H&R Block Asks for End to Pay Stub Loans

H&R Block has asked two competitors to stop making pay stub loans.

In a quarterly conference call with analysts on Wednesday, Chief Executive Mark Ernst asked his top two competitors, Jackson Hewitt Tax Service Inc. and Liberty Tax Service, to stop selling unsecured cash payment made before the filing of an income tax return.

“The economics of the product have more in common with payday lending than refund lending,” Ernst said, referring to loans often criticized for spiraling levels of interest.

“While there is no question that there’s a need for unsecured credit, the association of these high-cost pay-stub loans with tax preparation generally is not good for consumers and clearly takes the professional tax services industry into a direction that we should all wish to avoid.”

Ernst estimates that the competition’s use of pay-stub loans contributed to the loss of 250,000 H&R Block clients in January alone.

John Hewitt of Liberty Tax Services, said that he “detests” pay-stub loans but sold them as a trial after seeing how many customers he was losing to Jackson Hewitt. Jackson Hewitt reports that itt sold 1.3 million pay-stub loans under the name “Money Now” during the first quarter of 2006. Revenues for that period increased by 25%.

“It’s an inferior product and costs more,” Hewitt said. “I fully believe Jackson Hewitt saw an additional 250,000 to 300,000 returns.”

Pay stub loans are different from refund-anticipation loans based on timing.

Refund-anticipation loans occur after the client files his taxes. The borrower will pay fees on the loan.

Pay stub loans are sold before the client receives a W-2. The tax preparer uses the client’s final pay stub of the year to estimate the refund. The loan is made on this estimation.

If figures change, the taxpayer may not get a refund, leaving him or her unable to pay back the pay-stub loan.

Ernst appears ready to counteract the new loans offered by competitors.

“I would tell you that we will not stand by and lose ground to competitors who choose to go down this path,” he said. “We feel we have ways to respond that hold with our values.”

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