HR Block 2014 Annual Report Download - page 28

20 2014 Form 10-K | H&R Block, Inc.
representation and warranty claims and other claims against SCC. The tolling agreements are with counterparties that
have made and are expected to assert the majority of previously denied and expected future representation and
warranty claims against SCC.
Development of loss estimates is subject to a high degree of management judgment, and estimates may vary
significantly period to period. SCC accrues a liability for losses related to representation and warranty claims when
those losses are believed to be both probable and reasonably estimable. SCC has developed its estimate of losses
related to representation and warranty claims based on the best information currently available, significant
management judgment, and a number of factors that are subject to change, including developments in case law and
the factors mentioned in Item 7, "Critical Accounting Estimates." Changes in any one of these factors could significantly
impact the estimate.
SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and
warranty claims of $183.8 million. If future losses are in excess of SCC's accrued liability, those losses could have a
material adverse effect on our business and our consolidated financial position, results of operations and cash flows,
as SCC's financial condition, results of operations and cash flows are included in our consolidated financial statements.
The accrued liability does not include potential losses related to litigation matters discussed in the risk factor below
and in Item 8, note 17 to the consolidated financial statements. Also see Item 8, note 18 to the consolidated financial
statements.
SCC is subject to potential contingent losses related to securitization transactions in which SCC participated as a
depositor or loan originator, which may result in significant financial losses.
Between January 2005 and November 2007, SCC originated mortgage loans totaling approximately $80 billion.
Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized
such loans, or in the form of RMBSs. SCC estimates approximately 90% of the loans it originated in 2005, 2006 and
2007 were securitized in approximately 110 securitization transactions. In most of these securitization transactions,
SCC agreed, subject to certain conditions and limitations, to indemnify the underwriters or depositors for certain
losses and expenses that the underwriters or depositors may incur as a result of certain claims made against them
relating to loans originated by SCC, including certain legal expenses the underwriters or depositors incur in their
defense of such claims. Some of those underwriters and depositors are defendants in lawsuits where various other
parties allege a variety of claims, including violations of U.S. federal and state securities law and common law fraud
based on alleged materially inaccurate or misleading disclosures, arising out of the activities of such underwriters or
depositors in their sale of RMBSs or mortgage loans. Based on information currently available to SCC, it believes that
the 18 lawsuits, in which notice of a claim for indemnification has been made, involve 38 securitization transactions
with original investments of approximately $14 billion (of which the outstanding principal amount is approximately
$4 billion). Because SCC is not party to these lawsuits (with the exception of the Federal Home Loan Bank of Chicago
v. Bank of America Funding Corporation case discussed in Item 8, note 17) and does not have control of this litigation,
SCC does not have precise information about the amount of damages or other remedies being asserted or the defenses
to the claims in such lawsuits and thus SCC cannot reasonably estimate the amount of potential losses or associated
fees or expenses that may be incurred, which may be material. Additional notices of claims for indemnification may
be received by SCC in the future from underwriters or depositors who are subject to existing or new litigation.
In addition, other counterparties to the securitization transactions, including certificate holders, securitization
trustees and monoline insurance companies, have filed or may file lawsuits, or may assert indemnification claims,
directly against depositors and loan originators in securitization transactions alleging a variety of claims, including U.S.
federal and state securities law violations, common law torts and fraud and breach of contract, among others.
Additional or new lawsuits may be filed against SCC in the future.
These matters are in the early stages. We have not concluded that a loss related to any of these indemnification
claims is probable, have not accrued a liability for these claims and are not able to estimate a reasonably estimable
possible loss or range of loss for these claims. However, if SCC were required to pay material amounts with respect
to these matters, it could have a material adverse effect on our business and our consolidated financial position,
results of operations and cash flows, as SCC's financial condition, operating results and cash flows are included in our
consolidated financial statements. See Item 8, note 17 to the consolidated financial statements for additional
information.