Reg Order Forces HSBC, H&R Block to Stop Offering Refund Anticipation Loans

Regulators may have dealt a fatal blow to H&R Block Inc.'s tax-refund loan program through its main partner, HSBC Holdings PLC.

The Kansas City, Mo., tax preparer said in a Dec. 24 press release that HSBC is terminating a contract the companies have to offer refund anticipation loans after the Office of the Comptroller of the Currency ordered HSBC to stop offering "any form of" the product.

"While we are very disappointed by this decision, we have been preparing for the loss of RALs, so we have several other financial products available and under development for this tax season," Alan Bennett, H&R Block's president and chief executive, said in the press release. Yet the "OCC's 11th hour timing will make it difficult for us to put alternative products in place at all of our locations in time for the early part of the 2011 tax season," he said.

H&R Block said it would continue offering customers refund anticipation checks that do not require out-of-pocket expenses by taxpayers at the time their tax return is filed.

In a recent filing with the U.S. Securities and Exchange Commission, H&R Block sued HSBC Bank USA and certain affiliates in federal court to require HSBC to meet its contractual obligations to offer the loans at the tax preparer's retail offices.

In January, HSBC extended a new $2.5 billion line of credit to H&R Block to buy participation interests in the loans during the most recent tax season.

H&R Block generated $146.2 million of revenue from participating in refund anticipation loans during the fiscal year ended April 30, according to the filing.

The loans, which consumer advocates say are predatory, have come under increased scrutiny from the Internal Revenue Service. The agency in August said it no longer would provide tax preparers or financial institutions with its debt indicator, an underwriting tool lenders used to determine whether to make a refund anticipation loan to a consumer.

H&R Block said because of the IRS's decision, approval rates and loan amounts would be lower in the upcoming tax season. The discontinuation of the debt indicator tool could reduce profits by 5 cents per diluted share.

H&R Block isn't the only tax preparer to face troubles with the loans.

Jackson Hewitt Tax Service Inc. encountered problems during the last tax season when regulators stopped its main partner, Pacific Capital Bancorp Inc., from funding the loans.