H&R Block Inc. fell 7 percent after saying U.S. regulators blocked funding for its tax-refund loans and that alternative products may not be ready for the 2011 season.
The Office of the Comptroller of the Currency told HSBC Holdings Plc not to make refund-anticipation loans, according to a statement H&R Block released after business hours on Dec. 24. The order scuttled a deal the two companies reached after H&R Block, the biggest U.S. tax preparer, sued to force HSBC to offer the loans under a contract that was set to expire in 2013.
“The OCC’s 11th-hour timing will make it difficult for us to put alternative products in place at all of our locations in time for the early part of the 2011 tax season,” Chief Executive Officer Alan Bennett said in the statement. “Millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives.”
H&R Block dropped 89 cents to $11.80 at 4:15 p.m. in New York Stock Exchange composite trading and earlier fell as much as 9.9 percent, the most in more than two months.
The Internal Revenue Service said in August it will no longer help banks, including HSBC and Republic Bancorp Inc., underwrite refund loans, which consumer groups say carry unfairly high interest rates. H&R Block’s struggle to offer loans in 2011 helped drive down its shares 44 percent this year through last week, making it the second-worst performer in the Standard & Poor’s 500 Index. Only Dean Foods Co. fell more.
Oppenheimer & Co. reduced its 2011 profit forecast for H&R Block to $1.44 a share from $1.57.
“With less than three weeks before the 2011 tax season begins, HRB’s competitive position appears significantly weakened,” Scott Schneeberger, an Oppenheimer analyst, said today in a note to clients.
H&R Block still offers customers a way to speed refund checks and is developing “other financial products we intend to put in place by the early part of the tax season,” said Kate O’Neill Rauber, a spokeswoman for the Kansas City, Missouri-based company, in an e-mail. “We have no doubt that our 11,000 retail tax offices will be ready to serve any taxpayer that needs assistance.”
The firm learned of the OCC’s order on Dec. 23, she said.
Rob Sherman, an HSBC spokesman, said the bank is terminating its relationship with H&R Block. Spokesmen for the agency didn’t respond to messages.
Tax firms such as H&R Block, Liberty Tax Service and Jackson Hewitt Tax Service Inc. advertise refund loans as a way for customers to get immediate cash. The IRS has said it will withhold a digital indicator that tells banks when taxpayers qualify for refunds claimed on their tax forms and that a deposit is imminent.
Jackson Hewitt, the second-biggest U.S. tax preparer, said Dec. 10 that it expects to provide refund loans nationwide in 2011 through agreements with Republic, based in Louisville, Kentucky, and Santa Barbara Tax Products Group.
Shares of Jackson Hewitt, based in Parsippany, New Jersey, surged 30 percent to $2.30, the highest since March. The stock plunged 23 percent on Christmas Eve last year and fell as low as 75 cents in August after the OCC told Pacific Capital Bancorp that it wouldn’t be allowed to originate refund loans in 2010.
H&R Block sued HSBC in October as the London-based bank sought to exit the U.S. refund-loan business. The two companies had since reached an agreement for the 2011 season, under which H&R Block would have covered defaults, according to its statement. The tax preparer also agreed to fund instant loans at a “substantially reduced rate to consumers,” it said.
The company prepared 20.1 million U.S. tax returns in fiscal 2010 and 17 percent of those clients took refund loans, according to Standard & Poor’s.
The company’s possible inability to offer refund loans, “its most prominent settlement product, may hurt revenue and earnings for the 2011 tax season,” wrote Rian Pressman, an S&P analyst, in a Dec. 22 report.
At least three senior executives, including CEO Russ Smyth, left H&R Block earlier this year as the company lost market share to TurboTax maker Intuit Inc.