H&R Block loans to end

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, since Block’s banking partner was forced by federal regulators 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. About 17 percent of its customers used a refund anticipation loan in the 2010 tax season. Related revenue topped $146 million, or about 4 percent of annual revenue.

RALs, often referred to as “rapid refunds,” are short-term loans backed by an expected federal income tax refund. A refund anticipation “check” is actually 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 that 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 like 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 released Friday 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 said the proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, potentially a big issue for regulators.

Block said it will continue to offer customers refund anticipation checks, which are funded through H&R Block Bank, along with direct deposit accounts through its Emerald Card program.