HR Block 2013 Annual Report Download - page 94

H&R Block 2013 Form 10-K 87
calendar years 2005, 2006 and 2007, included a “knowledge qualifier” limiting SCC's liability to those instances where
SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale
transactions effectively did not include a knowledge qualifier as to borrower fraud. SCC believes it would have an
obligation to repurchase a loan or indemnify certain parties with respect to a claim for a breach of a representation and
warranty only if such breach materially and adversely affects the value of the mortgage loan, or a securitization insurer's
or certificate holder's interest in the mortgage loan, and the mortgage loan has not been liquidated, although there is
limited and conflicting case law on the liquidated loan defense issue. Such claims together with any settlement
arrangements related to these losses are collectively referred to as “representation and warranty claims.”
Representation and warranty claims received by SCC have primarily related to alleged breaches of representations
and warranties related to a loan's compliance with the underwriting standards established by SCC at origination and
borrower fraud for loans originated in calendar years 2006 and 2007. SCC has received $2.1 billion claims since May
1, 2008, of which $190 million were received in fiscal year 2013 and $1.1 billion in fiscal year 2012. Claims totaling
approximately $41 million remained subject to review as of April 30, 2013, of which, approximately $11 million
represent a reassertion of previously denied claims.
SETTLEMENT ACTIONS - SCC has vigorously contested any request for repurchase when it has concluded that
a valid basis for repurchase does not exist and will continue to do so in the future. Through its loan-by-loan review of
these claims, SCC has denied approximately 90% of all asserted claims.
However, SCC may enter into bulk settlements it believes to be advantageous in lieu of a loan-by-loan review
process. Factors SCC considers in relation to bulk settlements vary by counterparty, and SCC analyzes settlement
opportunities based on the specific counterparty, or type of counterparty.
During the latter-half of fiscal year 2013, SCC entered into tolling agreements with the counterparties from whom
SCC has received a significant majority of its asserted claims. These tolling agreements toll the running of any applicable
statute of limitations related to potential representation and warranty claims and other claims against SCC. During the
fourth quarter, SCC engaged in discussions with these counterparties regarding the bulk settlement of previously denied
and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk settlement
approach, rather than the loan-by-loan claim process, will be needed to achieve settlement with these counterparties
with respect to all of their representation and warranty and other claims. SCC has experienced a decline in claims on
a loan-by-loan basis for alleged breaches of representations and warranties during fiscal year 2013, which it believes
is primarily attributable to the existence of tolling agreements. In the event that current efforts to settle with these
counterparties are not successful, SCC believes claim volumes may increase or litigation may result.
American International Group, Inc. (AIG) had threatened to assert claims of various types in the approximate amount
of $650 million in connection with the sale and securitization of SCC-originated mortgage loans. On December 21,
2012, SCC and AIG entered into an agreement to resolve all of AIG's claims, except that AIG retained the right to
benefit from payments for representation and warranty claims by third parties, without AIG's assistance or
encouragement, that are made to securitization trusts in which AIG has a continuing interest.
LIABILITY FOR ESTIMATED CONTINGENT LOSSES - SCC records a liability for losses related to
representation and warranty claims when those losses are believed to be both probable and reasonably estimable.
Development of loss estimates is subjective, subject to a high degree of management judgment, and estimates may
vary significantly period to period. Historically, SCC has developed its estimate of losses related to representation and
warranty claims based primarily on projections of future claims on a loan-by-loan basis. As a result of counterparty
activity occurring during the fourth quarter, SCC has reassessed its estimate for losses, placing greater emphasis on
bulk settlement discussions involving counterparties subject to tolling agreements rather than projections of future
claims on a loan-by loan basis. SCC's loss estimate at April 30, 2013 considers the experience gained through discussions
with counterparties, and an assessment of, among other things, historical claim results, threatened claims, terms and
provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to
provide a comprehensive settlement, the potential pro-rata realization of the claims as compared to all similar claims
and other relevant facts and circumstances when developing its estimate of probable loss. The estimate is based on the
best information currently available, significant management judgment, and a number of factors, including
developments in case law and those factors mentioned above, that are subject to change. Changes in any one of these
factors could significantly impact the estimate.