• California Sues H&R Block over Loans
  • March 7, 2006
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • California Attorney General Bill Lockyer sued H&R Block Inc. on February 15, 2006, seeking to stop a popular loan program that allows the nation's largest tax preparer to carve out a piece of its customers' tax refunds.

    California is the latest in a long line of complainants targeting H&R Block's "refund anticipation loans" -- cash advances that the company provides to customers so they won't have to wait an extra one to four weeks for a check from the government. In return for the loans, customers must agree to give a percentage of their loans to H&R Block and its banking partner.

    Like many of the other complaints filed, Lockyer's suit alleges the company consistently misleads its customers about the costs of the short-term loans, which he claims sometimes impose fees that translate into interest rates of more than 500 percent. It claims that H&R Block has inaccurately depicted the loans as "instant money" and has not adequately warned the recipients about the possible consequences if they do not receive the entire refund claimed on their returns. Lockyer wants H&R Block to pay at least $20 million in fines in addition to refunds for its alleged abuses. He also plans to seek a court order that would prevent H&R Block from offering the tax refund loans in California.

    Kansas City, Missouri-based H&R Block has consistently defended the loan program as a popular program that helps its customers and adheres to all laws -- a position that the company reiterated after Lockyer filed his suit.

    Shutting down the loan program would be a significant blow to H&R Block, particularly if a court order comes during the next two months when most people are filing their returns. The loans are a major moneymaker for the company. According to its last annual report, covering 2005, H&R Block recognized a pretax profit of $101.3 million on revenue of $182.8 million generated from the loans nationwide. Besides accounting for about four percent of H&R Block's annual revenue, the promise of the loans helps draw customers.

    Without admitting wrongdoing, H&R Block last year agreed to pay $62.5 million to settle a series of refund loan lawsuits covering eight million consumers in more than two dozen states, including California. In 2003, the company agreed to a $43.5 million settlement of a refund loan case in Texas.

    Significance: Although H&R Block's tax refund loan program has been the subject of numerous lawsuits, apparently this is the first one by a state attorney general. It's unlikely that Lockyer will settle the case without extracting some concessions from the company.