H&R Block sees more than 15 million customers in its 8,800 offices every year. At any time, at least a million are considering a home loan, the company estimates.

So why hasn't the company made good on its 1997 promise to enter the mortgage market in a big way?

In 1997, H&R Block bought Option One Mortgage, Fleet Financial Group's Santa Ana, Calif.-based subprime unit that was rumored to be difficult for the bank to run.

William Anderson, then president of an H&R Block subsidiary, Block Financial, promised that it would be a big player in the subprime market, and that the company was looking to provide a full spectrum of financial services to its predominantly low- and moderate-income consumers.

Analysts applauded the move as a natural fit for H&R Block, and a unique way to reach customers.

But a year and a half later, H&R Block says that it is still in the early stages of figuring out the best way to make home loans through its tax preparation offices, and loan volume from those channels is tiny.

Option One has been profitable enough. The unit will be responsible for about 15% of H&R Block's pretax operating income for fiscal 1999, said Michael Hodes, a Goldman Sachs analyst.

Higher-than-expected revenues and profits from Option One drove earnings per share above analyst expectations for the third quarter of H&R Block's fiscal 1999.

"The strength in mortgage operations should dispel investors' concerns that it would be a source of earnings disappointment," said Mark R. Miller, a Merrill Lynch analyst, in a February report raising earnings estimates for the company.

Nonetheless, Option One has "yet to really get the cross-sell going," said Mr. Hodes.

Option One originations that come from H&R Block offices are negligible, the company said.

H&R Block said Option One's retail loan production has been hampered by a need for more information, the company's unwillingness to get anything wrong, and regulatory hurdles.

"We've attempted to do it in a couple of different ways, but it hasn't been growing at the pace that we wanted," admitted Brian Schell, vice president and treasurer at the Kansas City, Mo.-based company.

"Option One is still very much a wholesale operation," Mr. Schell said.

Legal restrictions make H&R Block's introduction of mortgage products more difficult. The Internal Revenue Services prohibits tax preparers from soliciting purchases of financial products by clients without first requiring them to sign a waiver.

The complexity of the Real Estate Settlement Practices Act, or Respa, which governs how commissions can be paid, has also made the logistics of referring tax customers to loan officers difficult, Mr. Schell said.

"Some of that takes a little time," Mr. Schell said.

Analysts say another contributing factor to Block's difficulties is Mr. Anderson's departure from Block Financial soon after announcing H&R Block would be a major player in the mortgage market. Block Financial is now run by the company's chief operating officer, Mark Earnst, who joined in September.

Mr. Schell said Mr. Anderson's departure did not affect the company's home loan originations, and that H&R Block had no plans to give up on the mortgage business.

H&R Block purchased Assurance Mortgage Corp. of America, a prime lender, in February to round out its product mix.

"We found that only half our client base is subprime," Mr. Schell said.

"We serve clients with incomes from $1 million a year to $10,000 a year," he said.

The company plans to fold Assurance Mortgage into Option One, he said.

Assurance Mortgage has 11 offices and made $1.3 billion in conventional retail loans last year.

The company said in January that it had opened eight financial centers that feature in-office mortgage representatives, in addition to tax preparers and mutual fund and stock advisers. H&R Block is testing consumer reaction to the one-stop centers, and expects to have results this summer.

"It's not a big earnings per share issue, it's a pilot program," Mr. Schell said. "Option One is instrumental in getting people into these offices."

The company is also testing a telemarketing approach. Tax return customers that indicate that they are interested in other financial products are called by mortgage professionals after filing their return.

"We're going down both paths," Mr. Schell said. "We're trying to see which approach works best."

Mr. Schell acknowledges that "maybe we didn't learn our lesson very quickly," but he was quick to add that "it didn't cost us a lot either."

Analysts say the company still has an unusual opportunity to capture mortgage share.

"Their advantage comes from a strong brand identity, the rapport they have with their customers, the opportunity they have to leverage their brand and the information they are exposed to," said Mr. Hodes.

H&R Block also said in late February that it was in discussions with McGladrey & Pullen, a Minneapolis-based accounting and consulting firm. The two are said to be considering a possible merger, which could greatly influence their focus on home lending.

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