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.

For many reasons, the nature of how tax preparers enable their clients to get an advance on their expected tax refunds is changing.

Earlier this month, the IRS announced that it will not offer the debt indicator for the upcoming tax season. Advocates were ecstatic about this event. Absent of some notice about the tax position of a RAL consumer, the new normal in RAL underwriting triggers all kinds of problems for this product. It makes the product more more risky. Given that most of the active players in this field are relatively small banks (MetaBank, Ohio Valley Bancorp, Republic Bank of Kentucky), the new rules should make regulators look twice. There are new (more…)

Wells Fargo has the power of life and death over Jackson Hewitt. In the next few months, we’ll get the first sense of how much patience Wells has for its patient.

Wells has extended a large revolving line of credit to Jackson Hewitt. The terms are about as strict as can be.  For Jackson Hewitt, those terms are a problem, because regulatory events in recent weeks have created the grounds for Wells Fargo to declare that JTX is in “event of default” on their loan.

Last May, Jackson Hewitt and Wells re-negotiated their agreement. Jackson (more…)

The IRS left a big question hanging in the air when it announced that the debt indicator would not return for 2011. The issue is the split refund. The split refund already exists. This year, tax payers were allowed to dedicate a “split” of their refund They said that will study the idea of letting taxpayers split their refund.

RALs aren’t going to disappear. Right now, Steve Trager, John Hewitt, Alan Bennett and the other titans of the refund anticipation loan are developing (more…)

Today’s announcement by the IRS that it is canceling the debt indicator is very significant.

The debt indicator is what made the refund anticipation loan possible. Without it, banks would never have been able to tell if a tax filer had outstanding tax liens. Now that the IRS is ceasing to provide the debt indicator, the future of refund anticipation loans seems dim.

RALs were a big business. More than 470,000 North Carolina households spent almost $50 million on RAL fees in 2006 (according to research we did with the IRS’ SPEC data).

The IRS’ complicit involvement in the RAL business was undermining (more…)