H&R Block clients accustomed to receiving Refund Anticipation Loans (RALs) might be disappointed this tax season because the only bank that underwrites these loans for the company, HSBC Bank USA, might pull out of the program.
RALs are short-term loans secured by a taxpayer’s anticipated tax refund. Approximately 40 percent of H&R Block’s clients used RALs in 2010.
Last month, H&R Block sued HSBC in a federal court in St. Louis, alleging that HSBC has failed to honor its contract to back the loans. The contract does not expire until next year.
The two parties announced on November 11 that they are "engaged in discussions in an attempt to settle the litigation to confirm the availability of settlement products," according to a H&R Block company statement, but a court hearing has been scheduled for this week.
H&R Block claims that HSBC has not taken the necessary planning steps to ensure that the tax preparation firm will be able to offer RALs and refund anticipation checks (RACs) during the 2011 tax season.
The lawsuit also states that HSBC has refused to provide lending for the products because the Internal Revenue Service (IRS) announced in August that it will no longer issue a report called the debt indicator, which is used as an underwriting tool for RALs.
When the IRS acknowledged receipt of a tax return filed electronically by a tax preparer in the past, the agency would include a debt indicator in the acknowledgment file. The debt indicator showed whether some, or all, of a taxpayer’s refund would go to federal liens for back taxes, child support, or delinquent student loans.