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H&R
Block needs to reform its ongoing predatory lending
practices and improve its overall corporate governance.
The company currently peddles tax refund loans,
high-fee IRA’s, and subprime mortgages, primarily to
low-income consumers.
It has faced numerous lawsuits over its tax refund
loans, including a February, 2006 lawsuit by
California’s Attorney General alleging the company had
violated 15 state and federal laws, and was most recently
hit by a $250 civil lawsuit by New York Attorney General
Eliot Spitzer over fraudulent marketing of its Express
IRA’s. The
company even has faced trouble with the IRS over
understatement of its own taxes.
Refund
Anticipation Loans
Tax
refund loans are controversial, and have resulted in
numerous class action lawsuits protesting their high fees
and the marketing of such loans to low-income taxpayers.
The National Consumer Law Center estimates 79% of
taxpayers who were sold tax refund loans in 2003 had
incomes of $35,000 or less, and over half were recipients
of the Earned Income Tax Credit (EITC), although EITC
recipients make up just 17% of all taxpayers.
For
example, a consumer going into an H&R Block office for
tax advice, who is entitled to a $2,000 tax refund, may be
sold a tax refund loan with an APR of more than 180
percent. They
would be charged $100 for a loan lasting less than two
weeks. H&R Block not only collects fees arranging these
predatory loans for its clients, but also profits by
buying up to a 49 percent stake in the loans.
 On
April 20, 2006, H&R Block and one of its former
banking partners, Beneficial National Bank, announced that
they would jointly pay $39 million to settle a 1998
nationwide class action lawsuit in Chicago involving
H&R Block’s refund anticipation loans (RAL’s), aka
tax refund loans. The
settlement covers RAL’s that Beneficial had financed
through H&R Block from April 8, 1994 through December
31, 1996, and will make available at least $30 in cash
payments to about 1.7 million class members who made about
2 million individual RAL transactions.
This
is only the latest in a string of troubles Block has faced
over its refund anticipation loans.
On February 15, 2006, California Attorney General
Bill Lockyer sued Block in San Francisco Superior Court,
alleging the company had violated 15 state and federal
laws in marketing and providing high-cost RAL’s mainly
to low-income families.
The suits seeks more than $20 million in fines plus
refunds to customers.
In
December, 2005, H&R Block announced it had agreed to
pay $62.5 million to settle four state class-action
lawsuits involving more than 8 million consumers related
to the loans in West Virginia, Ohio, Alabama, and
Maryland, and potential claims in 22 other states and the
District of Columbia.
In
November, 2002, the company agreed to settle a Texas suit
involving the loans that cost it $25.7 million.
A month later, Block said it had agreed to pay
plaintiffs’ lawyers an additional $49 million in the
case. A 1992
Pennsylvania case involving the loans is still pending.
Express
IRA Program
On March 15, 2006, New York
Attorney General Eliot Spitzer filed a $250 million civil
suit against H&R Block for fraudulent marketing of its
Express Individual Retirement Account (IRA) product.
As revealed in New York State’s lawsuit, Block
advised customers to buy an "unsuitable, fraudulently
marketed, poorly performing, fee-ridden 'retirement
vehicle' called the Express IRA" that shrinks over
time.
Spitzer,
who has struck landmark settlements with insurers, brokers
and mutual fund firms in recent years, alleges that Block
misled more than 500,000 mostly low-income customers when
it promoted "great rates" on the Express IRA.
Instead, 85% of Express IRA customers lost money
because their only investment option was a money market
account paying an interest rate too low to cover the
program’s unadvertised fees.
 For
the past several years, an Express IRA with a balance of
$323, the median amount invested in the account, has
earned about $3 in interest a year, Spitzer said.
That's nowhere near enough to cover the $10 annual
maintenance fee, the $15 fee to set up an account and a
$15 "re-contribution fee," the lawsuit said.
Customers who closed the accounts lost even more, the
lawsuit said, because they had to pay a $25 termination
fee.
The
lawsuit charged that more than 150,000 H&R Block
customers ending up closing their accounts, triggering
additional fees and nearly $6 million in tax penalties.
In addition to $250 million in fines, the suit
seeks refunds to customers.
OTS
Approval of H&R Block Bank
The
same day NY Attorney General Spitzer’s lawsuit over
Block’s Express IRA program was filed, the Office of
Thrift Supervision (OTS) announced its approval of H&R
Block’s application to open a federal savings bank.
This was the third time Block had applied to open a
bank, having withdrawn its applications twice before when
confronted by opposition from consumer groups.
In
the Director’s Order issued by OTS head John Reich on
March 14 announcing the decision, the agency disclosed
that H&R Block plans to transfer “a significant
portion of the present Express IRA and money market
account funds to the Savings Bank,” and that Block’s
bank “will be the custodian of new Express IRA
accounts.”
In
testimony during an Office of Thrift Supervision hearing
on its bank charter application in October, 2005, H&R
Block Vice President Bernard M. Wilson repeatedly used the
company’s Express IRA program to justify the need for a
Block bank. He
said Block had opened 500,000 Express IRA’s in the past
five years, which proved the company “can act really in
a way that most traditional banks are not choosing to…we
think we can fill that gap for low income consumers.”
