NOTE 18: COMMITMENTS AND CONTINGENCIES

We offer guarantees under our POM program to tax clients whereby we will assume the cost of additional tax assessments, up to a cumulative per client limit of $5,500, attributable to tax return preparation error for which we are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing these amounts over the term of the guarantee based on historical and actual payment of claims. The related current asset is included in prepaid expenses and other current assets. The related liability is included in accounts payable, accrued expenses and other current liabilities in the consolidated balance sheets. The related noncurrent asset and liability are included in other assets and other noncurrent liabilities, respectively, in the consolidated balance sheets. A loss on these POM guarantees would be recognized if the sum of expected costs for services exceeded unearned revenue. Changes in the related balance of deferred revenue are as follows:


	(in 000s)
Year ended April 30,	2012			2011
Balance, beginning of the year	$	140,603		$	141,542
Amounts deferred for new guarantees issued		76,080			77,474
Revenue recognized on previous deferrals		(75,603	)		(78,413	)

Balance, end of the year		$141,080			$140,603

In addition to amounts accrued for our POM guarantee, we had accrued $16.3 million and $14.7 million at April 30, 2012 and 2011, respectively, related to estimated losses under our standard guarantee which is included with our standard tax preparation services.

We have recorded liabilities totaling $6.8 million and $11.0 million as of April 30, 2012 and 2011, respectively, in conjunction with contingent payments related to acquisitions of our continuing operations, with the short-term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included in other noncurrent liabilities. Our estimate is based on current financial conditions. Should actual results differ materially from our assumptions, the potential payments will differ from the above estimate and any differences will be recorded in our consolidated income statement.

We have contractual commitments to fund certain franchises requesting revolving lines of credit. Our total obligation under these lines of credit was $87.3 million at April 30, 2012, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $43.2 million.

We are self-insured for certain risks, including, workers' compensation, property and casualty, professional liability and claims related to our POM program. These programs maintain various self-insured retentions. In all but POM, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated losses for self-insured retentions using actuarial models and assumptions based on historical loss experience. The nature of our business may subject us to error and omissions, casualty and professional liability lawsuits. To the extent that we are subject to claims exceeding our insurance coverage, such suits could have a material effect on our financial position, results of operations or liquidity.

We issued three standby letters of credit to servicers paying claims related to our POM, errors and omissions, and property and casualty insurance policies. These letters of credit are for amounts not to exceed $5.3 million in the aggregate. At April 30, 2012, there were no balances outstanding on these letters of credit.

Our self-insured health benefits plan provides medical benefits to employees electing coverage under the plan. We maintain an accrual for incurred but not reported medical claims and claim development. The accrued liability is an estimate based on historical experience and other assumptions, some of which are subjective. We adjust our self-insured medical benefits liability as our loss experience changes due to medical inflation, changes in the number of plan participants and an aging employee base.

During fiscal year 2006, we entered into a transaction with the City of Kansas City, Missouri, to provide us with sales and property tax savings on the furniture, fixtures and equipment for our corporate headquarters facility. Under the transaction, the City purchased equipment by issuing $31.0 million in Industrial Revenue Bonds due in December 2015, and leased the furniture, fixtures and equipment to us for an identical term under a capital lease. Because the City has assigned the lease to the bond trustee for our benefit as the sole bondholder, we, in effect, control enforcement of the lease against ourselves. As a result of the capital lease treatment, the furniture, fixtures and equipment will remain a component of property, plant and equipment in our consolidated balance sheets. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides us with property tax exemptions for the leased furniture, fixtures and equipment. As of April 30, 2012, we have purchased $31.0 million in bonds in connection with this arrangement.

Substantially all of the operations of our subsidiaries are conducted in leased premises. Most of the operating leases are for periods ranging from three years to five years, with renewal options, and provide for fixed monthly rentals. Future minimum operating lease commitments of our continuing operations at April 30, 2012, are as follows:


	(in 000s)
2013	$	181,800
2014		136,419
2015		93,625
2016		33,822
2017		14,628
2018 and beyond		7,900

	$	468,194

Rent expense of our continuing operations for fiscal years 2012, 2011 and 2010 totaled $218.3 million, $224.9 million and $242.1 million, respectively.

We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair value of guarantees and indemnifications related to our continuing operations is not material as of April 30, 2012.

DISCONTINUED OPERATIONS – MORTGAGE LOAN REPRESENTATION AND WARRANTY CLAIMS –

Overview. SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.

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 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 did not include a knowledge qualifier as to borrower fraud. In the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan or a securitization insurer's or bondholder's interest in the mortgage loan, SCC may be obligated to repurchase the loan or may otherwise indemnify certain parties for losses, referred to as "representation and warranty claims."

Claim History. 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. Claims received since May 1, 2008 are as follows:

		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX		XXXX
	(in millions)
	Fiscal Year		Fiscal Year				Fiscal Year 2011								Fiscal Year 2012
	2009		2010		Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4		Total
Loan Origination Year:
2005	$	62	$	15	$	6	$	1	$	—	$	1	$	—	$	—	$	4	$	—	$	89
2006		217		108		100		15		29		50		29		130		29		137		844
2007		153		22		3		5		4		4		2		353		2		406		954

Total	$	432	$	145	$	109	$	21	$	33	$	55	$	31	$	483	$	35	$	543	$	1,887

Note: The table above excludes amounts related to an indemnity agreement dated April 2008, which is discussed below.

