|H&R Block: As Office of Thrift SUpervision OKs Charter Bid, Spitzer Sues
American Banker Thursday, March 16, 2006
By Jody Shenn <mailto:Joseph.Shenn@sourcemedia.com>
The lawsuit <http://www.americanbanker.com/attachments/20060315I1EEXJWU-1-HRBLOCKCOMPLAINT.pdf> Eliot Spitzer filed Wednesday against H&R Block Inc. is one in a years-long series of challenges posed by authorities skeptical of the tax preparer's effort to offer financial services to unbanked consumers.
Block denied the charges, and it's too soon to tell whether this challenge will force the company to change its practices, as others have in the past. But the potential ramifications are many.
The timing of Mr. Spitzer's announcement - a day after the Office of Thrift Supervision approved <http://www.americanbanker.com/attachments/20060315I1EEXJWU-2-HRBlockOrder.pdf> Block's request for a savings bank charter - showed the New York attorney general and gubernatorial candidate is still willing to tweak banking regulators.
For the industry, the contretemps adds momentum for those who oppose banking by nonbanks.
Sarah Ludwig, the director of the Neighborhood Economic Development Advocacy Project, a New York nonprofit, stood next to Mr. Spitzer at a press conference announcing the suit. In a brief interview afterward, she called the OTS "irresponsible" for granting the charter.
"We don't need more fringe banks," she said.
The lawsuit targets a product at the heart of the bank-charter strategy of Block - whose stock dropped 6% Wednesday - and further clouds its prospects in a market it has identified as crucial to its growth.
Even the approval Block received from the OTS came with conditions that industry lawyers called unusual.
Mr. Spitzer said Wednesday he had filed suit in the state's Supreme Court over "Express IRAs," the individual retirement accounts that Block markets as a way to reduce tax liabilities.
At the press conference, he said that the company had "created a product that is fundamentally injurious." He alleged that fees on the accounts often exceed returns on the funds, which are invested in money market accounts. Compounding the problem, he said, is the fact that many customers incurred taxes anyway, because they closed their accounts once they realized they were losing money - a problem he claimed Block obscured.
Taking a swipe at H&R Block's slogan, Mr. Spitzer said, "I think it is fair to say they are not 'in your corner' - they've been putting their clients in the corner instead."
He said he would seek at least $250 million of fines, plus unspecified damages, from Block. According to a securities filing, the accounts contained $378 million on Oct. 31.
Block has transferred Express IRA funds to other depositories but sought a charter as a way to retain them. According to the approval letter it received Tuesday from the OTS and past executive comments, the company plans to transfer most of the funds from the product, and other money market accounts it sells, into the new savings bank.
H&R Block Bank would be based in Kansas City, Mo. It would be initially capitalized with about $160 million and would get another $25 million within a year. Within three months it would buy about $850 million of mortgages from other Block units. (The tax company owns two home lenders, H&R Block Mortgage Corp. and Option One Mortgage Corp.)
Executives have said the savings bank would help Block leverage its vast network of tax offices and other relationships to serve low-income individuals. About 6 million of Block's 19 million customer households are unbanked or underbanked, chief executive Mark Ernst said in November.
In a press release issued Wednesday in response to Mr. Spitzer's accusations, Block said about 42% of those who opened Express IRAs over the past two tax seasons had no other savings accounts. Nearly 596,000 individuals have opened Express IRAs since their debut in 2001, the company said.
"We believe in the Express IRA product," Mr. Ernst said in the release. "Block will fight vigorously to defend the … product and ensure it remains available to our many clients."
In a September conference call, Jeff Yabuki, Block's chief operating officer, said the low-cost deposits it was originating for others, and would put in its bank, would "help to insulate us, or inoculate us a bit, against the … oddity in the yield curve right now."
Last month the OTS extended its review of Block's charter application by 30 days. On Wednesday an OTS spokesman said it based its decision on "extensive information … from the applicant and public commenters" and put "numerous conditions" on its approval.
For example, for its first six years the savings bank must get OTS approval before substantially changing the business plan.
Gerard Comizio, a partner in the Washington office of the law firm Thacher Proffitt & Wood LLP, said the minimum business-plan length for a start-up bank would be three years, and "I haven't seen many out of the box that have been longer than that." It is more common for the OTS to ask for another three-year plan at the end of the first, he said.
Another unusual condition: The savings bank must also file quarterly reports on variances from the plan.
"I guess they want to keep them on a short leash for a longer period of time than they typically do," said Gilbert Schwartz, a banking lawyer with Schwartz & Ballen LLP.
The approval letter addressed some of the objections raised by consumer groups. It noted that the savings bank's business plan does not include putting Block's mortgage units under the bank or offering payday or other high-cost lending products. There also are no plans for the savings bank to participate in Block's refund-anticipation loan program.
Block also committed to developing a bank account for low-income individuals, limiting automated teller machine charges, improving data security, and not offering overdraft protection on checking accounts.
The OTS also cleared Block of charges that the Home Mortgage Disclosure Act pricing data released last year showed discriminatory practices. Like others, the company argued that the data does not take into account enough of the risk factors that go into loan pricing.
In 2003, Block settled its dispute with Mr. Spitzer and 40 other state attorneys general over disclosures about its tax-preparation warranties, and it set up a $1 million fund to reimburse customers who allegedly unwittingly paid a $22 fee for the warranty.
Last month California Attorney General Bill Lockyer sued Block over its refund anticipation loans.
Matthew Quinn contributed to this report.
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