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).