SCC received $1.1 billion in claims during fiscal year 2012, most of which were asserted by a private-label securitization trustee on behalf of certificate holders ($989 million) with the remainder asserted by monoline insurers ($92 million) and a government-sponsored entity ($11 million). The nature of the claims in fiscal year 2012 and the characteristics of the loans to which they relate, including loan vintage, loan performance characteristics, and alleged breaches of representations and warranties, are generally consistent with claims received in prior periods. The amount of claims received varies from period to period, and these variances have been and are expected to continue to fluctuate substantially. Although there is no certainty regarding future claim volume, SCC has experienced, and may in the future continue to experience, an increase in representation and warranty claims which may be due to increasing mortgage delinquency rates, declining housing prices, expected expiration of applicable statutes of limitations and developments in securities litigation and other proceedings to which SCC is not a party, among other factors.

All claims asserted against SCC since May 1, 2008 relate to loans originated during calendar years 2005 through 2007, of which, approximately 95% relate to loans originated in calendar years 2006 and 2007. During calendar years 2005 through 2007, SCC originated approximately $84 billion in loans, of which less than 1% were sold directly to government sponsored entities. Government sponsored entities also purchased bonds backed by SCC-originated mortgage loans and, with respect to these bonds, have the same rights as other certificate holders in private label securitizations. SCC is not subject to representation and warranty losses on loans that have been paid in full, repurchased, or were sold without recourse.

The majority of claims asserted since May 1, 2008 determined by SCC to represent a valid breach of its representations and warranties, relate to loans that became delinquent within the first two years following the origination of the mortgage loan. Based on its experiences to date, SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty. A loan that defaults within the first two years following the origination of the mortgage loan does not necessarily default due to a breach of a representation and warranty. Exclusive of loans that have been paid in full or for which a representation and warranty claim has been asserted and deemed valid, loans originated in 2005, 2006 and 2007 that defaulted in the first two years totaled $3.9 billion, $6.1 billion and $2.7 billion, respectively.

Reviewed Claims. Since May 2008, SCC has denied approximately 90% of all claims reviewed, excluding loans covered by other settlements. During fiscal year 2012, SCC denied approximately 98% of all claims reviewed. Losses on representation and warranty claims, including settlement payments totaled approximately $133 million for the period May 1, 2008 through April 30, 2012. Loss severity rates have approximated 62% and SCC has not observed any material trends related to average losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the consolidated balance sheets. The net balance of all mortgage loans and REO held for sale by SCC was $11.8 million at April 30, 2012.

SCC generally has 60 to 120 days to respond to representation and warranty claims and performs a loan-by-loan review of all claims during this time. Counterparties are able to reassert claims that SCC has denied. Claims totaling approximately $618 million remained subject to review as of April 30, 2012, of which, approximately $47 million represent a reassertion of previously denied claims.

Liability for Estimated Contingent Losses. SCC estimates probable losses relating to representation and warranty claims by assessing claim activity, both known and projected, based on historical validity and severity rates. Projections of future claims are based on an analysis that includes a review of the terms and provisions of related agreements and the historical experience under representation and warranty claims, which includes inquiries from various third-parties. SCC's methodology for calculating this liability also includes an assessment of the probability that individual counterparties (private label securitization trustees on behalf of certificate holders, monoline insurers and whole-loan purchasers) will assert future claims.

SCC has accrued a liability for estimated contingent losses related to representation and warranty claims as of April 30, 2012 of $130.0 million, which represents SCC's estimate of the probable loss that may occur. While SCC uses what it believes to be the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating probable losses are inherently subjective and require considerable management judgment. To the extent that the volume of asserted claims, the level of valid claims, the counterparties asserting claims, the nature and severity of claims, or the value of residential home prices, among other factors, differ in the future from current estimates, future losses may differ from the current estimates and those differences may be significant. Because the rate at which future claims may be determined to be valid and actual loss severity rates may differ significantly from historical experience, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. A 1% increase in both assumed validity rates and loss severities would result in losses beyond SCC's accrual of approximately $31 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on the representation and warranty claims liability. In reality, changes in one assumption may result in changes in other assumptions, which could affect the sensitivity and the amount of losses.

A rollforward of our accrued liability for representation and warranty claims is as follows:


	(in 000s)
Year ended April 30,	2012			2011			2010
Balance, beginning of the year:
Amount related to representation and warranty claims	$	126,260		$	138,415		$	156,659
Amount related to indemnity agreement dated April 2008		—			49,785			49,936

		126,260			188,200			206,595

Changes:
Provisions		20,000			—			—
Payments on representation and warranty claims		(16,242	)		(12,155	)		(18,244	)
Payments under indemnity agreement dated April 2008		—			(49,785	)		(151	)

Balance, end of the year:
Amount related to representation and warranty claims		130,018			126,260			138,415
Amount related to indemnity agreement dated April 2008		—			—			49,785

	$	130,018		$	126,260		$	188,200

During the second and fourth quarters of fiscal year 2012, SCC observed an increase in third-party activity. As a result of this third-party activity, SCC's estimate of probable claims increased from its prior expectations, resulting in additional loss provision of approximately $56 million. These loss provisions were partially offset by changes in assumptions, including a decrease in the rate at which claims have been found to be valid, corresponding to recent trends in reviewed claims as described above, and a decrease in expected future claims related to NIM bonds that had matured, resulting in a net recorded loss provision in discontinued operations of $20.0 million.

During fiscal year 2011, SCC made payments totaling $49.8 million under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party's ability to assert representation and warranty claims. The indemnity agreement was given as part of obtaining the counterparty's consent to SCC's sale of its mortgage servicing business in 2008. SCC has no remaining payment obligations under this indemnity agreement.

DISCONTINUED OPERATIONS – INDEMNIFICATION OBLIGATIONS – Losses may also be incurred with respect to indemnification claims by underwriters and depositors, and litigation claims by others, with respect to loans and securities SCC originated and sold, as discussed in note 19.

See discussion in note 20 below for indemnification obligations related to the sales of RSM and MCM.