H&R Block’s refund loans hit regulatory hurdle

By Archana Shankar

BANGALORE (BestGrowthStock) – H&R Block Inc, the largest U.S. tax preparer, said it will not be able to help customers borrow money against their tax refunds in the coming months, as the bank that was supposed to provide the loans is under a regulatory directive not to.

An inability to offer refund anticipation loans is a big blow to H&R Block, which relies on such loans to attract clients.

H&R Block’s shares fell as much as 10 percent in morning trade on Monday. The stock has fallen 39 percent this year, following regulatory uncertainty concerning refund loans.

Banking regulators at the Office of the Comptroller of Currency (OCC) told an HSBC Holdings unit not to offer refund anticipation loans to H&R Block customers.

U.S. regulators have been cracking down on refund anticipation loans, which according to consumer advocates carry unduly high interest rates, and HSBC had tried to avoid offering them this year, spurring H&R Block to sue the bank in October.

But some competitors still offer the loans. Jackson Hewitt Tax Service Inc, the second largest U.S. tax preparer, said earlier this month it could fund 80 percent of its refund anticipation loan program.

Jackson Hewitt shares surged more than 38 percent as it is expected to get more business from H&R Block’s inability to offer refund loans.

“With less than three weeks before the 2011 tax season begins, H&R Block’s competitive position appears significantly weakened,” analyst Scott Schneeberger of Oppenheimer said.


If H&R Block does not offer refund anticipation loans in 2011, which is the “most likely” scenario, its tax preparation volume would fall 4 percent, analyst Schneeberger said.

Schneeberger sees an earnings hit of 13 cents a share to $1.44. The company generated about $90 million pretax from RALs last year.

Analysts on average were expecting the company to earn $1.58 per share for 2011, according to Thomson Reuters I/B/E/S.

H&R Block disclosed the regulatory directive from the OCC late on December 24, on a day when U.S. financial markets were closed for Christmas Eve.

It is not clear what the directive from the OCC said, but any OCC decision would not be applicable to Republic Bancorp, which provides refund anticipation loans to Jackson Hewitt.

Republic is regulated by the Federal Deposit Insurance Corp, an analyst said.

Refund anticipation loans usually last one to two weeks, until taxpayers get their refunds from the U.S. Internal Revenue Service. They are popular among lower income taxpayers.

But the effective annual percentage rate for such loans can range from about 50 percent to 500 percent, depending on the size of the loan, according a February report by the National Consumer Law Center and Consumer Federation of America.

The report said about 8.4 million U.S. taxpayers used this type of loan in 2008, according to the recent data available.


HSBC’s exclusive rights to provide such products also ended with this directive, allowing H&R Block to enter into other partnerships for these financial products, the company said in a statement.

In August, the Internal Revenue Service (IRS) said it will not provide tax preparers and associated financial institutions with the “debt indicator,” which is used to facilitate refund anticipation loans starting with the next tax filing season.

HSBC did not return calls requesting comment, while H&R Block said it will continue to develop other financial products by the early part of the tax season.

The tax preparer will continue to offer its traditional refund-anticipation checks that do not require any out-of-pocket costs by taxpayers, it said.

(Reporting by Abhinav Sharma and Archana Shankar; Editing by Gopakumar Warrier and Dan Wilchins)

H&R Block’s refund loans hit regulatory hurdle