There may not be much legal basis for HSBC's hesitancy to provide financial products for H&R Block, but the exchange of letters and the court documents generated by the dispute are still very telling.
HSBC has failed to perform a number of steps necessary for the fulfillment of their retail distribution agreement (the "RDA"). Block expected HSBC to provide a template for a RAL and RAC application form by September 1st, along with a list of fees for those products. On September 15th, Block expected to have HSBC's underwriting criteria for refund anticipation loans, as well as a template for disclosure statements that are programmed into the tax preparation software used by Block staff.
John Butler of HSBC sent a letter to the assistant Vice-President for Settlement Products at H&R Block on August 30th. Butler wrote that the agreement terms state that "the Settlement Products Program must be consistent with safe and sound banking practices." There was no specific factor given for what constituted a lack of such sound practices, but it is fairly easy to see the reference: the IRS had suspended the debt indicator on August 5th.
Unfortunately for HSBC, their contract doesn't give HSBC room to make that statement. There is a portion of the RDA that covers termination which gives either party grounds to quit the contract if there is some change in how the IRS sanctions RALs and RACs. Here is
an excerpt from the Block complaint that references Section 17.2 of the RDA.
(d) All of the Block Companies or all of the HSBC Companies may terminate this Retail Distribution Agreement and any other Program Contract (other than the Servicing Agreement) in the event the IRS withdraws or changes the implementing revenue procedures sanctioning RALs or RACs (other than the removal of the Debt Indicator), to the extent such withdrawal could reasonably be expected to have a Material Adverse Effect on the anticipated benefits that the terminating parties would achieve from the Settlement Products Program.
(e) All of the Block Companies or all of the HSBC Companies may terminate this Retail Distribution Agreement and any other Program Contract (other than the Servicing Agreement) in the event that the offering of HSBC RAL's pursuant to the Settlement Products Program becomes commercially infeasible due to a change in Law (other than the removal of the Debt Indicator) that creates a Material Adverse Effect.
Why is HSBC pursuing this plan, if the RDA is so explicit about the non-effect of the suspension of the DI?
Maybe because they have all the cards. Time is on their side. Brinksmanship harms Block, but not HSBC.
In their complaint, Block acknowledges the problem: "there is no comparable alternative source of the products at this late date. Block, therefore, does not have the option of finding a substitute for HSBC and then suing HSBC for the difference.There is no substitute for HSBC's performance."
Block says that forty percent of its consumers used a settlement product in 2010. That's a far cry from Jackson Hewitt, where 89 percent sought a RAL or RAC in 2010. Block is envisioning a situation where they lose market share to preparers with RALs (Liberty and Jackson Hewitt) in 2011.
Block seems to believe that HSBC is being disingenuous when they cite "unsound banking practice."
"HSBC rested its refusal... on the claim that to offer Settlement Products without being able to offer the Classic RAL would be unprofitable for HSBC and therefore would constitute an "unsafe and unsound banking practice." Id. In other words, HSBC has refused to perform under the contract because it projects that it may lose money (or, more likely, simply make less profits) this year under the agreement it reached five years ago."
The thing that really points to insincerity on the part of HSBC is their insistence on not funding RACs. RACs aren't loans. By including RACs in their decision, it points to a different motive. HSBC must have decided, once and for all, that the risk to their reputation that is posed by participating in settlement products is just not worth whatever profit it brings.
This is a situation where size matter. Block is the nation's largest tax preparer. A lot of their customers are used to having a settlement product. It contributes to a material portion of their revenue. Still, when it comes to size, Block is dwarfed by HSBC. HSBC is one of the world's largest banks. They could lose profits from RALs and RACs and it wouldn't amount to 1/10th of a cent of their annual EPS.
I would love to be in on the phone calls between these two companies right now. I can imagine the call. The man from Block dials
Block: "Hello, HSBC?
Block: "We'd like to talk with someone about our settlement products agreement."
HSBC: "to HSBC!"
Block: "Hello. Hello!"
HSBC: "We would like to express our appreciation and concern for your phone call. We value your relationship and want you to know that you are very important to us. This call will be recorded for your own benefit."
Block: "Zero. Operator!"
HSBC: "We will connect you to the next available operator. Understand right now that a lot of tax prep firms are trying to call. Your call will be answered in..."
Block: "Darn it, we have a deal!"
HSBC: "....mid-January 2011."
Block: "Hold on! It takes months to roll out RAL software. January is no good. No one wants to get a RAL in April! If they want their refund fast, they don't file in March."
HSBC: "Response times may vary."
Block: "We had a deal. We had an exclusive deal."
HSBC: "If you would like to address your complaint in writing, please fax to our offices at 81 (1e1) (32a0). This is our loan modification line. Our loan modification department is currently located in Indonesia. There have been some recent staffing issues with our foreclosure department. We believe that someone will answer the line. Wait times can be long, and remember that business hours are different there.
Block: "We don't want our loan modified. We want our loan to not be modified!"
HSBC: Put your case number on all fax correspondence, in case it is misplaced. If there is no fax paper at our West Java offices, it will be your responsibility to send it again. If you do not have a case number, call Mark Ernst."