H&R Block Alters Refund Loan Structure After 'Kickback' Lawsuits

Analysts were generally unconcerned about the new fee model, noting that Block is still getting paid for the refund anticipation loans (RALs), which contribute heavily to the firm's overall profitability.

In fiscal 2001, Block received about 18% of its profits from these loans, and in 2002, RAL revenue jumped 20% from a year earlier. Profits on the loans weren't reported last year.

Still, analysts remain concerned about the possibility of more lawsuits.

"It's my contention that Block is just going to keep getting sued. By settling the Texas case, it's opened up the floodgates for more lawsuits," Barnard said.

In a new development, Block said a Maryland judge stayed a class action case there until a Chicago trial court has ruled on the fairness of a pending nationwide settlement in another RAL class action case and all appeals were completed. The trial in the Maryland case had been scheduled to begin Jan. 7.

Block Chief Executive Mark Ernst has said he is confident that all litigation would be resolved soon, pending court approval of the nationwide settlement.

But if the court doesn't approve that settlement, the company would be forced to renegotiate or litigate cases separately in eight states.

"As long as they're in the business of making high-interest loans, they're going to be vulnerable. It's just a natural target, and they're a big firm with deep pockets," Barnard said. "It's sort of akin to the cigarette companies."

Still, Barnard added that the effect of such lawsuits shouldn't be too damaging over the long term. So far, Block has been able to settle lawsuits for relatively small amounts. In Texas, for example, the firm settled for just $41.7 million.

Block traded down 0.41% to $41.51 Wednesday. But Barnard, who has a four-star rating on the stock, believes the shares are worth about $48.

"I've been pretty conservative about assuming growth rates and tried to factor in what could happen if they have a lot of little lawsuits," she said. "The big caveat is if they get a big lawsuit, then all bets are off."