HR Block 2014 Annual Report Download - page 86

78 2014 Form 10-K | H&R Block, Inc.
regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others
similarly situated.
While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any,
we are required to pay to discharge or settle these other matters will not have a material adverse impact on our
business or our consolidated financial position, results of operations and cash flows.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and
we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be
no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our
operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be
substantial and could have a material adverse impact on our consolidated financial position, results of operations and
cash flows.
NOTE 18: LOSS CONTINGENCIES ARISING FROM REPRESENTATIONS AND WARRANTIES OF OUR DISCONTINUED
MORTGAGE OPERATIONS
SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued
its remaining operations.
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. In connection with the sale of loans and/or RMBSs, SCC made certain
representations and warranties. These representations and warranties varied based on the nature of the transaction
and the buyer's or insurer's requirements, but generally pertained to the ownership of the loan, the validity of the
lien securing the loan, borrower fraud, the loan's compliance with the criteria for inclusion in the transaction, including
compliance with SCC's underwriting standards or loan criteria established by the buyer, ability to deliver required
documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in
whole loan sale transactions to institutional investors, which were generally securitized by such investors, represented
approximately 68% of the disposal of loans originated in 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 only if it breached a representation
and warranty and such breach materially and adversely affects the value of the mortgage loan or certificate holder's
interest in the mortgage loan. SCC also would assert that it has no liability for the failure to repurchase any mortgage
loan that has been liquidated prior to a repurchase demand, 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 claims representing an original
principal amount of $2.1 billion since May 1, 2008, of which $190 million were received in fiscal year 2013 and $1.1
billion in fiscal year 2012. SCC received new claims totaling $70.3 million during fiscal year 2014, all of which were
initiated by parties with whom SCC has tolling agreements. These tolling agreements toll the running of any applicable
statute of limitations related to potential lawsuits regarding representation and warranty claims and other claims
against SCC. The tolling agreements are with counterparties that have made and are expected to assert a significant
majority of previously denied and expected future representation and warranty claims. There were no material
outstanding claims subject to review as of April 30, 2014.
SETTLEMENT ACTIONS – SCC has entered into tolling agreements with the counterparties that have initiated the
majority of claims received by SCC. Beginning in the fourth quarter of fiscal year 2013 and continuing in fiscal year
2014, SCC has been 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 resolution process, will be needed to resolve all of the
representation and warranty and other claims that are the subject of these discussions. In the event that current
efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result.