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H&R Block Blocked from Refund Anticipation Loans

posted by Bob Lawless

In August, the IRS announced that it would no longer tell tax preparers and associated financial institutions when a consumer had a "debt indicator" that the consumer's tax refund would be offset against past due debts such as unpaid child support or delinquent student loans. The IRS move increased the repayment risk for those high-priced refund anticipation loans (RALs). Now comes news that the Office of the Comptroller of the Currency (OCC) has directed HSBC to terminate its contract with H&R Block to provide the financing for RALs.

H&R Block stock dropped 7% on the news while the stock of its principal competitor, Jackson-Hewitt, rose almost 30%. The market's reaction to the OCC move is a telling reminder of how important RALs have become to the tax preparation business. According to H&R Block's most recent 10-K, it earns almost all of its profits from its tax services business and according to my calculation, as much as 21% of H&R Block's tax services revenue comes from sources related to credit products such as RALs or the very similar (despite the industry's protests to the characterization) refund anticipation checks.

The market's move also hints at how important the availability of RALs are to bringing business in the front door. Even before today's news, the stock prices of both H&R Block and Jackson-Hewitt had dropped over the year as RALs came under increasing regulatory pressure. I used to think of these firms as tax preparers with a high-priced lending product attached to them. Now, I wonder whether they have not become high-priced consumer lenders with a tax preparation service attached.

For persons looking for more information on RALs, I would recommend pages from the Illinois Attorney General, the Consumer Federation of America, and the National Consumer Law Center.


I can see why refund anticipation loans are so popular, but it isn't just a tax time thing. My wife manages a call center and is often approached by employees who tell her if she can't give them a pay advance they will not come in the following day because they can not afford enough gas for the commute to work. She is confronted with requests and even demands every week. People who have worked for her specifically use tax preparers that offer immediate cash. These people need help not just with managing money, but many of the events that are going on in their lives.

Obviously, I do not know the economics of your wife's call center. That said, it is probably fair to say that constantly needing short term funds to meet financial obligations goes beyond poor financial planning. I think the second half of your final sentence is very fair. Its sad that so many live with this approach, although struggling in the 2nd world is nothing compared to struggling in the 3rd world.

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