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Reaction to the OCC RAL Directive

Adam Rust's picture

Posted December 27, 2010

People have a lot of questions about the OCC's directive to make HSBC end their Settlement Products Agreement with H&R Block.

Here are a few:

  • Why did the OCC do it?
  • Will the FDIC do the same thing?
  • Will H&R Block be able to come up with a substitute means of helping their customers settle the cost of their tax preparation fees?

HSBC reports that the OCC required them to terminate their contract, known as the HSBC Settlement Products Program, on Christmas Eve. Block's 8-K reports that the OCC directive required HSBC to immediately stop providing any form of refund anticipation loans and refund

anticipation checks. Block says that it will still have RACs, although from a different source. The source has not yet been identified.

The last question seems to be the easiest one to answer. Block says that it will still offer RACs. Block may move consumers over to a line of credit on their Emerald Card platform.  Block even has the ability to shop for other bank partners.

This is a jarring end of a product line for the firm that invented the refund anticipation loan. Before the 1980s, consumers that wanted to get their tax refund instantly signed over their refund to consumer finance companies, including Beneficial.  When HSBC purchased Household Finance and its subsidiary Beneficial in 2002, they inherited this business. For a few years, though, the relationship has been something that HSBC wanted to end. Their SP agreement made that hard, because Block had several options years to renew.

The directive says a lot about the Office of the Comptroller of the Currency, the primary regulator of HSBC. The OCC's concern in any affair is safety and soundness. Without the debt indicator, the RAL is a very risky product. Still, safety and soundness at HSBC has never really been threatened by the performance of RALs. The lack of a debt indicator did not impact that proposition. HSBC is just too big. The SPA even stipulated that Block was responsible to make up losses incurred by HSBC on the banks share of participation interests in refund loans.

There was probably a lot of behind the scenes pressure in the days leading up to this directive. We know that HSBC wanted out of their Settlement Products Agreement. On the other side, there was the interest of H&R Block. I think it is safe to say that the OCC is not worried about the affairs of Block. Block should realize that, too.Most likely, Block has been using its public affairs department to try to change the OCC's stance. Richard Breeden, the former leader of the Securities and Exchange Commission, has hired at least one person from his former DC staff. If political pressure was brought to bear on the situation, it didn't make any difference. However, the OCC is fairly well insulated from any political pressure. It is not funded by Congress, but instead by dues paid by its member banks (the NA's) and by investment income. One of the arguments that supported the political desire for an independent regulator was the fact that institutions like the OCC are funded by their members.

What will the FDIC do? At this point, they have already given us some hints. They will continue to hold Republic accountable for the work of the tax preparers at their partners. They will continue to see that their deposits are under adequate safeguards.  I think that the conversations that I had with a staff member at Ohio Valley Bank last year is prescient. He said that the FDIC had sent a letter to their firm about the future of RALs. He told me that he had the impression that the same letter had gone to the other FDIC-regulated RAL providers. The letters said that the FDIC would not force its members to stop RALs during the 2011 tax season.