 According
to news stories, the OTS did not communicate with New York
State about the pending fraud probe of H&R Block,
although H&R Block told the agency they were under
investigation. "We
had communication with H&R Block, but not the attorney
general," OTS spokesman Chris Smith said. "The
company told us there was an investigation going on."
(National Mortgage News, 3/20/06)
Clearly,
the nature of H&R Block’s Express IRA product poses
a significant safety and soundness concern to Block’s
proposed savings bank operations.
Another
concern is that H&R Block plans to open only a single
bank in Kansas City, Missouri, but will continue to market
tax refund loans and subprime mortgages nationwide.
This is an end run around the federal Community
Reinvestment Act, which requires banks to reinvest in
local neighborhoods where they do business.
Subprime
Mortgages
H&R
Block’s mortgage lending also needs reform.
More than half of the company's
mortgage loans to African-Americans in 2004 were
high-cost, as measured by the new federally defined
subprime rate spread of three percent over Treasury
securities on a first lien, five percent on a subordinate
lien. This rose to over 70 percent in Missouri, to which
H&R Block is trying to confine its CRA
responsibilities.
H&R
Block remains one of the only financial services companies
that do not guarantee its customers the lowest cost home
loan they qualify for.
With its new federal savings bank charter, H&R
Block could eventually seek to exempt its Option One
Mortgage subsidiary from state and local consumer
protection laws.
Understatement
of Taxes
 In
February, 2006, H&R Block admitted to understating its
own taxes in 2005, causing a restatement of its earnings
going back as far as 2004.
Block said it underestimated its state
income tax liability by approximately $32 million.
However, since the company said it was still
reviewing its control mechanisms, this was only a
preliminary figure that could very well change.
The tax problems were a public relations
embarrassment and resulted in much negative publicity and
jokes made at the expense of H&R Block’s credibility
as the nation’s largest tax preparer.
How
Block Can Clean Up its Act
In light of H&R Block’s recent
troubles, the company needs to take concrete action to
clean up its act and live up to its own mission statement,
which states “to help our clients achieve their
financial objectives by serving as their tax and financial
partner.”
1.
Block must cease arranging, marketing, and
investing in Refund Anticipation Loans. These predatory
products carry equivalent Annual Percentage Rates of up to
700% and strip wealth from consumers, especially those
with the lowest incomes who qualify for the federal Earned
Income Tax Credit. To add insult to injury, Block not only collects fees for
arranging these predatory loans for its clients, but also
profits by buying up to a 49% stake in the loans.
A
good place to start would be for the company to commit to
specific and substantial targets to provide its
“unbanked” customers with low-cost savings accounts.
This would allow low-income families to join the
financial mainstream, start to build assets, and get their
tax refunds quickly and safely.
Additionally,
H&R Block must commit to support federal legislation
that would resolve the problem of RALs by prohibiting all
tax preparation companies and other financial services
firms from offering them..
2.
H&R Block’s Bank must not circumvent the
Community Reinvestment Act.
If Block wants to open a bank, it needs to assume
the same responsibilities banks are required to meet.
Block Bank proposes to take deposits and offer bank
products nationally through its tax preparation
offices. Yet H&R Block lacks a firm plan, goals,
or a description of how it will serve low income community
members. H&R Block must work with community
groups to provide transparency, ensure low income
customers are being treated fairly, and determine how the
company will fulfill its CRA obligations.
3.
Block must engage in responsible lending practices.
We believe H&R Block initially sought a thrift charter
to secure OTS preemption protection from state and local
anti-predatory lending laws for subprime subsidiary Option
One. Block should not be allowed to evade state and local
laws, especially given its disparate lending. More than
half of H&R Block's mortgage loans to African
Americans in 2004 were over the federally defined subprime
rate spread. H&R Block also remains one of the only
financial services companies that does not guarantee a
prime product to prime customers.
H&R Block must commit to changing this policy.
In order to meet this commitment, Block will
invariably have to take concrete steps, which may include:
setting performance goals, creating financial
incentives for relevant staff to ensure customers receive
the right product, conducting greater outreach and
education of brokers, monitoring and penalizing brokers
that send prime borrowers to the subprime channel, working
with community based organizations to outreach and educate
affected consumers, ensuring that any communication and
disclosure to the customer shows the long term benefits
and the ease and quickness of obtaining the lower cost
product, etc. Block’s
written commitment to date does not evidence the
appropriate level of thoughtfulness to ensure the
commitment is real.
4. The Board of
Directors must hold management accountable for its
actions. The primary basis of both the recent
California and New York Attorney Generals’ lawsuits
against the company are that the marketing of Block’s
products did not live up to the reality. A word game
was played with consumers. As an example, H&R
Block advertised that tax filers can get their refund
today, when it is actually a loan that the consumer is
getting today at a high cost. As another example,
H&R Block advertised Express IRAs as a great deal,
when 85% of all investors lost money.
There is a corporate culture where language is used to
provide cover for actions. There continues to be a
mismatch between the defenses that H&R Block offers
and its actions. Management needs to make
substantive moves towards reform. The Board of
Directors must demonstrate greater involvement and
leadership. The position of Mark Ernst as Chairman,
CEO and President is indicative of management having too
much influence on the Block Board. The Board must hold
management to a greater accountability for its
performance.
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