HR Block 2011 Annual Report Download - page 23

In December 2010, HSBC terminated its contract with us to provide RALs in our retail tax offices based on
restrictions placed on HSBC by its regulators due to the DI no longer being available. As a result, RALs were not
offered in our retail tax offices in the 2011 tax season. Subsequently, two other banks offering RALs during the 2011
tax season through our competitors announced that due to regulatory concerns they will not be offering RALs next
tax season. Additionally, a third bank offering RALs during the 2011 tax season through our competitors
announced that it was requesting an administrative hearing regarding a notice it had received from its
regulator that its practice of originating RALs without the DI is “unsafe and unsound” and has recently filed a
lawsuit in federal court against its regulator. Based on these developments and the overall limited amount of banks
that offer RALs, there can be no assurances as to the availability of RALs in our retail tax offices in the future.
Termination of the contract with HSBC and our inability to secure a RAL originator in the future could continue
to have adverse effects on our operating results, including declines in tax returns prepared as a result of clients
seeking alternate preparers who may be able to offers RALs, to the extent prior RAL clients do not purchase a RAC
or change their refund disbursement elections. A decline in clients could have other adverse impacts, including
increased credit losses on loan balances with those clients.
We are subject to extensive government regulation, including banking rules and regulations. If we fail to
comply with applicable banking laws, rules and regulations, we could be subject to disciplinary actions,
damages, penalties or restrictions that could significantly harm our business.
The OTS can, among other things, censure, fine, issue cease-and-desist orders or suspend or expel a bank or any of
its officers or employees with respect to banking activities. Similarly, the attorneys general of each state could
bring legal action on behalf of the citizens of the various states to ensure compliance with local laws.
HRB Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet
minimum capital requirements may trigger actions by regulators that, if undertaken, could have a direct material
effect on HRB Bank, and potentially us, as HRB Bank’s holding company. HRB Bank must meet specific capital
guidelines involving quantitative measures of assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. A bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about the strength of components of its capital, risk-weightings of assets, off-balance
sheet transactions and other factors. Quantitative measures established by regulation to ensure capital adequacy
require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1
capital. In addition to these minimum ratio requirements, HRB Bank is required to continually maintain a 12.0%
minimum leverage ratio.
In addition, the OTS may deem certain products offered by HRB Bank, including EAs, to be “unsafe and
unsound” and thus require us to discontinue offering such products. To the extent such products are instrumental
in attracting clients to our offices for tax preparation services, we could experience a significant loss of clients
should such products be discontinued. This could cause our revenues or profitability to decline. See Item 8, note 20
to the consolidated financial statements for additional discussion of regulatory capital requirements and
classifications.
Recent legislative and regulatory reforms may have a significant impact on our business, results of
operations and financial condition.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act) was signed into
law, which contains a comprehensive set of provisions designed to govern the practices and oversight of financial
institutions and other participants in the financial markets.
The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to
adopt implementing regulations. In addition, the Reform Act mandates multiple studies, which could result in
additional legislative or regulatory action. The Reform Act, as well as other legislative and regulatory changes,
could have a significant impact on us and on our subsidiary, HRB Bank, by, for example, requiring us to change our
business practices, requiring us to meet more stringent capital, liquidity and leverage ratio requirements, limiting
our ability to pursue business opportunities, imposing additional costs on us, limiting fees we can charge for
services, impacting the value of our assets, or otherwise adversely affecting our businesses. Specific provisions of
the Reform Act include:
쐍changes to the thrift supervisory structure as the responsibility and authority of the OTS moves to the OCC in
July 2011;
쐍changes which may require the Company, as a thrift holding company, to meet regulatory capital, liquidity,
leverage or other standards;
쐍regulation of interchange fees charged by payment card issuers for transactions in which a person uses a debit
or general-use prepaid card, and enforcement of a new statutory requirement that such fees be reasonable and
proportional to the actual cost of the transaction to the issuer; and
H&R BLOCK 2011 Form 10K 11