HR Block 2016 Annual Report Download - page 25

H&R Block, Inc. | 2016 Form 10-K 17
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.
The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally
six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred.
On June 11, 2015, the New York Court of Appeals, New York's highest court, held in ACE Securities Corp. v. DB Structured
Products, Inc., that the six-year statute of limitations under New York law starts to run at the time the representations
and warranties are made, not the date when the repurchase demand was denied. This decision applies to claims and
lawsuits brought against SCC where New York law governs. New York law governs many, though not all, of the
transactions into which SCC entered. However this decision would not affect representation and warranty claims and
lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement
or a suit was timely filed.
It is possible that in response to the statute of limitations rulings in the ACE case and similar rulings in other state
and federal courts, parties seeking to pursue representation and warranty claims or lawsuits with respect to trusts
where the statute of limitations for representation and warranty claims against the originator has run, may seek to
distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against
other contractual parties such as securitization trustees.
For example, a recent ruling by a New York intermediate appellate court allowed a counterparty to pursue litigation
on additional loans in the same trust even though only some of the loans complied with the condition precedent of
timely pre-suit notice and opportunity to cure or repurchase. The impact on SCC, if any, from alternative legal theories
seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear.
SCC entered into tolling agreements with counterparties that made a significant portion of previously denied
representation and warranty claims. While these tolling agreements remain in effect, they toll the running of any
applicable statute of limitations related to potential lawsuits regarding representation and warranty claims and other
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, 2016, for estimated contingent losses arising from representation and
warranty claims of $65.3 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.
Except where specified, the accrued liability does not include potential losses related to litigation matters discussed
in the risk factor below and in Item 8, note 15 to the consolidated financial statements. Also see Item 8, note 16 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