HR Block 2006 Annual Report Download - page 83

secondary market. Accordingly, all of these items could adversely affect independence rules and requirements. In addition, our relationship with
our results of operations. the Attest Firms closely links our RSM McGladrey brand with the Attest
In 2002, the Federal Reserve Board adopted changes to Regulation C Firms. If the Attest Firms were to encounter regulatory or independence
promulgated under the HMDA. Among other things, the new regulations issues resulting from their relationship with us or if significant litigation
require lenders to report pricing data on loans with annual percentage arose involving the Attest Firms or their services which implicated RSM
rates that exceed the yield on treasury bills with comparable maturities McGladrey, our brand reputation and our ability to realize the mutual
by 3%. The expanded reporting was effective in 2004 for reports filed in benefits of our relationship, such as the ability to attract and retain
2005. We anticipate that a majority of our loans would be subject to the quality professionals, could be impaired.
expanded reporting requirements. The expanded reporting does not INTEGRATION OF AMERICAN EXPRESS TAX AND BUSINESS
provide for additional loan information such as credit risk, debt-to- SERVICES –The integration of American Express Tax and Business
income ratio, loan-to-value ratio, documentation level or other salient Services is proceeding according to plan. While we expect a successful
loan features. However, reported information may lead to increased integration, there is the potential that it could be delayed or otherwise
litigation as the information could be misinterpreted by third parties impacted, which could adversely affect our financial condition and
and could adversely affect our results of operations. results of operations.
COUNTERPARTY CREDIT RISK –Derivative instruments involve INVESTMENT SERVICES
counterparty credit risk, which is the risk that a counterparty may fail to REGULATORY ENVIRONMENT –The broker-dealer industry continues
perform on its contractual obligations. We manage this risk through the to come under increased scrutiny by federal and state regulators and
use of a policy that includes credit standard guidelines, counterparty self-regulatory organizations and, as a result, more focus has been
diversification, monitoring of counterparty financial condition, use of placed on compliance issues. If we do not comply with these
master netting agreements with counterparties, and exposure limits regulations, it could result in regulatory actions and negative publicity,
based on counterparty credit, exposure amount and management risk which could adversely affect our results of operations and our ability to
tolerance. The policy is reviewed on an annual basis and as conditions recruit and retain qualified advisors. Negative public opinion about our
warrant. See Item 7A, under ‘‘Mortgage Services,’’ and Item 8, note 8 to industry could damage our reputation even if we are in compliance with
our consolidated financial statements for discussion of our such regulations.
derivative instruments. INTEGRATION INTO THE H&R BLOCK BRAND –We are working to
REAL ESTATE MARKET –Our residual interests and beneficial foster an advice-based relationship with our tax clients through our
interest in Trusts are secured by mortgage loans, which are in turn retail tax office network. This advice-based relationship is key to the
secured by residential real estate. Any material decline in real estate integration of Investment Services into the H&R Block brand and
values would likely result in higher delinquencies, defaults and deepening our current client relationships. If we are unable to
foreclosures. Additionally, a significant portion of the mortgage loans successfully integrate, it may significantly impact our ability to
we originate or service is secured by properties in California. A decline differentiate our business from other investment service providers and
in the economy or the residential real estate market values, or the grow our client base.
occurrence of a natural disaster not covered by standard homeowners’ RECRUITING AND RETENTION OF FINANCIAL
insurance policies, such as an earthquake, hurricane or wildfire, could ADVISORS –Attracting and retaining experienced financial advisors is
decrease the value of mortgaged properties in California. Any sustained extremely competitive in the investment industry. Additionally, in this
period of increased delinquencies, foreclosures or losses could harm industry, clients tend to follow their advisors, regardless of their
our ability to originate and sell loans, the prices we receive on our affiliated investment firm. The inability to recruit and retain qualified
loans, or the values of our mortgage servicing rights and residual and productive advisors, may adversely affect our results of operations.
interests in securitizations, which could adversely affect our financial RECURRING OPERATING LOSSES –Continuing operating losses in
condition and results of operations. our Investment Services segment may impact the valuation of goodwill
BUSINESS SERVICES and intangible assets. Such losses could also necessitate additional
ALTERNATIVE PRACTICE STRUCTURE WITH ATTEST FIRMS –Our capital contributions to comply with regulatory requirements. The
relationship with the Attest Firms requires us to comply with applicable inability to operate this segment in a profitable manner may adversely
regulations regarding the practice of public accounting and auditor affect our results of operations.
H&R BLOCK 2006 Form 10K
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