H&R Block Inc. (HRB) has sued the U.S. arm of HSBC Holdings PLC (HBC, HSBA.LN) in an effort to force the bank to provide its popular instant refund anticipation loans and checks during the upcoming tax season.

In a lawsuit filed Friday in a U.S. district court in Missouri, H&R Block alleged HSBC has breached a 2005 contract by failing to timely set the proposed fees, credit criteria and qualifying procedures for the loan program this tax season. The company said if HSBC doesn't act in the next two months, it won't be able to offer the products and will lose market share to competitors.

H&R Block shares Monday hit their lowest point since 2001 and closed down 12% at $10.94.

Through the controversial refund anticipation loans, taxpayers pay to borrow their own money--the customers receive their tax refunds on the spot, as opposed to having to wait for a check in the mail. Consumer advocates have criticized the lending practice as highly predatory, saying they target low-income families. A refund anticipation check, meanwhile, is deposited directly into a refund account and tax-preparation and other fees are deducted.

H&R Block, the nation's biggest tax-service provider, said its inability to offer the products this year would damage or destroy its relationships with the "millions of clients who desire them" and can't be remedied by "mere monetary damages." It added that the loans and checks have proved to be highly successful products and have significantly increased tax preparation customer traffic. In 2010, about 40% of its clients purchased one of the products.

The lawsuit follows an announcement by the Internal Revenue Service in August that it will no longer provide tax preparers and associated financial firms with a "debt indicator" used to facilitate the loans. The underwriting tool indicates whether a taxpayer will have any portion of the refund offset for delinquent tax or other debts, such as unpaid child support or delinquent federally funded student loans.

IRS Commissioner Doug Shulman said at the time the IRS no longer sees a need for the tool because it can process a tax return and deliver a refund in 10 days.

In the lawsuit, H&R Block noted the IRS decision as HSBC's purported reason for breaching the contract. But it called that a pretext because HSBC has announced its desire to exit consumer lending lines of business and alleged the bank is using the IRS decision as a means to that end.

H&R Block said in a statement Monday that its agreement with HSBC specifically states that the removal of the debt indicator doesn't allow HSBC to default on its contractual commitments. "We believe the court will protect the needs of our clients and H&R Block's rights under the contract, which we have the option to extend through 2013," the company said.

Meanwhile, an HSBC spokesman said the bank doesn't comment on legal matters but noted that HSBC began exiting the tax-refund loan business in 2007 and had exited all partnerships by 2008 with the exception of its contract with H&R Block.

"We have met our contractual obligations. Our focus is on reaching a solution with Block that addresses the safety and soundness concerns that have arisen from the IRS decision" on the debt indicator, he said.

H&R Block said in the lawsuit it believes its primary competitors, Jackson Hewitt Tax Service Inc. (JTX), Liberty Tax Service and Intuit Inc. (INTU) through its TurboTax software, plan to offer the loan products in 2011, and it believes they will aggressively market their products to lure away customers if H&R Block can't compete.

Morningstar analyst Vishnu Lekraj said that if H&R Block can't offer the products, it stands to lose a material amount of revenue and profitability this tax season. In addition, he said the market-share losses over the past few years due to do-it-yourself products could be compounded if customers seek other vendors who can offer the refund anticipation loan products.

The company previously has said it extended 2.1 million refund anticipation loans in 2010, each with an average amount of $3,000 issued for 10 to 11 days. Each loan costs about $62, or 2.1% of the loan principal.

-By Caitlin Nish, Dow Jones Newswires; 212-416-2076; caitlin.nish@dowjones.com
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