HR Block 2008 Annual Report Download - page 32

Our digital tax solutions businesses compete with a number of companies. Price and marketing competition for
tax preparation services increased in recent years.
See clients served statistics included in Item 7, under “Tax Services.”
BUSINESS SERVICES
Our alternative practice structure involves relationships with Attest Firms that are subject to regulatory
restrictions and other constraints. Failure to comply with these restrictions, or operational difficulties
involving the Attest Firms, could damage our brand reputation, lead to reduced earnings and impair our
investment in RSM.
Our relationship with the Attest Firms requires us to comply with applicable regulations regarding the practice of
public accounting and auditor independence rules and requirements. Many of our clients are also clients of the
Attest Firms. In addition, our relationship with the Attest Firms closely links our RSM McGladrey brand with the
Attest Firms. If the Attest Firms were to encounter regulatory or independence issues resulting from their
relationship with us or if significant litigation arose involving the Attest Firms or their services, such developments
could have an adverse effect on our brand reputation and our ability to realize the mutual benefits of our
relationship. In addition, a significant judgment or settlement of a claim against the Attest Firms could (1) impair
M&P’s ability to repay amounts borrowed under the revolving credit facility it maintains with us, (2) impact RSM’s
ability to attract and retain clients and quality professionals, (3) have a significant indirect adverse effect on RSM,
as the Attest Firm partners are also RSM employees, and (4) result in significant management distraction. This in
turn could result in reduced revenue and earnings and, if sufficiently significant, impairment of our investment in
RSM.
CONSUMER FINANCIAL SERVICES
We are subject to extensive government regulation, including banking and securities rules and
regulations. If we fail to comply with applicable securities and banking laws, rules and regulations,
we could be subject to disciplinary actions, damages, penalties or restrictions that could significantly
harm our business.
The SEC, FINRA and other self-regulatory organizations and state securities commissions can, among other
things, censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or
employees. The OTS may take similar action with respect to our 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.
HRBFA must comply with many laws and rules, including rules relating to possession and control of customer
funds and securities, margin lending and execution and settlement of transactions. The SEC, FINRA and various
other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers. Net capital is the net worth of a broker or dealer (assets minus liabilities), less
deductions for certain types of assets. Failure to maintain the required net capital could result in suspension
or revocation of registration by the SEC and suspension or expulsion by FINRA and could ultimately lead to
liquidation.
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. 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 through fiscal year
2012.
See Item 8, note 16 to the consolidated financial statements for the calculation of required ratios.
Economic conditions that negatively affect housing prices and the job market may result in deterioration
in credit quality of our loan portfolio, and such deterioration could have a negative impact on our
business.
The overall credit quality of mortgage loans held for investment is impacted by the strength of the U.S. economy
and local economic conditions, including residential housing prices. Economic trends that negatively affect
housing prices and the job market could result in deterioration in credit quality of our mortgage loan portfolio and
a decline in the value of associated collateral. Future interest rate resets could also lead to increased delinquencies
in our mortgage loans held for investment. Recent trends in the residential mortgage loan market reflect an
12 H&R BLOCK 2008 Form 10K