H&R Block, HSBC In Dispute Over 'Instant Refund' Loans

Consumer advocates hate them but the 250% loans are very popular

10/20/2010 | By James R. Hood

| ConsumerAffairs.com | Finance

Hardly anyone has anything good to say about refund anticipation loans, also known as "instant refunds." Consumer advocates say they amount to predatory lending and cash-starved taxpayers often complain that lenders are too picky about deciding who qualifies.

That may not be a problem this year. H&R Block, the nation's largest tax preparation firm, has filed suit against HSBC, saying the bank has failed to set up the procedures for making tax loans next year.

H&R Block says it will lose market share to competitors if it can't make the loans. HSBC's U.S.arm has been pulling out of the retail loan business over the last few years.

Critics say the loans amount to borrowing one's own money but they remain very popular. H&R Block says about 40% of its clients applied for the loans last year.

The appeal of the tax loans is that consumers can get their money very quickly. While it does take about six weeks to get a refund for those that send paper returns via mail, those who file electronically and choose direct deposit can cut that time to 10 to 14 days. The fee charged to get your money a few days sooner using a RAL can be the equivalent of a 250% annual interest rate.

Perhaps hoping to discourage use of the loans, the Internal Revenue Service (IRS) announced in August that it would no longer provide tax preparation firms and their lenders with a "debt indicator" - an underwriting tool that indicates whether any of a taxpayer's refund will be seized the pay delinquent student loans, unpaid child support or other debts.

HSBC said the IRS decision imperils that "safety and soundness" of the tax refund loans,

H&R Block argues that its competitors - Jackson Hewitt, Liberty Tax and Intuit's TurboTax - will all be offering the loans in 2011 and says it will suffer losses that can't be remedied by "mere monetary damages."

H&R Block has said previously that it wrote about 2.1 million tax loans in 2010, for an average amount of $3,000, charging about 2.1%, or $62, for each loan. The loans were repaid in 10 to 11 days when the government issued refund checks - thus making the $62 fee equivalent to a 250% annual percentage rate.