imposing a fee when the borrower tries to refinance or sell the home. Balloon payments – payments twice as large as the average of previous payments – are another common pitfall for homeowners with high-risk loans. The legislation passed today, which harmonizes Illinois law with the federal Dodd-Frank Act, defines high-risk loans and will help prevent foreclosures by giving high-risk borrowers a better chance of continuing to make their payments and staying in their homes.

“Neighborhoods are suffering real harm from the high rate of foreclosures resulting in vacant, poorly maintained properties,” Sen. Collins said. “Addressing the prevalence of loan terms that make repayment difficult or impossible is a key step in reclaiming our neighborhoods from the scourge of the housing crisis.”

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