HR Block 2012 Annual Report Download - page 28

condition and results of operations. The accrued liability for representation and warranty claims does not
include any losses related to litigation matters discussed in the risk factor below and in Item 8, note 19 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 participated in approximately 110 securitization transactions
either as a depositor or a loan originator. 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 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. As of April 30, 2012, SCC has received notice of a claim for
indemnification from the underwriters or depositors relating to 9 of these lawsuits and involving approximately
25 securitization transactions collateralized in whole or in part by loans originated by SCC. 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 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 and SCC is not able to reasonably estimate the associated amount of any
possible loss or range of loss. As a result, we have not accrued any liability related to these exposures.
However, if SCC were required to pay material amounts with respect to these matters, it could have a material
adverse effect on our financial position, results of operations or cash flows, as SCC’s financial condition and
operating results are included in our consolidated financial statements. See Item 8, note 19 to the consolidated
financial statements for additional information.
H&R Block has guaranteed the payment of certain limited claims against SCC.
SCC is subject to representation and warranty claims by counterparties to SCC whole loan sales and
securitization transactions, including certificate holders, securitization trustees and monoline insurance
companies. In certain limited circumstances described below, H&R Block has outstanding guarantees of
payment if claims are successfully asserted by such counterparties.
These guarantees include representation and warranty claims with respect to three whole loan sales in 2007
by SCC with an aggregate outstanding principal and liquidated amount of approximately $1.4 billion as of
April 30, 2012. There have been a total of $29.3 million of representation and warranty claims with respect to
these three whole loan sales, of which $4.4 million were deemed valid and paid by SCC, representing
significantly less than one percent of the original principal amount of such loans.
These guarantees also cover payment of representation and warranty claims with respect to mortgage loans
supporting RMBSs with a remaining outstanding principal amount of approximately $1.2 billion that were
issued prior to 2005 (“Pre-2005 RMBSs”). We do not anticipate that any significant amount of representation and
warranty claims will be asserted with respect to the Pre-2005 RMBSs in view of (i) the underlying loan vintage
and performance, (ii) principal losses to certificate holders represent significantly less than one percent of the
original aggregate principal amount of Pre-2005 RMBSs, (iii) no claims have been asserted since 2008, and
(iv) based upon our belief regarding the applicable statute of limitations we do not expect that new
representation and warranty claims would be viable. This claims history is consistent with our experience that
most valid claims relate to loan delinquencies occurring within the first two years following origination, and
that the longer a loan performs prior to an event of default, the less likely a default will be related to a breach of
a representation and warranty.
These guarantees also cover limited representation and warranty claims on other outstanding securitization
transactions, with a potential claims exposure of less than $200 million. In addition, as is customary in
divestiture transactions, H&R Block guaranteed the payment of any indemnification claims from the purchaser
of SCC’s servicing business, including claims relating to pre-closing services (which closing occurred in 2008).
14 H&R BLOCK 2012 Form 10K