The Feds Undercut H&R Block

Just a little while ago, I wrote about the downside risk to H&R Block (NYSE: HRB) if the company would be blocked from issuing refund anticipation loans. Well, it looks like we're going to see just how that is going to work out. Sometime on Friday (long after I'd signed off for the holiday weekend, at any rate), HSBC (NYSE: HBC) announced that the Office of the Comptroller of Currency had stepped in and effectively banned the bank from honoring its contract and its new plan with H&R Block to offer these loans. As a result, HRB is out of luck and will be without one of its most profitable products (and with little time to find a back-up plan).

This is a curious move by the OCC, but one that makes sense in the bigger picture. A lot of people have compared refund anticipation loans to the sort of payday loans offered by Cash America (NYSE: CSH) or EZCORP (Nasdaq: EZPW). As HRB itself pointed out in its press release, the fee for these loans ranges from the $40's up to $75 - a very nice return for these companies considering that the loans are only outstanding for a couple of months at most.

Anyways, getting back to the bigger picture, the current U.S. administration has openly targeted payday lending. To their aggravation, they have learned that there are limits on what the Feds can do to squash this industry, and it mostly under the purview of the states (some which have turned the screws on the industry, others have not). But, since HSBC is a national bank (and a subsidiary of a foreign bank), that puts them directly under the control of the OCC and the government can knock HSBC out of this business without much recourse or chance for appeal (not that HSBC is exactly screaming about this; they wanted out after all).

As of this AM, HRB's rival Jackson Hewitt (NYSE: JTX) was up in premarket - certainly on the presumption that tax-filers who want these high-priced loans will now flock to them instead. JTX's partner is Republic Bank (Nasdaq: RBCAA), a Kentucky-based bank with operation in four states that is organized as a state bank. As such, the OCC cannot touch it - though the bank is abiding by a $1,500 limit on refund anticipation loans.

As a curious aside, banks in the U.S. can organize themselves as "national banks" if they so choose. Doing so puts them under the direct supervision of the OCC instead of state bank officials. Why would any bank do so? Because the Feds don't have interest rate limitations and some banks have used this option as a  means of avoiding state restrictions on "predatory lending". Nice little irony there, huh?

When I last wrote about HRB, I thought that the market was essentially pricing the stock for inexorable decline. That still may be the case, and today won't be pleasant as the market digests the bad news. In the absence of a clear plan from management regarding how to rebuild the business, it is probably dead money. Still, very patient deep-value hounds may want to keep an eye on this one. I think there's more value in the business than the stock price suggests, though I'm not convinced management will realize all of it.