Feds halt H&R Block's refund loans

In a blow to Kansas City-based H&R Block, federal regulators have ordered its banking partner to stop making refund anticipation loans used by millions of Block's customers.

The dictate stripped the tax-preparation company of its most popular lure for early filers on the eve of the tax season. Because 1 in 6 of its customers used a refund anticipation loan last year, it stands to lose millions in revenue.

Such loans allow taxpayers to collect their expected tax refunds quickly, often within a day or two of filing their returns. They essentially borrow the money — in this case from HSBC Bank, Block's partner — and pay back the loan when their refund arrives from the Internal Revenue Service. The IRS usually delivers refunds by direct deposit in 10 to 14 days.

Block collects the cost of the loan and its tax preparation fee out of the refund.

Block is not expected to find another lender soon, certainly not in time for customers who seek the refund loans starting next month.

Rival tax services, however, will still be able to offer the loans through their banking partners, putting Block at a competitive disadvantage.

A spokesman for the federal Office of Comptroller of the Currency, the Treasury Department agency that regulates national banks, would not discuss the directive against HSBC, stating that such actions by the agency are confidential.

But the agency has previously cited "safety and soundness" concerns for banks that make the refund loans and warned consumers of the high costs that can accompany them.

Block has been battling for months to preserve its refund anticipation loans.

In August, the IRS said it would withhold a code that let tax preparers know whether customers would get their entire refund, or if some part would be held to cover unpaid back taxes or similar debts. The tax preparers use the code as a form of credit check.

After the IRS announced its change, HSBC tried to pull out of the contract with Block.

Block then sued the bank, seeking a court order forcing HSBC to make the loans in the upcoming tax season.

In a statement Friday, Block said 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. The comptroller's order to HSBC blocked that deal.

Regulators have not ordered Republic Bank & Trust in Kentucky to stop making the refund anticipation loans it provides for Block's two largest rivals, Jackson Hewitt Tax Service and Liberty Tax Service.

Experts are less certain about how much the untimely end of refund anticipation loans at Block will send customers to other tax preparation firms that can offer the loans. They do know that Block failed to capitalize a year ago when the same thing happened to Jackson Hewitt.

H&R Block CEO Alan Bennett said in a statement that Block would "spare no effort" to provide alternative products for the early part of the tax season. The statement noted that Block would still offer refund anticipation checks to qualified customers.

The checks, however, don't deliver refund dollars nearly as quickly as refund anticipation loans do, and that fast turnaround has been the main appeal for early tax filers.