Shares of tax-preparation company
lost about 9% Friday after the company was accused in lawsuits of charging illegally high interest on loans it makes against tax refunds.
The company said the suits won't have a material effect on its earnings, but investors weren't as convinced and sent the shares down $4.03, to $40.35.
H&R Block conceded that plaintiffs are claiming "substantial" amountsin what it described as routine litigation against the company and itssubsidiaries. It also acknowledged that ultimate liability is hard topredict, but said it believes the amounts potentially paid out forjudgments or settlements won't seriously dent the firm's operating resultsor financial position.
H&R Block is accused of charging excessive interest rates on the RefundAnticipation Loans (RALs) that it helps to arrange with lending bank
. The loans are short-term cash advances based on a customer's anticipated tax refund. Such loans are useful for people who want early access to their refund, but some consumer groups have complained that the interest rates charged on these loans are far too high, running anywhere from 67% to 773% annually.
Consumers Union policy analyst Shelley Curran said earlier this yearthat there's no reason for such a high rate given that the loan is basedon a tax return prepared by H&R Block for which the consumer has alreadypaid a fee. "These interest rates are far higher than the rates charged bymost credit card companies for similar short-term transactions," Curransaid.
Others say that the firm doesn't do enough to explain to its primarilylow-income customers that the loan must be repaid even if the InternalRevenue Service disputes the refund claim.
H&R Block said nothing in the current litigation involving RALs wouldcause the company or the lending bank to change the fee structure of itsproduct offerings.
"Block has not lost any of the more than 20 class-action lawsuits filedagainst it involving the refund anticipation loan program," the firm saidin a press release. "Block has won these cases on dispositive motions orthey have been dropped by plaintiffs."
In October 1999, H&R Block gave $12.5 million towards a $25 millionnationwide settlement with plaintiffs, but the agreement was reversed andremanded by the Court of Appeals in April 2002 for further consideration.
The firm still faces a suit in Texas, where plaintiffs are trying torecover $75 million in damages plus undisclosed punitive damages for H&RBlock's failure to disclose license fees paid to it by the bank providingthe loans. The license fees received by the company during the relevanttime period totaled $3.5 million.
In a separate Texas class-action case, the same plaintiffs are seekingan unspecified amount of damages based on allegations of usury.
H&R Block has denied all allegations and said it has a meritoriousdefense in both Texas cases. The second case is also part of theaforementioned settlement, and therefore would be covered by thatsettlement, the firm said. In previous RAL class-action decisions, othercourts have held that such loans are not usurious, H&R Block noted.
Shares of Household fell 2% to $23.21 on the news. Householdrecently said it would pay up to $484 million to settle allegations that ithad engaged in predatory lending practices. Customers complained that thefirm deceived them into accepting unfair loan terms, and despite thesettlement, Household still faces potential class-action lawsuits in threestates.