H&R Block Inc. disclosed late last week that HSBC Holdings PLC had ended its long-term contract to provide refund anticipation loans (RALs) to H&R Block clients. HSBC acted under a directive from its federal regulator, the Office of the Comptroller of the Currency (OCC), which immediately prohibited HSBC from offering any form of RALs.
RALs are short-term, high interest loans secured by a taxpayer’s anticipated tax refund. Tax return preparers who offer the loans, which have been criticized by consumer advocates, deduct fees and interest from the refund. Approximately 40 percent of H&R Block’s clients used RALs in 2010.
“As a result of the OCC’s decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general,” said Alan Bennett, H&R Block’s president and CEO.
“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, but we will spare no effort to do so. Our clients, our tax preparers and our franchisees deserve nothing less,” Bennett said.
A spokesman for the OCC, the Treasury Department agency that regulates national banks, would not provide any explanation for the directive. The OCC had published a consumer advisory in February 2010, criticizing RALs and suggesting alternatives.
Earlier in the year HSBC had notified H&R Block that it would not fund the loans, following a decision by the Internal Revenue Service that it would no longer release information about liens on taxpayers’ refunds. H&R Block sued HSBC saying that HSBC had not honored its contract obligations. Prior to the OCC ruling, however, the two parties were able to reach a deal whereby HSBC would continue to provide the loans for one year.
H&R Block said the proposed terms would have made it nearly impossible for HSBC to suffer any financial losses, potentially a big issue for regulators.
In addition, H&R Block said in a statement that it agreed at its own expense to fund Instant RALs at a substantially reduced rate to consumers. The total cost to the consumer of a $1,500 Instant RAL under the proposed terms rejected by the OCC would have been $46. This is approximately 62 percent less expensive for consumers than products offered this year by competitors through a few banks regulated by the Federal Deposit Insurance Corporation (FDIC). Apparently these products will continue despite the OCC directive to HSBC.
H&R Block’s principal competitors, Jackson Hewitt Tax Service Inc. and Liberty Tax Service, will continue to offer the loans, which will be funded by the largest remaining provider, Republic Bancorp Inc. of Louisville.
Another banking regulator, the FDIC said that the agency had no new comments to make on the products, according to the American Banker, noting that it imposed a cease-and-desist order on Republic Bancorp in 2009 in connection with some RAL practices. The FDIC also has warned consumers that the loans usually are a bad deal.
H&R Block will continue to offer its customers its traditional refund anticipation checks (RACs), which do not require any out-of-pocket costs by taxpayers at the time the tax return is filed, the company said.
Additionally, H&R Block will continue to provide direct deposit accounts through its Emerald prepaid debit card program. H&R Block transfers tax refunds to the Emerald Card electronically, enabling customers to avoid the delay and cost of paper checks and check-cashing charges.