Loss of refund cash advance product cuts H&R Block revenues
The loss of the ability to offer a cash advance against tax refunds has caused revenues to fall for tax preparation giant H&R Block. The latest earnings reports for the company indicate that revenues so far are less than expected this tax season. Earlier this year, the company was forced to abandon refund anticipation loans when a key partner was sued by the FDIC.
Tax season off to a slower than normal start
A decline in people paying to have their tax returns prepared has led to a decline in revenues for tax preparation giant H&R Block, according to CNBC. Block expects January earnings will come close to breaking even, but activity began to pick up in mid-February. From Jan. 1 to Feb. 15, online returns prepared through H&R Block increased by almost 28 percent, though total digital tax returns only registered a 7.3 percent increase since the start of the year. Preparation fees for H&R Block have declined by 7.6 percent since the start of the year, and part of the loss is because the company is no longer offering the popular refund anticipation loan, a cash advance against an income tax refund.
Blocked from lending by suit against key partner
Short term loans against tax refunds are similar to payday loans, in that a customer is advanced cash immediately instead of having to wait for their tax refund. The refund is signed over to Block, and borrowers receive less than the total refund because fees are deducted. In December of 2010, H&R Block announced that the company would not be offering refund anticipation loans, a very popular product among lower and mid-income customers. A key partner in the financing of the loans, HSBC, was enjoined by the Federal Deposit Insurance Corporation from lending refund loans. Nearly 17 percent of Block customers took out a refund anticipation loan in 2010.
FDIC countersued by refund loan lender
A prominent tax refund lender has sued the Federal Deposit Insurance Corporation for interfering in the tax refund loan business, according to Business Week. Republic Bank and Trust, a bank based in Kentucky, is suing the FDIC and claims the agency overstepped its boundaries by labeling the loan products “unsafe and unsound” when the FDIC ordered Republic to stop lending the loans last month. Republic lent more than $3 billion in refund loans last year to almost 836,000 people. The bank observed a default rate of only 2.13 percent. The suit alleges that the FDIC is trying to coerce loan lenders into dropping a product that government officials don’t like, even though the product is popular.