Regulators Block Tax Refund Loans

December 28, 2010

It was bound to happen. With Americans' trust in banks falling faster than the ratings for the TV show Sarah Palin's Alaska, anything out of Washington that sticks it to banks these days is bound to generate public support.

So it came to be, on the day before Christmas, that H&R Block announced it was terminating it's long-standing tax refund anticipation loan (RAL) program in response to a directive from the Office of the Comptroller of the Currency (OCC), the federal agency that regulates the company's bank partner, HSBC.

"As a result of the OCC's decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives, without the slightest benefit to the solvency of HSBC or the banking systems in general," Alan Bennett, H&R Block's president and CEO in a December 24 statement.

Let's Get Real

From my vantage here in the 21st Century, RALs are a thing of the past. Who really needs an RAL when anyone can access inexpensive (and in some cases, free) online tax filing services and, provided they are due refunds, money in the bank (or on a prepaid debit card) in a matter of days.

I know this because I helped some first-timer online tax filers last tax season.

I convinced Linda, a single mom with a meager income, to let me teach her to file her own taxes instead of taking the job to H&R Block, which had charged her in excess of $100 the year before. We went online, spent less than an hour on the IRS Website, where she filed her taxes for free. (IRS offers free filing to anyone earning less than $57,000 gross per year.) And to her elation, refund money was credited to her bank account just a few days later.

Linda did have to pay (about $10) to file her state taxes, but still got a speedy return thanks to Direct Deposit.

The OCC's directive should not have come as a surprise to HSBC, H&R Block or anyone focused on this portion of the market. The bank regulator has voiced concerns repeatedly about these micro-loans. And earlier this year, it issued a "Consumer Advisory" detailing alternatives to RALs.

250 microfinance institutions made loans to Americans in 2007.