Is Block on the Hook for Sour RALs?

Unless I am mistaken, H&R Block will share in much of the risk for its refund anticipation loans during the upcoming tax season.

Block has a relationship with HSBC for its refund products.  Block’s customers are delivered to HSBC for refund loans.  HSBC advances the customer cash based on the expectation that they will have a refund.  In the past, that expectation was backed up by the IRS debt indicator. HSBC won’t have that kind of certainty next year.

My reading of Article IV, Section 4.5, part (a) of this filing, made in March 2010, is that Block will have to refund to HSBC on their losses from RAL advances that cannot be collected.

Tax refunds are going to be very risky without the debt indicator. Last year, a high percentage of refund loans were turned down. Many people have outstanding liens, either for child support or back taxes or for unpaid student loan debt. The debt indicator caught those returns. Now, it’ll be an unknown.

Block shareholders should be paying attention to this situation. HSBC might be one of the world’s largest financial institutions. Block is not.