HR Block 2007 Annual Report Download - page 36

commercial banks and other types of financial services providers and HRB Bank is subject to regulation, supervision and examination by
extend privacy provisions and anti-money laundering procedures across the OTS, the Federal Reserve and the FDIC. All savings associations are
the financial services industry. subject to the capital adequacy guidelines and the regulatory framework
We compete based on expertise and integration with our tax services for prompt corrective action. HRB Bank must meet specific capital
relationships, quality of service, breadth of services offered, prices, guidelines that involve quantitative measures of HRB Bank’s assets,
accessibility through delivery channels and technological innovation. liabilities and certain off-balance sheet items as calculated under
GOVERNMENT REGULATION –Financial services businesses are regulatory accounting practices. HRB Bank’s capital amounts and
subject to extensive regulation by U.S. federal and state regulatory classification are also subject to qualitative judgments by the regulators
agencies, securities exchanges and by various non- governmental about components, risk weightings and other factors. As a savings and
agencies, regulatory bodies and central banks. These regulatory loan holding company, H&R Block, Inc. is subject to regulation by the
agencies in the U. S. include, among others, the SEC, the NASD, the OTS, including maintenance of a three percent minimum ratio of
NYSE, the FDIC, the Federal Reserve, the Municipal Securities adjusted tangible capital to adjusted total assets, as defined by the OTS.
Rulemaking Board and the OTS. Additional legislation, regulations and See Item 7, ‘‘Regulatory Environment’’ and Item 8, note 17 to the
rulemaking may directly affect our manner of operation and consolidated financial statements for additional discussion of regulatory
profitability. requirements, including discussion of our non-compliance with the
HRBFAis registered with the SEC and subject to regulation by the three percent minimum capitalrequirement as of January 31, 2007 and
SEC and by self-regulatory organizations, such as the NYSE, NASD and April 30, 2007.
the securities exchanges of which itis a member. As a registered Also see discussion in 1A, ‘‘Risk Factors’’ for additional information.
broker-dealer, HRBFA is subject to the Uniform Net Capital Rule
(Rule 15c3-1) administered by the SEC, which specifies minimum net
capital requirements for registered brokers and dealers.
DISCONTINUED OPERATIONS
GENERAL –Conditions in the non-prime mortgage industry were During fiscal year 2007, we met the criteria requiring us to present the
m8
challenging throughout fiscal year 2007, and particularly in our fourth related financial results of these businesses as discontinued operations
quarter. Our mortgage operations, as well as the entire industry, were and the assets and liabilities of all of the businesses being sold as held-
impacted by deteriorating conditions in the secondary market, where for-sale in the consolidated financial statements for all periods
reduced investor demand for loan purchases, higher investor yield presented. See Item 1A and Item 8, note 20 to our consolidated financial
requirements and increased estimates for future losses reduced the statements for additional information and discussion of the sale of
value of non-prime loans. Under these conditions non-prime originators OOMC and impairments we recorded relating to the disposition of these
generally reported significant increases in losses and many were unable businesses.
to meet their financial obligations. As a result, during our fourth quarter
our mortgage operations originated mortgage loans that, by the time we MORTGAGE OPERATIONS
sold them in the secondary market, were valued at less than par. OOMC originates and services non-prime mortgage loans and sells and
Conditions in the non-prime mortgage industry resulted in significant securitizes non-prime mortgage loans and residual interests in the
losses in our mortgage operations during the fourth quarter of fiscal United States. HRBMC, a wholly-owned subsidiary of OOMC, originates
year 2007. See additional discussion of the performance of our mortgage non-prime and prime mortgage loans for sale to OOMC, HRB Bank or
operations in Item 7, under ‘‘Discontinued Operations.’’ third-party buyers. Revenues primarily consist of gains from sales and
On November 6, 2006 we announced we would evaluate strategic securitizations of mortgage assets, net of repurchase provisions,
alternatives for OOMC, including a possible sale or other transaction derivative gains and losses, and impairments of residual interests,
through the public markets. On April 19, 2007, we entered into an interest income and servicing fee income.
agreement to sell OOMC. In conjunction with this plan, we also OOMC originates non-prime mortgage loans, which are those that
announced we would terminate the operations of HRBMC. may not be offered through government-sponsored loan agencies and
During fiscal year 2007, we committed to a plan to sell and/or typically involve borrowers with limited income documentation, high
completed the wind-down of three smaller lines of business previously levels of consumer debt or past credit problems. Even though these
reported in our Business Services segment, as well as our tax operations borrowers have credit problems, they generally have equity in their
in the United Kingdom previously reported in Tax Services. property that will be used to secure the loan. OOMC’s wholesale
origination channel works with independent brokers throughout the
H&R BLOCK 2007 Form 10K