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

Despite a barrage of criticism, H&R Block(HRB Quote) won't stop offering rapid tax refunds to clients anytime soon. It's simply too lucrative. But amid a slew of lawsuits alleging that the loans were a source of "kickback" revenue for the company, Block has decided to change the way it gets paid for them.

That adjustment will cut revenue by some $50 million this year, according to a press release issued Wednesday.

Kansas City-based H&R Block said it will now receive direct payments from Household International(HI Quote) -- the bank that makes the loans -- over the course of the tax season. The payments are fixed, although subject to some adjustments.

Previously, the company had been receiving a cut from each loan its customers received, according to Rachel Barnard, an analyst at Morningstar. "The series of payments are probably related to the volume of loans that [Block] throws their way," she said.

Block also noted that it would no longer be able to participate in the risk and the benefit of the loans as it had done before.

The tax-preparation firm offers its clients high-interest loans secured by expected tax refunds. In doing so, it receives fees from Household. Numerous states have sued H&R Block, charging that the firm did not disclose these kickbacks. But last month, the firm settled a class action lawsuit in Texas, paving the way for a 38% run-up in its share price.

While Block's decision to receive direct payments will eat into revenue, earnings guidance remained unchanged. On Tuesday, Block said it expects a profit of between $2.90 to $3.10 a share for the 2003 fiscal year ending in April.

That range is below the $3.21 a share analysts had expected, but Block said Wednesday that its own earnings guidance is actually in line with the consensus estimate "when factoring differing treatments of nondisclosure items."