October 21, 2010 in Business

H&R Block sues over refund anticipation loans

Eileen Aj Connelly Associated Press
 

NEW YORK – H&R Block Inc.’s allegations that HSBC Bank USA is trying to back out of funding its tax refund loan program signals both a potential blow to the nation’s largest tax preparer and an indication that the controversial loans may be disappearing.

With funding scarce and help underwriting the loans from the IRS discontinued, the high-interest advances on tax refunds are going to be harder to find when tax season begins in January. Where they are available, taxpayers will find that it’s harder to get approved and they’ll have to pay more.

Kansas City, Mo.-based H&R Block filed a lawsuit Friday that alleges HSBC has failed to honor its contract to back the loans, which expires next year. The suit says HSBC has not taken the necessary planning steps to ensure that H&R Block will be able to offer refund anticipation loans and refund anticipation checks during the 2011 tax season.

A refund anticipation loan is a short-term loan 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.

In the lawsuit, H&R Block said about 40 percent of its customers used one of these products during the 2010 tax season. Standard & Poor’s equity analyst Erik Kolb estimated that translated into about $146 million in revenue from the loan products alone – not counting the tax prep fees for the associated returns – or 3.8 percent of the company’s annual revenue.

In terms of profit, eliminating the loans could mean a 10-cents-per-share reduction next year, estimated Vance Edelson, an analyst with Morgan Stanley. The drop could be more if customers looking for these loans have their taxes prepared elsewhere. H&R Block was expecting to increase this segment of its business because it had full funding for loans, while some competitors did not.

The issue with HSBC stems from an August announcement by the Internal Revenue Service that it will no longer inform tax prep companies if all of an individual’s expected tax refund will be sent. Without such confirmation, called a “debt indicator,” there’s no way for tax prep companies and the banks that fund their refund loan programs to know if the refund will be reduced by factors like back taxes due, a defaulted federal student loan or unpaid child support.

In essence, the IRS debt indicator acted as a form of credit check for a population that typically doesn’t have access to traditional credit.

The IRS said it would stop providing the information because it’s now able to deliver refunds quickly.

In the lawsuit, H&R Block said HSBC is trying to back out of funding its refund anticipation products because without help from the IRS, the bank fears it will lose money.

HSBC said it hopes to reach a solution with H&R Block that addresses concerns about the risk from these loans resulting from the elimination of the debt indicator.

Despite the current difficulties, the tax prep companies say the demand for the products will remain. “There’s always 5 percent of the population who live paycheck to paycheck, they don’t have good credit and they don’t have any collateral,” said John Hewitt, CEO of Liberty Tax Service, which made about 300,000 refund anticipation loans last year.

© Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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