HSBC, H&R Block and Refund Anticipation Loans: Is OCC Being Fair?

Includes: HRB, HSBC
by: Ira Stoll

HSBC (HBC) and H&R Block (NYSE:HRB) had a dispute over "refund anticipation loans" that has now been resolved by the Treasury Department's Office of the Comptroller of the Currency, which regulates HSBC, essentially siding with HSBC and ordering the bank not to issue any more of the loans.

Bloomberg has a news article on shares of H&R Block dropping more than 8% in response to the decision, and H&R Block has a press release in which the tax preparation firm's CEO, Alan Bennett, said:

As a result of the OCC's decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general. The OCC's 11th hour timing will make it difficult for us to put alternative products in place at all of our locations in time for the early part of the 2011 tax season, but we will spare no effort to do so.

I haven't seen any explanation from the OCC of its decision. An earlier Wall Street Journal article explained that "Consumer advocates have criticized the lending practice as predatory, saying it targets low-income families," and that "the IRS no longer sees a need for the tool because it can process a tax return and deliver a refund in 10 days."

The Block press release says:

The total cost to the consumer of a $1,500 Instant RAL under the proposed terms rejected by the OCC would have been $46, which is approximately 62 percent less expensive for consumers than the products being offered this year by competitors through a few banks that are regulated by the Federal Deposit Insurance Corporation (FDIC) that will apparently continue despite the OCC directive to HSBC.

The Journal article said:

The company previously has said it extended 2.1 million refund anticipation loans in 2010, each with an average amount of $3,000 issued for 10 to 11 days. Each loan costs about $62, or 2.1% of the loan principal.

A 2.1% rate on a 10 day loan works out to something more like 72% (if my math is right) on an annualized basis. But apparently 2.1 million people made the decision that it was worth paying the extra $62 or $46 or whatever it is to get the $1500 or $3000 refund ten days earlier. The OCC's action is a kind of paternalism in which the federal government has decided it, like the "consumer advocates," knows better than actual consumers whether it is worth it to the consumers to get the money sooner in exchange for the fee.

The consumers would like to have the money earlier and pay the fee, and H&R Block would like to make that possible for them, but the government doesn't want to facilitate it and is doing all it can to prevent it, to the point of ordering H&R Block's business partner not to participate. It's a remarkable situation.

Disclosure: No positions