H&R Block shares fell Monday after it received notice from HSBC that the bank is immediately terminating refund anticipation loans and refund anticipation checks for Block as a result of a regulatory directive from the Office of the Comptroller of the Currency.
The two parties had signed a long-term contract under which HSBC would provide all of H&R Block’s refund anticipation loans and some of its refund anticipation checks. As a result of the order from banking regulators, HSBC told the tax prep giant Friday that it would no longer provide RALs or RACs to H&R Block clients. At the same time, HSBC’s exclusive right to provide such products has also ended, thereby enabling H&R Block to enter into other partnerships for financial products that were previously precluded.
The contract termination is the result of a directive from the OCC, HSBC’s banking supervisory agency, immediately prohibiting HSBC from offering any form of RALs. Shares of H&R Block were down about 8 percent in mid-morning trading on Monday.
H&R Block said it would continue to offer all its customers its traditional RACs that do not require any out-of-pocket costs by taxpayers at the time the tax return is filed. In addition, the company provides direct deposit accounts through its Emerald Card program that allow customers to avoid the delay and cost of paper checks and check-cashing charges through electronic transfers of tax refund proceeds.
H&R Block also provides various other programs to its tax preparation clients, such as its Emerald Advance revolving line of credit product that has been used by more than 4 million customers.
“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 H&R Block president and CEO Alan Bennett in a statement. “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. We are working around the clock to give our company and franchise teams the best tools we can to fill the void for our clients created by the OCC’s action. 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.”
Block had filed suit against HSBC in October when the bank tried to end their arrangement, saying it could not provide funding for the RALs and RACs because the IRS had decided to stop providing a debt indicator next tax season that would say whether a taxpayer has liens outstanding, and that would make the loans too risky to provide (see
Prior to the OCC’s recent action, H&R Block and HSBC had reached agreement on a proposal that would have allowed HSBC to honor its contractual obligations to H&R Block during tax season 2011. Under the revised terms agreed upon by both parties, H&R Block would have in effect covered essentially all credit defaults experienced by HSBC, thereby making H&R Block’s credit rather than the taxpayer’s refund the ultimate source of repayment to HSBC. The proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, according to Block.
In addition, H&R Block 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, which is approximately 62 percent less expensive for consumers than the products being offered this year by competitors through a few banks that are regulated by the Federal Deposit Insurance Corporation that will apparently continue despite the OCC directive to HSBC.
