In This Issue
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:
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:
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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H. Katerina Hertzog
Paul H. Irving
T.J. Mick Grasmick
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