NEW YORK — Millions of H&R Block Inc. customers who relied on short-term loans backed by their expected tax refunds will not have that option this year because federal regulators forced Block's banking partner to stop offering the loans.
It's a blow to Block, the nation's largest tax-preparation company, which could lose tax customers to competitors still offering the loans and has virtually no time to find a new funding partner before tax season starts in January.
That means Block could lose millions of dollars in revenue because nearly 45 percent of its customers use a refund-anticipation loan or refund-anticipation checks. The company made about $146 million on the two products in 2010.
RALs, often referred to as "rapid refunds," are short-term loans backed by an expected federal income tax refund. A refund-anticipation "check" is an account where a refund is deposited. This enables taxpayers to have their tax return-preparation fees deducted from their refund, rather than paying up front. Both products are typically used by low-income customers who file their taxes early in the season.
Block's contract with HSBC Bank to back its RALs dates to 2005, but bank regulators ordered HSBC to stop funding the high-interest loans, which typically are offered to customers with spotty or no credit histories. A spokesman for the federal Office of Comptroller of the Currency, the Treasury Department agency that regulates national banks, would not provide any explanation for the directive, stating such actions by the agency are confidential.
It is likely that a change in policy this summer by the Internal Revenue Service contributed to the OCC's decision. The IRS eliminated a code that let tax preparers know if customers will get their entire refund or if some will be held to cover things such as unpaid back taxes. Tax-prep companies used the code as a form of credit check for the loans.
After the IRS announced its policy change, HSBC tried to pull out of the contract with Block, which prompted the tax preparer to file a lawsuit. Block said in a statement that negotiations related to the suit had led to an agreement calling for HSBC to fund the loans for the 2011 tax season with Block covering any defaults. That deal was blocked by the OCC action.
Block Chief Executive Officer Alan Bennett said that while the company is working to provide other options, the OCC's last-minute action makes it difficult to put alternative products in place at all locations in time for the early part of the 2011 tax season.