LOS ANGELES (CN) - A federal class action claims H&R Block targets the working poor and minorities for tax-refund anticipation loans that, combined with Block's "exorbitant" and illegal fees, charge annual interest rates of more than 100 percent.
Named plaintiffs Anthony Johnson and Phyllis Robinson say H&R Block "aggressively" markets its loans at "exorbitant triple-digit interest rates to working poor and minorities" with "finance charges, that when properly calculated in accordance with the Truth in Lending Act, often exceed 100 percent APR."
Robinson and Johnson say H&R Block did not provide them "any disclosures regarding the APR or finance charges" in preparing their refund anticipation loans.
"Although a significant profit source to defendant and other for profit tax preparers, and a fundamental part of their business models, these aggressively marketed bank products provide little to no value to consumers at predatory interest rates and fees, often in conjunction with exorbitant tax preparation fees for straightforward tax filings," the complaint states. "Tax filers can usually get their federal tax refund in 8 to 15 days by direct deposit, without getting a loan or paying any extra fees to companies like defendant. The IRS usually issues refunds by check within 21 to 28 days.
"The Department of Treasury has determined that RAL [refund anticipation loan] usage is highly concentrated in poor and minority communities. Across the U.S., just 20 percent of all communities account for nearly 70 percent of all RALs. Defendant and other tax preparers target these high-interest-rate loans to minorities and the working poor, particularly those who receive the Earned Income Tax Credit (EITC). The median adjusted gross income among RAL consumers is $19,768. In 2008, although only 17 percent of tax filers received the EITC, EITC claimants comprised 64 percent of RAL consumers. Viewed another way, 33 percent of EITC claimants purchased a RAL, compared to only 3 percent of non-EITC claimants."
H&R Block spokeswoman Stephanie Simonson told Courthouse News she could not "comment on any specifics of this case" but said Block believes it "acted in accordance with all applicable laws and regulations governing our products."
But the class claims that H&R Block's "predatory bank products are a critical part of its business model. Defendant reportedly files 1 in every 5 EITCs filed in the U.S."
The predatory loans are coordinated through Block subsidiary H&R Block Bank (HRBB) and HSBC Trust Co., according to the complaint. It claims that HSBC was the lender for Block's refund anticipation loans for every tax season from 1996 through 2010.
"During fiscal year 2006, defendant signed an agreement with HSBC allowing it to purchase a 49.999999% interest in all RALs that it facilitates," the complaint states. "Defendant's HSBC RAL participation revenue was $146.2 million, 139.8 million and $190.2 million for fiscal years 2010, 2009 and 2008 respectively.
"In December of 2010, HSBC terminated its agreement to provide defendant's clients with HSBC RALs due to significant federal regulatory restrictions. As a result, defendant was not able to offer HSBC RALs during the 2011 tax season. Defendant recognized an immediate decrease in its revenue, receiving only $17 million in HSBC RAL participation proceeds. In an effort to offset the loss of HSBC RAL participation revenue, defendant raised the fees on its HRBB Federal RACs [refund anticipation checks] and aggressively marketed these predatory products to the working poor and minority clients. Defendant's efforts were successful, with its HRBB RAC fee revenues increasing over 107% to more than $181.6 million in 2011 compared to only $87.5 million in 2010. Therefore, defendant has a strong economic interest in steering its customers to these predatory products." (Footnotes omitted.)
The class claims Block loads the predatory loans with finance charges, including administrative and check-processing fees, but "provides no disclosure of the triple-digit interest rate or finance charge for these transactions."
It claims that these practices violate California's refund anticipation loan laws, the Truth In Lending Act and California consumer protection laws.
Citing Block's own website and 10-K filings, the class claims that $2.9 billion of the company's $3.7 billion in revenue for fiscal year 2011 came from tax services.
"According to H&R Block's website, it prepares 1 in every 7 U.S. tax returns. For the 2011 fiscal year H&R Block prepared 21.4 million tax returns in the U.S., representing 16.4% of the total number of estimated returns received by the Internal Revenue Service ('IRS'). As of April 20, 2011, H&R Block operated 6,493 company-owned stores and 4,575 franchise offices. H&R Block's workforce includes approximately 7,900 regular full-time employees, with its numbers growing to over 107,000 when you include tax season employees," according to the complaint.
The class seeks disgorgement, compensatory and statutory damages. Its lead counsel is M. Isaac Miller with Milstein Adelman of Santa Monica, who filed a similar class action against JTH Tax dba Liberty Tax Services. The law firm did not immediately respond to a request for comment.
Named as defendants in the Block case are H&R Block and its affiliates and subsidiaries H&R Block Services, HRB Tax Group, H&R Block Enterprises and H&R Block Eastern Enterprises.
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