Tax Mogul H&R Block Tempts Fate by Branching into the World of Everyday Banking

by Lucy Kalnes September 16 2006, 02:06

I. Introduction

Tax preparation giant H&R Block announced at the beginning of this month that in response to lawsuits brought by angered taxpayers about the company's Refund Anticipation Loan (RAL) program, it will be revamping the program in an effort to reduce consumer cost as well as, presumably, it's own litigation costs.[1]  But will the plan work? 

II. Operation

The H&R Block RAL program operates as follows.  First, the taxpayer turns over his tax return information to H&R Block, who in turn computes the anticipated refund.  Then, H&R Block presents the taxpayer with a paperwork from one lending institution with whom it contracts which offers to pay out the amount of the anticipated refund (less fees that amount to annualized interest rates from 40% to more than 500%) the same or next day as a loan.  In return for providing the lending institution with the consumer, the lending institution and H&R Block share the loan fee.  When the refund arrives about one to two weeks later, it is automatically used to pay off the loan.[2]  If the taxpayer is denied his refund in whole or in part, suddenly the same taxpayer that was willing to pay exorbitant fees to get $200 today instead of $300 a week later is faced with a seemingly insurmountable loan and interest rate. 

RALs are regularly criticized as predatory for appealing primarily to working class individuals and taking advantage of paycheck-to-paycheck lifestyles.[3]  Indeed, according to 2004 IRS data, 78% of all individuals that used RAL programs had adjusted gross incomes of $35,000 or less.[4]  The running themes in class actions attacking these loans are that the loan fees qualify as usurious and that H&R Block, as an agent of the taxpayer, had a fiduciary duty to the taxpayer to disclose, in short, what a bad deal these loans truly are.[5]  Such lawsuits have only in rare cases resulted in a finding of a fiduciary relationship.[6] 

III. Aims

So what does H&R Block's new plan do to try and fix this?  Two things.  The first is to reduce prices on its fee schedule so that now a typical $2,800 loan carries with it a fee of "only" $60 which the company says equates to an annualized 36% interest rate.[7]  The second is a little more creative.  H&R Block has obtained a bank charter.[8]  On some level, this two-part plan of action makes sense.  H&R Block in 2004 was found to serve 27% of households not possessing a bank account.[9]  Instead of obtaining a RAL, customers could instead open up an H&R Block bank account with their refund.  Result?  H&R Block obtains revenues from a new, lower-income banking industry, and taxpayers obtain the benefit of being able to access their money via ATMs as well as have a bank account open in the event that the customer wants to take advantage of the IRS Free File [10] program in the future.  H&R Block would essentially be hedging its losses caused by lowering the fees associated with RALs, boosting its image, and potentially reducing its litigation costs.  Sounds pretty good, right? 

It does sound good, until one starts to consider what might happen once these two programs start to exist side by side.  For example, what if the taxpayer decides in the first year to go the way of opening a bank account -- only to decide the following year to "take advantage" of the RAL program.  While banks generally don't have a fiduciary duty to their depositors, fiduciary duties have been found where a customer "reposes trust in the bank and relies on it for financial advice" or where the bank "knows that the customer is relying on its professional judgment."[11]  H&R Block has relied in the past on the fact that it is ultimately the consumer's decision alone to enter into a RAL to disprove the existence of a fiduciary relationship.  However, once the company name becomes generalizable to everyday financial services and taxpayers begin relying on its services year-round for one-stop-financial-shopping, it is possible and likely given the negative press RALs continue to receive that courts will react differently and be more likely to find a fiduciary relationhip.  The fact of consumer autonomy becomes infinitely more difficult to swallow the more H&R Block becomes entrenched in their lives.

IV. Conclusion

There is something positive to be said for H&R Block's creativity in approaching what is its increasingly less profitable RAL market.  However, I question whether at the end of the day the decision will be a positive one for the company.  It is very possible that instead of having the positive effects of lowering the cost of RALs to consumers and creating a new source of revenue for H&R Block, it will instead result in a lashback by the courts and the beginning of a slow death for the H&R Block RAL.  It will be interesting to see how the company's foray into everyday financial services will play out.

[1] Jonathan Stempel, H&R Block Cuts Rates on Tax Refund Loans, Reuters, Sept. 7, 2006, available at http://news.yahoo.com/s/nm/20060907/bs_nm/financial_hrblock_dc.

[2]  See generally Jean Ann Fox, Patrick Woodall & Chi Chi Wu, Another Year of Losses: High-Priced Refund Anticipation Loans Continue to Take a Chunk Out of Americans' Tax Refunds, The NCLC/CFA 2006 Refund Anticipation Loan Report, available at www.consumerlaw.org/news/content/2006RALReport.pdf.

[3] See Bernice Young, Tax Refund Scheme Targets the Working Poor, The Nation, April 17, 2006, available at www.thenation.com/doc/20060501/yeung.

[4] Supra note 2.

[5] See, e.g., Basile v. H&R Block, 897 F. Supp. 194 (E. D. Pa. 1995) (plaintiffs alleged violation of Delaware usury laws as well as breach of fiduciary duty, among other claims).

[6] Green v. H&R Block, Inc., 735 A.2d 1039, 1049 (Ct. of App. Md. 1999) (holding that plaintiffs had presented sufficient evidence of an agency/fiduciary relationship to defeat summary judgment); but see, e.g., Basile v. H&R Block, 761 A.2d 1115, 1121-22 (Pa. 2000) (holding that no agency relationship exists that gives rise to fiduciary duties).

[7] Eileen Alt Powell, Top News - H&R Block to Develop Banking Service, Associated Press, Sept. 7, 2006, available at http://news.aol.com/topnews/articles/a_handr-block-to-develop-banking-service/n20060907004609990001?cid=403.  It should also be noted that while a "typical" loan might be for $2,800 and carry with it a 36% rate of interest, other loans could be for as little as $200 and carry with them rates as equally unconscionable as those under the old fee schedule.

[8] Supra note 7.

[9] Supra note 2.

[10] 'Free File' is a web-based electronic filing program made available by the IRS through an agreement with the Free File Alliance to taxpayers who make less than $50,000 annually.  This agreement does not ban Free File commerial preparers from marketing RALs to taxpayers.  Supra note 2.

[11] 9 C.J.S. Banks and Banking § 248 (2006).

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