H&R Block removes refund anticipation loans from menu next year

H&R Block has announced that it won't offer refund anticipation loans next year. Photo Credit: kenteegardin/Flickr.com/CC-BY-SA

H&R Block, the largest tax preparation service in the nation, has announced it will not offer refund anticipation loans next year to consumers. The loans, which are a cash advance against a tax return, are controversial, and Block says they aren’t necessary.

Tax firm did well enough without them

Earlier this year, H&R Block announced that it would not be offering refund anticipation loans for the 2011 tax season, according to Forbes. Block’s financing partner in providing loan capital, HSBC, was ordered by the Office of the Comptroller of the Currency to stop funding refund anticipation loans, or RALs, in December. Block still managed to increase the volume of returns it filed. There was a 6.5 percent increase in the number of returns prepared by H&R Block over the tax season, including 18.6 percent more first-time customers. Block’s chief executive, according to Reuters, said that the “strong 2011 tax season without RALs” made the company realize that there wasn’t “a compelling reason” to offer the loans again.

Controversial loans on the way out

The RAL, a cash advance against a pending income tax refund check less a fee, is controversial to many consumer advocates. The fee for a $1,500 RAL is $61. Steep penalties can be incurred if the refund is rejected; the customer could be left holding the bag for the whole amount. RAL lenders used to be able to get a code from the Internal Revenue Service indicating that a return was accepted.

However, the IRS changed its privacy rules in 2010 so that third parties, i.e. return preparers, couldn’t see that code anymore. The OCC also passed a rule that loan lenders can’t extend anyone a loan unless they have proof of income, in this case a successful tax refund. Thus, HSBC had to stop funding them.

After Block left the market, only the Kentucky-based Republic Bank and Trust was funding the loans this tax season, and only through Jackson Hewitt. The Federal Deposit Insurance Corporation, according to the Sargent Shriver National Center on Poverty Law’s Shriver Brief, sued Republic for making the loans despite being ordered to stop by the FDIC earlier in the year.

Alternatives exist

H&R Block is still going to offer Refund Anticipation Checks, or RACs, in lieu of RALs. A refund anticipation check is similar to an RAL, according to St. Louis Today, in that the IRS deposits a person’s refund, minus fees, into a temporary bank account and Block hands the customer a debit card when the funds become available. Usually, according to Block’s website, the funds are available in eight to 15 days after their return is transmitted. The account closes as soon as the funds are gone.

Customers can also elect to receive a paper check for an additional $20 or have their refund direct deposited into their own bank account. However, it is cheapest to e-file for free and get a direct deposit straight from the Treasury, without a middleman.