by Angelee Harris
The Office of the Comptroller of the Currency (OCC) has rejected arguments that the U.S. government is on the hook for bank loans made to taxpayers in anticipation of tax refund payments and that these loans should qualify for a 20% risk weight. Instead, the OCC says these loans do not perform as if Uncle Sam is the guarantor and 100% is the appropriate risk weight.
During the mad rush of tax season, taxpayers often cash in at the beginning of the year by borrowing against their anticipated tax refund payments. In order to obtain a tax refund loan, a taxpayer must open a deposit account at the lender (which the lender controls) and direct the tax refund to be deposited into that account. These tax refund loans have historically been classified as having a 100% risk weight by the OCC. However, in OCC Interpretive Letter #959, a bank requested that the OCC lower the risk weight to 20%. The OCC’s risk-based capital regulations permit a 20% risk weight for assets that are:
- conditionally guaranteed by the U.S. government,
- collateralized by cash or securities issued by the U.S. government, or
- directly and unconditionally guaranteed by the U.S. government.
The bank argued that a 20% risk weight should apply to tax refund loans because the Internal Revenue Service (IRS) conditionally guarantees payment of a tax refund claimed by an individual taxpayer, which effectively guarantees repayment of the tax refund loan. The bank also suggested that tax refund loans are similar to general obligations of states and other political subdivisions, instruments conditionally guaranteed by the U.S. government and obligations guaranteed by Fannie Mae or Freddie Mac.
After examining the tax refund loan characteristics, the OCC concluded that the tax refund loans did not perform as if they were guaranteed by the U.S. government. The OCC pointed to the following:
- The charge-off rate for the bank’s tax return loans is five times higher than the rest of the bank’s loan portfolios;
- The IRS handbook specifically states that the IRS is not responsible for any loss suffered by taxpayers or financial institutions from reduced refunds or direct deposits not being honored;
- The IRS does not recognize the assignment of the payment of individual tax refunds to a third party; and
- There is no contractual relationship between the bank and the IRS establishing any form of guarantee.
Accordingly, the OCC concluded that the bank’s tax refund loan program did not meet collateral or guarantee provisions that would qualify for a 20% risk weight and also concluded that the tax refund loans did not have characteristics that would make them similar to the obligations of municipalities and assets issued by other entities that qualify for a 20% risk weight.
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