Attorney General Lockyer Files Lawsuit Against H&R Block for Illegally Marketing and Selling High-Cost Loans as 'Instant' Tax Refunds

Refund Anticipation Loans Enrich Firm, But Drain Millions from Low-Income Families

Wednesday, February 15, 2006
Contact: (916) 210-6000,

(SAN FRANCISCO) – Attorney General Bill Lockyer today filed a lawsuit against H&R Block alleging the tax preparation giant has violated 15 state and federal laws in marketing and providing high-cost refund anticipation loans (RALs) mainly to low-income families.

“Millions of Californians have placed their trust in H&R Block, and unfortunately H&R Block has repaid them by violating that trust,” said Lockyer. “In marketing and selling these expensive loans, H&R Block has profited greatly, but deceived consumers, violated their privacy rights and taken money from California families who can least afford it. This lawsuit seeks to hold the company accountable for unlawful business practices, prevent future violations and compensate victims.”

Lockyer filed the complaint in San Francisco Superior Court, along with a request that the court issue a temporary restraining order (TRO) to prohibit H&R Block from engaging in deceptive debt collection practices related to RALs. Judge James L. Warren will consider the TRO request today at a hearing set for 11 a.m. PST.

The complaint asks the court to require the defendants to pay restitution to harmed consumers, plus at least $20 million in civil penalties. The complaint does not specify the total restitution amount, but Lockyer estimated the maximum could reach into the hundreds of millions of dollars.

The defendants include H&R Block, Inc. and the following subsidiaries of the Kansas City, Missouri-based firm: H&R Block Services, Inc.; H&R Block Enterprises, Inc.; H&R Block Tax Services, Inc.; Block Financial Corporation; and HRB Royalty, Inc.

The complaint alleges the H&R Block defendants have violated 15 state and federal laws that regulate debt collection practices and contracts, and prohibit false or deceptive advertising, unfair business practices, and unauthorized use or sharing of individuals’ tax return information.

As described in the complaint, RALs are loans provided to taxpayers, secured by their expected refund. Internal Revenue Service rules prohibit H&R Block from providing the loans itself, so it contracts with banks for that purpose. H&R Block, however, provides clients the loan applications, fills out the applications, sends the applications to the banks, and distributes the loan checks to customers.

In a typical case, the program works like this: A customer comes into an H&R Block branch office. A “tax professional” calculates the customer’s taxes and determines they are owed a refund. The customer signs up for a RAL. If the bank approves the application, H&R Block ultimately provides the customer a check – not for the full tax refund amount, but for the estimated refund, minus loan fees, tax preparation fees and other charges. Depending on the amount of refund, those fees can force customers to pay the equivalent of annual interest exceeding 500 percent, according to the complaint.

Since 2001, the complaint alleges, Californians have bought more than 1.5 million RALs from H&R Block, “generating tens of millions of dollars in income for Block.” H&R Block has received a “substantial portion of the loan fees,” according to the complaint, and has purchased up to 49.9 percent of the loans. To illustrate how H&R Block’s RAL program targets low-income families, the complaint notes recipients of the federal Earned Income Tax Credit (EITC) comprise 70 percent of the company’s customers for RALs and similar products, even though EITC recipients account for just 17 percent of all taxpayers. The federal government established the EITC to benefit low-income workers and their families.

H&R Block holds itself out as a tax preparer and adviser that consumers can trust. But to maximize its RAL revenue, the complaint alleges, H&R Block has failed to adequately inform customers they can keep more of their income throughout the year and not have to wait for a refund at tax time.

Additionally, H&R Block’s marketing of RALs has been deceptive in a number of ways, according to the complaint. Advertisements have portrayed RALs as a “refund” or “instant money,” and falsely told consumers that RAL recipients get “cash, cold, green, in your hand, out the door.” In reality, the complaint alleges, the refund is a loan, the cash is a check, and the check is for substantially less than the refund, after the loan fees and other charges are deducted.

Further, according to the complaint, H&R Block frequently has steered customers to companies that charge fees to cash RAL checks, with H&R Block getting a kickback on a portion of those fees. H&R Block has failed to adequately disclose these arrangements to consumers, the complaint alleges.

H&R Block also participates with banks and other entities in a deceptive debt collection scheme under the banner of its RAL program, the complaint alleges. RAL customers are liable for paying fees and paying back the borrowed money if their anticipated refund does not materialize, for whatever reason. When a customer allegedly owes that debt, H&R Block still will sell them a new RAL when they come to H&R Block in a subsequent year to get their taxes prepared. H&R Block does not adequately tell such customers about any alleged debts, or that when they sign the new RAL application, they agree to automatic debt collection – including collection on alleged RAL-related debts from other tax preparers or banks. These applications are denied, and the customer’s anticipated refund is used to pay off the debt, plus a fee. “Therefore, Block clients who are claimed to owe debt from a prior year are led to expect a loan, but instead find themselves in a collection proceeding,” the complaint alleges.

Additionally, according to the complaint, H&R Block has used and shared customers’ tax-return information without clients’ written consent, in violation of state and federal law. H&R Block has illegally shared customers’ information, and unlawfully used clients’ tax return information for marketing RALs, home mortgages and other financial products, and to collect debts, the complaint alleges.

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