HR Block 2009 Annual Report Download - page 73

insurance coverage could have a direct adverse effect on Attest Firm operations and could impair RSM’s ability to
attract and retain clients and quality professionals. For example, accounting and auditing firms (including one of
the Attest Firms) have become subject to claims based on losses their clients suffered from investments in
investment funds managed by third-parties. Although RSM may not have a direct liability for significant Attest
Firm Claims, such Attest Firm Claims could have a material adverse effect on RSM’s operations and impair the
value of our investment in RSM. There is no assurance regarding the outcome of the Attest Firm Claims.
LITIGATION AND CLAIMS PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although mortgage
loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC
remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and
lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance,
fraud, and violations of the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased
over historical experience and is likely to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is
difficult to predict. In the event of unfavorable outcomes, the amounts SCC may be required to pay in the discharge
of liabilities or settlements could be substantial and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County,
Massachusetts (Case No. 08-2474-BLS) entitled Commonwealth of Massachusetts v. H&R Block, Inc., et al.,
alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable
relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or
advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice
to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the
court. The preliminary injunction generally applies to loans meeting all of the following four characteristics:
(1) adjustable rate mortgages with an introductory period of three years or less; (2) the borrower has a
debt-to-income ratio generally exceeding 50 percent; (3) an introductory interest rate at least 2 percent lower
than the fully indexed rate (unless the debt-to-income ratio is 55% or greater); and (4) loan-to-value ratio of
97 percent or certain prepayment penalties. We have appealed this preliminary injunction. We believe the claims in
this case are without merit, and we intend to defend this case vigorously, but there are no assurances as to its
outcome.
SCC also remains subject to potential claims for indemnification and loan repurchases pertaining to loans
previously sold. In the current non-prime mortgage environment, it is likely that the frequency of repurchase and
indemnification claims may increase over historical experience and give rise to additional litigation. In some
instances, H&R Block, Inc. was required to guarantee SCC’s obligations. The amounts involved in these potential
claims may be substantial, and the ultimate resulting liability is difficult to predict. Because SCC’s operating
results are included in our consolidated financial statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of unfavorable outcomes could have a material adverse impact
on our consolidated results of operations.
OTHER CLAIMS AND LITIGATION – We are from time to time party to investigations, claims and lawsuits not
discussed herein arising out of our business operations. These investigations, claims and lawsuits include actions
by state attorneys general, other state regulators, individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these investigations, claims and lawsuits pertain to RALs,
the electronic filing of customers’ income tax returns, the POM guarantee program, wage and hour claims and
investment products. We believe we have meritorious defenses to each of these claims, and we are defending or
intend to defend them vigorously. The amounts claimed in these claims and lawsuits are substantial in some
instances, however the ultimate liability with respect to such litigation and claims is difficult to predict. In the
event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or
settlements could be material.
In addition to the aforementioned types of cases, we are party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively, “Other Claims”)
concerning the preparation of customers’ income tax returns, the fees charged customers for various products and
services, relationships with franchisees, intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will ultimately prevail in each instance, we believe the
H&R BLOCK 2009 Form 10K 69